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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(c) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(c) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-23958
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CINERGI PICTURES ENTERTAINMENT INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4247952
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2308 BROADWAY, SANTA MONICA, CA 90404
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (310) 315-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated herein by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of
the Registrant (assuming for these purposes, but without conceding, that all
executive officers, directors and greater than 10% stockholders are "affiliates"
of the Registrant) as of April 10, 1997 (based on the closing sale price as
reported on the NASDAQ National Market System on such date) was $6,149,002.
The number of shares of Common Stock outstanding as of April 10, 1997 was
13,446,874.
DOCUMENTS INCORPORATED BY REFERENCE
NO DOCUMENTS ARE INCORPORATED BY REFERENCE INTO PARTS I, II OR III.
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PART I
THIS ANNUAL REPORT ON FORM 10-K (INCLUDING, WITHOUT LIMITATION, PARTS I,
II AND III) CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS MAY
CONSIST OF ANY STATEMENT OTHER THAN A RECITATION OF HISTORICAL FACT AND CAN
BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY,"
"EXPECT," "ANTICIPATE," "ESTIMATE" 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. AS SET FORTH HEREIN UNDER "RECENT DEVELOPMENTS," THE REGISTRANT
HAS RECENTLY ENTERED INTO AN AGREEMENT TO SELL SUBSTANTIALLY ALL OF THE FILMS
IN THE REGISTRANT'S MOTION PICTURE LIBRARY AND CERTAIN OTHER ASSETS AND IS
CONSIDERING ITS ALTERNATIVES ASSUMING CONSUMMATION OF SUCH SALE (WHICH
INCLUDE DISPOSING OF ADDITIONAL ASSETS IN ONE OR A SERIES OF TRANSACTIONS).
THE AGREEMENT TO SELL SUBSTANTIALLY ALL OF THE FILMS IN THE REGISTRANT'S
MOTION PICTURE LIBRARY IS SUBJECT TO NUMEROUS CONDITIONS AND MAY ALSO BE
TERMINATED IN CERTAIN CIRCUMSTANCES. NO ASSURANCES CAN BE GIVEN THAT SUCH
SALE OR ANY ADDITIONAL SALE OF ASSETS OR OTHER TRANSACTIONS WILL BE
CONSUMMATED. IN ADDITION, THE REGISTRANT ALSO HAS ANNOUNCED THAT IT DOES NOT
PRESENTLY INTEND TO COMMENCE PRODUCTION ON ANY ADDITIONAL MOTION PICTURES.
AS A RESULT, THE REGISTRANT'S RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1996 ARE NOT NECESSARILY INDICATIVE OF THE RESULTS THAT MAY BE
EXPECTED IN FUTURE PERIODS. ADDITIONAL RISKS AND UNCERTAINTIES ARE DISCUSSED
ELSEWHERE IN APPROPRIATE SECTIONS OF THIS REPORT. THE RISKS HIGHLIGHTED ABOVE
AND ELSEWHERE IN THIS REPORT SHOULD NOT BE ASSUMED TO BE THE ONLY THINGS THAT
COULD AFFECT FUTURE PERFORMANCE OF THE REGISTRANT. THE REGISTRANT DOES NOT
HAVE A POLICY OF UPDATING OR REVISING FORWARD-LOOKING STATEMENTS AND THUS IT
SHOULD NOT BE ASSUMED THAT SILENCE BY MANAGEMENT OF THE REGISTRANT OVER TIME
MEANS THAT ACTUAL EVENTS ARE BEARING OUT AS ESTIMATED IN SUCH FORWARD-LOOKING
STATEMENTS.
ITEM 1. BUSINESS
Cinergi Pictures Entertainment Inc., a Delaware corporation ("Cinergi" or
the "Company"), was formed in November 1989 to develop, finance, produce and
license "event" motion pictures for exhibition in domestic and international
theatrical markets and for later worldwide release in all media, including home
video and pay and free television. Except where the context otherwise requires,
the terms "Cinergi" and the "Company" refer to Cinergi Pictures Entertainment
Inc. and its wholly owned subsidiaries. The Company's executive offices are
located at 2308 Broadway, Santa Monica, California 90404, and its telephone
number is (310) 315-6000.
RECENT DEVELOPMENTS
AGREEMENT TO SELL SUBSTANTIALLY ALL OF THE FILMS IN THE COMPANY'S FILM
LIBRARY AND CERTAIN OTHER ASSETS. 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, 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 to the Company (approximately $38,400,000 as of
March 31, 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 has 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
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Sale) up to a maximum amount of $10,000,000 (which the Company anticipates
will not be exceeded) and the Company has agreed to transfer to Disney all
minimum guarantee payments and any overages paid or to be paid with respect
to such film.
The film library being sold to Disney includes primarily all of the
Company's rights (except minimum guarantee payments for films other than AN
ALAN SMITHEE FILM) to the following eleven motion pictures: MEDICINE MAN,
TOMBSTONE, RENAISSANCE MAN, COLOR OF NIGHT, JUDGE DREDD, THE SCARLET LETTER,
NIXON, EVITA (excluding soundtrack rights, which will be retained by the
Company), 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 an affiliate of Disney, Buena Vista Pictures Distribution,
Inc. ("BVPD"), under which nine films have been delivered, will be
terminated. Please see "Motion Picture Production" and "Distribution of
Motion Pictures - Other Production and Distribution Arrangements" below for
additional information regarding the Company's motion picture library,
"Financing of Motion Picture Production" for an explanation of minimum
guarantee payments and overages, "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations" for additional
information regarding residuals and participations, "Distribution of Motion
Pictures" for additional information regarding the Company's domestic
distribution arrangement with BVPD and other exploitation arrangements, "Item
7 -- Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources" for additional information
regarding Disney's loans to the Company and the Company's credit facility,
and "Item 13 -- Certain Relationships and Related Transactions - Certain
Transactions with BVPD and Disney" for additional information regarding
certain other transactions between the Company and Disney.
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. Management of the Company
(including Chairman of the Board and Chief Executive Officer, Andrew G.
Vajna), which owns approximately 43.7% of the outstanding Common Stock of the
Company, has agreed to vote its shares in favor of the transaction in
accordance with the terms of the Library Sale Agreement. Certain additional
information regarding the Library Sale Agreement is contained in applicable
sections throughout this Report. The foregoing description of the Library
Sale Agreement and the other information regarding the Library Sale Agreement
contained herein are only summaries of the material terms of the Library Sale
Agreement and are qualified in their entirety by reference to the Library
Sale Agreement which is Exhibit 2 to this Report.
ANNOUNCEMENT REGARDING INTENTION TO CEASE PRODUCTION ON ADDITIONAL
FILMS. On April 3, 1997, the Company also announced that it does 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 is in the process of
considering its alternatives assuming consummation of the Film Library Sale
to Disney. Such alternatives include disposing of those assets which are not
being sold to Disney, in one or a series of transactions.
In connection therewith, the Company is presently in discussions
regarding the potential sale of a substantial portion of the assets that
would remain assuming consummation of the Film Library Sale. Not included in
the Film Library Sale to Disney are the Company's slate of approximately
forty development projects, the Company's visual effects facility, and
Cinergi's rights in DIE HARD, WITH A VENGEANCE (which the Company owns with
Twentieth Century Fox which controls the sequel rights to the film). See
"Motion Picture Production" and "Distribution of Motion Pictures - Other
Production and Distribution Arrangements" and "Item 13 -- "Certain
Relationships and Related Transactions -- Certain
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Transactions with BVPD and Disney." The Company is entitled to significant
overages from Twentieth Century Fox with respect to those territories and
media (including the United States, Canada and Japan) for which Fox controls
distribution rights. The Company controls distribution rights to DIE HARD,
WITH A VENGEANCE in certain international territories. The Company has
previously granted Disney distribution rights to the film in a portion of
those territories and, in connection with 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 thereto.
The Company's announcement and the execution of the Library Sale
Agreement follows a year long strategic review initiated by the Company to
assess its goals and business strategies in the context of, among other
things, the continuing increase in motion picture production and releasing
costs, an increased number of motion pictures released by motion picture
companies domestically, the development projects available in the
marketplace, and the Company's financial capabilities. The financial
advisory firm of Jefferson Capital Group, Ltd. assisted Cinergi in its
strategic review, which included discussions with other parties regarding the
sale of an interest in the Company or of the entire Company.
The Company currently anticipates that any decision made regarding its
alternatives assuming consummation of the Film Library Sale, will effectively
result, after provision for the Company's remaining liabilities, in a cash
payment to the Company's stockholders in exchange for their equity interests
in the Company. However, certain factors could cause actual events to be
different from those set forth in the forward-looking statement. No
assurance can be given that the Film Library Sale or any additional
transactions will be consummated or that a cash payment of any type will be
made to the Company's stockholders and no assurances can be given as to the
amount of any cash payment, if made. No agreements have been entered into or
record date set with respect to any additional transactions, and any such
transaction or series of transactions would be subject to, among other
things, consummation of the Film Library Sale and receipt of applicable,
including stockholder, approvals. Assuming consummation of the Film Library
Sale and receipt of all applicable approvals with respect to any additional
transactions, the amount of any payment to the Company's stockholders would
depend upon, among other things, the terms of such additional transactions
(including any transactions to dispose of the Company's remaining assets) and
the provisions made to satisfy the Company's remaining liabilities. The
Company does not anticipate that any payment will be made to the Company's
stockholders until at least the third or fourth quarter of 1997. However,
any such payment could be significantly delayed depending upon, among other
things, the form of any additional transactions and the time required to
obtain any necessary approvals. Any such delay could reduce the amount of
any payment ultimately to be made to the Company's stockholders.
MOTION PICTURE PRODUCTION
The Company has released ten motion pictures to date: MEDICINE MAN,
TOMBSTONE, RENAISSANCE MAN, COLOR OF NIGHT, DIE HARD WITH A VENGEANCE, JUDGE
DREDD, THE SCARLET LETTER, NIXON, EVITA and THE SHADOW CONSPIRACY. Of such
films, EVITA, based on the music of Andrew Lloyd Weber, starring Madonna and
Antonio Banderas and directed by Alan Parker, was released in 1996 (Christmas
Day) with domestic box office receipts through March 31, 1997 of
approximately $49,146,000, and THE SHADOW CONSPIRACY, directed by George
Cosmatos, was released in 1997 (January 31) with domestic box office receipts
of approximately $1,371,000. In addition, AMANDA was completed by the
Company in 1996 and delivered to Family Channel Pictures, Inc. ("FCP") in
July 1996 for domestic distribution and to an international sales company
(assisting the Company in the international distribution of the film) in
connection with the film's international distribution. FCP has not yet
obtained domestic theatrical distribution of the film. See "Distribution of
Motion Pictures - Other Production and Distribution Arrangements." The
Company is currently in post-production on AN ALAN SMITHEE FILM, a satirical
look at the making of big budget action/adventure Hollywood films. In
February 1997, the Company also commenced principal photography on the film
BROADWAY BRAWLER, starring Bruce Willis, however, due to circumstances beyond
the Company's control, production ceased
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approximately three weeks after commencement of principal photography. The
Company is currently in discussions with certain parties involved in the
production of BROADWAY BRAWLER regarding settlement of various obligations in
connection therewith. See "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." The Film Library Sale to Disney does not include any rights to
BROADWAY BRAWLER.
The Company also has approximately forty projects in various stages of
development. The Company's slate of development projects are not part of the
assets included in the Film Library Sale. Pursuant to the Library Sale
Agreement, Disney has received the right of first negotiation, and in certain
cases, a right of last refusal to acquire or participate in the financing and
distribution of one of the development projects, SMOKE AND MIRRORS, and will
also be entitled to reimbursement of its development costs in such project if
the project is made into a film. See "Item 13 -- "Certain Relationships and
Related Transactions -- Certain Transactions with BVPD and Disney."
The Company does not own or operate sound stages and related production
facilities generally referred to as a "studio" and instead has generally
utilized, as needed in the production of its motion pictures, creative and
technical personnel (such as screenwriters, directors and performers),
production and editing facilities and laboratories available in the market. The
Company acquired certain visual effects equipment to complete the visual effects
for JUDGE DREDD and also used such equipment for visual effects for DIE HARD
WITH A VENGEANCE. The Company's visual effects facility is located in Lenox,
Massachusetts. See "Item 2 -- Properties."
FINANCING OF MOTION PICTURE PRODUCTION
The Company has generally financed the production costs of its motion
pictures through loans obtained under its credit facility with The Chase
Manhattan Bank ("Chase") and a syndicate of lenders, advances and loans from
BVPD pursuant to the Company's distribution agreement and certain related
agreements with BVPD (collectively, the "BVPD Agreement") and direct investments
by the Company, as necessary. See "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations." In connection with
such financing, prior to the commencement of production of a motion picture, the
Company has generally entered into license agreements with distributors pursuant
to which distributors acquire the right to distribute such motion picture (or
series of motion pictures pursuant to an output agreement) in a certain
geographic territory and media for a specific term. In consideration for these
distribution rights, the distributor is typically required to pay to the
producer a fixed amount upon delivery of the motion picture to the distributor
("Minimum Guarantee"). The Company would assign the right to receive the
Minimum Guarantees for such motion picture to its lenders as collateral to
secure loans used to finance a portion of the production costs of the motion
picture. This manner of financing (referred to herein as "pre-licensing")
guarantees a minimum return from distribution in each such territory which is
the subject of a license agreement prior to completion of a picture, while still
allowing the Company to retain the right to share in certain distribution
revenues. Once the distributor has recouped an amount equal to its Minimum
Guarantee and costs of distribution, the distributor is entitled to retain
ongoing distribution fees computed as a percentage of the gross revenues
generated from the distribution of the motion picture. The Company is
thereafter entitled to receive all remaining revenues received by the
distributor from distribution of the picture in such territory in excess of the
ongoing distribution fee retained by the distributor. Such remaining revenues
received by the Company are commonly referred to as "overages."
DISTRIBUTION OF MOTION PICTURES
DISTRIBUTION IN THE AMERICAS -- THE BVPD AGREEMENT. The Company has not
engaged in domestic theatrical distribution of its motion pictures due to the
substantial costs involved. Instead, in July 1990,
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the Company entered into the BVPD Agreement, which was last amended in April
1994. Upon consummation of the Film Library Sale, the BVPD Agreement will be
terminated.
Pursuant to the BVPD Agreement, in exchange for exclusive distribution
rights in all media throughout the United States and its possessions, Canada
and Latin America (the "Americas"), BVPD is required, subject to the terms
and conditions of the BVPD Agreement, to advertise, promote and exploit in
all such media 25 "qualified" motion pictures produced by the Company that
meet certain criteria specified in the BVPD Agreement. In general,
"qualified" motion pictures have budgets exceeding $25,000,000, feature star
performers meeting certain criteria, and do not include foreign language films
or films receiving ratings from the Motion Picture Association of America, an
industry trade association (the "MPAA"), more restrictive than "R." During
the term of the BVPD Agreement, BVPD also has the right to elect to
distribute any non-qualified motion pictures produced by the Company which
BVPD exercised in the case of AN ALAN SMITHEE FILM. The term of the BVPD
Agreement extends until the Company has delivered 25 qualified motion
pictures, although BVPD's right to distribute in the Americas motion pictures
produced during the term of the BVPD Agreement continues in perpetuity if
BVPD continues to actively exploit the motion pictures. The Company has
delivered nine films to date which count toward the 25 qualified motion
pictures, and AN ALAN SMITHEE FILM will count as the tenth such film.
Under the BVPD Agreement, BVPD is obligated to provide the Company with
advances and loans (at the Company's option, subject to certain conditions)
for the production of qualified motion pictures based upon scaled percentages
of each film's budgeted direct negative cost, subject to certain maximums and
the other terms of the BVPD Agreement. Subject to the terms of the BVPD
Agreement, BVPD is also obligated to advance amounts to cover the costs of
the initial theatrical release of each such picture in the United States and
Canada, including specified minimum amounts to cover the costs of
manufacturing release prints, advertising and publicity. All advances and
distribution costs are recoupable out of the revenues generated by the motion
picture in the Americas, except that distribution costs expended for home
video distribution and Latin American distribution are recoupable only out of
the respective revenues generated in each such media or market. As set forth
in the BVPD Agreement, BVPD is entitled to receive certain specified
percentages of gross revenues generated in each media as distribution fees
and is entitled to recoup the amounts advanced to the Company, together with
interest thereon, as well as its costs of distribution. The Company is
thereafter entitled to receive the remainder of all revenues received by BVPD
generated by the Company's films in excess of BVPD's ongoing distribution
fees. The repayment of each production loan made by BVPD with respect to
each qualified motion picture is secured by certain rights in such qualified
picture and all proceeds from the exploitation of such qualified motion
picture in all media in the Americas. The BVPD Agreement provides that it
may be terminated by BVPD in the event that the Company fails to deliver a
qualified picture to BVPD for a period of three years or in the event of the
loss of Mr. Vajna's services; provided, however, that if the loss of Mr.
Vajna's services is due to death or disability, BVPD may not terminate the
BVPD Agreement with respect to qualified pictures for which the Company has
already engaged certain creative elements. BVPD has assumed the obligation
to pay the residuals arising out of the exploitation of the Company's motion
pictures in the Americas, subject to BVPD's right to recoup such payments
pursuant to the BVPD Agreement. The Company, which is obligated to pay all
other residuals, grants security interests to the guilds and unions in each
of its motion pictures.
Pursuant to the Library Sale Agreement, the Company has agreed that any
motion picture on which the Company commences pre-production or production
during the term of the Library Sale Agreement will not be a "qualified"
motion picture under the BVPD Agreement, and, accordingly, BVPD shall not be
obligated to finance or distribute any such motion pictures.
OTHER PRODUCTION AND DISTRIBUTION ARRANGEMENTS. The Company produced
DIE HARD WITH A VENGEANCE which was released in May 1995. The Company and
Twentieth Century Fox jointly own DIE
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HARD WITH A VENGEANCE, but Twentieth Century Fox retained all sequel rights
to the film. Although the Company's qualified motion pictures are usually
distributed in the Americas by BVPD, Twentieth Century Fox has the right to
distribute DIE HARD WITH A VENGEANCE in all media, in perpetuity, in the
United States, Canada and Japan, and worldwide in certain ancillary media.
The Company received advances in 1995 from Twentieth Century Fox in exchange
for the distribution rights granted to Twentieth Century Fox. Twentieth
Century Fox has assumed the obligation to pay the residuals arising out of
the United States, Canadian and Japanese exploitation of DIE HARD WITH A
VENGEANCE, subject to Twentieth Century Fox's right to recoup such payments
pursuant to the distribution agreement with the Company. The Company also
received advances in 1995 from Disney in exchange for the right of Disney to
distribute the film in a portion of the international territories for which
the Company controls distribution rights. Upon consummation of the Film
Library Sale, the Company will relinquish to Disney all overages payable by
Disney after January 1, 1997 with respect thereto.
As AMANDA did not meet the criteria under the BVPD Agreement to be a
"qualified" motion picture, in 1995 the Company entered into a production and
distribution agreement with Family Channel Pictures ("FCP") granting FCP all
distribution rights in the U.S. and Canada to the film AMANDA in exchange for
payment of approximately one-half of the negative cost of the picture, while
the Company retained the distribution rights for the rest of the world. The
Company used Summit, an unaffiliated international sales company, to assist
in the international distribution of the film. The Company financed this
motion picture by borrowings under its Credit Facility and assigned to the
Lenders thereunder, FCP's payment due on delivery of the motion picture and
Minimum Guarantees from international distributors. In 1996, AMANDA was
delivered to FCP for domestic distribution and to Summit in connection with
the film's international distribution. 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 in the event
the Film Library Sale is not consummated.
In addition, the Company and Hollywood Pictures Company ("HPC"), a
subsidiary of The Walt Disney Company have an arrangement whereby the Company
is financially obligated to pay to HPC the lesser of 50% of the cost of the
picture or $22,500,000 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 Fall 1997) 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 latter amount and will
relinquish the equity participation and sales fee.
INTERNATIONAL DISTRIBUTION. The Company arranges for international
distribution of its motion pictures (in territories other than Canada and
Latin America) by licensing them to various local distributors in those
territories either on a picture-by-picture basis or pursuant to selected
output agreements. Under the BVPD Agreement, BVPD receives the exclusive
distribution rights in all media in the territories of Canada and Latin
America for all qualified motion pictures. In the past, the Company has
generally arranged for international distribution of motion pictures on a
territory-by-territory basis by entering into licensing agreements with
distributors (including, in some circumstances, affiliates of Disney) in
territories such as England, France, Germany, Japan, Italy, Australia and
others. The Company has either entered into such agreements directly or has
utilized the services of an international sales company. Under such license
agreements, the Company typically receives a Minimum Guarantee prior to the
release of the picture in a particular territory, which is then recouped by
the distributor out of the revenues generated by the picture in such
territory. The distributor typically receives certain fees for its
distribution of the picture and recoups its costs of distribution and Minimum
Guarantee before remitting the remaining revenues received by it to the
Company. The Company must rely on the distributor's ability to successfully
exploit the film in order to receive any proceeds in excess of any
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applicable Minimum Guarantee. Often the Company obtains letters of credit
from acceptable banks guaranteeing payment of the Minimum Guarantees under
the license agreements.
The Company has entered into output agreements with distributors in
certain major territories whereby the distributor agrees for a period of
years or for a specified number of pictures to advance or guarantee, in many
cases backed by letters of credit, a portion of the final budget of each
motion picture produced by the Company and available for release during the
term of the relevant agreement in exchange for the right to distribute in a
particular territory allsuch motion pictures. These output agreements
include an output agreement in Australia, New Zealand and Greece with Village
Roadshow Netherlands B.V., in Scandinavia with AB Svensk Filmindustri, in
Italy with Medusa Film S.p.A., in the United Kingdom with Entertainment Film
Distributors Ltd. and in South Korea with SKC America, Inc. The output
agreement for France expired after the delivery of EVITA. See Note 13 of
Notes to the Company's Consolidated Financial Statements for certain
geographic information regarding the Company's operations.
Upon consummation of the Film Library Sale, Disney will acquire all of
the rights and benefits arising under the Company's existing exploitation
agreements with respect to the films and rights therein being sold to Disney
and will assume scheduled liabilities under such existing exploitation
agreements. With respect to the Company's output agreements, Disney will not
acquire the right (or have any obligation) to have any additional motion
pictures of Disney or its affiliates be distributed by such distributors
party to the Company's output agreements.
MAJOR CUSTOMERS
In 1996, BVPD and Twentieth Century Fox accounted for $43,454,000 (or
33%) and $12,937,000 (or 10%), respectively, of the Company's consolidated
revenues. In 1995, BVPD and Twentieth Century Fox accounted for $57,808,000
(or 30%) and $44,053,000 (or 23%), respectively, of the Company's
consolidated revenues. In 1994, BVPD was the only customer that accounted
for more than 10% of the Company's consolidated revenues with $43,207,000 (or
40%). See Note 13 of Notes to the Company's Consolidated Financial
Statements.
EMPLOYEES
The Company, like other independent production companies, has not
maintained a substantial staff of creative or technical personnel. At March
31, 1997, the Company employed a total of 30 full-time employees. Additional
employees have also been hired by the Company on a picture-by-picture basis
in connection with the production of the Company's motion pictures. The
salaries of these additional employees, as well as portions of the salaries
of certain full-time employees of the Company who provide direct production
services, are typically allocated to the capitalized cost of the related
pictures. As the Company does not presently intend to commence production on
any additional motion pictures, management of the Company is currently
considering reductions in personnel to achieve staff size commensurate with
the Company's current level of activity. The Company and certain of its
subsidiaries are subject to the terms in effect from time to time of various
industry-wide collective bargaining agreements, including the Writers Guild
of America, the Directors Guild of America, the Screen Actors Guild and the
International Alliance of Theatrical Stage Employees.
REGULATION
Audiovisual works, such as television programs and motion pictures, are not
included under the terms of the General Agreement on Trade and Tariffs Treaty.
As a result, many countries (including members of the European Union) are able
to enforce quotas that restrict the amount of United States produced television
programming which may be aired on television in such countries. Although these
quotas generally apply only to television programming and not to theatrical
exhibition of motion pictures, there can be no assurance that additional or more
restrictive theatrical or television quotas will not be
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enacted or that existing quotas will not be more strictly enforced.
Additional or more restrictive quotas or more stringent enforcement of
existing quotas could materially and adversely limit the ability of the
Company to exploit fully its motion pictures. Motion picture and distribution
rights to motion pictures are granted legal protection under the copyright
laws of the United States and most foreign countries, which laws provide
substantial civil and criminal sanctions for unauthorized duplication and
exhibition of motion pictures. The Company takes appropriate and reasonable
measures to secure, protect and maintain or obtain agreements to secure,
protect and maintain copyright protection for all Company pictures under the
laws of applicable jurisdictions. Extensive unauthorized misappropriation of
videocassette rights to motion pictures, which may include Company pictures,
is an industry-wide problem. Motion picture piracy is extensive in many
parts of the world. Voluntary industry embargoes or United States government
trade sanctions to combat piracy, if enacted, could impact the amount of
revenue that the Company realizes from the international exploitation of its
motion pictures. If not enacted or if other measures are not taken, the
motion picture industry (including the Company) may continue to lose an
indeterminate amount of revenues as a result of motion picture piracy. The
Code and Ratings Administration of the MPAA assigns ratings indicating
age-group suitability for theatrical distribution of motion pictures. The
Company has submitted its pictures for such ratings. United States
television stations and networks, as well as foreign governments, impose
additional restrictions on the content of motion pictures which may restrict
in whole or in part theatrical or television exhibition in particular
territories. Management's policy has been to produce motion pictures for
which there will be no material restrictions on exhibition in any major
territories or media. There can be no assurance that current and future
restrictions on the content of the Company's pictures may not limit or affect
the Company's ability to exhibit certain of its pictures in certain
territories and media. See "Item 1 -- Business -- Recent Developments."
COMPETITION
Motion picture production and distribution are highly competitive
businesses. The competition comes from both companies within the same
business and companies in other entertainment media which create alternative
forms of leisure entertainment. The Company competes with several "major"
film studios (The Walt Disney Company, Paramount Pictures Corporation,
Universal Pictures, Columbia Pictures, Tri-Star Pictures, Twentieth Century
Fox, Warner Bros. Inc. and MGM/UA) which are dominant in the motion picture
industry, as well as numerous independent motion picture and television
production companies, television networks and pay television systems for the
acquisition of literary properties, the services of performing artists,
directors, producers and other creative and technical personnel and
production financing. Many of the organizations with which the Company
competes have significantly greater financial and other resources than does
the Company. In addition, the Company's films compete for audience
acceptance and exhibition outlets with motion pictures produced and
distributed by other companies, including numerous motion pictures
distributed by BVPD which distributes the Company's motion pictures in the
Americas. As a result, the success of any of the Company's films is
dependent not only on the quality and acceptance of that particular film, but
also on the quality and acceptance of other competing films released into the
marketplace at or near the same time. In addition, there have been
significant technological developments effecting the entertainment industry
in general, and the motion picture industry in particular. These
developments have resulted in the availability of alternative and competing
forms of leisure time entertainment, including pay/cable television services,
satellite television and home entertainment equipment such as videocassettes,
video games, computers, and now digital video discs. Such technological
developments have also resulted in the creation of additional revenue sources
through the licensing of rights with respect to such new media, however, the
theatrical success of a motion picture remains a crucial factor in generating
revenues in other media such as videocassettes and television.
9
<PAGE>
ITEM 2. PROPERTIES
The Company leases the building housing its corporate headquarters in
Santa Monica, California from Andrew G. Vajna under a lease (which expired in
May 1996.) Subsequent thereto, the Company has been leasing its corporate
headquarters on the same general terms but on a month-to-month basis. See
"Item 13 -- "Certain Relationships and Related Transactions." The Company
leases space from an unaffiliated party in Lenox, Massachusetts housing its
facility for producing visual effects under a lease which expired in August
1996. Subsequent thereto, the Company has been leasing its visual effects
facility on the same general terms but on a month-to-month basis. The
Company also leases office space from unaffiliated parties on an as-needed
basis in connection with the production of specific motion picture projects.
ITEM 3. LEGAL PROCEEDINGS
On January 16, 1997, two purported class action lawsuits, which had been
filed on May 13, 1996 in the Superior Court of California for the County of
Los Angeles by alleged stockholders of the Company (and later consolidated
into one action), against the Company and certain of its current and former
executive officers and directors were dismissed. The lawsuits had alleged,
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.
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.
The Company had an output agreement in France with Le Film Office
("LFO") (which expired after the delivery of EVITA). Pursuant to the output
agreement with LFO, a $3,071,000 advance was 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 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. However, LFO filed a
motion with the Court seeking to dismiss the arbitration and proceed with the
litigation in the Court. On April 10, 1997, such motion was denied by the
Court.
10
<PAGE>
An arbitration hearing is scheduled for April 17, 1997. The Company believes
that LFO's allegations are without merit and intends to defend them
vigorously. In light of the disappointing domestic box office performance of
THE SHADOW CONSPIRACY and the adverse publicity generated in France by LFO's
refusing to accept delivery of THE SHADOW CONSPIRACY, in the event the
Company does not prevail in the arbitration, it believes that it will be
difficult to obtain alternative distribution of THE SHADOW CONSPIRACY in
France. In addition, even if an alternative distribution arrangement is
obtained it is unlikely any such arrangement will provide for an advance on
delivery or otherwise be on terms as advantageous as those under the
Company's output agreement with LFO.
Trial is scheduled for August 11, 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 and declaratory relief, 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. On September 4,
1994, the Company successfully demurred to all of the plaintiffs' causes of
action except the breach of contract claim and on November 29, 1994, the
Company successfully demurred to an amended complaint for bad faith denial of
existence of contract. On December 29, 1994, the Company and the other
defendants answered the First Amended Complaint for breach of contract, fraud
and deceit and civil conspiracy. Summary adjudication has been obtained in
favor of Mr. Vajna, who was named as an additional defendant in the original
complaint. 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 and is defending the action
vigorously.
An adverse arbitration finding in the arbitration with LFO or an adverse
judgment in the foregoing litigation could have a material adverse effect on
the Company's financial condition, and the amount of cash payment, if any,
ultimately paid to the Company's stockholders in accordance with the future
plans currently being considered by the Company.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No items were submitted to a vote of the Company's security holders during
the final quarter of the year ended December 31, 1996.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET PRICE
Since the Company's initial public offering in June 1994, the Company's
Common Stock has been traded on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") National Market System. The following
table sets forth the high and low reported sale prices of the Common Stock on
the NASDAQ National Market System in each of the periods indicated. The
prices represent quotations between dealers without adjustment for mark-up,
mark-down or commission, and may not necessarily represent actual
transactions.
HIGH LOW
------- -------
Fiscal 1995
First Quarter . . . . . . . . . . . . . . $11-3/8 $5-7/8
Second Quarter . . . . . . . . . . . . . . 11-1/4 5-7/8
Third Quarter . . . . . . . . . . . . . . . 6-5/8 3-3/8
Fourth Quarter . . . . . . . . . . . . . . 6 2-17/32
Fiscal 1996
First Quarter . . . . . . . . . . . . . . . $ 2-11/16 $1-1/16
Second Quarter . . . . . . . . . . . . . . 3- 5/16 1-1/16
Third Quarter . . . . . . . . . . . . . . . 2- 3/8 1-9/16
Fourth Quarter . . . . . . . . . . . . . . 2- 3/16 1-7/16
Fiscal 1997
First Quarter . . . . . . . . . . . . . . . $2- 1/16 $1-1/16
Second Quarter (through April 10, 1997) . . 1- 1/2 3/8
HOLDERS
As of March 31, 1997, there were approximately 37 holders of record of
the Company's Common Stock, and there were 13,446,874 shares issued and
outstanding of the 20,000,000 shares authorized.
DIVIDENDS
Since the Company's incorporation in November 1989, the Company has not
paid cash dividends on its Common Stock. The Company has no present
intention to pay any cash dividends on its Common Stock.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below are selected financial data of the Company. The
financial data for each of the years ended December 31, 1992 through 1996
have been derived from the consolidated financial statements of the Company
which have been audited by Ernst & Young LLP, independent auditors. The data
should be read in conjunction with the consolidated financial statements and
related notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Revenues:
Feature films . . . . . . . . . . . $ 39,566 $ 8,064 $108,517 $192,582 $132,940
Fee income . . . . . . . . . . . . . - 942 511 298 60
-------- -------- -------- -------- --------
Total Revenues . . . . . . . . . . . 39,566 9,006 109,028 192,880 133,000
Costs and Expenses:
Amortization of film costs,
residuals and participations . . . . 39,447 7,899 103,422 204,544 139,612
Selling, general and
administrative expenses . . . . . . . 7,863 3,779 2,694 5,098 9,752
-------- -------- -------- -------- --------
Operating (loss) income . . . . . . . . (7,744) (2,672) 2,912 (16,762) (16,364)
Interest expense . . . . . . . . . . . (3,774) (1,875) (281) (241) (448)
Interest income . . . . . . . . . . . 568 111 264 941 907
-------- -------- -------- -------- --------
(Loss) income before equity in
income (loss) of affiliated
company . . . . . . . . . . . . . . . (10,950) (4,436) 2,895 (16,062) (15,905)
Equity in income (loss) of
affiliated company . . . . . . . . . 146 (387) - - -
-------- -------- -------- -------- --------
Net (loss) income . . . . . . . . . . $(10,804) $ (4,823) $ 2,895 $(16,062) $(15,905)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net (loss) income per share . . . . . . $ (.64) $ .30 $ (1.23) $ (1.12)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of
shares outstanding . . . . . . . . . . 7,518 9,494 13,025 14,169
-------- -------- -------- --------
-------- -------- -------- --------
BALANCE SHEET DATA:
Cash . . . . . . . . . . . . . . . . $ 1,985 $ 1,840 $ 2,665 $ 29,832 $ 27,364
Restricted cash . . . . . . . . . . . 1,000 500 - - 5,654
Film costs, net of amortization . . . 18,665 115,108 223,827 160,756 103,792
Total assets . . . . . . . . . . . . 27,102 119,992 253,891 206,257 156,548
Total debt . . . . . . . . . . . . . 32,711 93,991 143,146 73,202 47,420
Stockholders' (deficiency) equity. . . (14,808) (18,506) 44,434 51,717 36,607
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
As indicated under "Item 1 -- Business -- Recent Developments," on
April 3, 1997 the Company entered into the Library Sale Agreement
with Disney to sell to Disney, subject to certain conditions,
substantially all of the film's in the Company's motion
picture library and certain other assets. The Company also announced
that it does not presently intend to commence production on
any additional motion pictures and that it is in the process of
considering its alternatives assuming consummation of the Film Library
Sale to Disney, including disposing of those assets which are not
being sold to Disney, in one or a series of transactions. In connection
therewith, the Company is presently in discussions regarding the
potential sale of a substantial portion of the assets that would remain
assuming consummation of the Film Library Sale. The Company's announcement
and the execution of the Library Sale Agreement follows a
year long strategic review initiated by the Company to assess its
goals and business strategies. The strategic review included
discussions with other parties regarding the sale of an interest in the
Company or of the entire Company.
Prior to the initiation of the strategic review, the Company's goal had
been to produce and arrange for release of three to five commercially
successful "event" motion pictures per year. "Event" motion pictures, which
feature major film stars, high quality production values and other
exploitable qualities which appeal to the largest segment of the motion
picture audiences in both the United States and international markets, also
typically involve direct negative costs (excluding capitalized interest and
overhead) substantially in excess of the industry average direct negative
cost. The industry average direct negative cost in 1996 for members of the
Motion Picture Association of America ("MPAA") which includes the major
studios with which the Company competes was $39,835,000 (an increase of
approximately 16.2% from 1994 and approximately 69.9% from 1989) and the
industry average prints and advertising costs per picture in 1996 for members
of the MPAA was $19,838,000 (an increase of approximately 23.4% from 1994 and
approximately 114.5% from 1989).
The Company has generally financed the production costs of its
motion pictures through loans obtained under its credit facility with
Chase and a syndicate of lenders (as described under "Liquidity and Capital
Resources" below), advances and production loans from BVPD pursuant to the
BVPD Agreement, and direct investments by the Company, as necessary.
Typically the Company obtained advances (before commencement and during
production of its motion pictures, but generally payable upon delivery of the
applicable film) from pre-licensing, pursuant to single picture output
agreements, as well as the BVPD Agreement, in an amount equal to a
substantial percentage of the aggregate direct negative cost of each motion
picture. For motion pictures with budgeted direct negative cost exceeding
approximately $40,000,000, however, such advances available from third
parties and BVPD would not typically cover the direct production costs of
such films, thereby necessitating direct investment by the Company.
In light of, among other things, the disappointing financial results of
three of the Company's four 1995 releases (JUDGE DREDD, THE SCARLET LETTER
and NIXON) and the 1997 releases of THE SHADOW CONSPIRACY and the continuing
increase in motion picture production and releasing costs, which could
necessitate increased direct investment by the Company in its motion pictures
if it were to produce additional "event" motion pictures, the Company
determined the Film Library Sale and cessation of production of additional
motion pictures to be in the best interests of the Company's stockholders.
The Company currently anticipates, as indicated under "Item 1 -- Business --
Recent Developments" and subject to the risks and considerations set forth
therein, that any decision by the Company regarding its alternatives assuming
consummation of the Film Library Sale, will effectively result, after
provision for the Company's remaining liabilities, in a cash payment to the
Company's shareholders in exchange for their equity interests in the Company.
The Company reflects advances and Minimum Guarantees as income for
financial reporting purposes when a picture is available for exploitation in
the applicable media or territory. See Note 2 of Notes to the Company's
Consolidated Financial Statements. As a matter of custom and practice and
contractual requirements, the Company delays the exploitation of home video
rights and television rights for a period of time after initial theatrical
distribution in the applicable territory. This results in a delay in the
recognition of advances and Minimum Guarantees from those media as income for
financial reporting purposes.
Costs accumulated in the production of a film ("unamortized film costs"),
including direct negative costs, marketing costs, capitalized interest and
overhead, represent a major component of the Company's assets. Unamortized
film costs are amortized in the proportion that gross revenues realized bear
to management's estimate of total gross revenues expected to be received.
Currently, based on the Company's estimate of future revenues, approximately
92% of unamortized released film costs at December 31, 1996 will be amortized
during the three year period ending December 31, 1999.
The following table sets forth the unamortized film costs for the last
three years:
Year Ended December 31,
----------------------------
(in thousands)
1994 1995 1996
-------- -------- --------
Released films (net of amortization). . . . $ 30,082 $101,238 $ 52,077
Completed, not released . . . . . . . . . . - - 37,025
Production & development . . . . . . . . . 193,745 59,518 14,690
-------- -------- --------
Film costs, net of amortization . . . . . $223,827 $160,756 $103,792
-------- -------- --------
-------- -------- --------
A substantial portion of the unamortized film costs attributable to
RENAISSANCE MAN, COLOR OF NIGHT and TOMBSTONE were amortized in 1994 due to
the domestic theatrical release and international availability of these
pictures in 1994.
14
<PAGE>
The decrease in unamortized film costs in 1995 reflects the domestic
theatrical release and international availability of DIE HARD WITH A
VENGEANCE, JUDGE DREDD, and THE SCARLET LETTER, and the resulting
amortization of a substantial portion of the unamortized film costs
attributable to such pictures. Although NIXON was initially released on
December 20, 1995 and is, therefore, included in "Released Films" in the
amount of $43,000,000, no revenues were recognized in 1995. Unamortized film
costs for 1995 also includes the production costs of AMANDA, THE SHADOW
CONSPIRACY and EVITA incurred through December 31, 1995.
The decrease in unamortized film costs in 1996 reflects the domestic
theatrical release and international availability of EVITA and the
international availability of NIXON (as described above). Although THE
SHADOW CONSPIRACY was initially released on January 31, 1997, it was
completed in 1996, available for release as of December 31, 1996 and
accordingly included completed, not relevant in "Released Films" in the
amount of $37,000,000 which reflects an adjustment to reduce the film cost to
its net realizable value. Unamortized film costs for 1996 also includes the
production costs of THE SHADOW CONSPIRACY, AN ALAN SMITHEE FILM and BROADWAY
BRAWLER incurred through December 31, 1996.
As is customary in the motion picture industry, the Company has granted
and may grant to certain key creative talent involved in the production of a
particular motion picture (which includes certain key officers of the
Company), rights to participate in the revenues generated by such motion
picture. See "Item 1 -- Business -- Distribution of Motion Pictures," and
"Item 11 --Executive Compensation -- Employment Agreements." In many cases,
these participation rights, and the Company's obligation to pay such
participations, will not be incurred until the Company has recouped its costs
of production, including capitalized interest and overhead, however, in some
cases, such as with certain creative talent involved in EVITA, the Company
may be obligated to pay participations before it has recouped such costs. In
addition, residuals based on revenues from video and pay, cable and free
television are required to be paid by the Company pursuant to the terms of
collective bargaining agreements to which the Company may be subject. For
purposes of determining the total amortization of film costs for each motion
picture, the Company includes its estimated obligations to pay residuals and
participations. Pursuant to the Library Sale Agreement, upon consummation of
the Film Library Sale, Disney will assume all residuals and participation
obligations with respect to the films and rights therein being sold to Disney
which constitute substantially all of the Company's residuals and
participation obligations.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Feature film revenues decreased from $192,582,000 for the year ended
December 31, 1995 to $132,940,000 for the year ended December 31, 1996
primarily because of the lower revenues associated with NIXON, AMANDA and
EVITA in 1996 as compared to the revenues from DIE HARD WITH A VENGEANCE,
JUDGE DREDD and THE SCARLET LETTER in 1995. Feature film revenues for the
year ended December 31, 1995 consisted mainly of domestic and international
revenues from the theatrical release of DIE HARD WITH A VENGEANCE, JUDGE
DREDD and THE SCARLET LETTER and domestic and certain international home
video revenue from DIE HARD WITH A VENGEANCE. Although NIXON was initially
released on December 20, 1995, no revenues were recognized until 1996.
Feature film revenues in 1995 also included $5,000,000 received in October
1995 from a major studio in exchange for an actor relinquishing an acting
commitment to the Company. Feature film revenues for the year ended December
31, 1996 consisted mainly of domestic and international revenues from the
theatrical release of NIXON, home video revenues from NIXON and international
revenues from the theatrical release of EVITA. Feature film revenues in 1996
also included certain domestic television revenues from TOMBSTONE, certain
domestic revenues from THE SCARLET LETTER and AMANDA and continuing domestic
and foreign overages from DIE HARD WITH A VENGEANCE.
15
<PAGE>
Amortization of film costs, residuals and participations decreased from
$204,544,000 for the year ended December 31, 1995 to $139,612,000 for the
year ended December 31, 1996 primarily due to the decrease in feature film
revenue recognized in the year ended December 31, 1996 as compared to the
year ended December 31, 1995. As described in Note 2 of Notes to the
Company's Consolidated Financial Statements, 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. The amortization of film costs, residuals and
participations for the year ended December 31, 1996 included $10,086,000 of
adjustments to reduce the cost of two films (EVITA and THE SHADOW CONSPIRACY)
released in 1996 and 1997, respectively, to their net realizable values
compared to $32,452,000 of adjustments for the year ended December 31, 1995
to reduce the costs of three films released in 1995 (JUDGE DREDD, THE SCARLET
LETTER and NIXON) to their net realizable value. It is the Company's policy
to write-off development costs incurred on projects which do not enter
production within three years after development costs are first incurred and
to capitalize these costs to motion pictures currently in production. In
1996, development costs of $3,246,000 were written off and were allocated to
current motion pictures in production as compared to write-offs of such costs
of $668,000 in 1995.
Selling, general and administrative ("SG&A") expenses (excluding
production overhead costs capitalized to film costs) increased from
$5,098,000 for the year ended December 31, 1995 to $9,752,000 for the year
ended December 31, 1996. The difference is primarily because indirect costs
attributable to the special effects facility were included in general and
administrative expense in the year ended December 31, 1996. For the year
ended December 31, 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 year
ended December 31, 1996 was also due to approximately $1,461,000 in legal
expenses in connection with the Investigation and lawsuits described in Note
10 of Notes to the Company's Consolidated 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 capitalized to film costs
increased from $6,591,000 in the year ended December 31, 1995 to $7,918,000
in the year ended December 31, 1996, and the total of SG&A expenses and
production overhead costs capitalized to film costs increased from
$11,689,000 for the year ended December 31, 1995 to $17,670,000 for the year
ended December 31, 1996, primarily due to the factors described above.
Interest expense increased from $241,000 for the year ended December
31, 1995 to $448,000 for the year ended December 31, 1996 because certain
interest expense paid to a related party was not capitalizable. 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 $11,106,000 for
the year ended December 31, 1995 to $6,836,000 for the year ended December
31, 1996. This decrease was due to the lower average outstanding balance of
the Company's production loans in the year ended December 31, 1996 as
compared to the year ended December 31, 1995. Four films were in various
stages of production during the year ended December 31, 1996 as compared to
six films during the year ended December 31, 1995.
16
<PAGE>
Fee income decreased from $298,000 for the year ended December 31, 1995
to $60,000 for the year ended December 31, 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.
As a result of the above, the Company had a net loss for the year ended
December 31, 1996 of $15,905,000 as compared to a net loss of $16,062,000 for
the year ended December 31, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Feature film revenues increased from $108,517,000 for the year ended
December 31, 1994 to $192,582,000 for the year ended December 31, 1995
primarily because of the higher revenues associated with DIE HARD WITH A
VENGEANCE, JUDGE DREDD and THE SCARLET LETTER as compared to the revenues
from TOMBSTONE, RENAISSANCE MAN and COLOR OF NIGHT in 1994. Feature film
revenues for the year ended December 31, 1994 include domestic and
international revenues from the release of TOMBSTONE, RENAISSANCE MAN and
COLOR OF NIGHT, the domestic home video revenues from TOMBSTONE and domestic
pay television and international television revenues for MEDICINE MAN.
Feature film revenues for the year ended December 31, 1995 include
principally domestic and international revenues from the theatrical release
of DIE HARD WITH A VENGEANCE, JUDGE DREDD and THE SCARLET LETTER and domestic
and certain international home video revenue from DIE HARD WITH A VENGEANCE.
Although NIXON was initially released on December 20, 1995, no revenues were
recognized until 1996. Feature film revenues in 1995 also included
$5,000,000 received in October 1995 from a major studio in exchange for an
actor relinquishing an acting commitment to the Company.
Amortization of film costs, residuals and participations increased from
$103,422,000 for the year ended December 31, 1994 to $204,544,000 for the
year ended December 31, 1995 primarily due to the increase in feature film
revenues recognized in the year ended December 31, 1995 as compared to the
year ended December 31, 1994. The amortization of film costs, residuals and
participations for the year ended December 31, 1995 included $32,452,000 of
adjustments to reduce the cost of two films released in 1994 (COLOR OF NIGHT
and RENAISSANCE MAN) and three films released in 1995 (JUDGE DREDD, THE
SCARLET LETTER and NIXON) to their net realizable value compared to
$6,343,000 of adjustments for the year ended December 31, 1994 to reduce the
costs of the two films released in 1994 indicated above to their net
realizable value. In addition, in 1995, development costs of $668,000 were
written off and were allocated to current motion pictures in production as
compared to write-offs of such costs of $1,187,000 in 1994.
SG&A expenses (excluding production overhead costs capitalized to film
costs) increased from $2,694,000 for the year ended December 31, 1994 to
$5,098,000 for the year ended December 31, 1995. This difference is primarily
due to a substantial portion of the overhead attributable to the Company's
visual effects facility, which was acquired in late 1994, not being
capitalized into film costs in 1995. Production overhead being capitalized
to films decreased from $7,236,000 for year ended December 31, 1994 as
compared to $6,591,000 for the year ended December 31, 1995. The total of
SG&A expenses and production overhead costs capitalized to film costs
increased from $9,930,000 for the year ended December 31, 1994 to $11,689,000
for the year ended December 31, 1995 primarily due to the overhead costs
associated with operations of the visual effects facility.
Interest expense decreased from $281,000 for the year ended December 31,
1994 to $241,000 for the year ended December 31, 1995. This decrease was due
primarily to a greater percentage of total interest expense being capitalized
to film costs due to the Company's having more films in production in 1995.
Interest expense of $5,465,000 was capitalized into film costs in 1994
compared to $10,865,000 in 1995. Interest expense, including interest
capitalized into film costs, increased from $5,746,000 for the year ended
December 31, 1994 to $11,106,000 for the year ended December 31, 1995. This
increase
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was due to the larger average outstanding balances of the Company's
production loans in the year ended December 31, 1995 as compared to the year
ended December 31, 1994. Six films were in various stages of production
during 1995 as compared to only three films in 1994.
Fee income decreased from $511,000 for the year ended December 31, 1994
to $298,000 for the year ended December 31, 1995. Fee income represented 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. See Note 6 of Notes to the Company's Consolidated Financial Statements.
Interest income increased from $264,000 for the year ended December 31,
1994 to $941,000 for the year ended December 31, 1995 due to higher cash
balances during 1995 resulting from the Company's public offering of
CommonStock which was completed in May 1995.
As a result of the above, the Company had a net loss for the year ended
December 31, 1995 of $16,062,000 as compared to net income of $2,895,000 for
the year ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a Credit, Security, Pledge and Guaranty Agreement dated
as of August 16, 1994 with Chase and a syndicate of lenders (collectively,
the "Lenders") which provides the Company with a revolving credit facility
(the "Credit Facility") initially in the amount of $150,000,000, but which
has been reduced to $50,000,000 at the request of the Company in order to
conserve fees on the unused portion of the commitment in light of the
Company's present intention not to commence production on any additional
motion pictures. The interest rate payable to Lenders on borrowings under
the Credit Facility is selected by the Company as either (i) 1.50% above the
London Inter-Bank Offered Rate ("LIBOR") in effect from time-to-time for one,
two, three or six months (if available as determined by Chase) as selected by
the Company, or (ii) a rate equal to the greatest of the prime rate plus
0.5%, the base CD rate plus 1.5%, and the federal funds rate plus 1%, as such
rates are in effect from time-to-time. The commitment fee on the average
daily unused portion of the commitment is 3/8ths of one percent per annum.
Under the Credit Facility, the Lenders have committed to make loans available
until August 31, 1997, although the Company does not currently contemplate
any additional borrowings under the Credit Facility.
The Credit Facility (which is secured by substantially all of the assets
of the Company, including $5,000,000 in proceeds from $10,000,000 in
aggregate "key man" life insurance on Mr. Vajna) matures on February 28,
1999. As of March 31, 1997, approximately $15,707,000 in borrowings were
outstanding under the Credit Facility, as of the same date, the interest rate
on the amounts outstanding under the Credit Facility was 7.15% per annum.
Substantially all of the amounts outstanding under the Credit Facility as of
March 31, 1997 relate to borrowings incurred in the production of the soon to
be completed AN ALAN SMITHEE FILM and in the production of BROADWAY BRAWLER
(on which production ceased after commencement of principal photography).
The Company is currently in discussions with certain parties involved in the
production of BROADWAY BRAWLER regarding settlement of various obligations in
connection therewith including, among other things, debt incurred under the
Credit Facility in connection with production of the film (approximately
$8,300,000) and advances (approximately $3,000,000) received from BVPD as
part of funding production (repayment of which is guaranteed in both cases by
the completion guarantor for the film), as well as shutdown costs and other
commitments made in connection with production of the film (approximately
$4,700,000). The completion guarantor for BROADWAY BRAWLER guaranteed
completion and delivery of a motion picture containing certain essential
elements. As the motion picture could not be completed without such essential
elements the completion guarantor is required to pay an amount equal to the
amount loaned by the Lenders and advanced by BVPD to make the motion picture
and such additional amounts as were required to complete delivery of the
motion picture and which had been committed prior to the shut down. The
Company anticipates that no significant amounts will be outstanding under its
Credit Facility
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assuming payment of the debt relating to BROADWAY BRAWLER and the assumption
by Disney, in accordance with the Library Sale Agreement, of the debt (up to
a maximum of $10,000,000, which the Company anticipates will not be exceeded)
relating to AN ALAN SMITHEE FILM. Management of the Company believes,
although no assurances can be given, that a settlement of the obligations
relating to BROADWAY BRAWLER will be reached. In the event a settlement is
not reached, management of the Company believes a substantial portion of any
obligations the Company might otherwise have with respect to BROADWAY BRAWLER
will be borne by the completion guarantor. The failure of the parties
involved in the production of BROADWAY BRAWLER to settle the various
obligations in connection therewith and any failure of the completion
guarantor to perform under the completion guaranty could have a material
adverse effect on the Company's financial condition.
The Company is not in compliance with three covenants under the Credit
Facility (the minimum consolidated net worth covenant, the limitation on
capital expenditures and the limitation on unallocated overhead costs) at
December 31, 1996 and is therefore in default under the Credit Facility. The
Company intends to seek waivers of such defaults from the lenders under the
Credit Facility, however there can be no assurance that lenders under the
Credit Facility willgrant such waivers. If the lenders were to accelerate
the amounts outstanding under the Credit Facility as a result of such
defaults, such acceleration would also constitute a default under the
Company's term loan agreements with BVPD described below. The Company,
however, believes that it currently has sufficient resources to satisfy the
amounts outstanding under the Credit Facility in the event the lenders were
to accelerate the amounts outstanding thereunder as a result of such defaults.
Pursuant to the BVPD Agreement, the Company currently has outstanding
term loan agreements with BVPD, the proceeds of which were used to finance a
portion of the costs of COLOR OF NIGHT, THE SCARLET LETTER, NIXON, THE SHADOW
CONSPIRACY and EVITA. Each loan bears interest at the prime rate in effect
from time to time (8.5% at March 31, 1997) plus 1.5%, and 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 such picture. Each of these loans
is 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 the other motion pictures financed by BVPD. The COLOR OF NIGHT
term loan with a balance of $6,265,000 at March 31, 1997 is 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 March 31, 1997, the aggregate amount outstanding
under all term loans from BVPD plus accrued interest was approximately
$38,400,000.
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 $3,393,000 in principal and accrued interest was
outstanding at March 31, 1997. See "Item 13 -- Certain Relationships and
Related Transactions."
In September 1995, the Company sold its interest in JUDGE DREDD to the
British corporation Lloyds Commercial Leasing Ltd. 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 "ABN Bank") to be used as
security for a guaranty of the lease payments issued by the ABN 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 ABN 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
ABN Bank were returned to the Company.
In November 1996, the Company also completed a sale-leaseback transaction
with respect to its motion picture EVITA. The Company sold its interest in
EVITA to Lloyds General Leasing Limited and concurrently leased the film back
pursuant to a 15 year lease. The Company retained approximately
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<PAGE>
$5,769,000 of the sale proceeds (after payment of related expenses) and
placed the remainder of the sale proceeds (an amount sufficient to satisfy
the anticipated aggregate lease payments over the term of the lease assuming
certain adjustments do not occur) on deposit with ABN Bank to be used as
security for a guaranty of the lease payments issued by the ABN Bank. The
amount retained by the Company reduced unamortized film costs. The
sale-leaseback transactions with respect to JUDGE DREDD and EVITA may be
unwound by Lloyds in certain circumstances relating to British tax treatment
of the transactions, and the Company could be liable for certain unwind costs
which could be substantial, although based upon Lloyd's discussions with
British taxing authorities prior to the JUDGE DREDD transaction, the Company
believes it is unlikely the transactions will be unwound. Pursuant to the
Library Sale Agreement, Disney has agreed, upon consummation of the Film
Library Sale to either acquire the Company's subsidiaries that are the
lessees in such sale-leaseback transactions or assume all of such
subsidiaries' rights and obligations under such leases, however, the Company
would remain responsible for any of the foregoing unwind costs.
The Company's cash flows provided by / (used in) operating, investing and
financing activities in 1994, 1995 and 1996 were as follows:
Year Ended December 31
-----------------------
1994 1995 1996
------ ------ ------
Operating................. (106,973,000) 76,200,000 21,438,000
Investing................. (1,402,000) (2,434,000) (587,000)
Financing................. 109,700,000 (46,599,000) (23,319,000)
Cash flow from operating activities consists primarily of cash collections
generated by the license or other exploitation of distribution and other film
rights by the Company. Investing activities consist primarily of expenditures
on property and equipment. Financing activities includes bank and other
borrowings, including loans from BVPD, and other activities that give rise to
additional cash to the Company (including offerings of securities).
At December 31, 1996, the Company had cash on hand of approximately
$27,364,000 (exclusive of restricted cash of $5,654,000).
CAPITAL COMMITMENTS
Management estimates that the direct negative cost of the one motion
picture currently in production and scheduled for release in 1997 (AN ALAN
SMITHEE FILM, which is now in post-production) will be approximately
$9,500,000 (of which, through March 31, 1997, $7,845,000 in direct negative
costs had been incurred). The Company estimates, based on information
currently available to management, that it will receive in excess of
$9,500,000 in advances and Minimum Guarantees with respect to such 1997
release and, therefore, the Company currently anticipates that it will not
have made an aggregate direct investment in such picture, through the date of
its release, excluding capitalized interest and overhead. There can be no
assurance that the motion picture 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. Adjustments to
the advances and Minimum Guarantees may occur on the above motion picture
with respect to currently
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licensed territories, although it is not possible to estimate at the present
time whether the amount of such will be significant and whether as a result
of any such adjustments the Company will have made an aggregate direct
investment (excluding capitalized interest and overhead) in such film. In
the event the Film Library Sale is consummated, Disney has agreed to assume
the outstanding debt under the Company's Credit Facility relating to AN ALAN
SMITHEE FILM (up to a maximum of $10,000,000, which the Company anticipates
will not be exceeded), and the Company will transfer to Disney all Minimum
Guarantees and any overages paid or to be paid with respect to the film. See
Note 10 of Notes to the Company's Consolidated Financial Statements for
information regarding certain additional commitments and contingencies,
including, among other things, commitments in connection with motion picture
projects in development and commitments under existing employment agreements
and the Company's Deferred Compensation Plan. See also "Item 11 -- Executive
Compensation - Employment Agreements."
In addition, as described under "Item 1 -- Business -- Distribution of
Motion Pictures -- Other Production and Distribution Arrangements," 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 picture or
$22,500,000, 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 latter
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, if the Film Library Sale is consummated, the Company
will be responsible for all payments due to Stone from February 10, 1997
through expiration of the arrangement in February 1998. The Company
currently estimates the payments due under the Stone Agreement during such
period will be approximately $1,875,000.
The Company has a Tax Reimbursement Agreement with Mr. Vajna for the
purpose of reimbursing him for certain tax liabilities he may incur which
relate to the termination of the Company's S Corporation election. See
"Certain Tax Matters" below.
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 up to the next 12
months.
INFLATION
Management believes that neither the Company's operating revenues nor
costs have materially increased in the last fiscal year due to inflation or
general price changes and, in particular, management believes that no
material increases in revenue were attributable to increases in ticket prices
for admission to motion picture theatres.
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CERTAIN TAX MATTERS
The Company and each of its domestic subsidiaries were S Corporations
from their incorporation through the tax year ended December 31, 1993.
Taxable income and the loss of the Company for 1993 and prior years was
included in the computation of the taxable income or loss of Mr. Vajna, the
Company's sole stockholder during those years. The corporate income tax
returns of the Company for its 1990, 1991, 1992 and 1993 fiscal years are
currently under audit by the Internal Revenue Service ("IRS") and California
Franchise Tax Board, and returns for the 1995 and 1996 fiscal years remain
open to audit. The Company anticipates no federal tax liability and only
minimal, if any, California tax liability as a result of any income tax
audits for pre-1994 years because of the S Corporation election in effect for
such years. In the absence of the agreement described below, Mr. Vajna, the
sole stockholder of the Company during such period, and not the Company would
be responsible for any tax liability assessed as a result of such audits of
pre-1994 years.
The Company received approximately $20,000,000 of advances (the
"Advances") during the fiscal year ended December 31, 1993. The Advances were
received in connection with motion pictures that were released during the
fiscal year ended December 31, 1994. Consistent with its financial accounting
for the Advances and prior tax reporting practices, the Company did not
include the Advances in its 1993 taxable income, and instead included such
amounts -- and deducted the related costs -- in computing its taxable income
for the year in which the underlying motion pictures were released, in this
case 1994. It is possible, however, that the IRS will challenge the Company's
tax treatment of the Advances, and if the IRS were successful in that
challenge, the Company would be required to include the Advances in the
computation of its 1993 taxable income without an offsetting deduction in
1993 for costs associated with those motion pictures. As a result of the S
Corporation election then in effect, such an adjustment (an "Adjustment") to
the Company's 1993 taxable income would cause acorresponding increase in the
taxable income of Mr. Vajna and, therefore, a significant increase in Mr.
Vajna's tax liability for 1993. However, if the Company has cumulative
taxable income in 1994 through 1997 (exclusive of the Advances), it would
obtain a benefit from the Adjustment in the form of a reduction in its 1994
taxable income and related tax liability as it would not be required to
include the Advances in its 1994 taxable income.
Therefore, should Mr. Vajna's tax liability for 1993 increase as a
result of the Adjustment (i.e., acceleration of 1994 income into 1993) and
only if the Company does have cumulative taxable income in 1994 through 1997
(exclusive of the Advances) and thereby obtains a corresponding decrease in
its tax liability, the Company has agreed to reimburse Mr. Vajna for the
increase in his 1993 income tax liability. For purposes of calculating
cumulative taxable income for the period 1994 through 1997, the effect of any
post-1997 net operating loss carrybacks will not be taken into account. From
January 1, 1994 through December 31, 1996, the Company had a cumulative
taxable loss (treating income relating to the Advances as taxable income in
1994) in excess of $20,000,000.
In order to allow the reimbursement, if required, to be paid to Mr. Vajna
under tax free provisions of the tax law, the Company paid $10,000,000 to
Mr. Vajna on June 8, 1994. Mr. Vajna previously loaned the Company $10,000,000
to assist in funding the distribution.
Pursuant to the Company's agreement with Mr. Vajna, should the Company
not receive the tax benefit as described above, the Company may offset the
$10,000,000 loan payable to Mr. Vajna against a receivable from Mr. Vajna
created to reflect the possibility that the Company will not get such
benefit. Pursuant to the legal right of offset, such loan payable and
corresponding receivable are netted against
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one another for financial reporting purposes. See "Item 13 -- Certain
Relationships and Related Transactions -- Tax Reimbursement Agreement with Mr.
Vajna."
At December 31, 1996, the Company had a federal net operating loss
carryforward of approximately $59,406,000 which expires in 2011.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Report of Independent Auditors, Consolidated Financial Statements
and Notes to the Company's Consolidated Financial Statements appear in a
separate section of this report (beginning on page F-1) following Part IV.
See the Index to Financial Statements under "Item 14 -- Exhibits, Financial
Statement Schedules, and Reports on Form 8-K".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth information with respect to the current
directors and executive officers of the Company:
NAME AGE POSITION DATE JOINED
- - ----- --- -------- CINERGI
----------
Andrew G. Vajna 52 Chairman of the Board of Directors, November 1989
President and Chief Executive Officer
Warren Braverman 58 Chief Operating Officer, Chief March 1990
Financial Officer, Executive Vice
President and Director
Fred R. Feitshans 60 President of Production October 1991
Randolph M. Paul 45 Senior Vice President, Business April 1993
Affairs and Director
Dianne Caplan 43 Director March 1990
Lebovits
R. Timothy 41 Director March 1994
O'Donnell
Gregory R. Paul 39 Director March 1994
The directors of the Company are divided into three classes having terms
expiring at the annual meetings of the Company's stockholders in 1997 (Messrs.
Braverman and Vajna), 1998 (Ms. Lebovits and Mr. Gregory R. Paul), and 1999
(Messrs. Randolph M. Paul and R. Timothy O'Donnell) or such later dates as
their successors are elected and have qualified. At each annual meeting of
the stockholders, successors to the class of directors whose terms expire at
such meeting will be elected to serve for three-year terms and until their
successors are elected and have qualified. All officers serve at the
discretion of the Board of Directors, subject to any applicable employment
agreements. Mr. Vajna's employment agreement with the Company provides that he
will serve as Chairman of the Board and a member of the supervisory or
comparable committee (including the Executive Committee), in addition to
serving as Chief Executive Officer. Mr. Braverman's employment agreement
provides that, during the term of the agreement, he will be included in
management's slate of directors nominated for approval by the Company's
stockholders. His employment agreement also provides that he is entitled to be
a member of the Executive Committee during the term thereof. See "Employment
Agreements" below. Randolph M. Paul and Gregory R. Paul are not related.
CURRENT DIRECTORS AND EXECUTIVE OFFICERS
ANDREW G. VAJNA founded the Company in November 1989 and has served as
Chairman of the Board of Directors, President and Chief Executive Officer of
the Company since such date. He is the producer of MEDICINE MAN, THE SCARLET
LETTER, NIXON, AN ALAN SMITHEE FILMY and EVITA, and he is executive producer
of TOMBSTONE, RENAISSANCE MAN, COLOR OF NIGHT, JUDGE DREDD, THE SHADOW
CONSPIRACY and DIE HARD WITH A VENGEANCE. Mr. Vajna co-founded the motion
picture company Carolco Pictures Inc. ("Carolco") in 1986 (and Carolco's
predecessor in 1975) and served as Co-Chairman of its Board of Directors until
November 1989 when he sold virtually all of his interest at that time in
Carolco. During such period, Mr. Vajna was co-executive producer of many well
known films, including FIRST
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BLOOD, RAMBO: FIRST BLOOD PART II and TOTAL RECALL. In 1982, Mr. Vajna was a
founder and subsequently served as President of the American Film Marketing
Association.
WARREN BRAVERMAN joined the Company in March 1990 and has served as Chief
Operating Officer, Chief Financial Officer, Executive Vice President and a
Director of the Company since such date. From 1985 through February 1990, Mr.
Braverman was the Chief Financial Officer and Executive Vice President of
Carolco, and he served as a director of Carolco from 1986 through February
1990.
FRED R. FEITSHANS joined the Company in October 1991 and has
served asPresident of Production since such date. Mr. Feitshans also served
as a Director of the Company from March 1994 through May 1996. From 1986 until
joining the Company, Mr. Feitshans served as Executive Vice President and a
director of Carolco. Mr. Feitshans has been a film producer for 19 years with
credits including CONAN THE BARBARIAN, RED DAWN, 1941, FIRST BLOOD, RAMBO:
FIRST BLOOD PART II, EXTREME PREJUDICE, RAMBO III, TOTAL RECALL, TOMBSTONE,
COLOR OF NIGHT, THE SHADOW CONSPIRACY and DIE HARD WITH A VENGEANCE.
RANDOLPH M. PAUL has served as Senior Vice President, Business Affairs
since January 1994 and a Director of the Company since March 1994. Mr. Paul
began providing business affairs services to the Company in April 1993 (when
he joined the Company). From 1991 through 1992, Mr. Paul was Senior Vice
President of Business Affairs for Sovereign Pictures, Inc., a production
company and distributor of motion pictures in international markets. From
January 1, 1993 through March 31, 1993, Mr. Paul provided business affairs
services to the Company as an independent contractor. From 1986 through 1990,
he served as Senior Vice President of Business Affairs at Miramax Film Corp.,
a production and domestic distribution company.
DIANNE CAPLAN LEBOVITS joined the Company in March 1990 and has served as
a Director of the Company since such date. Ms. Lebovits also served as General
Counsel, Executive Vice President and Corporate Secretary of the Company from
March 1990 until her resignation from such positions in August 1996. From
1984 through 1988, Ms. Lebovits was a principal in, and from 1989 until
joining the Company "of counsel" to, the law firm of Gipson Hoffman &
Pancione, P.C. in Los Angeles, California.
R. TIMOTHY O'DONNELL became a Director of the Company in March 1994. He
is currently President of Jefferson Capital, a privately-held investment
banking group which he co-founded in August 1989. Mr. O'Donnell serves on the
board of directors of Shorewood Packaging Corporation (a specialty packaging
company), and All American Communications Inc. (a diversified entertainment
company).
GREGORY R. PAUL became a Director of the Company in March 1994. Mr. Paul is
a Managing Director of BT Securities Corporation, an affiliate of Bankers Trust
Company. Mr. Paul joined Bankers Trust Company in 1981. Since 1985, Mr. Paul has
specialized in the financing of media and entertainment companies.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers and persons who own
more than 10% of the Company's Common Stock ("10% Stockholders") to file with
the Securities and Exchange Commission (the "Commission") initial reports of
ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Executive officers, directors and 10%
Stockholders of the Company are required by Commission regulations to furnish
the Company with copies of Section 16(a) forms they file. Based on a review
of the copies of Section 16(a) forms furnished to the Company during and with
respect to the fiscal year ended December 31, 1996, the following directors
of the Company, Messrs. R. Timothy O'Donnell and Gregory R. Paul and Ms.
Dianne Caplan Lebovits each filed late with the Commission their Form 5
(Annual Statement of Beneficial Ownership of Securities) with respect to the
year ended December 31, 1996. In each such case, the Form 5 was required to
be filed by such director solely to report an automatic grant to the director
on December 1, 1996 of options to purchase 5,000 shares of Common Stock of
the Company pursuant to the Company's 1994 Special Stock Option and Stock
Appreciation Rights Plan. Except for the foregoing, to the Company's
knowledge, based solely upon a review of the Forms 3 and 4 and amendments
thereto furnished to the Company during its most recent fiscal year, the
Forms 5 furnished to the Company with respect to its most recent fiscal year,
and written representations of the Company's directors, executive officers
and 10% Stockholders, during the fiscal year ended December 31, 1996, all
Section 16(a) filing requirements applicable to the Company's executive
officers, directors and 10% Stockholders were complied with.
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ITEM 11. EXECUTIVE COMPENSATION
The following "Summary Compensation Table" sets forth individual
compensation information with respect to the Company's Chief Executive
Officer, Andrew G. Vajna, and four other executive officers of the Company
during the fiscal year ended December 31, 1996 whose total salary and bonus
compensation during fiscal 1996 was in excess of $100,000, including three
individuals who were serving as executive officers at the end of fiscal 1996
(Messrs. Braverman, Feitshans and Randolph M. Paul) and Ms. Lebovits, who
resigned as an executive officer and employee of the Company in August 1996.
Such five executives are referred to herein as the "Named Executives." The
Summary Compensation Table includes compensation information with respect to
the Named Executives for services rendered as executive officers to the
Company and its subsidiaries during the fiscal years ended December 31, 1994,
1995 and 1996.
Following the Summary Compensation Table are certain additional charts
and tables detailing other aspects of the compensation of the Named
Executives including (i) an Option/SAR Grants Table that includes information
regarding individual grants of options made to the Named Executives during
fiscal 1996 along with the grant date present value of such options, (ii) a
table that indicates whether any of the Named Executives exercised options in
fiscal 1996 and includes the number and value of unexercised options held by
the Named Executives at December 31, 1996, and (iii) a Long-Term Incentive
Plans ("LTIP") Table that includes information on LTIPs awarded during fiscal
1996 to the Named Executives.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------------------------------
OTHER ANNUAL
NAME AND COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)
- - ------------------ ---- ---------- ----------- -----------
ANDREW G. VAJNA 1996 $1,000,000 $250,000(1) $224,421(2)
CHAIRMAN OF THE BOARD, 1995 1,000,000 250,000(1) 86,000(3)
PRESIDENT AND CHIEF 1994 1,000,000 250,000(1) 67,963(3)
EXECUTIVE OFFICER
WARREN BRAVERMAN 1996 $531,000 $150,000 (12)
CHIEF OPERATING 1995 508,000 150,000 130,000(8)
OFFICER, CHIEF 1994 465,000 96,000(10) 300,000(8)
FINANCIAL OFFICER AND
EXECUTIVE VICE
PRESIDENT
DIANNE CAPLAN LEBOVITS 1996 $250,000 $ 50,000 (12)
EXECUTIVE VICE 1995 387,000 100,000 130,000(8)
PRESIDENT, GENERAL 1994 350,000 100,000(13) 300,000(8)
COUNSEL AND CORPORATE
SECRETARY (THROUGH
AUGUST 1996)
FRED R. FEITSHANS 1996 $500,000 -0- (12)
PRESIDENT OF PRODUCTION 1995 500,000 -0- (12)
1994 500,000 -0- (12)
RANDOLPH M. PAUL 1996 $215,089 $ 12,000 (12)
SENIOR VICE PRESIDENT, 1995 177,000 10,000 (12)
BUSINESS AFFAIRS 1994 168,759 12,500 (12)
LONG TERM COMPENSATION
------------------------------------------
AWARDS PAYOUTS
------------------------- ------------
SECURITIES
RESTRICTED UNDERLYING ALL OTHER
NAME AND STOCK OPTIONS/ LTIP COMPENSATION
PRINCIPAL POSITION AWARDS($) SARS(#) PAYOUTS($) ($)
- - ------------------ ---------- ----------- ------------ ------------
ANDREW G. VAJNA -0- -0- $293,147(4) $33,350(5)
CHAIRMAN OF THE BOARD, -0- -0- 32,278(4) 33,350(5)
PRESIDENT AND CHIEF -0- -0- -0- 16,700(5)
EXECUTIVE OFFICER
WARREN BRAVERMAN -0- -0- -0- $ 5,760(9)
CHIEF OPERATING -0- -0- -0- 4,260(9)
OFFICER, CHIEF $450,000(11) -0- -0- 4,260(9)
FINANCIAL OFFICER
AND EXECUTIVE VICE
PRESIDENT
DIANNE CAPLAN LEBOVITS -0- 5,000 -0- $ 2,656(9)
EXECUTIVE VICE -0- -0- -0- 4,260(9)
PRESIDENT, GENERAL $450,000(11) -0- -0- 4,260(9)
COUNSEL AND CORPORATE
SECRETARY (THROUGH
AUGUST 1996)
FRED R. FEITSHANS -0- 10,000 -0- -0-
PRESIDENT OF PRODUCTION -0- 50,000 -0- -0-
-0- 10,000(14) -0- -0-
RANDOLPH M. PAUL -0- 5,000 -0- -0-
SENIOR VICE PRESIDENT, -0- 10,000 -0- -0-
BUSINESS AFFAIRS -0- 4,000(15) -0- -0-
- - ---------------------
(FOOTNOTES TO THE TABLE ARE SET FORTH ON THE FOLLOWING PAGE)
27
<PAGE>
FOOTNOTES TO THE SUMMARY COMPENSATION TABLE
(1) Represents commencement fees paid pursuant to Mr. Vajna's employment
agreement (described under "Employment Agreements" below) in the amount of
$125,000 for each of THE SHADOW CONSPIRACY and EVITA in 1996, for each of
THE SCARLET LETTER and NIXON in 1995 and for each of DIE HARD WITH A
VENGEANCE and JUDGE DREDD in 1994. Although principal photography commenced
on a third motion picture during 1995 (THE SHADOW CONSPIRACY), Mr. Vajna's
employment agreement limits his commencement fees to $250,000 per year.
The employment agreement permits the carryover of such fees to future years
during the term of the agreement, subject to the $250,000 yearly maximum.
Mr. Vajna has agreed to forego his commencement fee for AMANDA. Mr. Vajna
received a commencement fee for AN ALAN SMITHEE FILM in 1997.
(2) Includes the cost of past financial planning, legal and related services
provided by the Company to Mr. Vajna in the amount of $162,000 and for
which the Company's Audit Committee to determine reimbursement by
Mr. Vajna will not be required.
(3) Includes legal fees in the amount of $50,000 incurred by Mr. Vajna and paid
by the Company pursuant to Mr. Vajna's employment agreement. Also includes
in 1995, Company paid health insurance and medical reimbursements for Mr.
Vajna and his family in the amount of $23,000.
(4) Represents Producer's performance fees paid in connection with TOMBSTONE.
See the "Long-Term Incentive Plans -- Awards in Last Fiscal Year" table
below.
(5) Represents Company paid term life insurance for which designees of
Mr. Vajna are the beneficiaries.
(8) Represents the amount paid by the Company on behalf of the Named Executive
to assist the Named Executive in discharging federal and state income taxes
in connection with the stock purchase disclosed in the "Restricted Stock
Awards" column and described in footnote 11 below. Perquisites with respect
to such Named Executive did not exceed the lesser of $50,000 or 10% of such
executive officer's salary and bonus.
(9) Represents imputed interest for the fiscal year (at the applicable federal
rate) on an outstanding $50,000 non-interest bearing loan to the Named
Executive and on an $18,000 non-interest bearing advance.
(10) Represents a bonus equal to 3% of the Company's earnings before interest
and taxes (but exclusive of investment income) earned pursuant to
Mr. Braverman's employment agreement.
(11) Represents the difference between the price paid by the Named Executive for
372,341 shares of restricted Common Stock purchased from the Company in
1994 and the value of such Common Stock on the date of purchase, which was
prior to the establishment of a public trading market for the Company's
Common Stock. All of Mr. Braverman's shares are vested. Ms. Lebovits'
shares have been repurchased by the Company. See "Item 13 -- Certain
Relationships and Related Transactions."
(12) Perquisites with respect to such Named Executive did not exceed the lesser
of $50,000 or 10% of such executive officer's salary and bonus.
(FOOTNOTES CONTINUE ON THE FOLLOWING PAGE)
28
<PAGE>
(13) Paid pursuant to Ms. Lebovits' employment contract which expired on March
12, 1995.
(14) Represents an option for 5,000 shares of Common Stock granted in 1994 and
an option for an identical number of underlying shares granted upon
cancellation of such prior grant as part of a stock option cancellation and
reissuance program.
(15) Represents an option for 2,000 shares of Common Stock granted in 1994 and
an option for an identical number of underlying shares granted upon
cancellation of such prior grant as part of a stock option cancellation and
reissuance program.
(COMPENSATION TABLES CONTINUE ON THE FOLLOWING PAGE)
29
<PAGE>
OPTION/SAR GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
GRANT DATE
INDIVIDUAL GRANTS VALUE
-------------------------------------------------- ----------
% OF TOTAL
NUMBER OF OPTIONS/SARS
SECURITIES GRANTED TO EXERCISE GRANT DATE
UNDERLYING EMPLOYEES OR BASE PRESENT
OPTIONS/SARS IN FISCAL PRICE EXPIRATION VALUE(2)
NAME GRANTED(#)(1) YEAR ($/SH) DATE ($)
- - ------------------- ------------- ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Andrew G. Vajna 0 -- -- -- --
Warren Braverman 0 -- -- -- --
Dianne Caplan Lebovits 5,000(3) (4) $2.00(6) 12/1/06 $ 8,800
Fred R. Feitshans 10,000(5) 20% $2.00(6) 9/18/06 $17,600
Randolph M. Paul 5,000(5) 10% $2.00(6) 9/18/06 $ 8,800
</TABLE>
- - -------------------
(1) Although the Company's stock option plans provide for the granting of stock
appreciation rights, no grant of such rights has been made by the Company.
(2) These values were established using the modified Black-Scholes stock
option valuation model which modifies the Black-Scholes model to include
the impact of the right to exercise options prior to their maturity. The
actual value, if any, an executive may realize upon exercise of such
options will depend upon the excess of the stock price over the exercise
price on the date the option is exercised. Therefore, there can be no
assurance that the value realized by an executive will be at or near the
value estimated by this Black-Scholes model. The estimated values under the
model are based on arbitrary assumptions as to variables and as to interest
rates, stock price volatility and future dividend yield. The above model
assumes a period of three years after grant until exercise, a volatility of
the stock price equal to that experienced in 1996 (standard deviation
0.9425), an interest rate of 6.48% (rate as of the grant date of U.S.
Treasury Notes with a term of three years) and a dividend yield of 0%.
(3) Options for these shares vested immediately on the date of grant (December
2, 1996).
(4) These options were granted after Ms. Lebovits resigned as Executive Vice
President, General Counsel and Corporate Secretary of the Company and
represent an automatic grant of options pursuant to the Company's 1994
Special Stock Option and Stock Appreciation Rights Plan to Ms. Lebovits as
a non-employee member of the Company's Board of Directors. See "Board
Fees" below.
(5) Options for one-third of these shares vest one year after the date of grant
(September 18, 1996), options for another one-third vest two years after
the date of grant and options for the final one-third vest three years
after the date of grant.
(6) Market price of the Company's Common Stock on the date of grant (September
18, 1996 in the case of Messrs. Feitshans and Paul and December 2, 1996 in
the case of Ms. Lebovits).
30
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS/SARS
OPTIONS/SARS AT AT
DECEMBER 31, DECEMBER 31,
1996 1996
SHARES
ACQUIRED ON EXERCISABLE/ EXERCISABLE/
EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) ($)
- - ---------------- ----------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Andrew G. Vajna 0 $ 0 0 (2) $ 0
Warren Braverman 0 0 0 (2) 0
Dianne Caplan Lebovits 0 0 5,000/0 0/0
Fred R. Feitshans 0 0 29,999/65,000 0/0
Randolph M. Paul 0 0 7,001/17,000 0/0
</TABLE>
- - --------------------------
(1) Although the Company's stock option plans provide for the granting of
stock appreciation rights, no grant of such rights has been made by the
Company.
(2) The Named Executive did not hold any options at December 31, 1996.
LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK PRICE-BASED PLANS
---------------------------------
PERFORMANCE OR
NUMBER OF OTHER PERIOD
SHARES, UNITS UNTIL
OR OTHER RIGHTS MATURATION OR THRESHOLD TARGET MAXIMUM
NAME (#) PAYOUT ($ OR #) ($ OR #) ($ OR #)
- - ---------------- --------------- ------------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
Andrew G. Vajna (1) (1) (3) (2) (3)
Warren Braverman 0 -- -- -- --
Dianne Caplan 0 -- -- -- --
Lebovits
Fred R. Feitshans 0 -- -- -- --
Randolph M. Paul 0 -- -- -- --
</TABLE>
- - --------------------------
(1) Pursuant to his employment agreement, Mr. Vajna is entitled to receive
producer's performance fees with respect to each of the Company's motion
pictures for which principal photography has
(FOOTNOTES CONTINUE ON THE FOLLOWING PAGE)
31
<PAGE>
commenced after January 1, 1993 but before December 31, 1998, in an amount
equal to three percent of "Gross Receipts" commencing at "Actual Break-Even"
(as defined in Mr. Vajna's employment agreement and described below under
"Employment Agreements") and payable solely out of the Company's receipts
from the exploitation of such motion picture in excess of Actual Break-Even.
(2) As of December 31, 1996, Mr. Vajna had earned producer's performance fees
only on TOMBSTONE ($32,278 and $293,147 in such fees were paid in 1995 and
1996, respectively). See "Summary Compensation Table" above.
(3) Not Applicable.
BOARD FEES
Pursuant to one of the Company's stock option plans, each member of the
Compensation Committee of the Board of Directors and each other member of the
Board of Directors who is not employed by the Company receives an automatic
annual grant on December 1 of each year of non-qualified stock options to
purchase 5,000 shares of Common Stock at the fair market value of the Common
Stock on the date of grant. In addition, each member of the Board of
Directors who is not employed by the Company and who serves on a committee of
the Board (other than the Executive Committee) receives $20,000 per year for
committee service, and the Company reimburses all directors for travel
expenses incurred in connection with their activities on behalf of the
Company. Directors of the Company are not otherwise compensated for serving
on the Board of Directors.
In addition to the foregoing, please see "Item 13 -- Certain
Relationships and Related Transactions" for a description of certain
transactions involving certain directors and their affiliates and the Company
and its affiliates.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee was established in March 1994 and
currently consists of Gregory R. Paul and R. Timothy O'Donnell. Harry M.
Brittenham, formerly a Director of the Company, was appointed to the
Compensation Committee in May 1996 but attended no meetings of such committee
and took no action as a member of such committee prior to his resignation
from such committee as of September 1, 1996.
Mr. O'Donnell is the President of Jefferson Capital, a privately-held
investment banking group, which was retained by the Company in 1996 to assist
the Company in its strategic review. As agreed in connection therewith, in
1996, Jefferson Capital received a retainer of $75,000 and was reimbursed
expenses amounting to approximately $13,000. In the event the Film Library
Sale is successfully consummated, Jefferson Capital will be entitled to
receive an additional fee of approximately $472,000. In the event additional
dispositions of assets or other similar transactions are consummated,
Jefferson Capital will also be entitled to additional fees based upon the
size of such transactions.
32
<PAGE>
INDEMNIFICATION
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. 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. The Company also advanced the expenses of
certain of its employees, officers and directors in connection with the
purported class action lawsuits which were dismissed in January 1997. See
"Item 3 -- Legal Proceedings" and "Item 13 -- Certain Relationships and
Related Transactions."
EMPLOYMENT AGREEMENTS
ANDREW G. VAJNA. Andrew G. Vajna has an employment agreement with the
Company, dated as of January 1, 1994, which was amended as of December 16,
1994 (all references to his employment agreement herein are to the employment
agreement, as amended). The employment agreement provides for his services as
Chairman of the Board of Directors, Chief Executive Officer, and a member of
the Executive (or comparable) Committee, for a term which commenced as of
January 1, 1994 and ends December 31, 1998 (the "Term"). Although Mr. Vajna's
production services are exclusive to the Company during the Term, the
agreement permits Mr. Vajna to continue to be actively involved in the
management of certain corporations in which he has a direct or indirect
ownership interest and which include Intercom KFT, a distributor of motion
pictures in Hungary to which the Company licenses Hungarian distribution
rights in various media for its motion pictures and Blackburn International
Casino KFT, the operator of a casino in Hungary. See "Item 13 -- Certain
Relationships and Related Transactions." As compensation for his services,
Mr. Vajna receives fixed compensation of $1,000,000 per year. Mr. Vajna is
also entitled to receive a commencement fee of $125,000 for each motion
picture produced by the Company for which principal photography commences
after January 1, 1994, up to a maximum of $250,000 per year (but with
carryovers of such fees allowed subject to the yearly maximum). Mr. Vajna is
also entitled to receive producer's performance fees with respect to each of
the Company's motion pictures for which principal photography has commenced
after January 1, 1993 but before the end of the Term in an amount equal to
three percent of Gross Receipts commencing at Actual Break-Even and payable
solely out of the Company's receipts from the exploitation of such motion
picture in excess of Actual Break-Even. "Gross Receipts" are all amounts
received by or credited to the account of the Company or an affiliate in
connection with the worldwide exploitation of a motion picture. "Actual
Break-Even" for each picture is the sum of (i) the Company's and its
affiliates' actual production costs and interest thereon, (ii) certain
related financing fees and costs, (iii) overhead and (iv) certain
distribution costs and participations. Mr. Vajna's agreement also provides
for such additional incentive compensation as may be approved by the
Company's Board of Directors, demand registration rights for Common Stock
held by Mr. Vajna or his affiliates, and certain fringe benefits, including
reimbursement of Mr. Vajna's personal, legal and accounting expenses in an
amount not to exceed $50,000 per year.
33
<PAGE>
If the agreement is terminated by Mr. Vajna due to a material breach by
the Company or by the Company other than for "Cause," "Death," or
"Disability" (as such terms are defined in the agreement), Mr. Vajna will
receive a payment equal to 200% of the aggregate of all fixed annual
compensation discounted to its then present value at a discount rate of five
percent per annum with respect to each future payment, plus any commencement
fees, producer's performance fees and additional incentive compensation due
and payable to Mr. Vajna as of the date of termination. Mr. Vajna will also
receive any commencement fees and producer's performance fees to which he may
thereafter become entitled relating to motion pictures for which principal
photography commenced prior to termination. Mr. Vajna will also be entitled,
under limited circumstances, to acquire from the Company all rights to
certain projects in development at the time of such termination upon
reimbursement of all costs incurred by the Company in connection with the
projects, plus interest, and payment to the Company of a percentage of the
revenues thereafter generated by each such project.
Mr. Vajna's employment agreement, which provides that Mr. Vajna's
production services will be exclusive to the Company, permits Mr. Vajna to
continue to be involved in the management of certain corporations in which he
has direct and indirect ownership interests. The Company does not anticipate
that Mr. Vajna's other activities will occupy a material portion of Mr.
Vajna's time and the BVPD Agreement provides that such activities may not
materially interfere with Mr. Vajna's activities on behalf of the Company.
WARREN BRAVERMAN. Warren Braverman has an employment agreement, dated
as of January 1, 1994, which was amended as of December 16, 1994 and as of
January 1, 1997 (all references to his employment agreement herein are to the
employment agreement, as amended). The employment agreement provides for his
services as Chief Operating Officer of the Company from January 1, 1994
through December 31, 1999. Under the agreement, Mr. Braverman receives an
annual base salary of $556,000 for 1997, $584,000 for 1998 and $613,000 for
1999 ("Fixed Annual Compensation"). Pursuant to the last amendment, Mr.
Braverman also received a signing bonus of $600,000 of which $300,000 was
used to fully repay two loans previously made by the Company to Mr. Braverman
(a $250,000 loan bearing interest at 7% per annum, which matured December 31,
1996 and a $50,000 interest free loan maturing September 30, 1997). Mr.
Braverman is also entitled to annual incentive compensation in an amount
equal to 3% of the Company's earnings before interest and taxes (but
exclusive of investment income) ("EBIT") until Mr. Braverman has received
$1,000,000 of such incentive compensation, 2% of EBIT for the next $1,000,000
of such incentive compensation, and 1% of EBIT thereafter ("Incentive
Compensation").
If Mr. Braverman's employment is terminated by the Company for any
reason other than material breach, death or disability or by Mr. Braverman
due to a material breach by the Company, Mr. Braverman is entitled to receive
all (i) Fixed Annual Compensation, (ii) Incentive Compensation and (iii)
health insurance benefits due under the agreement through the term. If Mr.
Vajna's employment agreement is terminated due to a material breach of such
agreement by the Company, Mr. Braverman will be entitled to terminate his
employment agreement (subject to a twelve month transition period during
which he shall continue to serve thereunder) and to receive all compensation
described in the preceding sentence. Mr. Braverman is not required to
mitigate his damages in the event he is entitled under the employment
agreement to terminate his employment.
34
<PAGE>
CERTAIN INFORMATION CONCERNING STOCK OPTION AND OTHER PLANS
STOCK OPTION PLANS. The Company has two stock-based incentive
compensation plans for the Company's employees and certain other persons
providing services to the Company: the Cinergi Pictures Entertainment Inc.
1994 Basic Stock Option and Stock Appreciation Rights Plan (the "Basic Plan")
and the Cinergi Pictures Entertainment Inc. 1994 Special Stock Option and
Stock Appreciation Rights Plan (the "Special Plan") (collectively, the
"Plans"). All of the Company's regular full-time employees, and all other
persons (including directors and consultants) providing services to the
Company on a regular or substantial basis, are eligible to participate in the
Basic Plan. The Special Plan is designed to provide alternative procedures in
meeting special requirements imposed by federal income tax law relating to
compensation expense deductions for making grants to certain key or highly
compensated employees. Accordingly, only officers, directors who are also
employed by the Company and non-clerical salaried employees of the Company
are eligible to participate in the Special Plan. As of March 31, 1997,
options to purchase an aggregate of 255,000 shares of Common Stock were
outstanding under the Plans with exercise prices ranging from $2 to $8 per
share.
DEFERRED COMPENSATION PLAN. Under the Company's Deferred Compensation
Plan, the executive officers of the Company may elect by written notice to
the Company on or before the close of the fiscal year to credit to an account
such portion of the employee's base annual compensation and/or incentive
compensation for the succeeding year as may be selected by the employee.
Amounts credited tothis account shall be kept in cash or invested in mutual
funds, stocks, bonds, securities or such other assets as may be selected by
the Board of Directors of the Company or an investment advisor selected by
the Company. The return (if any) or loss from these investments will be
credited or debited (as the case may be) to such account. To date, Mr.
Braverman is the only executive officer of the Company who has elected to
participate in the Deferred Compensation Plan.
35
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of March 31, 1997 by
(i) each person known to the Company to be the beneficial owner of more than
5% of the Common Stock, (ii) each director of the Company, (iii) each of the
Named Executives listed in the Summary Compensation Table under "Item 11 --
Executive Compensation" above, and (iv) all executive officers and directors
as a group. Unless otherwise indicated in the footnotes following the table,
the persons as to whom the information is given had sole voting and
investment power over the shares of Common Stock shown as beneficially owned
by them, subject to community property laws where applicable.
PERCENT OF
NUMBER OF SHARES COMMON STOCK
OF COMMON STOCK BENEFICIALLY
BENEFICIALLY OWNED OWNED
NAME (1)(2) (1)(2)
- - ---- ------------------ --------------
Andrew G. Vajna . . . . . . . . 5,863,872 (3)(4) 43.6%
Valdina Corporation N.V.(5) . . 957,446 7.1%
Warren Braverman . . . . . . . . 373,591 (6) 2.8%
Dianne Caplan Lebovits . . . . . 7,500 (7) *
Fred R. Feitshans . . . . . . . 29,999 (8) *
Randolph M. Paul . . . . . . . . 7,001 (8) *
R. Timothy O'Donnell . . . . . . 76,250 (9) *
Gregory R. Paul . . . . . . . . 15,000 (8) *
The Walt Disney Company . . . . . 705,556 (10) 5.2%
All executive officers &
directors as a group (seven persons) 6,000,872 (11) 44.2%
- - ------------------
* Less than 1%
(1) The number of shares and percentages in this table and accompanying
footnotes are based on 13,446,874 shares of Common Stock outstanding as of
March 31, 1997.
(2) The shares of Common Stock underlying immediately exercisable options,
warrants or rights, or immediately convertible securities, or shares of
Common Stock underlying options, warrants, rights or convertible securities
that become exercisable or convertible within 60 days of March 31, 1997,
are deemed to be outstanding for the purpose of calculating the number and
percentage beneficially owned by the holder of such options, warrants,
rights or convertible securities, but are not deemed to be outstanding for
the purpose of computing the percentage beneficially owned by any other
person.
(FOOTNOTES CONTINUE ON THE FOLLOWING PAGE)
36
<PAGE>
(3) Includes the right to vote 372,341 shares of Common Stock pursuant to an
irrevocable proxy granted to Mr. Vajna by Mr. Braverman (which continues
during Mr. Braverman's ownership of the shares for the maximum period
permitted by applicable law). See footnote 6 below. Does not include any
shares of Common Stock held by Valdina which is indirectly owned 49.9% by
Mr. Vajna and 50.1% by The Mong Family Trust. See footnote 5 below. Mr.
Vajna has disclaimed beneficial ownership of any such shares as he does not
have voting, investment or dispositive power with respect to such shares.
In the event Mr. Vajna were deemed to beneficially own the shares of Common
Stock held by Valdina, he could be deemed to beneficially own 6,821,318
(50.7%) of the shares outstanding as of March 31, 1997.
(4) The business address of Mr. Vajna is in care of the Company, 2308 Broadway,
Santa Monica, California 90404.
(5) Valdina Corporation N.V. is indirectly beneficially owned 49.9% by
Mr. Vajna and 50.1% by The Mong Family Trust, which benefits certain
descendants of Mong Hing Yan, including the son of Mr. Vajna, and the
trustee of which is BT Trustees (Jersey) Ltd. The address of Valdina is
Castorweg 22-24, Suite 10, P.O. Box 155, Curacao, Netherlands Antilles, and
the address of The Mong Family Trust is P.O. Box 634, Kensington Place, 46-
50 Kensington Place, St. Helier, Jersey, JE4 8YZ, Channel Islands.
(6) Of the shares indicated, 372,341 shares are subject in the event of
transfer to a right of first refusal in favor of Mr. Vajna at the then
current market price. In addition, Mr. Braverman has granted the right to
vote such 372,341 shares to Mr. Vajna pursuant to an irrevocable proxy
(which continues during Mr. Braverman's ownership of the shares for the
maximum period permitted by applicable law).
(7) Includes 5,000 shares of Common Stock subject to immediately exercisable
options granted under the Special Plan.
(8) Represents shares of Common Stock subject to immediately exercisable
options granted under the Special Plan.
(9) Includes 50,000 shares of Common Stock issuable pursuant to a warrant held
by Jefferson Capital Group, Ltd. ("Jefferson Capital"), of which
Mr. O'Donnell serves as President. Also includes 15,000 shares of Common
Stock subject to immediately exercisable options granted under the Special
Plan.
(10) Includes 150,000 shares of Common Stock issuable pursuant to a warrant
beneficially owned by The Walt Disney Company. See "Item 13 -- Certain
Relationships and Related Transactions -- Certain Transactions with BVPD
and Disney." The address of The Walt Disney Company is 500 South Buena
Vista Street, Burbank, California 91521.
(11) Includes 50,000 shares of Common Stock issuable pursuant to a warrant held
by Jefferson Capital (see footnote 9 above) and an aggregate of 72,000
shares of Common Stock underlying options granted to Mr. Feitshans,
Mr. Randolph M. Paul, Ms. Lebovits, Mr. Gregory R. Paul and Mr. O'Donnell
(see footnotes 7, 8 and 9 above).
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS WITH MANAGEMENT (OTHER THAN MR. VAJNA)
On December 30, 1996 and January 2, 1997, respectively, the Company
repurchased 372,341 shares of the Company's Common Stock held by Dianne
Caplan Lebovits, a Director and former executive officer of the Company, and
372,341 shares of the Company's Common Stock held by the law firm of Ziffren,
Brittenham, Branca & Fischer ("ZBBF"), which provides legal services to the
Company. Harry M. Brittenham, a partner in ZBBF, was a member of the
Company's Board of Directors from July 1994 until March 13, 1997. Ms.
Lebovits, ZBBF and Warren Braverman, a Director and executive officer of the
Company, had each originally acquired 372,341 shares of the Company's Common
Stock pursuant to separate Stock Purchase Agreements dated as of January 1,
1994 (each an "Original Purchase Agreement") and in exchange for payment of
the aggregate par value of such shares in cash and a full recourse secured
promissory note in the principal amount of $450,000, bearing interest at the
rate of 6% per annum, and secured by a pledge of the 372,341 shares of Common
Stock purchased (each a "Purchase Note"). The principal of each note was
payable to the Company on December 31, 1998 or, in the event of the earlier
termination of the purchaser's relationship with the Company (continued
employment by the Company with respect to Mr. Braverman and Ms. Lebovits and
continued engagement by the Company with respect to ZBBF), upon the date any
shares vest and can be sold without restrictions under the Securities Act of
1933 or pursuant to Rule 144 thereunder. Ms. Lebovits subsequently split her
Purchase Note into two separate notes (the "Purchase Notes"), one secured by
new collateral consisting of marketable securities and one secured by shares
of Common Stock of the Company.
Pursuant to the terms of the repurchase, in consideration for the sale
by ZBBF of its 372,341 shares to the Company, the Company canceled the
Purchase Note of ZBBF under which $450,000 was then outstanding. Pursuant to
the terms of Ms. Lebovits' Original Purchase Agreement, 51,714 shares of the
Common Stock held by Ms. Lebovits which were not vested at the time of her
resignation as Executive Vice President, General Counsel and Corporate
Secretary of the Company in August 1996, were repurchased at the original
purchase price (approximately $1.21 per share) by reducing the aggregate
balance due under her Purchase Notes by approximately $62,500. In
consideration for the sale by Ms. Lebovits to the Company of the other
320,627 shares repurchased, the Company canceled the remaining balances of
her Purchase Notes under which approximately $468,000 was then outstanding
(after the $62,500 reduction).
The largest amount of all indebtedness owed to the Company by ZBBF at
any time during 1996 was $484,000 (which consisted solely of amounts owing
under its Purchase Note). The largest amount of all indebtedness owed to the
Company by Ms. Lebovits at any time during 1996 was $571,000 (which consisted
of amounts owing under her Purchase Notes, as well as a $50,000 non-interest
bearing loan extended to Ms. Lebovits in March 1990 and canceled by the
Company in connection with her resignation as an executive officer and
employee). The largest amount of all indebtedness owed to the Company by Mr.
Braverman at any time during 1996 was $848,000, which consisted of a
non-interest bearing advance of $18,000, amounts owing under his Purchase
Note, as well as amounts owing under a $250,000 interest bearing (7%) loan
and a $50,000 non-interest bearing loan entered into pursuant to the terms of
his employment agreement, which latter two loans were repaid by Mr. Braverman
in January 1997 upon receipt of the signing bonus in connection with the
latest amendment to his employment agreement. See "Item 11 -- Executive
Compensation - Employment Agreements." As of March 31, 1997, the total
amount outstanding under Mr. Braverman's Purchase Note was $538,000.
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In connection with the Investigation described herein under "Item 3
- - --Legal Proceedings," the Company has determined to advance the expenses of
certain of the Company's employees, officers and directors other than Mr.
Vajna ("Indemnitees") which the Indemnitees may incur in connection with the
Investigation. See "Item 11 -- Executive Compensation -- Indemnification."
As of March 31, 1997, the Company had advanced an aggregate of $157,000 on
behalf of the Indemnitees. The Company also advanced the expenses of the
current and former officers and directors named as defendants in two purported
class action lawsuits filed in May 1996 and dismissed in January 1997 (the
"Litigation Indemnitees") which they incurred in the defense of the
litigation. See "Item 3 -- Legal Proceedings." The Litigation Indemnitees
were jointly represented with the Company. As of March 31, 1997, total fees
incurred on behalf of the Company and the Litigation Indemnitees in
connection with this litigation were approximately $330,000. As the lawsuits
were dismissed, no reimbursement of such advances is due to the Company from
the Litigation Indemnitees.
CERTAIN TRANSACTIONS WITH BVPD AND DISNEY
The BVPD Agreement (which, in accordance with the Library Sale
Agreement, will be terminated upon consummation of the Film Library Sale)
provides for BVPD to distribute 25 of the Company's qualified films in all
media, including theatrical, in the Americas. As of March 31, 1997, nine of
the Company's motion pictures had been distributed pursuant thereto. See
"Item 1 -- Business --Recent Developments" "-- Motion Picture Production,"
and "-- Distribution of Motion Pictures -- Distribution in the Americas --
The BVPD Agreement." In addition to the BVPD Agreement, the Company has also
separately licensed to Disney certain distribution rights to EVITA in Spain
and to NIXON in Japan, China, Switzerland and German speaking Europe. In
addition, by a letter agreement between the Company and Buena Vista
International, Inc. ("BVI"), an affiliate of BVPD, dated as of August 1,
1994, the Company granted to BVI certain distribution rights in DIE HARD WITH
A VENGEANCE in certain foreign territories (including the Banelux region,
French speaking Europe and Africa, German speaking Europe, the United
Kingdom, Spain, Latin America, Scandinavia, Taiwan, Switzerland, Portugal and
Greece) in exchange for advances paid upon delivery of such picture to BVI in
1995. BVI is obligated to pay all costs associated with distribution of the
picture in the territories specified and is entitled to receive certain
specified percentages of gross revenues generated in each media as
distribution fees, and then to recoup the amounts advanced to the Company,
together with interest thereon, as well as its costs of distribution. The
Company is thereafter entitled, with certain exceptions, to receive overages,
i.e., the remainder of all revenues generated by the picture in excess of
BVI's ongoing distribution fees and costs. In accordance with the Library
Sale Agreement, upon consummation of the Film Library Sale, the Company will
relinquish its rights to such overages otherwise payable to the Company by
BVI after January 1, 1997. Pursuant to the BVPD Agreement, the separate
license agreements with respect to distribution of EVITA and NIXON in certain
international territories, and the DIE HARD WITH A VENGEANCE letter
agreement, during the year ended December 31, 1996, BVPD earned aggregate
fees of $14,909,000 with respect to distribution of the Company's motion
pictures (including DIE HARD WITH A VENGEANCE). BVPD is a wholly owned
subsidiary of The Walt Disney Company which beneficially owns, as of March
31, 1997, approximately 5.2% of the Company's Common Stock. See "Item 12 --
Security Ownership of Certain Beneficial Owners and Management."
In 1996, BVPD paid the Company $3,016,000 in overages with respect to
certain of the Company's previously released motion pictures, $18,168,000 in
advances and minimum guarantees (including $3,000,000 with respect to
Broadway Brawler). See also "Item 1 - Business - Major "Customers" for
additional information regarding the portion of the Company's Consolidated
revenues represented by the Company's transactions with Disney, as well as
the Company's Consolidated Financial Statements. In accordance with the BVPD
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Agreement, in 1996, BVPD also advanced amounts to cover the costs of
theatrical release of two films in the United States and Canada, including
certain amounts to cover the costs of manufacturing release prints,
advertising and publicity. The Company has also assisted Disney in the
international pre-licensing of the motion picture UP CLOSE AND PERSONAL. All
sales agency fees paid to the Company by Disney in 1996 with respect thereto
were paid by the Company to an international sales company unaffiliated with
the Company utilized in connection with such pre-licensing. Upon consummation
of the Film Library Sale, the Company will no longer serve as sales agent and
will relinquish all sales agency fees with respect to such
arrangement.
As described in "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," the Company has entered into term loan agreements with BVPD to
finance motion pictures. During 1996, the Company borrowed $7,907,000 under
three existing term loan agreements to fund certain production costs of
NIXON, THE SHADOW CONSPIRACY and EVITA. Each BVPD term loan bears interest
at the prime rate in effect from time to time (8.5% at March 31, 1997) plus
1.5% and is to 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
such picture. Although the term loan with respect to one film is scheduled
to mature on May 9, 1997, 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. Each of these loans is
secured by rights to distribute the respective motion picture in the Americas
and, except for one term loan which is personally guaranteed by Mr. Vajna,
certain other distribution rights related to the other motion pictures
financed by BVPD. See "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources" for a discussion of additional term loans with BVPD. In 1996, one
term loan was reduced by $575,000 by offsetting certain funds due to the
Company from BVPD. At March 31, 1997, the aggregate amount outstanding
(including accrued interest) under all such term loans was $38,400,000.
In July 1996, the Company assigned to Disney the development project
EATERS OF THE DEAD in exchange for the following upon production and release
of a theatrical motion picture based on such project: reimbursement of
$767,298 (plus interest) of the Company's development costs relating to such
project, fixed compensation of $1,500,000 if the Company provides the
executive producing services of Mr. Vajna in connection with such production,
and a participation interest in such project. Disney has informed the Company
that production of such motion picture will commence in the near future.
Pursuant to the Library Sale Agreement, the Company agreed, upon consummation
of the Film Library Sale, to relinquish such amounts due in connection with
production and release of the film and the participation interest. In
addition, through March 31, 1997, Disney had advanced approximately
$2,504,000 to assist in the development of the Company's motion picture
project SMOKE AND MIRRORS. Pursuant to the Library Sale Agreement, upon
consummation of the Film Library Sale, Disney will receive a right of first
negotiation, and in certain cases, a right of last refusal to acquire or
participate in the financing and distribution of such project and will also
be entitled to reimbursement of its development costs in such project in the
event the project is made into a film. In addition, the Library Sale
Agreement provides that the amounts contributed by Disney to the project will
continue to accrue interest at $528 per day and that all such obligations
will be secured. In connection with the Company's decision to produce the
film project EVITA, the Company became obligated to repay the development
costs previously expended on such project by certain parties, including
$3,900,000 by Disney. The Company and Disney have agreed that such amount
will be offset against production advances otherwise due to the Company from
BVPD and a reduction in the unused availability under the term loans with
BVPD for Nixon, Evita and The Shadow Conspiracy. During 1996, Disney also
paid the Company $2,685,000 to reimburse the Company for its costs during
such period under its first look arrangement with Oliver Stone and his
affiliates. See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." In
1996, the Company also entered into an arrangement with a subsidiary of
Disney with
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respect to a motion picture tentatively entitled DEEP RISING. See "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
CERTAIN TRANSACTIONS WITH MR. VAJNA AND CERTAIN OTHER STOCKHOLDERS
In 1994, the Company acquired all of the outstanding stock of one of the
Company's principal subsidiaries, from Valdina Corporation N.V. ("Valdina")
for consideration consisting of a $3,300,000 promissory note of the Company
(bearing interest at the rate of 6% per annum, with principal and interest
originally due January 17, 1995) and 957,446 shares of Common Stock. The
maturity date of the promissory note was subsequently extended first until
July 17, 1996 and then until January 17, 1997, and the interest rate after
January 17, 1996 was 7% per annum. During 1996, $600,000 was paid under the
promissory note. The promissory note is currently due and payable in its
entirety. As of March 31, 1997, an aggregate of $3,393,000 in principal and
accrued interest was outstanding under the promissory note. Valdina
beneficially owns, as of March, 31, 1997, approximately 7.1% of the Company's
Common Stock. See "Item 12--Security Ownership of Certain Beneficial Owners
and Management." Valdina is indirectly beneficially owned 49.9% by Mr. Vajna
and 50.1% by the Mong Family Trust, which benefits certain descendants of
Mong Hing Yan, including the son of Mr. Vajna, and the trustee of which is BT
Trustees (Jersey) Limited ("The Mong Family Trust").
In 1994, in order to assist the Company in obtaining financing for and
completion bonds on certain films, Valdi Corporation N.V. ("Valdi") entered
into an arrangement with the Company (which has since expired) whereby Valdi
undertook to have letters of credit issued for the benefit of the Company's
lenders to provide additional collateral under the Company's credit facility.
Valdi is owed a facility fee of $110,220 in connection therewith. In
addition, the Company has non-interest bearing receivables of $258,000 from
Valdi and or affiliate representing amounts due from Valdi and or affiliate
to reimburse the Company for financial planning and related services provided
to Valdi. The Company has subsequently agreed to forgive $33,000 of such
amount. Valdi is indirectly beneficially owned 49.9% by Mr. Vajna and 50.1%
by The Mong Family Trust.
Valdi beneficially owns approximately 84.7% of Intercom KFT
("Intercom"), a distributor of motion pictures in Hungary to which the
Company licenses Hungarian distribution rights to its motion pictures in
various media. The Company and Intercom have an agreement in principle for
an output agreement for the Hungarian distribution of all of the Company's
films, beginning with NIXON. The agreement in principle provides for a
distribution fee to Intercom of 17.5% of the gross receipts of Intercom from
distribution of such films plus reimbursement of distribution expenses.
During the Company's fiscal year ended December 31, 1996, Intercom received
distribution fees of approximately $189,000 with respect to this distribution
arrangement with the Company. In addition, Intercom has assisted the Company
by paying to the Hungarian tax authorities on behalf of the Company value
added taxes incurred by the Company in connection with its distribution of
films through its Hungarian subsidiary, Cinergi Productions KFT ("CPKFT").
Intercom subsequently files for and receives the refund of such taxes.
During 1996, the Company paid Intercom approximately $349,000 representing
the aggregate accrued interest on amounts advanced in 1996 and certain prior
year by Intercom to the Hungarian tax authorities from the date of payment of
each such advance until receipt by Intercom of the applicable refund, and
Intercom's out of pocket costs incurred in connection iwth Intercom's
activities on behalf of the Company 1996 and prior years. The Company
believes that the terms of such arrangements are no less favorable to the
Company than those that could have been obtained from an independent third
party at the time such arrangements were entered into.
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The Company leases the building housing its corporate headquarters in
Santa Monica, California from Mr. Vajna. During the calendar year 1996, the
Company made total lease payments of $462,000 to Mr. Vajna under the lease,
which provides for monthly rental payments of $38,500 (approximately $1.75
per square foot) and expired on May 1, 1996. Subsequent thereto, the Company
has been leasing its corporate headquarters on the same general terms but on
a month-to-month basis. The Company believes that the terms of such lease
are no less favorable to the Company than those that could have been obtained
from an independent third party at the time such lease was entered into. The
Company and its affiliates have also obtained air charter services in the
past from a corporation owned by Mr. Vajna and may obtain future air charter
services from such corporation. During the Company's fiscal year ended
December 31, 1996, the Company incurred air charter expenses to such
corporation in the amount of $229,000, pursuant to a protocol approved by the
independent members of the Company's Board of Directors. At March 31, 1997,
no amounts were owed by the Company for such air charter expenses. During
1996, Mr. Vajna also received financial planning, legal and related services
from the Company on terms approved by the Company's Audit Committee including
the agreement of Mr. Vajna to pay $142,000 to the Company. See also, the
"Summary Compensation Table."
Mr. Vajna is engaged in preliminary discussions with the Company
with respect to (and he has indicated in a Schedule 13D filed with the
Securities and Exchange Commission that he may seek to bid for) certain of
the assets that would remain assuming consummation of the Film Library Sale
including, without limitation, certain development projects and the "Cinergi"
name. No agreements have been entered into with respect thereto and any such
agreement would be subject to approval of the Company's independent Board
members, as well as other applicable approvals.
TAX REIMBURSEMENT AGREEMENT WITH MR. VAJNA
As described above under "Item 7 -- Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Certain Tax Matters," the
Company received approximately $20,000,000 of advances (the "Advances")
during the fiscal year ended December 31, 1993. The Advances were received in
connection with motion pictures that were released during the fiscal year
ending December 31, 1994. Consistent with its financial accounting for the
Advances and prior tax reporting practices, the Company did not include the
Advances in its 1993 taxable income, and instead included such amounts -- and
deducted the related costs -- in computing its taxable income for the year in
which the underlying motion pictures were released, in this case 1994. It is
possible, however, that the IRS will challenge the Company's tax treatment of
the Advances, and if the IRS were successful in that challenge, the Company
would be required to include the Advances in the computation of its 1993
taxable income without an offsetting deduction in 1993 for costs associated
with those motion pictures. As a result of the S Corporation election then in
effect, such an adjustment (an "Adjustment") to the Company's 1993 taxable
income would cause a corresponding increase in the taxable income of Mr.
Vajna and, therefore, a significant increase in Mr. Vajna's tax liability for
1993. However, if the Company has cumulative taxable income in 1994 through
1997 (exclusive of the Advances), it would obtain a benefit from the
Adjustment in the form of a reduction in its 1994 taxable income and related
tax liability as it would not be required to include the Advances in its 1994
taxable income.
In order to alleviate the additional tax burden on Mr. Vajna relating
solely to the Adjustment for the Advances, the Company and Mr. Vajna entered
into a Tax Reimbursement Agreement (the "Tax Agreement"), dated as of
December 30, 1993. Pursuant to the terms of the Tax Agreement, the Company
paid Mr. Vajna $10,000,000 (the "Reimbursement Payment") on June 8, 1994.
Such amount represents the tax liability which could be imposed on Mr. Vajna,
exclusive of interest and penalties, if the Advances are included in 1993
taxable income. The tax associated with the increase in taxable income
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to Mr. Vajna resulting from the Adjustment will exceed the potential
reduction in taxes realized by the Company due to the difference between
personal and corporate tax rates and approximately $1,500,000 of the
Reimbursement Payment is intended to reimburse Mr. Vajna for such difference.
In order to assist the Company in funding the Reimbursement Payment, Mr.
Vajna loaned $10,000,000 to the Company on May 12, 1994 in exchange for a
promissory note (the "Stockholder Note").
The Tax Agreement provides that Mr. Vajna will be required to repay all
of the Reimbursement Payment to the Company in the following circumstances:
(i) a final determination by the IRS or the courts either that the Company is
not required to make an Adjustment or is required to include the Advances in
1993 taxable income but also is permitted to deduct all capitalized costs
incurred with respect to the Advances in 1993, (ii) lapse of the applicable
statutes of limitation with no Adjustment having been made or (iii) the
Company does not have cumulative taxable income for the period 1994 through
1997 taking into account the Advances, even if Mr. Vajna is assessed
additional taxes with respect to the Adjustment. The Tax Agreement also
provides for a pro rata repayment of the Reimbursement Payment by Mr. Vajna
if the Company earns cumulative taxable income for the 1994 through 1997
period (including the Advances in 1994 income for this purpose) that is
greater than zero but less than $20,000,000. If, on the other hand, there is
an Adjustment and the Company has earned cumulative taxable income for the
1994 through 1997 period of $20,000,000 or more (treating income relating to
the Advances as taxable income in 1994), then Mr. Vajna will not be required
to repay any portion of the Reimbursement Payment. The Tax Agreement also
permits the Company after April 15, 1995 to amend its 1993 tax return with
Mr. Vajna's concurrence to take into account the Advances in 1993; provided,
however, that Mr. Vajna will be subject to the obligation to repay the
Reimbursement Payment in the same manner as set forth above. For purposes of
calculating cumulative taxable income for the period 1994 through 1997, the
effect of any post-1997 net operating loss carrybacks will not be taken into
account. From January 1, 1994 through December 31, 1996, the Company had a
cumulative taxable loss (treating income relating to the Advances as taxable
income in 1994) in excess of $20,000,000.
In the event Mr. Vajna repays all or any portion of the Reimbursement
Payment to the Company, then, until December 31, 2010, the Company will be
obligated to return to Mr. Vajna a portion (up to 100%) of the Reimbursement
Payment equal to the reduction in taxes thereafter realized by the Company to
the extent a net operating loss in 1994 (or carried back to 1994) is
subsequently utilized to reduce the Company's tax obligations. Such
determination will be made on March 15, 2011 and any amount to be paid by Mr.
Vajna as a result will be paid at that time.
Interest and principal under the Stockholder Note will become due and
payable on April 30, 1998 unless it has not been finally determined whether
Mr. Vajna will have to pay some or all of the Reimbursement Payment pursuant
to the Tax Agreement, in which case the maturity date will be extended. The
Stockholder Note, which bears interest at a floating rate equal to the
federal short term rate plus two percent (2%) per annum, is subject to offset
against amounts that may be owed to the Company by Mr. Vajna pursuant to the
Tax Agreement. If at the maturity date of the Stockholder Note it has not
been finally determined whether Mr. Vajna will have to repay some or all of
the Reimbursement Payment, then the maturity date of the Stockholder Note
will be extended to coincide with the date the Company receives a tax refund
as a result of including the Advances in 1993 taxable income and not in 1994
taxable income.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)1. INDEX TO FINANCIAL STATEMENTS
Page(s) in
Form 10-K
----------
Report of Independent Auditors . . F-1
Consolidated Financial Statements:
Consolidated Balance Sheets --
December 31, 1995 and 1996 . . . . F-2
Consolidated Statements of
Operations -- Years Ended December
31, 1994, 1995 and 1996 . . . . . . F-3
Consolidated Statements of
Stockholders' Equity (Deficiency) --
Years Ended December 31, 1994,
1995 and 1996 . . . . . . . . . . . F-4
Consolidated Statements of Cash
Flows -- Years Ended December 31,
1994, 1995 and 1996 . . . . . . . . F-5
Notes to Consolidated Financial
Statements . . . . . . . . . . . . F-7
(a)2. INDEX TO FINANCIAL STATEMENTS SCHEDULES
The schedules for which provision is made in the
applicable accounting regulations of the
Securities and Exchange Commission are not
required under the related instructions or
are inapplicable, and therefore have been omitted.
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(a)3. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2 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 Commission on April 4, 1997.
3.1 Restated Certificate of Incorporation. Incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1, filed with the Commission on
April 29, 1994 (File No. 33-78386).
3.2 By-Laws. Filed herewith.
4 Specimen Certificate for Common Stock. Incorporated by
reference to Exhibit 4 to the Company's Registration
Statement on Form S-1, Amendment No. 1, filed with the
Commission on June 9, 1994 (File No. 33-78386).
10.1 Employment Agreement, dated as of January 1, 1994, between
the Company and Andrew G. Vajna. Incorporated by reference
to Exhibit 10.1 to the Company's Registration Statement on
Form S-1, filed with the Commission on April 29, 1994
(File No. 33-78386).
10.2 Letter Agreement, dated as of December 16, 1994, by and
between the Company and Andrew G. Vajna amending his
Employment Agreement dated as of January 1, 1994.
Incorporated by reference to Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
10.3 Employment Agreement, dated as of January 1, 1994, between
the Company and Warren Braverman. Incorporated by
reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1, filed with the Commission on
April 29, 1994 (File No. 33-78386).
10.4 Letter Agreement, dated as of December 16, 1994, by and
between the Company and Warren Braverman amending his
Employment Agreement dated as of January 1, 1994.
Incorporated by reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
10.5 Cinergi Pictures Entertainment Inc. 1994 Basic Stock
Option and Stock Appreciation Rights Plan. Incorporated by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-1, filed with the Commission on
April 29, 1994 (File No. 33-78386).
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EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.6 Cinergi Pictures Entertainment Inc. 1994 Special Stock
Option and Stock Appreciation Rights Plan. Incorporated by
reference to Exhibit 10.7 to the Company's Registration
Statement on Form S-1, filed with the Commission on
April 29, 1994 (File No. 33-78386).
10.7 Form of Cinergi Service Inc. Deferred Compensation Plan
Agreement. Incorporated by reference to Exhibit 10.8 to
the Company's Registration Statement on Form S-1, filed
with the Commission on April 29, 1994 (File No. 33-78386).
10.8 Form of Indemnity Agreement. Incorporated by reference to
Exhibit 10.9 to the Company's Registration Statement on
Form S-1, filed with the Commission on April 29, 1994
(File No. 33-78386).
10.9 Lease, dated April 1, 1991, between the Company and
Andrew G. Vajna. Incorporated by reference to
Exhibit 10.10 to the Company's Registration Statement on
Form S-1, filed with the Commission on April 29, 1994
(File No. 33-78386).
10.10 Amendment, dated June 30, 1991, to lease between the
Company and Andrew G. Vajna. Incorporated by reference to
Exhibit 10.11 to the Company's Registration Statement on
Form S-1, filed with the Commission on April 29, 1994
(File No. 33-78386).
10.11 Tax Reimbursement Agreement, dated as of December 30,
1993, by and between the Company and Andrew G. Vajna.
Incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1, filed with
the Commission on April 29, 1994 (File No. 33-78386).
10.12 Memorandum of Agreement, dated as of July 9, 1990, between
Buena Vista Pictures Distribution, Inc. and the Company.
Incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1, filed with
the Commission on April 29, 1994 (File No. 33-78386).+
10.13 Amendment to Memorandum of Agreement between Buena Vista
Pictures Distribution, Inc. and the Company. Incorporated
by reference to Exhibit 10.14 to the Company's
Registration Statement on Form S-1, filed with the
Commission on April 29, 1994 (File No. 33-78386).+
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EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.14 Second Amendment to Memorandum of Agreement between Buena
Vista Pictures Distribution, Inc. and the Company.
Incorporated by reference to Exhibit 10.15 to the
Company's Registration Statement on Form S-1, filed with
the Commission on April 29, 1994 (File No. 33-78386).
10.15 Third Amendment to Memorandum of Agreement between Buena
Vista Pictures Distribution, Inc. and the Company.
Incorporated by reference to Exhibit 10.16 to the
Company's Registration Statement on Form S-1, filed with
the Commission on April 29, 1994 (File No. 33-78386).+
10.16 Letter Agreement dated July 13, 1990 between Buena Vista
Pictures Distribution, Inc. and the Company. Incorporated
by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1, filed with the
Commission on April 29, 1994 (File No. 33-78386).+
10.17 Letter Agreement dated April 8, 1994 between Buena Vista
Pictures Distribution, Inc. and the Company. Incorporated
by reference to Exhibit 10.18 to the Company's
Registration Statement on Form S-1, filed with the
Commission on April 29, 1994 (File No. 33-78386).+
10.18 Form of Warrant for Buena Vista Pictures
Distribution, Inc. to purchase shares of Common Stock of
the Company. Incorporated by reference to Exhibit 10.20 to
the Company's Registration Statement on Form S-1, filed
with the Commission on April 29, 1994 (File No. 33-78386).
10.19 Stock Sale and Repurchase Agreement dated as of January 1,
1994 between the Company and Warren Braverman.
Incorporated by reference to Exhibit 10.21 to the
Company's Registration Statement on Form S-1, filed with
the Commission on April 29, 1994 (File No. 33-78386).
10.20 Letter Agreement dated April 27, 1994 by and between the
Company and Warren Braverman. Incorporated by reference to
Exhibit 10.22 to the Company's Registration Statement on
Form S-1, filed with the Commission on April 29, 1994
(File No. 33-78386).
10.21 Security and Stock Pledge Agreement dated as of January 1,
1994 between the Company and Warren Braverman.
Incorporated by reference to Exhibit 10.23 to the
Company's Registration Statement on Form S-1, filed with
the Commission on April 29, 1994 (File No. 33-78386).
47
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.22 Secured Promissory Note of Warren Braverman dated as of
January 1, 1994 payable to the Company. Incorporated by
reference to Exhibit 10.24 to the Company's Registration
Statement on Form S-1, filed with the Commission on
April 29, 1994 (File No. 33-78386).
10.23 Letter Agreement dated as of December 31, 1993 between the
Company and Warren Braverman. Incorporated by reference to
Exhibit 10.25 to the Company's Registration Statement on
Form S-1, filed with the Commission on April 29, 1994
(File No. 33-78386).
10.24 Promissory Note of Warren Braverman dated as of July 22,
1994, payable to the Company. Incorporated by reference to
Exhibit 10.27 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.
10.25 Stock Sale and Repurchase Agreement dated as of January 1,
1994 between the Company and Dianne Caplan Lebovits.
Incorporated by reference to Exhibit 10.26 to the
Company's Registration Statement on Form S-1, filed with
the Commission on April 29, 1994 (File No. 33-78386).
10.26 Letter Agreement dated April 27, 1994 by and between the
Company and Dianne Caplan Lebovits. Incorporated by
reference to Exhibit 10.27 to the Company's Registration
Statement on Form S-1, filed with the Commission on
April 29, 1994 (File No. 33-78386).
10.27 Security and Stock Pledge Agreement dated as of January 1,
1994 between the Company and Dianne Caplan Lebovits.
Incorporated by reference to Exhibit 10.28 to the
Company's Registration Statement on Form S-1, filed with
the Commission on April 29, 1994 (File No. 33-78386).
10.28 Secured Recourse Promissory Note of Dianne Caplan Lebovits
dated as of January 1, 1994 payable to the Company.
Incorporated by reference to Exhibit 10.29 to the
Company's Registration Statement on Form S-1, filed with
the Commission on April 29, 1994 (File No. 33-78386).
10.29 Letter Agreement dated as of December 31, 1993 between the
Company and Dianne Caplan Lebovits. Incorporated by
reference to Exhibit 10.30 to the Company's Registration
Statement on Form S-1, filed with the Commission on
April 29, 1994 (File No. 33-78386).
48
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.30 Promissory Note of Dianne Caplan Lebovits dated
February 28, 1995 payable to the Company. Incorporated by
reference to Exhibit 10.33 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994.
10.31 Security and Pledge Agreement dated February 28, 1995
between the Company and Dianne Caplan Lebovits.
Incorporated by reference to Exhibit 10.34 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
10.32 Stock Sale and Repurchase Agreement dated January 1, 1994
between the Company and Ziffren, Brittenham & Branca.
Incorporated by reference to Exhibit 10.31 to the
Company's Registration Statement on Form S-1, filed with
the Commission on April 29, 1994 (File No. 33-78386).
10.33 Letter Agreement dated April 27, 1994 by and between the
Company and Ziffren, Brittenham and Branca. Incorporated
by reference to Exhibit 10.32 to the Company's
Registration Statement on Form S-1, filed with the
Commission on April 29, 1994 (File No. 33-78386).
10.34 Security and Stock Pledge Agreement dated as of January 1,
1994 between the Company and Ziffren, Brittenham and
Branca. Incorporated by reference to Exhibit 10.33 to the
Company's Registration Statement on Form S-1, filed with
the Commission on April 29, 1994 (File No. 33-78386).
10.35 Secured Recourse Promissory Note of Ziffren, Brittenham &
Branca dated as of January 1, 1994 payable to the Company.
Incorporated by reference to Exhibit 10.34 to the
Company's Registration Statement on Form S-1, filed with
the Commission on April 29, 1994 (File No. 33-78386).
10.36 Form of Motion Picture Lease Agreement between Summit
Export (U.K.) Ltd. and Intercom Kft. Incorporated by
reference to Exhibit 10.35 to the Company's Registration
Statement on Form S-1, filed with the Commission on
April 29, 1994 (File No. 33-78386).
10.37 Sales Agency, Collection and Services Agreement dated as
of December 1, 1993 among Summit Entertainment N.V.,
Summit Entertainment L.P. and the Company. Incorporated by
reference to Exhibit 10.36 to the Company's Registration
Statement on Form S-1, filed with the Commission on
April 29, 1994 (File No. 33-78386).+
49
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.38 Non-negotiable Promissory Note of the Company dated
May 12, 1994 payable to Andrew G. Vajna. Incorporated by
reference to Exhibit 10.41 to the Company's Registration
Statement on Form S-1, Amendment No. 1, filed with the
Commission on June 9, 1994 (File No. 33-78386).
10.39 Form of Warrant for Jefferson Capital Group, Ltd. to
purchase shares of Common Stock of the Company.
Incorporated by reference to Exhibit 10.43 to the
Company's Registration Statement on Form S-1, Amendment
No. 1, filed with the Commission on June 9, 1994 (File
No. 33-78386).
10.40 Credit, Security, Pledge and Guaranty Agreement, dated as
of August 16, 1994, among Cinergi Productions N.V.,
Chemical Bank and certain other parties. Incorporated by
reference to Exhibit 10.44 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1994.
10.41 Reimbursement and Term Loan Agreement, dated as of August
16, 1994 among Valdi Corporation N.V., Chemical Bank and
certain other parties. Incorporated by reference to
Exhibit 10.45 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994.
10.42 Letter Loan Agreement, dated as of August 16, 1994, by and
between the Company and Valdi Corporation N.V.
Incorporated by reference to Exhibit 10.46 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994.
10.43 Quitclaim Agreement dated as of October 7, 1994 among The
Walt Disney Company, Walt Disney Pictures and Television,
Buena Vista Pictures Distribution, Inc., the Company and
Cinergi Productions N.V. Incorporated by reference to
Exhibit 10.50 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.+
10.44 Form of Term Loan Agreement between the Company and Buena
Vista Pictures Distribution, Inc. Incorporated by
reference to Exhibit 10.51 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994.
50
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.45 Letter Agreement dated as of August 1, 1994 between Buena
Vista International, Inc. and Cinergi Productions N.V.
with respect to DIE HARD WITH A VENGEANCE. Incorporated by
reference to Exhibit 10.52 to the Company's Form 10-K/A,
Amendment No. 1, to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.+
10.46 Restated Promissory Note dated as of January 17, 1994
executed by the Company in favor of Valdina Corporation
N.V. in the principal amount of $3,300,000. Incorporated
by reference to Exhibit 10.53 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1995.
10.47 Engagement Letter dated May 8, 1996 between Jefferson
Capital Group, Ltd. and the Company. Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1996.
10.48 Stock Purchase Agreement dated as of January 2, 1997 by
and between Ziffren, Brittenham, Branca & Fischer and the
Company. Incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K, dated December 30,
1996, filed with the Commission on January 9, 1997.
10.49 Stock Purchase Agreement dated as of December 30, 1996 by
and between Dianne Caplan Lebovits and the Company.
Incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K, dated December 30, 1996, filed
with the Commission on January 9, 1997.
10.50 Amendment to Restated Employment Agreement of Warren
Braverman, dated as of January 1, 1997, by and between
Warren Braverman and the Company. Incorporated by
reference to Exhibit 10.3 to the Company's Current Report
on Form 8-K, dated December 30, 1996, filed with the
Commission on January 9, 1997.
10.51 Undertaking, dated March 5, 1996, by Andrew G. Vajna to
reimburse certain indemnification costs. Incorporated by
reference to Exhibit 10.54 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
10.52 Equipment Lease dated February 8, 1996 between the Company
and Brentwood Credit Corporation. Incorporated by
reference to Exhibit 10 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996.
51
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.53 Letter Agreement dated as of July 3, 1996, between Walt
Disney Pictures and Cinergi Pictures Entertainment Inc.
with respect to the motion picture project currently
entitled, EATERS OF THE DEAD. Filed herewith.
10.54 Letter Agreement dated as of April 1, 1995, between Buena
Vista International, Inc. and Cinergi Productions N.V.
Inc. with respect to the motion picture, NIXON. Filed
herewith.
10.55 Deal Memorandum dated as of January 26, 1996, between
Cinergi Productions N.V. Inc. and Buena Vista
Distribution International, Inc. with respect to the
motion picture, EVITA. Filed herewith.
21 Subsidiaries of the Registrant. Filed herewith.
23 Consent of Ernst & Young LLP. Filed herewith.
27 Financial Data Schedule (Filed electronically only).
Filed herewith.
- - ----------------
+ Confidential treatment has been granted for portions of such exhibit.
(b) No reports on Form 8-K were filed by the Registrant during the
during the last quarter of the period covered by this Report.
(c) See Item 14(a)3 above.
(d) Not applicable.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CINERGI PICTURES ENTERTAINMENT INC.
By: /s/ Andrew G. Vajna
----------------------------------------------------
Andrew G. Vajna, Chairman of the Board of Directors,
President and Chief Executive Officer
Dated: April 14, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Andrew G. Vajna Chairman of the Board of April 14, 1997
- - --------------------------- Directors, President and
Andrew G. Vajna Chief Executive Officer
(Principal Executive Officer)
/s/ Warren Braverman Chief Operating Officer, April 14, 1997
- - --------------------------- Chief Financial Officer,
Warren Braverman Executive Vice President and
Director (Principal
Financial and Accounting
Officer)
/s/ Randolph M. Paul Sr. Vice President, Business April 14, 1997
- - --------------------------- Affairs, and Director
Randolph M. Paul
/s/ Dianne Caplan Lebovits
- - --------------------------- Director April 14, 1997
Dianne Caplan Lebovits
/s/ R. Timothy O'Donnell
- - --------------------------- Director April 14, 1997
R. Timothy O'Donnell
/s/ Gregory R. Paul
- - --------------------------- Director April 14, 1997
Gregory R. Paul
S-1
<PAGE>
Report of Independent Auditors
Board of Directors
Cinergi Pictures Entertainment Inc.
We have audited the accompanying consolidated balance sheets of Cinergi
Pictures Entertainment Inc. and subsidiaries as of December 31, 1995 and
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cinergi
Pictures Entertainment Inc. and subsidiaries at December 31, 1995 and 1996,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
April 11, 1997
F-1
<PAGE>
Cinergi Pictures Entertainment Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
ASSETS (NOTE 5)
Cash and cash equivalents $29,832,000 $27,364,000
Restricted cash (Note 1) - 5,654,000
Accounts receivable (including $745,000 (1995) and $3,074,000
(1996) from a related party) 7,494,000 10,850,000
Accounts receivable, related parties (NOTE 7) 682,000 799,000
Film costs, less accumulated amortization (NOTE 3) 160,756,000 103,792,000
Property and equipment, at cost, less accumulated depreciation (NOTE 4) 4,381,000 4,819,000
Other assets 3,112,000 3,270,000
------------ ------------
Total assets $206,257,000 $156,548,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $1,785,000 $2,141,000
Accrued interest 81,000 23,000
Accrued residuals and participations 8,781,000 13,045,000
Deferred revenue (including $44,949,000 (1995) and
$29,582,000(1996) from a related party) (NOTES 2 AND 10) 68,791,000 46,568,000
Loans payable (NOTE 5) 41,578,000 6,026,000
Capital lease obligation - 291,000
Notes and amounts payable to related parties (NOTE 7) 31,624,000 49,747,000
------------ ------------
Total liabilities 152,640,000 117,841,000
Common Stock, with certain redemption features, $.01 par value, 1,117,023
(1995) and 744,692 (1996) shares issued and outstanding, less notes
receivable from related parties amounting to $1,350,000 (1995) and
$900,000 (1996) (NOTE 9) 1,900,000 2,100,000
Commitments and contingencies (NOTE 10)
Stockholders' equity (NOTES 1 AND 9):
Preferred Stock, $.01 par value, 5,000,000 shares authorized,
no shares issued - -
Common Stock, $.01 par value, 20,000,000 shares authorized, 13,075,000
(1995) and 13,075,000 (1996) shares issued and outstanding 131,000 131,000
Additional paid-in capital 64,753,000 65,548,000
Retained deficit (13,167,000) (29,072,000)
------------ ------------
Total stockholders' equity 51,717,000 36,607,000
------------ ------------
Total liabilities and stockholders' equity $206,257,000 $156,548,000
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
Cinergi Pictures Entertainment Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Feature films (including $43,207,000 (1994),
$57,808,000 (1995) and $43,454,000 (1996) from
a related party) $108,517,000 $192,582,000 $132,940,000
Fee income (NOTE 6) 511,000 298,000 60,000
------------ ------------ ------------
109,028,000 192,880,000 133,000,000
Costs and expenses:
Amortization of film costs, residuals and 103,422,000 204,544,000 139,612,000
participations
Selling, general and administrative expense (including
$102,000 (1994), $93,000 (1995) and $274,000 (1996)
from related parties) (NOTES 7 AND 10) 2,694,000 5,098,000 9,752,000
------------ ------------ ------------
Operating income (loss) 2,912,000 (16,762,000) (16,364,000)
Interest expense (including $91,000 (1994), $61,000 (1995)
and $323,000 (1996) from related parties) NOTES 5 AND 7) (281,000) (241,000) (448,000)
Interest income (including $81,000 (1994), $85,000 (1995)
and $98,000 (1996) from a related party) (NOTE 7) 264,000 941,000 907,000
------------ ------------ ------------
Net income (loss) $2,895,000 $(16,062,000) $(15,905,000)
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per share $.30 $(1.23) $ (1.12)
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of shares outstanding 9,494,000 13,025,000 14,169,000
------------ ------------ ------------
------------ ------------ ------------
SEE ACCOMPANYING NOTES.
</TABLE>
F-3
<PAGE>
Cinergi Pictures Entertainment Inc.
Consolidated Statements of Shareholder's Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------------ PAID-IN (DEFICIT)
SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 6,383,000 $64,000 $10,256,000 $(28,826,000) $(18,506,000)
Additional capital contribution - - 33,661,000 - 33,661,000
Distribution - - - (3,300,000) (3,300,000)
Reclassification of Subchapter S retained
deficit - - (32,126,000) 32,126,000 -
Issuance of Common Stock in initial public
offering 3,692,000 37,000 29,647,000 - 29,684,000
Net income - - - 2,895,000 2,895,000
---------- ------- ----------- ----------- -----------
Balance at December 31, 1994 10,075,000 101,000 41,438,000 2,895,000 44,434,000
Issuance of Common Stock in public offering 3,000,000 30,000 23,315,000 - 23,345,000
Net loss - - - (16,062,000) (16,062,000)
---------- ------- ----------- ----------- -----------
Balance at December 31, 1995 13,075,000 131,000 64,753,000 (13,167,000) 51,717,000
Repurchase of Common Stock, with certain
redemption features - - 795,000 - 795,000
Net loss - - - (15,905,000) (15,905,000)
---------- ------- ----------- ----------- -----------
Balance at December 31, 1996 13,075,000 $131,000 $65,548,000 $(29,072,000) $36,607,000
---------- ------- ----------- ----------- -----------
---------- ------- ----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Cinergi Pictures Entertainment Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1994 1995 1996
------------ ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,895,000 $ (16,062,000) $ (15,905,000)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation 402,000 731,000 1,251,000
Amortization of unearned compensation 1,250,000 650,000 1,076,000
Amortization of film costs 94,246,000 200,591,000 129,843,000
Changes in operating assets and liabilities:
Accounts receivable (20,074,000) 12,939,000 (3,356,000)
Accounts receivable, related parties (704,000) 267,000 (198,000)
Film costs additions (202,965,000) (137,520,000) (73,454,000)
Other assets (2,577,000) 227,000 (158,000)
Accounts payable and accrued interest 2,223,000 (1,219,000) 298,000
Accrued residuals and participations 7,925,000 311,000 4,264,000
Deferred revenue 10,406,000 15,285,000 (22,223,000)
------------- ------------- -------------
Net cash (used in) provided by operating activities (106,973,000) 76,200,000 21,438,000
INVESTING ACTIVITIES
Purchase of property and equipment (1,402,000) (2,434,000) (587,000)
------------- ------------- -------------
Net cash used in investing activities (1,402,000) (2,434,000) (587,000)
FINANCING ACTIVITIES
Increase in loans payable 140,748,000 77,380,000 37,899,000
Payments on loans payable (69,622,000) (146,709,000) (73,451,000)
Decrease (Increase) in restricted cash 500,000 - (5,654,000)
Increase in notes and amounts
payable to related parties 20,496,000 16,291,000 19,493,000
Payments on notes and amounts
payable to related parties (12,106,000) (16,906,000) (795,000)
Proceeds from public offering 29,684,000 23,345,000 -
Payments on capital lease obligations - - (811,000)
------------- ------------- -------------
Net cash provided by (used in) financing activities 109,700,000 (46,599,000) (23,319,000)
------------- ------------- -------------
Increase (Decrease) in cash 1,325,000 27,167,000 (2,468,000)
Cash and cash equivalents at beginning of year 1,340,000 2,665,000 29,832,000
------------- ------------- -------------
Cash and cash equivalents at end of year $ 2,665,000 $ 29,832,000 $ 27,364,000
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (net of amount capitalized) $ - $ - $ 808,000
------------- ------------- -------------
------------- ------------- -------------
Income taxes $ 2,000 $ 60,000 $ 23,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-5
<PAGE>
Cinergi Pictures Entertainment Inc.
Consolidated Statements of Cash Flows (continued)
SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING AND FINANCING ACTIVITIES
1994:
Notes and amounts payable to related parties decreased by $33,661,000 and
additional paid-in capital increased by $33,661,000 due to a capital
contribution by Mr. Vajna, Valdina Corporation N.V. (Valdina) and Valdi
Corporation N.V. (Valdi) (See Note 1).
Notes and amounts payable to related parties increased by $3,300,000 and
retained deficit decreased by $3,300,000 due to a distribution to Valdina
(see Note 1).
Two executive officers and a law firm engaged by the Company purchased an
aggregate of 1,117,000 shares of Common Stock of the Company in exchange
for three notes totaling $1,350,000 (see Note 9).
1995:
In 1995, a term loan of $7,500,000 and accrued interest amounting to
$585,000 for one motion picture was canceled as consideration for the
Company's sale to Buena Vista Pictures Distribution, Inc. (BVPD) of an
equity interest in the picture.
During 1995, the Company and BVPD mutually agreed to reduce a term loan
from BVPD relating to one motion picture by $4,655,000 by offsetting the
present value of certain funds due to the Company from BVPD.
1996:
In December 1996, the Company repurchased 372,341 shares of Common Stock of
the Company from a former executive officer through the forgiveness of a
note and accrued interest due from the former executive officer amounting
to $531,000.
During 1996, the Company and BVPD mutually agreed to reduce a term
loan from BVPD relating to one motion picture by $575,000 by
offsetting certain funds due to the Company from BVPD.
During 1996, the Company entered into a capital lease agreement for special
effects equipment amounting to approximately $1,102,000 (see Note 10).
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements
December 31, 1996
1. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ORGANIZATION
The accompanying consolidated financial statements include the accounts of
Cinergi Pictures Entertainment Inc. and subsidiaries (the Company). The Company
is engaged in the business of developing, financing, producing and licensing
feature-length motion pictures worldwide. All significant intercompany balances
and transactions have been eliminated.
In January 1994, Andrew G. Vajna, Chairman of the Board of Directors,
President and Chief Executive Officer of the Company, contributed to the
Company all of the Common Stock of certain domestic corporations which were
previously 100% owned by Mr. Vajna. Further, in January 1994, the Company
acquired all the outstanding Common Stock of the foreign corporation from
Valdina, a company indirectly beneficially owned 49.9% by Mr. Vajna, in
consideration for 18 shares (pre-split) of Company Common Stock and a note in
the principal amount of $3,300,000 (of which $600,000 in principal amount was
paid) at 6% due January 17, 1995. The maturity date of the note was
subsequently extended until July 17, 1996, from which date the promissory
note was due on demand until January 17, 1997 and is currently due and
payable in its entirety. The note bears interest at the rate of 7% per annum
after January 17, 1996. At December 31, 1995 and 1996, accrued interest
relating to this obligation amounted to $396,000 and $655,000, respectively.
Mr. Vajna has entered into an employment agreement with the Company for a five
year term commencing January 1, 1994, pursuant to which he will receive base
compensation of $1,000,000 per year. In addition, Mr. Vajna may also receive
commencement fees and producer's performance fees with respect to motion
pictures produced by the Company.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-7
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenues in accordance with the provisions of Statement
of Financial Accounting Standards (FAS) No. 53. Minimum guaranteed amounts from
theatrical exhibition and revenues from home video, television and pay
television license agreements are recognized when the applicable license period
begins for each motion picture and such motion picture is made available to the
distributor for exploitation pursuant to the terms of the applicable license
agreement. Amounts in excess of the minimum guarantee under such license
agreements and other amounts (where no minimum guarantee was given) are
recognized when earned. Accounts receivable represent amounts due from domestic
and international distributors. Cash collected in advance of the time of
availability is recorded as deferred revenue.
Once completed, a typical theatrical film will generally be made available for
licensing as follows:
MONTHS AFTER
INITIAL DOMESTIC APPROXIMATE
MARKETPLACE THEATRICAL RELEASE RELEASE PERIOD
- - --------------------------------------------------------------------------------
Domestic theatrical 4 - 6 months
International theatrical 6 - 12 months
Domestic home video (initial release) 4 - 6 months 6 months
Domestic pay-per-view 6 - 9 months 2 months
International video (initial release) 6 - 12 months 6 - 12 months
Domestic pay television 12 - 15 months 18 months
International television (pay or free) 18 - 24 months 12 - 36 months
Domestic free television* 30 - 33 months 1 - 5 years
*Includes network, barter syndication, syndication and basic cable.
F-8
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FILM COSTS
Costs incurred in connection with the acquisition of story rights, the
development of stories, production, print and advertising costs (which benefit
future periods) and allocable interest and production overhead are capitalized
as film costs. Film costs are stated at the lower of cost or net realizable
value. The individual film forecast method is used to amortize film costs. Costs
accumulated in the production of a film are amortized in the proportion that
gross revenues realized bear to management's estimate of the total gross
revenues expected to be received. Estimated liabilities for residuals and
participations are accrued as the Company amortizes film cost inventories and
expensed in the same manner as film cost inventories. Revenue estimates on a
film-by-film basis are reviewed periodically by management and are revised, if
warranted, based upon management's appraisal of current market conditions.
Unamortized film costs are written down to net realizable value based on this
appraisal, where applicable.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and are depreciated or amortized over
their estimated useful lives (which range from 5 to 10 years) using the
following methods:
Editing equipment Double declining balance
Office furniture and equipment Double declining balance
Computer equipment Double declining balance
Computer software Straight-line
Vehicles Straight-line
Leasehold improvements Straight-line
Special effects equipment Straight-line
INCOME TAXES
The Company records its income tax provision in accordance with Statement of
Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes."
Deferred income taxes are provided on transactions which are reported in the
financial statements in different periods than they are for income tax purposes.
F-9
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME (LOSS) PER COMMON SHARE
The per share data 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. Fully diluted
amounts for each period do not materially differ from the amounts presented
herein.
FOREIGN CURRENCY TRANSLATION
All of the Company's transactions are expressed in U.S. dollars.
CONCENTRATION OF CREDIT RISKS AND CASH EQUIVALENTS
The Company licenses various rights in its motion pictures to distributors
throughout the world. Generally, upon the Company's delivery of the picture to
the distributor, the minimum guarantee is received in full. In most instances,
letters of credit secure the payment of minimum guarantees from international
distributors prior to delivery.
The Company places its temporary cash investments with high credit quality
financial institutions and mutual funds. Generally, the investments made mature
within 30 days and therefore are subject to little risk. The Company has not
incurred any losses related to these investments.
As of December 31, 1995 and 1996, the Company had no significant concentration
of credit risk.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1996, the carrying value of the Company's financial instruments,
which consist primarily of loans payable, approximates the fair value thereof.
RESTRICTED CASH
At December 31, 1996, restricted cash represents cash collections made by the
Company on behalf of BVPD (see Note 10) and cash subject to restrictions
relating to film production in connection with the Company's distribution
agreement with BVPD.
F-10
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting
for Stock Based Compensation", encourages, but does not require companies to
recognize expense for stock-based awards based on their fair value on the
date of grant. The Company has elected to continue to account for its stock
compensation arrangements under the provision of APB 25, "Accounting for
Stock Issued to Employees. Accordingly, compensation expense for stock
compensation arrangements is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant over the amount
the recipient of the stock award must pay to acquire the stock. If the
Company measured compensation expense using the fair value method prescribed
in FAS 123, there would be no material impact on reported net loss or loss
per share.
3. FILM COSTS
Film costs consist of the following:
DECEMBER 31,
-----------------------------------
1995 1996
---------------- ------------
Released, less amortization $101,238,000(1) $52,077,000
Completed, not released - 37,025,000
In production 53,545,000 9,373,000
Development 5,973,000 5,317,000
---------------- ------------
$160,756,000 $103,792,000
---------------- ------------
---------------- ------------
Interest capitalized into film costs during the years ended December 31, 1995
and 1996 totaled $10,865,000 and $6,156,000, respectively. Based on the
Company's estimate of future revenues, approximately 92% of unamortized
released film costs at December 31, 1996 will be amortized during the three
years ending December 31, 1999.
(1) Includes approximately $43 million in connection with the motion picture
"Nixon", which was released in December 1995 for which no revenues were
recognized in 1995.
F-11
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
----------------------------
1995 1996
---------- ---------
Editing equipment $130,000 $130,000
Office furniture and equipment 765,000 769,000
Computer equipment and software 371,000 433,000
Vehicles 260,000 260,000
Leasehold improvements 932,000 932,000
Special effects equipment, including
$1,102,000 in equipment under capital lease (1996) 3,555,000 5,179,000
---------- ----------
6,013,000 7,703,000
Less accumulated depreciation and amortization 1,632,000 2,884,000
---------- ----------
$4,381,000 $4,819,000
---------- ----------
---------- ----------
5. LOANS PAYABLE
The Company entered into a Credit, Security, Pledge and Guaranty Agreement
dated as of August 16, 1994 with Chase Manhattan Bank (Chase) and a syndicate
of lenders (collectively, the Lenders) which provides the Company with a
revolving credit facility initially in the amount of $150,000,000, but which
has been reduced to $50,000,000 on March 31, 1997 (the Credit Facility).
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
Credit Facility, which is secured by substantially all of the assets of the
Company (including $5,000,000 of "key man" life insurance on Mr. Vajna),
matures on February 28, 1999. The amount available under the Credit Facility
for borrowing at any time is limited in accordance with a formula based upon
the value of collateral in the Company's borrowing base as defined in the
agreement. As of December 31, 1995 and 1996, approximately $41,578,000 and
$6,026,000, respectively, in borrowings were outstanding under the Credit
Facility. The interest rate payable to Lenders on borrowings under the Credit
Facility is selected by the Company as either (i) 1.5% above the London
Interbank Offering Rate (LIBOR) (5.5% at December 31, 1996) in effect from
time to time for one, two, three or six months (if available as determined by
Chase) as selected by the Company, or (ii) a rate equal to the greatest of
the prime rate (8.25% at December 31, 1996) plus 0.5%, the base CD rate
(5.55% at December 31, 1996) plus 1.5% and the
F-12
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
5. LOANS PAYABLE (CONTINUED)
federal funds rate (6.26% at December 31, 1996) plus 1%, as such rates are in
effect from time to time. Interest is payable quarterly. The commitment fee
on the average daily unused portion of the commitment is 3/8 of one percent
per annum. The Credit Facility also requires the Company to meet certain
financial ratios. At December 31, 1996, the Company is not in compliance with
three covenants under the Credit Facility (the minimum consolidated net worth
covenant, the limitation on capital expenditures and the limitation on
unallocated overhead costs) and is therefore in default under the Credit
Facility. The Company intends to seek waivers of such defaults from the
lenders under the Credit Facility, however, there can be no assurance that
lenders under the Credit Facility will grant such waivers. If the lenders
were to accelerate the amounts outstanding under the Credit Facility as a
result of such defaults, such acceleration would also constitute a default
under the Company's term loan agreements with BVPD described below. The
Company, however, believes that it currently has sufficient resources to
satisfy the amounts outstanding under the Credit Facility in the event the
lenders were to accelerate the amounts outstanding thereunder as a result of
such defaults. The Credit Facility restricts the Company's ability to declare
and pay dividends.
6. FEE INCOME
On November 24, 1992, the Company and The Summit Group (M.E.V.) N.V. (Summit)
entered into a sales agency agreement, collection agency agreement and a
consulting services agreement (collectively, the Sovereign Agreement) with
Sovereign Pictures, Inc. (Sovereign) whereby the Company agreed to perform
certain services for Sovereign for a fee. Such services consisted of sale of
product, collection of accounts receivable, and resolution of Sovereign
liabilities. The Company and Summit agreed to share all fees earned equally. The
term of the agreement is for 15 years. The Company earned fees totaling
$511,000, $298,000 and $60,000 for the years ended December 31, 1994, 1995 and
1996, respectively, in connection with the Sovereign Agreement.
7. RELATED PARTY TRANSACTIONS
The Company incurred air charter expenses from Airborne Charter Inc. (ACI), a
company owned 100% by Mr. Vajna, amounting to $1,199,000, $747,000 and $229,000
for the years ended December 31, 1994, 1995 and 1996, respectively. Of such
amounts, the Company capitalized to film costs $1,199,000 (1994), $580,000
(1995) and $226,000 (1996). A liability in connection with unpaid air charter
expenses of $195,000 to ACI was included in notes and amounts payable to related
parties at December 31, 1995.
F-13
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
Mr. Vajna also received financial planning, legal and related services from
the Company on terms approved by the Company's Audit Committee.
The Company had notes payable to Mr. Vajna aggregating $24,126,000 at
December 31, 1993. The notes bore interest at 10% and were payable on demand.
Such funds were used to fund operations and development of motion picture
properties. On January 17, 1994, Mr. Vajna contributed $21,126,000 of such
amount to equity which resulted in a balance of $3,000,000 at December 31,
1994. In December 1995, the Company paid Mr. Vajna the full amount of the
note and related accrued interest.
During 1995 and 1996, the Company entered into term loan agreements with BVPD
to finance three motion pictures. The maximum amount to be borrowed is based
upon a certain percentage of each production budget. Each loan bears interest
at the prime rate in effect from time to time (8.25% at December 31, 1996)
plus 1.5% and shall 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
such picture. The loans are secured by certain distribution rights of the
Company and one of the loans is also guaranteed by Mr. Vajna. In 1995, a term
loan of $7,500,000 and accrued interest amounting to $585,000 for one motion
picture was canceled as consideration for the Company's sale to BVPD of an
equity interest in the picture. As additional consideration to BVPD for its
purchase of an equity interest in this picture, the Company also assigned to
BVPD substantially all of its profit participation in another motion picture.
During 1995, the Company and BVPD mutually agreed to reduce a term loan from
BVPD relating to one motion picture by $4,655,000 by offsetting the present
value of certain funds due to the Company from BVPD. In 1996, the Company and
BVPD mutually agreed to reduce a term loan from BVPD relating to one motion
picture by $575,000 by offsetting certain funds due to the Company from BVPD.
At December 31, 1995 and 1996, the aggregate principal loan balances
including accrued interest were $26,314,000 and $36,564,000, respectively. In
connection with the Company's decision to produce Evita, the Company became
obligated to pay the development costs previously expensed on such project by
certain partners, including $3,900,000 by Disney. Such amount will be offset
against obligations of Disney to the Company.
Interest expense incurred by the Company in connection with these obligations
amounted to $1,849,000, $2,844,000 and $2,882,000 in 1994, 1995 and 1996,
respectively. Of such amounts $1,758,000, $2,783,000 and $2,797,000 were
capitalized to film costs, respectively.
F-14
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company has a nonqualified deferred compensation plan in which one key
officer participates. Such obligation at December 31, 1995 and December 31,
1996 was $1,230,000 and $1,475,000, respectively (which includes bonuses or
partial bonuses of $150,000 and $75,000 for the years ended December 31, 1995
and 1996, respectively).
The Company leases office space from Mr. Vajna under an agreement which
expired on April 30, 1996 (see Note 10).
R. Timothy O'Donnell, a Director of the Company, is the President of
Jefferson Capital Group, Ltd. (Jefferson Capital), a privately-held
investment banking group, which provided financial advisory services to the
Company in connection with the issuance of common stock in the initial public
offering (Offering) and the sale of common stock to BVPD. In connection
therewith, the Company reimbursed Jefferson Capital's expenses amounting to
$20,000, paid Jefferson Capital a $150,000 fee and issued a warrant to
purchase 50,000 shares of Common Stock, expiring in June 1999, at an exercise
price per share equal to $9.00, the initial public offering price. Jefferson
Capital was retained by the Company in 1996 to assist the Company in its
strategic review. In connection therewith, the Company paid Jefferson Capital
a retainer of $75,000 and reimbursed Jefferson Capital's expenses amounting
to $13,000. In the event the Film Library Sale or other dispositions of
assets or similar transactions are consummated, Jefferson Capital will also
be entitled to additional fees based upon the size of such transactions.
In 1994, the Company sold a previously written off project to BVPD for the
Company's costs in the project of approximately $4,145,000.
Ziffren, Brittenham & Branca (Ziffren), a law firm of which a director is a
partner, received an annual retainer of $250,000 for each of the years ended
December 31, 1994 and 1995 in connection with legal services rendered for the
Company. For the year ended December 31, 1996, Ziffren was paid $156,000.
F-15
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company had noninterest bearing receivables of $100,000 and $50,000 from
executive officers at December 31, 1995 and December 31, 1996, respectively,
and at those respective dates had additional noninterest bearing receivables
of $197,000 and $246,000, respectively, from Mr. Vajna and other entities
owned or partially owned by Mr. Vajna. In 1994, an additional loan amounting
to $250,000 was made to a key officer bearing interest at 7% due December 31,
1996. Such loan and noninterest bearing receivable were paid on January 2,
1997 pursuant to an amendment to such key officer's employment agreement.
Interest receivable amounting to $135,000 and $81,000 was outstanding at
December 31, 1995 and 1996, respectively, from two executive officers and
Ziffren. Further, at December 31, 1996, a noninterest bearing advance of
$18,000 was due from a key officer.
The Company entered into an agreement with Twentieth Century Fox for the
production of "Die Hard, With a Vengeance." The Company granted Buena Vista
International, Inc. (BVI), an affiliate of BVPD, certain distribution rights
in such motion picture in certain foreign territories (including Belgium,
France, Germany, the United Kingdom, Spain, Latin America, Scandinavia,
Taiwan, Switzerland, Portugal and Greece) for an aggregate of $23,200,000 in
advances to be paid upon delivery of such picture to BVI. Such amount was
recognized as revenue in 1995.
In order to assist the Company in obtaining financing for and completion
bonds on the pictures "Die Hard, With a Vengeance," "Judge Dredd" and "The
Scarlet Letter," Valdi entered into a Reimbursement and Term Loan Agreement
(Letter of Credit Facility) dated as of August 16, 1994 whereby Valdi
undertook to have letters of credit issued for the benefit of Chase in an
amount not to exceed $22,044,000 to provide additional collateral for the
Company's Credit Facility with respect to the financing of the pictures
listed above. The Letter of Credit Facility and the letter of credit provided
thereunder expired on November 15, 1995 without any monies having been drawn
thereunder. There is no obligation on the part of any stockholder or
affiliate of the Company to guarantee borrowings under the Credit Facility or
any other future loan obtained by the Company or to enter into any future
arrangements similar to the Letter of Credit Facility.
In consideration for providing the Letter of Credit Facility, the Company
agreed to pay Valdi a one time facility fee of $110,220 and a utilization
fee. As no amounts were drawn under the Letter of Credit Facility prior to
its expiration, no utilization fees were paid to Valdi.
F-16
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
Valdi beneficially owns approximately 84.7% of Intercom KFT ("Intercom"), a
distributor of motion pictures in Hungary to which the Company licenses
Hungarian distribution rights to its motion pictures in various media. The
Company and Intercom have an agreement in principle for an output agreement
for the Hungarian distribution of all of the Company's films, beginning with
"Nixon." The agreement in principle provides for a distribution fee to
Intercom of 17.5% of the gross receipts of Intercom from distribution of such
films plus reimbursement of distribution expenses. During the Company's
fiscal year ended December 31, 1996, Intercom received distribution fees of
approximately $189,000 with respect to this distribution arrangement with the
Company. In addition, Intercom has assisted the Company by paying to the
Hungarian tax authorities on behalf of the Company value added taxes incurred
by the Company in connection with its distribution of films through its
Hungarian subsidiary, Cinergi Productions KFT ("CPKFT"). Intercom
subsequently files for and receives the refund of such taxes. During 1996,
the Company paid Intercom approximately $349,000 representing the aggregate
accrued interest on amounts advanced by Intercom to the Hungarian tax
authorities from the date of payment of each such advance until
receipt by Intercom of the applicable refund and Intercom's out of
pocket costs incurred in connection with Intercom's activities on behalf of
the Company in 1996 and in prior years.
8. INCOME TAXES
The components of pretax income (loss) for the Company are as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1995 1996
---------- ------------- -------------
Domestic $ (394,000) $(16,062,000) $(15,905,000)
International 3,289,000 - -
---------- ------------- -------------
$2,895,000 $(16,062,000) $(15,905,000)
---------- ------------- -------------
---------- ------------- -------------
F-17
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
Current and noncurrent deferred income taxes generally reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Company's current and noncurrent
deferred tax liabilities and assets are as follows:
DECEMBER 31,
1995 1996
--------------------------
Current and noncurrent deferred tax liabilities:
Film costs $ 6,904,000 $ 6,813,000
Amortization of film costs 27,075,000 23,457,000
----------- -----------
33,979,000 30,270,000
Current and noncurrent deferred tax assets:
Accruals not currently deductible 1,091,000 1,381,000
Deferred revenues 25,835,000 17,815,000
Net operating loss carryover 12,915,000 22,574,000
Other 38,000 38,000
----------- -----------
39,879,000 41,808,000
Valuation allowance (5,900,000) (11,538,000)
----------- -----------
33,979,000 30,270,000
----------- -----------
Net deferred tax $ - $ -
----------- -----------
----------- -----------
A reconciliation of income tax computed at the statutory federal income tax
rate to income tax expenses for the Company is as follows:
YEAR ENDED DECEMBER 31,
1995 1996
--------------------------
Provision assuming federal income tax rate of 35% $(5,622,000) $(5,567,000)
Effect of net operating loss for which no benefit
was received 5,622,000 5,567,000
Non-deductible items without tax benefit and other - -
----------- -----------
$ - $ -
----------- -----------
----------- -----------
At December 31, 1996, the Company had a federal net operating loss carryover of
approximately $59,406,000 which expires in 2011
F-18
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCKHOLDERS' EQUITY
On January 1, 1994, two executive officers of the Company and Ziffren each
purchased 372,341 shares of Common Stock from the Company. The two executive
officers and Ziffren are hereafter referred to as "Purchasers."
Each Purchaser acquired the Common Stock in exchange for payment of the
aggregate par value of such shares (pre-split) in cash and a full recourse
promissory note in the amount of $450,000 (approximately $1.21 per share of
Common Stock). The principal of each note is payable to the Company on
December 31, 1998 or upon the earlier termination of Purchaser's relationship
with the Company. Each promissory note accrues interest at the rate of 6% per
annum, payable annually, and is secured by a pledge of all of the Common
Stock so purchased by the Purchaser. The Company paid on behalf of each of
the executive officers $300,000 in 1994 and $130,000 in 1995, to assist them
in discharging federal and state income taxes relating to the stock purchase
transaction.
Each of the Purchasers has granted to Mr. Vajna the right to vote the Common
Stock purchased pursuant to an irrevocable proxy which continues during such
Purchaser's ownership of the shares for the maximum period permitted by
applicable law. Each of the Purchasers also received certain "piggyback"
registration rights which, with certain exceptions, require the Company to
use its best efforts to include in any of the Company's registration
statements any shares requested by such Purchaser to be so included. The
Purchaser will pay all expenses directly incurred on its behalf in connection
with such registration.
Until January 1, 1997, the Company was obligated to repurchase the Common
Stock purchased by each Purchaser, except for vested shares, at the original
purchase price if such Purchaser's relationship with the Company terminated
for any reason other than death, disability or discharge without cause. Until
such date, such shares could not be transferred to third parties. For one
executive officer and Ziffren, one-third of the shares vested free of such
restrictions for each full year of continued employment from and after
December 31, 1993 (or, in the case of Ziffren, the continued engagement of
Ziffren by the Company for each full year from and after December 31, 1993).
For the other executive officer (Other Executive Officer), two-thirds of the
shares vested as of December 31, 1995, and the remaining balance vested
monthly until the Other Executive Officer resigned in August 1996 (see
below). Also, in the case of the executive officers, all shares of the Common
Stock were to vest upon their death, disability or discharge without cause.
F-19
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCKHOLDERS' EQUITY (CONTINUED)
On December 30, 1996 the Company repurchased the 372,341 shares held by the
Other Executive Officer. The 51,714 shares of the Common Stock held by the
other executive officer that were not vested at the time of resignation were
repurchased at the original purchase price (approximately $1.21 per share) by
reducing the aggregate balance due under the Other Executive Officer's
promissory note to the Company by approximately $62,500. In consideration for
the sale to the Company of the remaining 320,627 shares, the Company canceled
the remaining balance of the Other Executive Officer's promissory note of
approximately $468,000 (after the $62,500 reduction).
The aggregate difference between the fair value of the Common Stock purchased
on January 1, 1994 and the $1.21 consideration given per share was $3,750,000
and was recognized as expense using the straight-line method over the vesting
period of the related shares. The promissory notes amounting to $1,350,000
and $900,000 at December 31, 1995 and 1996, respectively, have been netted
against Common Stock with certain redemption features in the balance sheet.
In January 1997, the shares held by Ziffren were repurchased by the Company
and the Company cancelled the promissory note from Ziffren amounting
to $450,000.
The Preferred Stock is issuable in one or more series by the Board of
Directors which may fix, among other things, the designation of and number of
shares to comprise each series and the relative rights, preferences and
privileges of shares of each series, including the dividends payable thereon,
voting rights, conversion rights, the price and terms on which shares may be
redeemed, the amounts payable upon such shares in the event of voluntary or
involuntary liquidation and any sinking fund provisions for redemption of
purchases of such shares. The Board of Directors, without stockholder
approval, may issue Preferred Stock with voting and/or conversion rights
which could adversely affect the voting power of the holders of the Common
Stock, or which could be used as a defensive measure in connection with an
attempted hostile takeover of the Company.
Such shares could be privately placed with purchasers who might align
themselves with the Board of Directors in opposing a hostile takeover bid. In
addition, the Board could authorize holders of a series of Preferred Stock to
vote as a class, either separately or with the holders of Common Stock, on
any merger, sale or exchange of assets by the Company or any other
extraordinary corporate transaction. The Board could also issue Preferred
F-20
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCKHOLDERS' EQUITY (CONTINUED)
Stock having terms that could discourage an acquisition attempt or other
transaction that some stockholders might believe to be in their best
interests or in which stockholders might receive a premium for their stock
over the then current market price of such stock. Although the Company has no
present intention to issue any shares of Preferred Stock, there can be no
assurance that the Company will not do so in the future.
10. COMMITMENTS AND CONTINGENCIES
The Company has employment contracts with Mr. Vajna and one of its key
officers with the longest term extending through 1999. Collectively, these
agreements provide for minimum annual compensation of approximately
$1,500,000 that can be increased for incentives based on the Company's
achieving specified levels of earnings or the receipt of specific revenues
attributable to the commencement of production and distribution of its motion
pictures. Pursuant to an amendment to the agreement with the key officer
dated January 1, 1997, the key officer received a signing bonus of $600,000,
of which $300,000 was used to fully repay two loans previously made by the
Company (see Note 7). In addition, Mr. Vajna is entitled to receive
additional amounts payable solely out of the revenues of each picture
produced after January 1, 1993 after "actual breakeven," as defined in his
employment agreement with the Company.
At December 31, 1995 and 1996, the Company had commitments totaling
$1,985,000 and $3,205,000 (excluding amounts to Mr. Stone (see below)),
respectively in connection with motion picture projects in development and
certain other assets.
The Company has leases for certain equipment and office space which expire
through 1998. The Company leases its office space from Mr. Vajna under an
agreement which expired in 1996. Since such expiration, the Company has been
leasing its office space from Mr. Vajna on a month-to-month basis. Rent
expense paid in connection with this lease amounted to $462,000 for each of
the years ended December 31, 1994, 1995 and 1996. Total rent expense for the
years ended December 31, 1994, 1995 and 1996 was $581,000, $702,000 and
$868,000, respectively. Of such amounts, the Company capitalized to film
costs $508,000 (1994), $497,000 (1995) and $383,000 (1996). Future minimum
payments under noncancelable operating leases are as follows:
1997 $ 82,000
1998 30,000
Thereafter -
--------
$112,000
--------
--------
F-21
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
During 1996, the Company entered into a one year capital lease for certain
special effects equipment. Such lease, which expires in March 1997, includes
an option to purchase the leased equipment for $153,000. Future minimum lease
payments under this capital lease amount to $291,000. Amortization of assets
recorded under this lease is included in depreciation expense.
In 1990, the Company entered into a distribution agreement and certain
related agreements with BVPD (collectively, the BVPD Agreement) whereby BVPD
agreed to distribute certain motion pictures produced by the Company in the
United States and its possessions, Canada and Latin America. At December 31,
1995 and 1996, $44,949,000 and $29,582,000, respectively, in advances had
been recorded as deferred revenue in connection with the BVPD Agreement. The
advances for each motion picture bear interest at the Bank of America prime
rate (8.25% at December 31, 1996) plus 1.5%.
In connection with an April 1994 amendment of the BVPD Agreement, the Company
granted BVPD a warrant to purchase 150,000 shares of the Company's Common
Stock at an exercise price equal to $9.00 per share, the initial public
offering price, expiring in June 1999. BVPD also purchased concurrently with
the Offering at $9.00 per share, the initial public offering price, 555,556
shares of Common Stock for approximately $5,000,000.
The Company and each of its domestic subsidiaries have been S Corporations
from their incorporation through the tax year ended December 31, 1993. As a
result, the Company and its domestic subsidiaries were not subject to federal
income taxes and were subject to a reduced rate of state income taxes through
that date. In addition, due to the S Corporation elections, the Company and
its domestic subsidiaries have no net operating loss carryforwards for
federal and state tax purposes for years prior to 1994. Rather, taxable
income and loss of the Company for 1993 and prior years was included in the
computation of the taxable income or loss of Mr. Vajna, the Company's sole
stockholder during those years. Effective January 1, 1994, the Company and
each of the domestic subsidiaries revoked their S Corporation elections. The
Company therefore expects that it will be subject to federal and state
corporate income tax in 1994 and future tax years.
The corporate income tax returns of the Company for its 1990, 1991, 1992 and
1993 fiscal years are currently under audit by the Internal Revenue Service
(IRS) and California Franchise Tax Board, and returns for the 1993 and 1994
fiscal years remain open to audit. The Company anticipates no federal tax
liability and only minimal, if any, California tax liability
F-22
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
as a result of any income tax audits for pre-1994 years because of the S
Corporation election in effect for such years. In the absence of the
agreement described below, Mr. Vajna, the sole stockholder of the Company
during such period, and not the Company would be responsible for any tax
liability assessed as a result of such audits of pre-1994 years.
The Company received approximately $20,000,000 of advances (the Advances)
during the fiscal year ended December 31, 1993. The Advances were received in
connection with motion pictures that were released during the fiscal year
ending December 31, 1994. Consistent with its financial accounting for the
Advances and prior tax reporting practices, the Company did not include
Advances in its 1993 taxable income, and instead included such amounts - and
deducted the related costs - in computing its taxable income for the year in
which the underlying motion pictures were released, in this case 1994. It is
possible, however, that the IRS will challenge the Company's tax treatment of
the Advances, and if the IRS were successful in that challenge, the Company
would be required to include the Advances in the computation of its 1993
taxable income without an offsetting deduction in 1993 for costs associated
with those motion pictures. As a result of the S Corporation election then in
effect, such an adjustment (an Adjustment) to the Company's 1993 taxable
income would cause a corresponding increase in the taxable income of Mr.
Vajna and, therefore, a significant increase in Mr. Vajna's tax liability for
1993. However, if the Company has cumulative taxable income in 1994 through
1997 (exclusive of the Advances), it would obtain a benefit from the
Adjustment in the form of a reduction in its 1994 taxable income and related
tax liability as it would not be required to include the Advances in its 1994
taxable income.
Therefore, should Mr. Vajna's tax liability for 1993 increase as a result of
the Adjustment (i.e., acceleration of 1994 income into 1993) and only if the
Company does have cumulative taxable income in 1994 through 1997 (exclusive
of the Advances) and thereby obtains a corresponding decrease in its tax
liability, the Company has agreed to reimburse Mr. Vajna for the increase in
his 1993 income tax liability. For purposes of calculating cumulative taxable
income for the period 1994 through 1997, the effect of any post-1997 net
operating loss carrybacks will not be taken into account.
In order to allow the reimbursement, if required, to be paid to Mr. Vajna
under tax free provisions of the tax law, the Company paid $10,000,000 to Mr.
Vajna in June 1994. Mr. Vajna loaned the Company $10,000,000 to assist in
funding the distribution.
From January 1, 1994 through December 31, 1996, the Company had a cumulative
taxable loss (treating income relating to the Advances as taxable income in
1994) in excess of $20,000,000.
F-23
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Should the Company not receive the tax benefit as described above, the
Company may offset the $10,000,000 loan payable to Mr. Vajna against a
receivable from Mr. Vajna created to reflect the possibility that the Company
will not get such benefit. Pursuant to the legal right of offset, such loan
payable and corresponding receivable will be netted against one another for
financial reporting purposes.
In 1995, the Company completed a transaction structured as a sale-leaseback
with respect to its motion picture "Judge Dredd." The Company sold its
interest in "Judge Dredd" to British corporation Lloyds Commercial Leasing
Ltd. and concurrently leased the film back pursuant to a 12 year
lease. The Company retained approximately $3,000,000 of the sale proceeds
(after payment of related expenses) and placed the remainder of the sale
proceeds (an amount sufficient to satisfy the anticipated aggregate lease
payments over the term of the lease assuming certain adjustments do not
occur) on deposit with ABN AMRO Bank (the ABN Bank) to be used as security
for a guaranty of the lease payments issued by the ABN Bank. The amount
retained by the Company reduced unamortized film costs. 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 ABN 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 ABN Bank were
returned to the Company.
In 1996, the Company also completed a sale-leaseback transaction with respect
to its motion picture "Evita." The Company sold its interest in "Evita" to
Lloyds General Leasing Limited (Lloyds General) and concurrently leased the
film back pursuant to a 15 year lease. The Company retained approximately
$5,769,000 of the sale proceeds (after payment of related expenses) and
placed the remainder of the sale proceeds (an amount sufficient to satisfy
the anticipated aggregate lease payments over the term of the lease assuming
certain adjustments do not occur) on deposit with the ABN Bank to be used as
security for a guaranty of the lease payments issued by the ABN Bank. The
amount retained by the Company reduced unamortized film costs. The
sale-leaseback transactions with respect to "Judge Dredd" and "Evita" may be
unwound by Lloyds General in certain circumstances relating to British tax
treatment of the transactions, and the Company could be liable for certain
unwind costs which could be substantial, although based upon Lloyds General's
discussion with British taxing authorities prior to the respective
transactions, the Company believes it unlikely the transactions will be
unwound. Pursuant to the Library Sale Agreement (see Note 12),
F-24
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Disney has agreed, upon consummation of the Film Library Sale, to either
acquire the Company's subsidiaries that are the lessees in such
sale-leaseback transactions or assume all of such subsidiaries rights and
obligations under such leases; however, the Company would remain responsible
for any of the foregoing unwind costs.
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. 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.
F-25
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In connection with the Investigation, the Company has determined to advance
the expenses of the Indemnitees which the Indemnitees may incur in connection
with the Investigation. As of December 31, 1996, the Company had advanced an
aggregate of $154,000 on behalf of the Indemnitees.
In February 1997, the Company ceased production on one of its motion pictures
after commencement of principal photography. The Company is currently in
discussions with certain parties involved in the production of "Broadway
Brawler" regarding settlement of various obligations in connection therewith
including, among other things, debt incurred under the Credit Facility in
connection with production of the film (approximately $8.3 million at March
31, 1997) and advances (approximately $3 million at March 31, 1997) received
from BVPD as part of funding production (repayment of which is guaranteed in
both cases by the completion guarantor for the film), as well as shutdown
costs and other commitments made in connection with production of the film
(approximately $4.7 million at March 31, 1997). The completion guarantor for
"Broadway Brawler" guaranteed completion and delivery of a motion picture
containing certain essential elements. As the motion picture could not be
completed with such essential elements, the completion guarantor is required
to pay an amount equal to the amount loaned by the Lenders and advanced by
BVPD to make the motion picture and such additional amounts as were required
to complete delivery of the motion picture and which had been committed prior
to the shut down. Management of the Company believes, although no assurances
can be given, that a settlement of the obligations relating to "Broadway
Brawler" will be reached. In the event a settlement is not reached,
management believes a substantial portion of any obligations the Company
might otherwise have with respect to "Broadway Brawler" will be borne by the
completion guarantor.
The Company had an output agreement in France with Le Film Office ("LFO")
(which expired after the delivery of "Evita"). Pursuant to the output
agreement with LFO, a $3,071,000 advance was 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 agreed to stay the Court
F-26
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
proceedings and submit the dispute to binding arbitration by the American
Film Marketing Association, as required by the output agreement. However, LFO
filed a motion with the Court seeking to dismiss the arbitration and proceed
with the litigation in Court. On April 10, 1997, such motion was denied by
the Court. An arbitration hearing is scheduled for April 17, 1997. The
Company believes that LFO's allegations are without merit and intends to
defend them vigorously. In light of the disappointing domestic box office
performance of "The Shadow Conspiracy" and the adverse publicity generated in
France by LFO's refusing to accept delivery of "The Shadow Conspiracy", in
the event the Company does not prevail in the arbitration, it believes that
it will be difficult to obtain alternative distribution of "The Shadow
Conspiracy" in France. In addition, even if an alternative distribution
arrangement is obtained, it is unlikely any such arrangement will provide for
an advance on delivery or otherwise be on terms as advantageous as those
under the Company's output agreement with LFO. Accordingly, if the Company
does not prevail in the arbitration, the Company could be required to write
down the carrying value of the film by an amount equal to the difference
between the amount of LFO advance not received and amounts actually received
by the Company pursuant to alternative distribution arrangements, if any.
Trial is scheduled for August 11, 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 and declaratory relief, 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. On September 4,
1994, the Company successfully demurred to all of the plaintiffs' causes of
action except the breach of contract claim, and on November 29, 1994, the
Company successfully demurred to an amended complaint for bad faith denial of
existence of contract. On December 29, 1994, the Company and the other
defendants answered the First Amended Complaint for breach of contract, fraud
and deceit and civil conspiracy. Summary adjudication has been obtained in
favor of Mr. Vajna, who was named as an additional defendant in the original
complaint. 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 and is defending the action
vigorously.
F-27
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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. Disney has reimbursed the Company for all amounts paid to Mr.
Stone ($2,685,000 in 1996); however, pursuant to the Library Sale Agreement,
the Company will be responsible for all future payments due to Mr. Stone for
the duration of the arrangement, which expires February 10, 1998. The Company
currently estimates the payments due under Mr. Stone's agreement during such
period will be approximately $1,875,000.
In 1996, the Company and Hollywood Pictures Company (HPC), as 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, in exchange for (i) a 50% equity participation in such motion
picture and (ii) a sales fee for international distribution of such motion
picture. In connection with the Library Sale Agreement (see Note 12), upon
consummation of the Film Library Sale, the Company will no longer be
obligated to pay the latter amount, will relinquish the equity participation
and sales fee, and will no longer serve as sales agent with respect to such
motion picture. At December 31, 1996, the Company had an obligation to BVPD
in connection with this arrangement amounting to $3,675,000.
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.
11. STOCK OPTION PLANS
In 1994, the Company adopted two stock option plans. The Basic Stock Option
and Stock Appreciation Rights Plan (the Basic Plan) is for regular full-time
employees, directors and consultants. The Special Stock Option and Stock
Appreciation Rights Plan (the Special Plan) is for certain key or highly
compensated employees and is designed to provide alternative procedures for
meeting special requirements imposed by federal income tax law in connection
with making grants to certain key or highly compensated employees.
Furthermore, grants of options or stock appreciation rights (SARs) under the
Special Plan will reduce the maximum amount of options and SARs that can be
issued in the aggregate and to the recipient under the Basic Plan. Both the
Basic Plan and the Special Plan provide for the grant of "incentive stock
options" (ISOs) and "nonqualified stock options" (NSOs) to acquire the
Company's Common Stock, as well as SARs entitling the recipient on exercise
to receive payment of increases in the market value of the Company's Common
F-28
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
11. STOCK OPTION PLANS (CONTINUED)
Stock from the date of grant to the date of exercise. ISOs may only be issued
to employees of the Company and its subsidiaries, whereas NSOs and SARs may
be issued to employees and other persons. The maximum number of shares
subject to the Basic Plan and the Special Plan are 500,000 and both plans by
their terms will expire on December 31, 2003 unless terminated sooner by the
Company.
On October 28, 1994, the Company's compensation committee, which consisted of
two outside Directors of the Company adopted a program for the cancellation
of certain options granted under the Basic Plan and Special Plan prior to
such date (the Reissuance Date) and the reissuance of new options for the
same number of shares for which the old options could have been exercised
with exercise prices equal to the closing price of the Company's Common Stock
on the Reissuance Date.
A summary of stock option activity under all plans relating to certain
employees and other persons who provide services to the Company is as follows:
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
--------------------------
Balance at January 1, 1994 - $ -
Granted 78,350(1) 7.26
--------------------------
Balance at December 31, 1994 78,350 7.26
Granted 129,000(2) 3.96
Canceled (8,350) 6.73
--------------------------
Balance at December 31, 1995 199,000 $5.14
Granted 66,000(3) 2.00
Canceled (10,500) 4.17
--------------------------
Balance at December 31, 1996 254,500 $4.37
--------------------------
--------------------------
F-29
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
11. STOCK OPTION PLANS (CONTINUED)
DECEMBER 31,
------------------------------------
1994 1995 1996
------ ------ -------
Exercisable 78,350 98,334 128,660
Weighted Average Exercise Price $7.26 $6.43 $5.45
(1) These options fully vested on the date of grant.
(2) Options relating to 1994 service vest one-third on the date of grant,
one-third one year after the date of grant, and one-third two years after
the date of grant. Options relating to 1995 service vest one-third one year
after the date of grant, one-third two years after the date of grant, and
one-third three years after the date of grant. Certain options granted
under the Special Plan vest in full on the date of grant.
(3) These options vest one-third one year after the date of grant, one-third
two years after the date of grant, and one-third three years after the date
of grant.
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------
NUMBER WEIGHTED-
OUTSTANDING AVERAGE WEIGHTED- WEIGHTED-
AT REMAINING AVERAGE AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE 1996 LIFE PRICE EXERCISABLE PRICE
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.00 66,000 9.9 years $2.00 15,000 $2.00
3.88 109,500 9.0 years 3.88 40,540 3.88
4.88 10,000 8.9 years 4.88 10,000 4.88
6.63 10,000 7.9 years 6.63 10,000 6.63
6.88 29,000 7.8 years 6.88 23,120 6.88
8.00 30,000 2.3 years 8.00 30,000 8.00
</TABLE>
At December 31, 1996, 1995 and 1994, 78,350, 199,000 and 254,500 shares of
Common Stock were reserved for future issuance under the Basic Plan and
Special Plan. Options to purchase 421,650 (1994), 301,000 (1995) and 245,000
(1996) were available for grant under the Basic Plan and Special Plan.
F-30
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
12. SUBSEQUENT EVENTS
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, 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
$36,654,000 as of December 31, 1996). 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 has 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 (which the Company anticipates will not be exceeded), and the
Company has agreed to transfer to Disney all minimum guarantee payments and
any overages paid or to be paid with respect to such film.
The film library being sold to Disney includes primarily all of the Company's
rights (except minimum guarantee payments for films other than "An Alan
Smithee Film") to the following eleven motion pictures: "Medicine Man,"
"Tombstone," "Renaissance Man," "Color of Night," "Judge Dredd," "The Scarlet
Letter," "Nixon," "Evita" (excluding soundtrack rights, which will be
retained by the Company), "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. Management of the Company
F-31
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
12. SUBSEQUENT EVENTS
(including Chairman of the Board and Chief Executive Officer, Andrew G.
Vajna), which owns approximately 43.7% of the outstanding Common Stock of the
Company, has agreed to vote its shares in favor of the transaction in
accordance with the terms of the Library Sale Agreement.
On April 3, 1997, the Company also announced that it does 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 is in the process of considering its
alternatives assuming consummation of the Film Library Sale to Disney. Such
alternatives include disposing of those assets which are not being sold to
Disney, in one or a series of transactions.
Not included in the Film Library Sale to Disney are the Company's slate of
approximately forty development projects, the Company's visual effects
facility, and Cinergi's rights in "Die Hard, With a Vengeance" (which the
company owns with Twentieth Century Fox which controls the sequel rights to
the film).
13. GEOGRAPHICAL INFORMATION
The Company's operations are principally developing, financing, producing and
licensing feature-length motion pictures worldwide. In 1994, the Company
earned revenues from one significant customer of approximately $43,207,000
(40%). In 1995, the Company earned revenues from two significant customers of
approximately $57,808,000 (30%) and $44,053,000 (23%). In 1996, the Company
earned revenues from two significant customers of approximately $43,454,000
(33%) and $12,937,000 (10%).
Export revenues by geographic area are as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
------------------------------------------
Europe $45,200,000 $72,648,000 $41,964,000
Asia 16,248,000 51,970,000 19,377,000
South America 4,058,000 3,813,000 4,428,000
Other 4,373,000 9,897,000 4,927,000
------------------------------------------
Total export revenue $109,028,000 $192,880,000 $70,696,000
------------------------------------------
------------------------------------------
F-32
<PAGE>
Cinergi Pictures Entertainment Inc.
Notes to Consolidated Financial Statements (continued)
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Certain quarterly financial information is presented below:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER(1)(2) YEAR
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995:
Revenues $12,706,000 $50,960,000 $51,528,000 $77,686,000 $192,880,000
Gross profit (loss) 905,000 (8,936,000) (8,162,000) 4,529,000 (11,664,000)
Operating income (loss) 336,000 (9,756,000) (9,217,000) 1,875,000 (16,762,000)
Net income (loss) 233,000 (9,435,000) (9,059,000) 2,199,000 (16,062,000)
.02 (.76) (.64) .15 (1.23)
Net income (loss) per share
1996:
Revenues $37,116,000 $22,467,000 $30,189,000 $43,228,000 $133,000,000
Gross profit (loss) 781,000 391,000 1,646,000 (9,430,000) (6,612,000)
Operating income (loss) (695,000) (1,012,000) (465,000) (14,192,000) (16,364,000)
Net income (loss) (637,000) (716,000) (294,000) (14,258,000) (15,905,000)
Net income (loss) per share (.04) (.05) (.02) (1.01) (1.12)
</TABLE>
(1) In the fourth quarter of 1995, the Company revised its revenue and certain
cost estimates related to released films, the effect of which decreased the
net income in the quarter ended December 31, 1995, by approximately
$3,700,000.
(2) In the fourth quarter of 1996, the Company revised its revenue and certain
cost estimates related to released films, the effect of which decreased the
net income in the quarter ended December 31, 1996, by approximately
$5,964,000.
F-33
<PAGE>
BYLAWS
for the regulation, except as
otherwise provided by statute or
the Certificate of Incorporation, of
CINERGI PICTURES ENTERTAINMENT INC.
(FORMERLY KNOWN AS CINERGI PRODUCTIONS INC.)
a Delaware corporation
<PAGE>
TABLE OF CONTENTS
Article I GENERAL PROVISIONS
Section 1.01 PRINCIPAL EXECUTIVE OFFICE....................... 1
Section 1.02 NUMBER OF DIRECTORS.............................. 1
Section 1.03 REGISTRATION OF SHARES........................... 1
ARTICLE II SHARES AND STOCKHOLDERS
Section 2.01 SHARE CERTIFICATES............................... 1
A. IN GENERAL....................................... 1
B. FORM OF CERTIFICATES............................. 2
C. FRACTIONAL SHARE INTERESTS....................... 2
Section 2.02 TRANSFER OF CERTIFICATES......................... 2
Section 2.03 LOST CERTIFICATES................................ 3
Section 2.04 MEETINGS OF STOCKHOLDERS......................... 3
A. PLACE OF MEETINGS................................ 3
B. ANNUAL MEETINGS.................................. 3
C. SPECIAL MEETINGS................................. 3
D. NOTICE OF MEETINGS............................... 3
E. ADJOURNED MEETINGS AND NOTICE THEREOF............ 4
F. WAIVER OF NOTICE................................. 4
G. QUORUM/MAJORITY VOTE............................. 4
H. CONDUCT OF MEETINGS.............................. 4
I. NOMINATIONS FOR DIRECTORS........................ 4
Section 2.05 ACTION WITHOUT A MEETING......................... 5
Section 2.06 VOTING OF SHARES................................. 5
A. IN GENERAL....................................... 5
B. SECRET VOTING BY BALLOT.......................... 5
C. VOTING OF SHARES BY CERTAIN HOLDERS.............. 5
Section 2.07 PROXIES.......................................... 6
Section 2.08 INSPECTORS OF ELECTION........................... 6
A. APPOINTMENT...................................... 6
B. DUTIES........................................... 6
Section 2.09 RECORD DATE...................................... 7
Article III DIRECTORS
Section 3.01 POWERS........................................... 7
Section 3.02 COMMITTEES OF THE BOARD.......................... 7
Section 3.03 ELECTION AND TERM OF OFFICE...................... 8
Section 3.04 VACANCIES........................................ 8
Section 3.05 REMOVAL.......................................... 9
Section 3.06 RESIGNATION...................................... 9
Section 3.07 MEETINGS OF THE BOARD............................ 9
A. REGULAR MEETINGS................................. 9
B. ORGANIZATION MEETINGS............................ 9
C. SPECIAL MEETINGS................................. 9
D. NOTICE OF ADJOURNMENT............................ 9
E. PLACE OF MEETING................................. 10
F. PRESENCE BY CONFERENCE TELEPHONE CALL............ 10
G. QUORUM/VOTING.................................... 10
H. WAIVER OF NOTICE................................. 10
Section 3.08 ACTION WITHOUT MEETING........................... 10
Section 3.09 FEES AND COMPENSATION............................ 10
Section 3.10 INTERESTED DIRECTORS............................. 10
(i)
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Article IV OFFICERS
Section 4.01 OFFICERS......................................... 11
Section 4.02 ELECTIONS........................................ 11
Section 4.03 OTHER OFFICERS................................... 11
Section 4.04 REMOVAL.......................................... 11
Section 4.05 RESIGNATION...................................... 11
Section 4.06 VACANCIES........................................ 11
Section 4.07 CHAIRMAN OF THE BOARD............................ 11
Section 4.08 PRESIDENT........................................ 12
Section 4.09 SECRETARY........................................ 12
Section 4.10 CHIEF FINANCIAL OFFICER.......................... 12
Section 4.11 TREASURER........................................ 12
Section 4.12 VICE PRESIDENT................................... 12
Article V INDEMNIFICATION AND INSURANCE
Article VI MISCELLANEOUS
Section 6.01 BOOKS OF ACCOUNT AND PROCEEDINGS................. 13
Section 6.02 RIGHTS OF INSPECTION............................. 13
A. BY STOCKHOLDERS.................................. 13
B. BY DIRECTORS..................................... 14
Section 6.03 CHECKS, DRAFTS, ETC.............................. 14
Section 6.04 AUTHORITY TO EXECUTE CONTRACTS................... 14
Section 6.05 REPRESENTATION OF SHARES OF OTHER CORPORATIONS... 14
Section 6.06 CONSTRUCTION AND DEFINITIONS..................... 14
Section 6.07 REIMBURSEMENT OF DISALLOWED COMPENSATION......... 14
Article VII AMENDMENTS
Section 7.01 POWER OF STOCKHOLDERS............................ 15
Section 7.02 POWER OF DIRECTORS............................... 15
Article VIII EMERGENCY PROVISIONS
Section 8.01 GENERAL.......................................... 15
Section 8.02 UNAVAILABLE DIRECTORS............................ 15
Section 8.03 AUTHORIZED NUMBER OF DIRECTORS................... 15
Section 8.04 QUORUM........................................... 16
Section 8.05 CREATION OF EMERGENCY COMMITTEE.................. 16
Section 8.06 CONSTITUTION OF EMERGENCY COMMITTEE.............. 16
Section 8.07 POWERS OF EMERGENCY COMMITTEE.................... 16
Section 8.08 DIRECTORS BECOMING AVAILABLE..................... 16
Section 8.09 ELECTION OF BOARD................................ 16
Section 8.10 TERMINATION OF EMERGENCY COMMITTEE............... 17
(ii)
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BYLAWS
for the regulation, except as otherwise provided
by statute or the Certificate of Incorporation
of
CINERGI PICTURES ENTERTAINMENT INC.
(formerly known as CINERGI PRODUCTIONS INC.)
ARTICLE I
GENERAL PROVISIONS
Section 1.01 PRINCIPAL EXECUTIVE OFFICE
The principal executive office of the corporation shall be located at
2308 Broadway, Santa Monica, California 90404-2916. The Board of Directors
shall have the power to change the principal office to another location and may
fix and locate one or more subsidiary offices at any place.
Section 1.02 NUMBER OF DIRECTORS
A. The affairs of the corporation shall be managed by a Board of
Directors (the "Board") consisting of not less than three (3) nor more than
twenty (20) directors. Directors need not been Stockholders or citizens or
residents of the United States.
B. The exact number of directors within the limits specified shall
be six (6) until changed by an amendment to these Bylaws duly adopted by the
Board or by the Stockholders.
Section 1.03 REGISTRATION OF SHARES
The corporation shall recognize each person registered in its stock
ledger as the exclusive owner and holder of the shares registered in his or her
name as the "Stockholder" for all purposes hereunder with the exclusive rights
INTER ALIA to vote the shares, to receive dividends declared with respect to the
shares, to transfer the shares to others, and to exercise any other rights of
Stockholders. The corporation shall have no obligation to recognize any
equitable or other claim or interest in any shares on the part of any person or
persons other than the registered owner, as set forth in the stock ledger,
whether or not the corporation shall have any notice thereof, except as may
otherwise be provided by the laws of the State of Delaware. "Shares" for
purposes hereof, shall mean shares of the corporation's stock authorized by its
Certificate of Incorporation and registered in the stock ledger as issued and
outstanding, including any one or more classes of stock so authorized, and
whether or not such share is deemed to have voting or other privileges.
ARTICLE II
SHARES AND STOCKHOLDERS
Section 2.01 SHARE CERTIFICATES
A. IN GENERAL
The corporation shall issue a certificate or certificates
representing shares of its capital stock. Each certificate so issued shall be
signed by or in the name of the corporation by the Chairman or Vice Chairman of
the
1.
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Board or the President or a Vice President and by the Chief Financial Officer,
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary
of the corporation and shall state the name of the record owner thereof and
represent the number of shares registered in certificate form. Any or all of
the signatures on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if such person were an officer, transfer
agent or registrar at the date of issue.
B. FORM OF CERTIFICATES
There shall be set forth on the face or back of a certificate
which the corporation shall issue to represent a class or series of stock one of
the following:
1. A statement of the powers, designations, preferences and
relative participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights; or
2. A summary of the statement described in Subsection
2.01(B)(1) above.
If a security of the corporation is subject to a restriction on the transfer or
registration thereof, such restriction shall be noted, in writing, conspicuously
upon the certificate representing the security.
C. FRACTIONAL SHARE INTERESTS
The corporation may, but shall not be required to, issue
certificates representing a fraction of a share and, in this event, the holder
thereof shall have the rights appurtenant to ownership of that interest in the
corporation. If the corporation elects not to issue certificates representing a
fraction of a share to the persons entitled thereto, it shall, at its election,
either:
1. Arrange for disposition of the fractional interest by those
entitled thereto.
2. Pay in cash the fair value of fractions of a share as of the
time when those entitled to receive such fractions are determined.
3. Issue scrip or warrants in registered or bearer form which
entitles the holder to receive a full share upon surrender of such scrip or
warrants aggregating one or more full shares, which scrip or warrants may, if
the Board elects, either become (i) void if not so surrendered on or before a
specified date, or (ii) subject to such other conditions or limitations as may
be designated by the Board.
Section 2.02 TRANSFER OF CERTIFICATES
Where a certificate for shares is presented to the corporation or its
transfer clerk or transfer agent with a request to register a transfer of
shares, the corporation is under a duty to register the transfer, cancel the
certificate presented, and issue a new certificate if:
A. The certificate is endorsed or the instructions originated by the
appropriate person or persons;
B. Reasonable assurance is given that those endorsements or
instructions are genuine and effective;
C. The corporation has no duty to inquire into adverse claims or has
discharged any such duty;
D. Any applicable law relating to the collection of taxes has been
compiled with; and
E. The transfer is in fact rightful or is to a bona fide purchaser.
2.
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Section 2.03 LOST CERTIFICATES
Where a certificate is alleged to have been lost, destroyed or stolen,
the corporation shall issue a new certificate in place of the original if the
owner:
A. So requests, in writing, before the corporation has notice that
the certificate has been acquired by a bona fide purchaser; and
B. If so requested by the Board, gives the corporation a bond
sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, destruction or theft of such certificate or the
issuance of such new certificate.
Except as provided above, no new certificate for shares shall be issued in lieu
of an old certificate unless the corporation is ordered to do so by a court in a
judgment in an action brought in a court of appropriate jurisdiction.
Section 2.04 MEETINGS OF STOCKHOLDERS
A. PLACE OF MEETINGS
Meetings of Stockholders shall be held at any place within or
without the State of Delaware designated by the Board. In the absence of any
such designation, Stockholders' meetings shall be held at the principal
executive office of the corporation.
B. ANNUAL MEETINGS
An annual meeting of the Stockholders of the corporation shall be
held for the election of directors on the date and at the time fixed, from time
to time, by the Board. The first annual meeting shall be held on a date within
thirteen (13) months after the organization of the corporation and each
subsequent annual meeting shall be held on a date within thirteen (13) months
after the immediately preceding annual meeting. Any other proper subject for
Stockholder consideration may be transacted which may be presented at the
meeting, whether or not included in the notice of the meeting.
C. SPECIAL MEETINGS
Special meetings of the Stockholders may be called by the Board,
the Chairman of the Board, the President, or by the holders of shares entitled
to cast not less than twenty-five percent (25%) of the votes at the meeting.
Upon request in writing to the Chairman of the Board, the President, any Vice
President or the Secretary by any person (other than the Board) entitled to call
a special meeting of Stockholders, the officer forthwith shall cause notice to
be given to the Stockholders entitled to vote that a meeting will be held at a
time requested by the person or persons calling the meeting not less than
thirty-five (35) nor more than sixty (60) days after the receipt of the request.
If the notice is not given within twenty (20) days after receipt of the request,
the persons entitled to call the meeting may give the notice.
D. NOTICE OF MEETINGS
1. Except to the extent otherwise provided by applicable law or
unless lapse of time shall be waived, written notice of any Stockholders'
meeting shall be given not less than ten (10) nor more than sixty (60) days
before the date of the meeting to each Stockholder entitled to vote thereat.
Each notice shall state the place, date and hour of the meeting and, in the case
of a special meeting, the purpose or purposes for which the meeting is called.
The notice of any meeting may be accompanied by any additional documents,
statement or information which may be selected by the persons calling the
meeting or which may be prescribed by any applicable law or regulation.
3.
<PAGE>
2. If mailed, notice is given when deposited in the United
States mail, postage prepaid, directed to the Stockholder at his or her address
as it appears on the records of the corporation. An affidavit of the Secretary
or an Assistant Secretary or of the transfer agent of the corporation that the
notice has been given shall, in the absence of fraud, be prima facie evidence of
the facts stated therein.
E. ADJOURNED MEETINGS AND NOTICE THEREOF
Any meeting of Stockholders may be adjourned from time to time by a
vote of a majority of the shares represented either in person or by proxy
whether or not a quorum is present. When a Stockholders' meeting is adjourned
to another time or place, notice need not be given of the adjourned meeting if
the time and place thereof are announced at a meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
which might have been transacted at the original meeting. However, if the
adjournment is for more than thirty (30) days or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each Stockholder of record entitled to vote at the
meeting.
F. WAIVER OF NOTICE
The transactions of any meeting of Stockholders, however called
and noticed, and wherever held, are as valid as though had at a meeting duly
held after regular call and notice, if a quorum is present either in person or
by proxy, and if, either before or after the meeting, each of the persons
entitled to vote, not present in person or by proxy, signs a written waiver of
notice or a consent to the holding of the meeting or an approval of the minutes
thereof. No Stockholder may object to any failure to comply with the provisions
of this Section if either (i) at any time before or after the meeting he
exercises a written waiver of notice or (ii) he attends one meeting in person or
by proxy, except if he attends solely for the express purpose of objecting at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Any waiver of notice or consent
need not specify either the business to be transacted or the purpose of any
annual or special meeting of Stockholders. All such waiver, consents and
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
G. QUORUM/MAJORITY VOTE
Except as otherwise provided by the laws of the State of Delaware, a
majority of shares entitled to vote, present in person, or represented by proxy,
shall constitute a quorum for the transaction of business. If a quorum is
present, the affirmative vote of the majority of the voting shares represented
at the meeting and entitled to vote on any matters shall be the act of the
Stockholders, unless the vote of a greater number, or voting by classes, is
required by law or under the Certificate of Incorporation of the corporation.
The Stockholders present at a duly called or held meeting at which a quorum is
present may continue to transact business until adjournment notwithstanding the
withdrawal of enough Stockholders to leave less than a quorum, provided that any
action taken (other than adjournment) must be approved by at least a majority of
the shares required to constitute a quorum.
H. CONDUCT OF MEETINGS
Meetings of Stockholders shall be presided over by one of the
following officers in the following order by seniority, if present and acting:
Chairman of the Board, Vice Chairman of the Board, if any, the President or any
Vice President selected in the order of chronological age. The Secretary of the
corporation or, in his or her absence, any Assistant Secretary shall act as
Secretary of the meeting. In lieu of the foregoing persons, the Board may
designate a Chairman and/or Secretary at any meeting of the Stockholders. All
meetings shall be conducted by reference to Roberts Rules of Order or other
parliamentary system selected by the chairman of the meeting and not
inconsistent with these Bylaws, the Certificate of Incorporation or any
applicable law.
I. NOMINATIONS FOR DIRECTORS
Nominations for the election of directors may be made at any
meeting at which directors are to be selected by the Board or its designees or
by any Stockholder entitled to vote for directors generally at that
4.
<PAGE>
meeting. Nomination may be made by Stockholders only if written notice thereof
is given to the Secretary of the corporation at least ten (10) days in advance
of the meeting or two (2) days after service of the notice of the meeting
(whichever shall occur last). Said notice should identify the person or persons
whom the Stockholder wishes to nominate and give the residential address of the
nominee and the nominee's business qualifications for such position. The
chairman of the meeting may refuse to acknowledge any nominations not made in
accordance with the foregoing procedure or in accordance with applicable law.
Section 2.05 ACTION WITHOUT A MEETING
Any action required or permitted to be taken at any annual or special
meeting of Stockholders may be taken without a meeting, without prior notice,
and without a vote, if the consent or consents in writing, setting forth the
action so taken, shall be signed by the holders of outstanding shares having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted and shall be delivered to the corporation by delivery (by hand
or by certificate and registered mail, return receipt requested) to its
registered office in the State of Delaware, its principal place of business, or
to the Secretary of the corporation. Where the approval of Stockholders is
given without a meeting by less than unanimous written consent, the Secretary
shall give prompt notice of the approved corporate action to those Stockholders
who have not consented in writing. Such notice shall be given in the same
manner as notice of Stockholders' meetings. Any such written consents shall be
filed with the minutes of proceedings of the Stockholders, and actions
authorized or taken under such written consents shall have the same force and
effect as those adopted by vote of the Stockholders at any annual or special
meeting thereof.
Section 2.06 VOTING OF SHARES
A. IN GENERAL
Except as may otherwise be prescribed by the provisions of the
Certificate of Incorporation, each share of stock shall entitle the holder
thereof to one vote. In the election of directors, a plurality of the votes
cast shall elect. Any other action shall be authorized by a majority of the
votes cast except where the applicable law in the State of Delaware prescribes a
different percentage of votes and/or a different exercise of voting power, and
except as may be otherwise prescribed by the provisions of the Certificate of
Incorporation or these Bylaws.
B. SECRET VOTING BY BALLOT
Elections for directors and voting in other matters need not be
by secret ballot until any Stockholder demands voting by secret ballot on the
applicable issues at the meeting and before the voting begins.
C. VOTING OF SHARES BY CERTAIN HOLDERS
Shares of capital stock of the corporation standing in the name
of another corporation, domestic or foreign, and entitled to vote may be voted
by such officer, agent or proxy as the bylaws of such other corporation may
prescribe or, in the absence of such provision, as the board of directors of
such other corporation may determine.
Shares of capital stock of the corporation standing in the name
of a deceased person, a minor, an incompetent or a corporation declared bankrupt
and entitled to vote may be voted by an administrator, executor, guardian,
conservator or trustee, as the case may be, either in person or by proxy,
without transfer of such shares into the name of the official so voting.
A Stockholder whose shares of capital stock of the corporation
are pledged shall be entitled to vote such shares unless on the transfer books
of the corporation the pledgor has expressly empowered the pledgee to vote such
shares, in which case only the pledgee, or such pledgee's proxy, may represent
such shares and vote thereon.
5.
<PAGE>
Shares of capital stock of the corporation belonging to the
corporation, or to another corporation if a majority of the shares entitled to
vote in the election of directors of such other corporation shall be held by the
corporation, shall not be voted at any meeting of Stockholders and shall not be
counted in determining the total number of outstanding shares for the purpose of
determining whether a quorum is present. Nothing in this Section 2.06C shall be
construed to limit the right of the corporation to vote shares of capital stock
of the corporation held by it in a fiduciary capacity.
Section 2.07 PROXIES
Every person entitled to vote for directors or any other matter shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the Secretary of the
corporation. A proxy shall be deemed signed if the Stockholder's name is placed
on the proxy (whether by manual signature, typewriting, telegraphic
transmission, or otherwise) by the Stockholder or Stockholder's attorney in
fact. A validly executed proxy which does not state that it is irrevocable
shall continue in full force and effect unless (i) revoked by the person
executing it, before the vote pursuant to that proxy, by a writing signed by the
person and delivered to the corporation stating that the proxy is revoked, or by
a subsequent proxy executed by, or attendance at the meeting and voting in
person by the person executing the proxy; or (ii) written notice of the death or
incapacity of the maker of that proxy is received by the corporation before the
vote pursuant to that proxy is counted; provided, however, that no proxy shall
be valid after the expiration of eleven (11) months from the date of the proxy,
unless otherwise provided in the proxy. The revocability of a proxy that states
on its face that it is irrevocable shall be governed by the provisions of the
law applicable in the State of Delaware.
Section 2.08 INSPECTORS OF ELECTION
A. APPOINTMENT
The Board shall, in advance of any meeting of Stockholders,
appoint one or more inspectors (individually an "Inspector" and collectively,
the "Inspectors") to act at such meeting and make a written report thereof. The
Board may designate one or more persons as alternate Inspectors to replace any
Inspector who shall fail to act. If no Inspector or alternate shall be able to
act at such meeting, the person presiding at such meeting shall appoint one or
more other persons to act as Inspectors thereat. Each Inspector, before
entering upon the discharge of his or her duties, shall take and sign an oath
faithfully to execute the duties of an Inspector with strict impartiality and
according to the best or his or her ability.
B. DUTIES
The Inspectors shall (i) ascertain the number of shares of
capital stock of the corporation outstanding and the voting power of each, (ii)
determine the shares of capital stock of the corporation represented at such
meeting and the validity of proxies and ballots, (iii) count all votes and
ballots, (iv) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the Inspectors and
(v) certify their determination of the number of such shares represented at such
meeting and their count of all votes and ballots. The Inspectors may appoint or
retain other persons or entities to assist them in the performance of their
duties.
The date and time of the opening and closing of the polls for
each matter upon which the Stockholders will vote at such meeting shall be
announced at such meeting. No ballots, proxies or votes, nor any revocations
thereof or changes thereto, shall be accepted by the Inspectors after the
closing of the polls unless the Court of Chancery of the State of Delaware upon
application by any Stockholder shall determine otherwise.
In determining the validity and counting of proxies and ballots,
the Inspectors shall be limited to an examination of the proxies, ballots and
the regular books and records of the corporation, except that the Inspectors may
consider other reliable information for the limited purpose of reconciling
proxies and ballots submitted by or on behalf of banks, brokers, their nominees
or similar persons which represent more votes than the holder of a proxy is
authorized by a Stockholder of record to cast or more votes than such
Stockholder holds
6.
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of record. If the Inspectors consider other reliable information for the
limited purpose permitted herein, the Inspectors, at any time they make their
certification pursuant to this Section 2.08(B), shall specify the precise
information considered by them, including the person or persons from whom they
obtained such information, when the information was obtained, the means by which
such information was obtained and the basis for the Inspectors' belief that such
information is accurate and reliable.
Section 2.09 RECORD DATE
In order that the corporation may determine the Stockholders entitled
to notice or of to vote at any meeting or entitled to express consent to any
corporate action without a meeting or entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action, the Board may fix, in
advance, a record date, which shall not be more than sixty (60) nor less than
ten (10) days prior to the date of such meeting nor more than sixty (60) days
prior to any such action. If no record date is fixed:
A. The record date for determining Stockholders entitled to notice
of or to vote at a meeting of Stockholders shall be at the close of business on
the business day next preceding the day on which notice is given or, if notice
is waived, at the close of business on the business day next preceding the day
on which the meeting is held.
B. The record date for determining Stockholders entitled to give
consent to corporate action in writing without a meeting, when no prior action
by the Board has been taken, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered (by
hand or by certified or registered mail, return receipt requested) to the
corporation's registered agent in the State of Delaware, its principal place of
business, or to the Secretary.
C. The record date for determining Stockholders for any other
purpose shall be at the close of business on the day on which the Board adopts
the resolution relating thereto.
A determination of Stockholders of record entitled to notice of or to vote at a
meeting of Stockholders shall apply to any adjournment of the meeting unless the
Board fixed a new record date for the adjourned meeting, but the Board shall fix
a new record date if the meeting is adjourned for more than thirty (30) days
from the date set for the original meeting. The stock ledger shall be the only
evidence as to who are the Stockholders entitled to examine the stock ledger,
the stock list or the books of the corporation, or to vote in person or by proxy
at any meeting of Stockholders.
ARTICLE III
DIRECTORS
Section 3.01 POWERS
Subject to the provisions of the laws of the State of Delaware and the
Certificate of Incorporation, the business and affairs of the corporation shall
be managed and all corporate powers shall be exercised by or under the direction
of the Board. The Board may delegate the management of the day-to-day
operations of the business of the corporation to a management company or other
person provided that the business and affairs of the corporation shall be
managed and all corporate powers shall be exercised under the ultimate direction
of the Board.
Section 3.02 COMMITTEES OF THE BOARD
The Board may, by resolution adopted by a majority of the who Board
designate one (1) or more committees, each consisting of one (1) or more
directors, to serve at the pleasure of the Board. The Board may designate one
(1) or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. In the absence
or disqualification of a member of a
7.
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committee, the member or members thereof present at any meeting and not
disqualified from voting, whether a quorum or not, may unanimously appoint
another member of the Board to act at the meeting in place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board and subject to the provisions of the applicable law in
the State of Delaware, shall have and may exercise all the powers and authority
of the Board in the management of the business and affairs of the corporation,
and may authorize the corporate seal to be affixed to all papers which may
require it, but no such committee shall have the power or authority with respect
to:
A. Amending the Certificate of Incorporation (except that a
committee may, to the extent provided in the resolution or resolutions providing
for the issuance of shares of stock adopted by the Board as provided in Section
151(a) of the Delaware General Corporation Law, fix the designations and any of
the preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of shares for, shares of any other class or classes of
stock of the corporation or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares in any series).
B. Adopting an agreement of merger or consolidation under Sections
251 or 252 of the Delaware General Corporation Law.
C. Recommending to the Stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets.
D. Recommending to the Stockholders a dissolution of the Corporation
or a revocation of a dissolution.
E. Amending the Bylaws of the Corporation.
F. Unless the resolutions, Bylaws, of Certificate of Incorporation
expressly so provide, declaring a dividend, authorizing the issuance of stock or
adopting a certificate of ownership and merger pursuant to Section 253 of the
Delaware General Corporation Law.
Section 3.03 ELECTION AND TERM OF OFFICE
The directors shall be elected at each annual meeting of Stockholders,
but, if any such annual meeting is not held or the directors are not elected
thereat, the directors may be elected at any special meeting of Stockholders
held for that purpose. All directors shall hold office until the expiration of
the term for which elected and until their respective successors are elected and
qualified.
Section 3.04 VACANCIES
A vacancy or vacancies in the Board shall be deemed to exist in case
of death, resignation or removal of any director, or if the authorized number of
directors be increased, or if the Stockholders fail, at any annual or special
meeting of Stockholders, at which any director or directors are elected, to
elect to fill the full authorized number of directorships. Except for a vacancy
created by the removal of a director, vacancies on the Board may be filled by a
majority of the directors then in office, whether or not less than a quorum, or
by a sole remaining director, and each director so elected shall hold office
until his successor is elected. A vacancy on the Board created by the removal
of a director may only be filled by the vote of a majority of the shares
entitled to vote represented at a duly held meeting at which a quorum is
present. The Stockholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors. Insofar as a director or
directors are elected by a class or series of stock, vacancies or newly created
directorships are to be filled only by the remaining director or directors
elected by such class or series or by the vote of a majority of the shares of
such class or series.
8.
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Section 3.05 REMOVAL
Subject to the rights of any shares having a preference over the
Common Stock of the corporation as to dividends or upon liquidation to elect
directors under specified circumstances, any director may be removed from
office, with or without cause, but only by the affirmative vote of the holders
of a majority of the combined voting power of all then outstanding shares
entitled to vote generally in the election of directors, voting together as a
single class.
Section 3.06 RESIGNATION
Any director may resign effective upon giving written notice to the
Chairman of the Board, the President, the Secretary of the Board of the
corporation, unless the notice specifies a later time for the effectiveness of
such resignation. If the resignation is effective at a future time the Board or
the Stockholders shall have the power to elect a successor to take office when
the resignation is to become effective.
Section 3.07 MEETINGS OF THE BOARD
A. REGULAR MEETINGS
Regular meetings of the Board shall be held at such time and
place within or without the State of Delaware as may be determined from time to
time by resolution of the Board or by written consent of all members of the
Board or in these Bylaws. Regular meetings shall be held upon oral or written
notice given by any means in sufficient time for the convenient assembly of
directors; forty-eight (48) hours' notice delivered by mail or twelve (12)
hours' notice delivered personally or by telephone, telegraph or telecopier or
other similar means shall be deemed sufficient for the foregoing purpose. Any
notice shall state the date, place and hour of the meeting. Notice of a meeting
need not be given to any director who signs a waiver of notice, whether before
or after the meeting, or who attends the meeting without protesting, prior
thereto or at its commencement, the lack of notice to such director.
B. ORGANIZATION MEETINGS
Immediately following each annual meeting of Stockholders, the
Board shall hold a regular meeting for the purpose of organization, election of
officers and the transaction of other business. Notice of such meetings is
hereby dispensed with.
C. SPECIAL MEETINGS
Special meetings of the Board for any purpose or purposes shall
be called at any time or place by the Chairman of the Board or the President or
by any Vice President or the Secretary or any two directors. Special meetings
shall be held upon oral or written notice given by any means in sufficient time
for the convenient assembly of directors; forty-eight (48) hours' notice
delivered by mail or twelve (12) hour' notice delivered personally or by
telephone or telegraph or other similar means shall be deemed sufficient for the
foregoing purpose. Any notice shall state the date, place and hour of the
meeting. Notice of a meeting need not be given to any director who signs a
waiver of notice, whether before or after the meeting, or who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such director.
D. NOTICE OF ADJOURNMENT
A majority of the directors present, whether or not a quorum is
present, may adjourn any meeting to another time and place. If the meeting is
adjourned for more than twenty-four (24) hours, notice of such adjournment to
another time and place shall be given prior to the time of the adjourned meeting
to the directors who were not present at the time of adjournment, in the same
manner set forth above for special meetings in Section 3.07.C.
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E. PLACE OF MEETING
Meetings of the Board may be held at any place within or without
the State of Delaware which has been designated in the notice of the meeting or,
if not stated in the notice or there is no notice, then such meeting shall be
held at the principal executive office of the corporation, or such other place
designated by resolution of the Board.
F. PRESENCE BY CONFERENCE TELEPHONE CALL
Members of the Board or any committee designated by the Board may
participate in a meeting through use of conference telephone or similar
communications equipment, so long as all members participating in such meeting
can hear each other. Such participation constitutes presence in person at such
meeting.
G. QUORUM/VOTING
A majority of the authorized number of directors constitutes a
quorum of the Board for the transaction of business; provided, however, that in
the absence of a quorum, a majority of the directors present at any directors'
meeting, either regular or special, may adjourn any meeting to another time and
place. If the meeting is adjourned for more than twenty-four (24) hours, notice
of any adjournment to another time or place shall be given prior to the time of
the adjourned meeting to the directors who were not present at the time of
adjournment, in the same manner as set forth above for special meetings in
Section 3.07.C. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present is the act
of the Board, unless a greater number be required by law, by the Certificate of
Incorporation or by the provisions of these Bylaws. A meeting at which a quorum
is initially present may continue to transact business notwithstanding the
withdrawal of directors, if any action taken is approved by at least a majority
of the required quorum for such meeting.
H. WAIVER OF NOTICE
Whenever notice is required to be given to any director pursuant
to Delaware law, the corporation's Certificate of Incorporation or these Bylaws,
a written waiver thereof, signed by such director, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
director at a meeting shall constitute a waiver of notice of such meeting except
when the director attends the meeting for the express and sole purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. All such waivers,
consents and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
Section 3.08 ACTION WITHOUT MEETING
Any action required or permitted to be taken at any meeting of the
Board or any committee thereof may be taken without a meeting if all members of
the Board or any committee, as the case may be, consent in writing to such
action and the writing or writings are filed with the minutes or proceedings of
the Board or committee, as the case may be.
Section 3.09 FEES AND COMPENSATION
Directors and members of the committees may receive such compensation,
if any, for their services, and such reimbursement of expenses, as may be fixed
or determined by resolution of the Board.
Section 3.10 INTERESTED DIRECTORS
The presence of a director, who is directly or indirectly a party in a
contract or transaction with the corporation, or between the corporation and any
other corporation, partnership, association or other organization in which such
director is a director or officer or has a financial interest, may be counted in
determining whether a quorum is present at any meeting of the Board of Directors
or a committee thereof at which such contract or
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transaction is discussed or authorized, and such director may participate in
such meeting to the extent permitted by applicable law, including Section 144 of
the Delaware General Corporation Law.
ARTICLE IV
OFFICERS
Section 4.01 OFFICERS
The officers of the corporation shall consist of a Chairman of the
Board or President, or both, a Secretary, a Chief Financial Officer, and such
additional officers as may be elected or appointed in accordance with Section
4.03 of these Bylaws and as may be necessary to enable the corporation to sign
instruments and share certificates. Any number of offices may be held by the
same person.
Section 4.02 ELECTIONS
All officers of the corporation, except such officers as may be
otherwise appointed in accordance with Section 4.03, shall be chosen by the
Board, and each shall hold his office until he shall resign or be removed or is
otherwise disqualified to serve, or until his successor is chosen and qualified.
Section 4.03 OTHER OFFICERS
The Board, at their discretion, may appoint, or empower the President
to appoint, one or more Vice Presidents, one or more Assistant Secretaries, a
Treasurer, one or more Assistant Treasurers, or such other officers as the
business of the corporation may require, each of whom shall hold office for such
period, have such authority and perform such duties as the Board or the
President may from time to time determine.
Section 4.04 REMOVAL
Any officer may be removed, either with or without cause, by the
Board, at any regular or special meeting thereof, or, except in case of an
officer chosen by the Board, by any officer upon whom such power or removal may
be conferred by the Board (subject, in each case, to the rights, if any, of an
officer under contract of employment).
Section 4.05 RESIGNATION
Any officer may resign at any time by giving written notice to the
Board or to the President, or to the Secretary of the corporation without
prejudice to the rights, if any, of the corporation under any contract to which
the officer is a party. Any such resignation shall take effect at the time of
the receipt of such notice or at any later time specified therein and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
Section 4.06 VACANCIES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filed in the manner prescribed in
these Bylaws for regular appointments to such office.
Section 4.07 CHAIRMAN OF THE BOARD
The Board may choose a Chairman of the Board from among its members.
The Chairman of the Board, if there shall be such an officer, shall, if present,
preside at all meetings of the Board and exercise and perform such other powers
and duties as may be from time to time assigned to him by the Board. If there
is no President, the Chairman of the Board shall in addition be the Chief
Executive Officer of the corporation and shall have the powers and duties
prescribed in Section 4.08 below. The Chairman of the Board shall hold office
until the organization
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meeting of the Board next succeeding his election and until his successor is
elected and qualified or until his earlier resignation or removal.
Section 4.08 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the
Board to the Chairman of the Board, if there be such an officer, the President
shall be the general manager and Chief Executive Officer of the corporation and
shall, subject to the control of the Board, have general supervision, direction
and control of the business and affairs of the corporation. He shall preside at
all meetings of the Stockholders and, in the absence of the Chairman of the
Board, or if there be none, at all meetings of the Board. He shall be
ex-officio a member of all the standing committees, including the Executive
Committee, if any, and shall have the general powers and duties of management
usually vested in the office of President of a corporation, and shall have such
other powers and duties as may be prescribed by the Board or these Bylaws.
Section 4.09 SECRETARY
The Secretary shall keep or cause to be kept, at the principal
executive office or such other place as the Board may order, a book of minutes
of all meetings of Stockholders, the Board and committees of the Board, with the
time and place of holding, whether regular or special, and if special, how
authorized, the notice thereof given, the names of those present at the
directors' or committee meetings, the number of shares present or represented at
Stockholders' meetings, and the proceedings thereof.
The Secretary shall keep or cause to be kept, at the principal
executive office or at the office of the corporation's transfer agent or
registrar, a record of its Stockholders giving the names and addresses of all
Stockholders and the number and class of shares held by each, the number and
date of certificates issued for shares, and the number and date of cancellation
of every certificate surrendered for cancellation. This information may be kept
in written form or in any other form capable of being converted into written
form.
The Secretary shall give, or cause to be given, notice of all meetings
of the Stockholders and of the Board required by the Bylaws or by law to be
given, and shall have such other powers and perform such other duties as may be
prescribed by the Board or by the Bylaws.
Section 4.10 CHIEF FINANCIAL OFFICER
The Chief Financial Officer shall have general supervision, direction
and control of the financial affairs of the corporation and shall have such
other powers and duties as may be prescribed by the Board or these Bylaws. In
the absence of a named Treasurer, the Chief Financial Officer shall also have
the powers and duties of the Treasurer as hereinafter set forth and shall be
authorized and empowered to sign as Treasurer in any case where such officer's
signature is required.
Section 4.11 TREASURER
The Treasurer shall keep or cause to be kept the books and records of
account as provided for and in accordance with Section 6.01.B of these Bylaws.
The books of account shall at all reasonable times be open to inspection by any
director. The Treasurer shall deposit all moneys and other valuables in the
name and to the credit of the corporation with such depositaries as may be
designated by the Board. He shall disburse the funds of the corporation as may
be ordered by the Board, shall render to the President and directors, whenever
they request it, an account of all of his transactions as Treasurer and of the
financial condition of the corporation, and shall have such other powers and
perform such other duties as may be prescribed by the Board or these Bylaws.
Section 4.12 VICE PRESIDENT
In the absence or disability of the President, the Vice Presidents, in
order of their rank as fixed by the Board, or, if not ranked, the Vice President
designated by the Board, shall perform all the duties of the President
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and when so acting shall have all the powers of, and be subject to the
restrictions upon, the President. The Vice Presidents shall have such other
powers and perform such other duties as from time to time may be prescribed for
them.
ARTICLE V
INDEMNIFICATION AND INSURANCE
The corporation shall, to the fullest extend permitted by Section 145
of the General Corporation Law of the State of Delaware, as the same may be
amended and supplemented, indemnify any and all persons whom it shall have the
power to indemnify under said section from and against any and all of the
expenses, liabilities or other matters referred to in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any bylaw, agreement, vote of Stockholders or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such person. Expenses
incurred by any such person in connection with a proceeding shall be paid by the
corporation in advance of the final disposition of such proceeding upon receipt
of an undertaking by or on behalf of such person to repay such amounts, upon
such terms and conditions as the Board of Directors deems appropriate, if it
shall ultimately be determined that such person is not entitled to be
indemnified by the corporation.
ARTICLE VI
MISCELLANEOUS
Section 6.01 BOOKS OF ACCOUNT AND PROCEEDINGS
The corporation shall keep adequate and correct books and records of
account and shall keep minutes of the proceedings of its Stockholders, Board and
committees of the Board and shall keep at its principal executive office, or at
the office of its transfer agent or registrar, a record of its Stockholders,
giving the names and addresses of all Stockholders and the number and class of
shares held by each. Such minutes shall be kept in written form. Such other
books and records shall be kept either in written form or in any other form
capable of being converted into written form.
Section 6.02 RIGHTS OF INSPECTION
A. BY STOCKHOLDERS
1. RECORD OF STOCKHOLDERS
The Secretary shall prepare and make, at least ten (10) days
before every meeting of Stockholders, a complete list of Stockholders entitled
to vote at the meeting, arranged in alphabetical order, and showing the address
of each Stockholder and the number of shares registered in the name of each
Stockholder. Such list shall be open to the examination of any Stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten (10) days prior to the meeting, at such place as specified in
the notice of the meeting or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
Stockholder who is present. Further, any Stockholder in person or by attorney
or other agent, upon written demand under oath stating the purposes thereof, has
the right, during usual business hours, to inspect for any proper purpose the
corporation's list of Stockholders. Such Stockholder has the right to make
copies or extracts therefrom. A proper purpose for this Section 6.02.A shall
mean a purpose reasonably related to such person's interest as a Stockholder.
In every instance where an attorney or other agent shall be the person who seeks
the right to inspection, the demand under oath shall be accompanied by a power
of attorney or such other writing which authorizes the attorney or other agent
to so act on behalf of the Stockholder. The demand under oath shall be
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directed to the corporation at its principal place of business. The corporation
shall either permit the right to inspection or reply to the written demand
within five (5) business days of receiving the demand.
2. CORPORATE RECORDS
Any Stockholder, in person or by attorney or other agent,
shall upon written demand under oath stating the purpose thereof, have the right
during business hours to inspect for any proper purpose the accounting books and
records and minutes of proceedings of the Stockholders and the Board and
committees of the Board. This right of inspection shall also extend to the
records of any subsidiary of the corporation.
B. BY DIRECTORS
Every director shall have the right at any reasonable time to
examine the Corporation's stock ledger, a list of its Stockholders and its other
books and records for a purpose reasonably related to his position as a
director. Such inspection by a director may be made in person or by agent or
attorney and the right of inspection includes the right to copy and make
extracts.
Section 6.03 CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for payment of money, notes or
other evidences of indebtedness, issued in the name of or payable to the
corporation, shall be signed or endorsed by such person or persons and in such
manner as, from time to time, shall be determined by resolution of the Board.
Section 6.04 AUTHORITY TO EXECUTE CONTRACTS
The Board may authorize any officer or officers, agent or agents, to
enter into any contract or execute any instrument in the name of and on behalf
of the corporation, and subject to the applicable laws of the State of Delaware.
Such authority may be general or confined to specific instances and, unless so
authorized by the Board, no officer, agent or employee shall have the power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose of to any amount.
Section 6.05 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The Chairman of the Board, if any, President or any Vice President and
the Secretary or any Assistant Secretary of this corporation are authorized to
vote, represent and exercise on behalf of this corporation all rights incident
to any and all shares of any other corporation or corporations standing in the
name of the corporation. The authority herein granted to said officers to vote
or represent on behalf of this corporation any and all shares held by this
corporation in any other corporation or corporations may be exercised either by
such officers in person or by any other person authorized so to do by proxy or
power of attorney duly executed by said officers.
Section 6.06 CONSTRUCTION AND DEFINITIONS
Unless the context otherwise requires, the general provisions, rules
of construction and definitions contained in the corporation laws of the State
of Delaware shall govern the construction of these Bylaws. Without limiting the
generality of the foregoing, the masculine gender includes the feminine and
neuter, the singular number includes the plural and the plural number includes
the singular, and the term "person" includes a corporation as well as a natural
person.
Section 6.07 REIMBURSEMENT OF DISALLOWED COMPENSATION
Any payments made to an officer or director of the corporation
including, but not limited, to payments of compensation, interest, rent or
reimbursement for expenses, which payments are disallowed to the corporation in
whole or in part by the Internal Revenue Service as a deductible business
expense, shall, at the option of the corporation, be reimbursed by such officer
or director to the corporation to the full extent of the amount so
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disallowed. Any officer or director of the corporation who shall have received
payment of any such amounts so disallowed shall promptly, on demand, reimburse
the corporation for same. The corporation may withhold the amount of any such
disallowance with respect to payment to any given officer or director from the
future compensation or other payments which may be due or become due to such
officer or director, if he does not reimburse the corporation on demand.
ARTICLE VII
AMENDMENTS
Section 7.01 POWER OF STOCKHOLDERS
New Bylaws may be adopted or these Bylaws may be amended or repealed
by the vote of Stockholders entitled to exercise a majority of the voting power
of the corporation or by the written consent of such Stockholders, except as
otherwise provided by law or by the Certificate of Incorporation.
Section 7.02 POWER OF DIRECTORS
Subject to the right of Stockholders as provided in Section 7.01 to
adopt, amend or repeal Bylaws, any Bylaw may be adopted, amended or repealed by
the Board.
ARTICLE VIII
EMERGENCY PROVISIONS
Section 8.01 GENERAL
The provisions of this Article shall be operative only during any
emergency resulting from an attack on the United States or on a locality in
which the corporation conducts its business or customarily holds meetings of the
Board or Stockholders, or during any nuclear or atomic disaster, or during the
existence of any catastrophe or other similar emergency condition, as a result
of which a quorum of the Board or a standing committee thereof cannot be
convened. Said provisions in such event shall override all other Bylaws of the
corporation in conflict with any provisions of this Article, and shall remain
operative so long as it remains impossible or impracticable to continue the
business of the corporation otherwise, but thereafter shall be inoperative;
provided that all actions taken in good faith pursuant to such provisions shall
thereafter remain in full force and effect unless and until revoked by action
taken pursuant to the provisions of the Bylaws other than those contained in
this Article. No officer, director or employee acting in accordance with any
provision of this Article shall be liable except for willful misconduct.
Section 8.02 UNAVAILABLE DIRECTORS
All directors of the corporation who are not available to perform
their duties as directors by reason of physical or mental incapacity or for any
other reason or who are unwilling to perform their duties or whose whereabouts
are unknown shall automatically cease to be directors, with like effect as if
such persons had resigned as directors, so long as such unavailability
continues.
Section 8.03 AUTHORIZED NUMBER OF DIRECTORS
The authorized number of directors shall be the number of directors
remaining after eliminating those who have ceased to be directors pursuant to
Section 8.02, or the minimum number required by law, whichever number is
greater.
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Section 8.04 QUORUM
The number of directors necessary to constitute a quorum shall be
one-third (1/3) of the authorized number of directors as specified in the
foregoing Section, or such other minimum number as, pursuant to the law or
lawful decree then in force, it is possible for the Bylaws of a corporation to
specify.
Section 8.05 CREATION OF EMERGENCY COMMITTEE
In the event the number of directors remaining after eliminating those
who have ceased to be directors pursuant to Section 8.02 is less than the
minimum number of authorized directors required by law, then until the
appointment of additional directors to make up such required minimum, all the
powers and authorities which the Board could by law delegate, including all
powers and authorities which the Board could delegate to a committee, shall be
automatically vested in an emergency committee, and the emergency committee
shall thereafter manage the affairs of the corporation pursuant to such powers
and authorities and shall have all other powers and authorities as may by law or
lawful decree be conferred on any person or body of persons during a period of
emergency.
Section 8.06 CONSTITUTION OF EMERGENCY COMMITTEE
The emergency committee shall consist of all the directors remaining
after eliminating those who have ceased to be directors pursuant to Section
8.02, provided that such remaining directors are not less than three (3) in
number. In the event such remaining directors are less than three (3) in
number, the emergency committee shall consist of three (3) persons, who shall be
the remaining director or directors and either one (1) or two (2) officers or
employees of the corporation, as the remaining director or directors may in
writing designate. If there is no remaining director, the emergency committee
shall consist of the three (3) most senior officers of the corporation who are
available to serve, and if and to the extent that officers are not available,
the most senior employees of the corporation. Seniority shall be determined in
accordance with any designation of seniority in the minutes of the proceedings
of the Board, and in the absence of such designation, shall be determined by
rate of remuneration. In the event that there are no remaining directors and no
officers or employees of the corporation available, the emergency committee
shall consist of three (3) persons designated in writing by the Stockholder
owning the largest number of shares of record as of the date of the last record
date.
Section 8.07 POWERS OF EMERGENCY COMMITTEE
The emergency committee, once appointed, shall govern its own
procedures and shall have power to increase the number of members thereof beyond
the original number, and in the event of a vacancy or vacancies therein, arising
at any time, the remaining member or members of the emergency committee shall
have the power to fill such vacancy or vacancies. In the event at any time
after its appointment all members of the emergency committee shall die or resign
or become unavailable to act for any reason whatsoever, a new emergency
committee shall be appointed in accordance with the foregoing provisions of this
Article.
Section 8.08 DIRECTORS BECOMING AVAILABLE
Any person who has ceased to be a director pursuant to the provisions
of Section 8.02 and who thereafter becomes available to serve as a director
shall automatically become a member of the emergency committee.
Section 8.09 ELECTION OF BOARD
The emergency committee shall, as soon after its appointment as is
practicable, take all requisite action to secure the election of a Board, and
upon such election all the powers and authorities of the emergency committee
shall cease.
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Section 8.10 TERMINATION OF EMERGENCY COMMITTEE
In the event, after the appointment of an emergency committee, a
sufficient number of persons who ceased to be directors pursuant to Section 8.02
become available to serve as directors, so that if they had not ceased to be
directors as aforesaid, there would be enough directors to constitute the
minimum number of directors required by law, then all such persons shall
automatically be deemed to be reappointed as directors and the powers and
authorities of the emergency committee shall be at an end.
<PAGE>
As of July 3, 1996
CINERGI PICTURES ENTERTAINMENT INC.
(f/s/o Andrew G. Vajna)
2308 Broadway
Santa Monica, CA 90404
Attn: Randy Paul, Esq.
RE: "EATERS OF THE DEAD"/ANDREW G. VAJNA (EXECUTIVE PRODUCER)
Gentlemen:
The following letter confirms the principal terms of the agreement between
Walt Disney Pictures ("WDPc") and Cinergi Pictures Entertainment Inc. ("Lender")
for the executive producing services of Andrew G. Vajna ("Artist") in connection
with a possible motion picture project currently entitled "Eaters of the Dead"
(the "Picture").
A. CONDITIONS PRECEDENT. WDPc shall have no obligation hereunder unless and
until:
1. WDPc receives a fully executed original of this letter of agreement
(in form and substance acceptable to WDPc).
2. WDPc receives a fully executed original of the agreement (in form and
substance acceptable to WDPc) for the underlying rights in and to the book
written by Michael Crichton ("Crichton") entitled "Eaters of the Dead" (the
"Book") and the producing services of Crichton in connection with the
Picture.
3. WDPc receives a fully executed original of the agreement (in form and
substance acceptable to WDPc) for the rights, directing and producing
services of John McTiernan ("McTiernan") in connection with the Picture.
4. WDPc receives a fully executed original of the quitclaim agreement
(the "Quitclaim Agreement") (in form and substance acceptable to WDPc) for
all of the rights of Cinergi Film Productions Co. (and/or any affiliate or
subsidiary thereof) ("Cinergi") in and to the Picture.
5. WDPc approves of the chain of title to the Book and the Picture,
approves all agreements with respect thereto and receives all assignments,
releases and other instruments and documents which it reasonably requires
in connection therewith [including but not limited to an assignment of all
rights from William Wisher ("Wisher") in and to the screenplay for the
Picture written by Wisher].
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6. WDPc approves and validates the "all-in" final budget (I.E., all
above-the-line elements and all below-the-line elements excluding) for the
Picture.
The aforesaid Conditions Precedent shall be deemed satisfied only upon
written confirmation thereof by a WDPc Business Affairs Executive.
B. LOAN-OUT. The services of Artist are being furnished to WDPc by Lender and
consequently all services and obligations to be performed hereunder by Artist
shall be deemed to be performed by Artist at the direction of Lender and all
compensation and other payments for the performance of such services and
obligations shall be paid by WDPc to Lender. All warranties and representations
made by either Lender or Artist shall be deemed made in addition by the other
and a breach of this Agreement by either Lender or Artist shall be deemed a
breach by both.
C. EXECUTIVE PRODUCING SERVICES. If WDPc elects in it sole discretion to
proceed with production of the Picture, then Lender shall cause Artist to
personally render all services customarily rendered by an executive producer in
the motion picture industry in connection with the development, preproduction,
production, post production and delivery of the Picture, subject to the
provisions of Paragraph I.2 below. Artist's services hereunder shall be on a
non-exclusive basis to WDPc.
D. FIXED COMPENSATION. If the Picture is produced as a theatrical motion
picture and if Artist fully performs all services and material obligations, then
Lender shall be entitled to receive the flat sum of $1,500,000, which sum shall
be fully applicable against and recoupable by WDPc from the contingent
compensation set forth in Paragraph E below and which sum shall accrue and
become payable on WDPc's receipt of a fully executed original of this Agreement
and the Quitclaim Agreement (both in form and substance acceptable to WDPc) and
the earlier to occur of: (1) commencement of principal photography of the
Picture; and (2) WDPc giving notice to Crichton and/or McTiernan that all the
Conditions Precedent set forth in Paragraph A above are either satisfied or
waived. Said compensation is an all-inclusive flat fee and no additional
compensation shall be payable by reason of overtime, weekend work, holidays,
etc.
E. CONTINGENT COMPENSATION. If the Picture is produced and released as a
theatrical motion picture and if Artist is not in default hereunder, then Artist
shall be entitled to receive (it being understood and agreed that any sums
payable to Artist under Paragraph D above shall be deemed an advance against and
recoupable from any sums payable pursuant to this Paragraph E) an amount equal
to 5% of 100% of the "Adjusted Gross Receipts" (as defined in Paragraph F.1
below), if any, of the Picture (less all sums paid to Artist pursuant to
Paragraph D) until such time, if ever, that Artist has received therefrom the
additional sum of $1,000,000 (at which time Artist's entitlement to said 5% of
100% of the Adjusted Gross Receipts, if any, shall terminate), thereafter
Artist's participation shall escalate on a prospective basis to an amount equal
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to 10% of 100% of the Adjusted Gross Receipts, if any, of the Picture at such
time, if ever, that the Picture achieves "Cash Breakeven" (as defined in
Paragraph F.2 below).
F. DEFINITIONS.
1. "Adjusted Gross Receipts" as referenced herein shall be defined,
computed and paid in accordance with WDPc's Exhibit "GRP" (and Rider
thereto) as the Gross Receipts under Paragraph I.A. thereof (subject to the
exclusions in Paragraph I.B. thereof) less the deductions in Paragraph I.C.
thereof, but substitution theatrical reissue costs in place of Paragraph
I.C.8. which relates to Theatre Level Advertising.
2. "Cash Breakeven" as referenced herein shall be defined as the end of
the accounting period in which Gross Receipts (as defined in WDPc's Exhibit
"NP" and Rider thereto) first equals the aggregate of the following: (a)
an "off the top" Distribution Fee in the amount of 10% on all Gross
Receipts; (b) all Distribution Costs as set forth in Paragraph IV. of
Exhibit "NP"; (c) Accrued Interest as set forth in Paragraph V.C. of
Exhibit "NP"; (d) Overhead as set forth in Paragraph V.B. of Exhibit "NP";
and (e) Cost of Production as set forth in Paragraph V.A. of Exhibit "NP".
G. EXECUTIVE PRODUCER CREDIT. If the Picture is produced as a theatrical
motion picture and if Artist is not in default hereunder, and further subject to
WDPc's standard exclusions and exceptions (including artwork title exceptions),
WDPc shall accord Artist an individual "Executive Producer" credit (which may be
shared, with Artist in first position of such individual "Executive Producer"
credits unless WDPc, in order to engage the services of one or more third
parties, in good faith accords one or more third parties an individual
"Executive Producer" credit in a position prior to that of Artist (and in such
case, Artist's credit shall follow such other credits) as follows:
1. ON SCREEN: On a separate card (which may be shared with others), in
the main titles if the director, cast, other producer credits etc. are in
the main titles (otherwise in the end titles) in a size of type not less
than the larger of (a) fifty percent (50%) of the size of the title; (b)
one hundred percent (100%) of the size of the "Screenplay by" credit or (c)
one hundred percent (100%) of the size of any other individual "Executive
Producer" credit in connection with the Picture, with placement and all
other characteristics of such credit at WDPc's discretion.
2. IN PAID ADS ISSUED OR CONTROLLED BY WDPc IN WHICH THE REGULAR BILLING
BLOCK APPEARS: In a size of type not less than the larger of (a) thirty-
five percent (35%) of the size of the regular title; (b) one hundred
percent (100%) of the size of the "Screenplay by" credit in such billing
block (c) or one hundred percent (100%) of the size of any other individual
"Executive Producer" credit in connection with the Picture, with placement
and all other characteristics of such credit at WDPc's discretion.
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3. EXCLUDED ADS. Notwithstanding the above, Artist's paid ad credit
pursuant to Paragraph G.2 above shall appear in any so-called "excluded
ads" in which any other individual "Screenplay by" or individual "Executive
Producer" credit appears in connection with the Picture (except for
congratulatory, nomination and/or award ads, special ads excepted under the
DGA Basic Agreement, ads announcing a personal appearance, radio ads and
the audio portion of teasers, trailers and television ads).
4. As used herein, "size" shall mean height, width and thickness.
H. APPROVALS AND CONTROLS. WDPc shall retain all approvals and the right to
initiate action at any time and in any respect in connection with the Picture.
I. GENERAL
1. The results and proceeds of Artist's services hereunder in connection
with the Picture shall be deemed a work-made-for-hire specially ordered or
commissioned by WDPc. WDPc shall exclusively own all now known or hereafter
existing rights of every kind throughout the universe, in perpetuity and in all
languages, pertaining to such results and proceeds, the Picture, and all
elements therein for all now known or hereafter existing uses, media, and forms.
Lender acknowledges that Lender solely owns all of the results and proceeds of
Artist's services in connection with the Picture prior to the date hereof.
Lender and Artist hereby assign the results and proceeds of Artist's services in
connection with the Picture rendered by Artist prior to the date of this
Agreement.
2. WDPc is not obligated to develop, produce, distribute, and/or exploit
the Picture, or to use the services of Artist hereunder or the results and
proceeds thereof in whole or in part and WDPc may (at its sole discretion)
abandon the Picture at any time without further obligation hereunder.
3. This letter agreement (including WDPc's Standard Terms and Conditions
for a Producer/Loan-Out, Form I-9, WDPc's Exhibit "NP" and Exhibit "GRP"
incorporated herein by this reference) contains the full and complete
understanding between the parties and supersedes all prior agreements and
understandings pertaining hereto.
4. Lender's and Artist's sole and exclusive remedy for WDPc's breach,
termination, or cancellation of this letter agreement (including any provision
relating to credit) shall be an action for damages and Lender and Artist
irrevocably waive any right to seek and/or obtain equitable or injunctive
relief.
5. Lender and Artist shall be covered as additional insureds on WDPc's
errors and omissions insurance policy in connection with Artist's services for
the Picture hereunder, during customary periods of pre-production, production
and distribution of
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the Picture, subject to the restrictions, limitations and terms of said policy.
Artist shall, as and to the extent Artist is deemed an employee of WDPc, be
covered as an additional insured on WDPc's general liability insurance policy in
connection with Artist's services for the Picture, subject to the limitations,
restrictions and terms of said policy. The provisions of this Paragraph I.5
shall not be construed so as to limit or otherwise affect any obligations,
representation, warranty or agreement of Lender and/or Artist's hereunder.
6. Except with respect to claims to which Cinergi, Lender and/or Artist
have indemnified WDPc and except with respect to any claims arising from any
other breach by Cinergi, Lender and/or Artist and/or any tortious and/or
criminal conduct of Cinergi, Lender and/or Artist, WDPc hereby defends,
indemnifies and holds Lender and Artist, and their respective successors and
assigns, harmless from and against any and all damages, loss, liability, cost,
penalty, guild fee or award or other expense of any kind (including reasonable
attorneys' fees) that may be obtained against, imposed upon or suffered by
Lender or Artist arising from any claim, demand or action relating to the
production or exploitation by WDPc of the Picture.
WALT DISNEY PICTURES
By: /s/ Phillip Mohl
------------------------
Its: Vice President
-----------------------
PHILLIP MOHL
ACCEPTED AND AGREED:
CINERGI PICTURES ENTERTAINMENT INC.
By: /s/ Randolph M. Paul
------------------------------
RANDOLPH M. PAUL
Its: Senior Vice President
-----------------------------
Federal I.D. No.:
----------------
By: /s/ Andrew G. Vajna
------------------------------
ANDREW G. VAJNA
Social Security No.:
-------------
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As of April 1, 1995
Cinergi Productions N.V. Inc.
Polarisweg 35. St. 6
Willemstad, Curacao
Netherlands, Antilles
Gentlemen:
The following sets forth the principal terms of the agreement between Buena
Vista International, Inc. ("BVI") and Cinergi Productions N.V. Inc. ("Cinergi")
with respect to the acquisition of exclusive distribution and other rights by
BVI to the full length theatrical motion picture tentatively entitled "Nixon"
(the "Picture").
1. INTENTIONALLY OMITTED.
2. DISTRIBUTION:
a. Cinergi does hereby irrevocably grant, assign and license to BVI
the exclusive right, title and interest in and to the Picture and each of its
elements and all exclusive rights to distribute, exhibit, market and exploit the
Picture in any and all manner and in all media, now known or hereafter devised
including, without limitation, theatrical, non-theatrical, all forms of home
video cassettes/discs, cartridges, video on demand (i.e. the exploitation by
per-exhibition charge of a motion picture which is delivered by means of a point
to point telecommunication system from a digital storage device at a time chosen
by the viewer ["Video On Demand"]), tapes or similar devices, near video on
demand, formats or delivery systems now known or hereafter devised to be used in
conjunction with a reproduction apparatus which causes the picture to be visible
on the screen of a television receiver, television monitor or comparable device
now known or hereafter devised in a private residence for viewing at the place
of origin of such exhibition ("Home Video Devices") and all forms of television
including, without limitation, standard, non-standard, subscription, pay
television, cable and basic cable, satellite, etc. (including pay-per-view),
fiber optic and digital delivery systems, etc. ("Television"); the right to
advertise, publicize and promote the Picture including, without limitation, the
right to excerpt and/or synopsize the Picture and/or screenplay for the Picture
[provided, that any such excerpt and/or synopsis shall not exceed Two Thousand
Five Hundred (2,500) words in length]; commercial tie-ins (subject to [x] the
applicable terms of existing agreements between Cinergi and distributors in the
BVI Territory and [y] the rights of principal talent under their respective
agreements with Cinergi [all relevant portions of which Cinergi agrees to
deliver pursuant to the delivery
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provisions of subparagraph 3.a. below]); subject to the prior consent of
Cinergi, the right to change the title of the Picture; the right to finance
and/or produce (if none currently exists) and distribute a "making of"
promotional film (subject to the rights and approvals of all persons who provide
services to the Picture [of which Cinergi shall deliver a written account
pursuant to the delivery provisions of subparagraph 3.a. below], and applicable
guild and union requirements); the right to cut or edit the Picture for legal
and censorship reasons, time parameters and standards and practices requirements
of airlines, television stations and broadcasters (subject to the terms of
Paragraph 4. below); the right to subtitle and dub the Picture into the foreign
languages specified in this subparagraph 2.a. (as well as those of Japan and
China); the right with respect to all persons appearing in the Picture or
performing production services therein to issue and authorize publicity
concerning such persons and the right to use, reproduce, transmit, broadcast,
exploit, publicize and exhibit their names and likenesses (subject to third
party agreements with Cinergi, of which Cinergi shall deliver a written account
of pertinent points pursuant to the delivery provisions of subparagraph 3.a.
below) in transcriptions, advertising, distribution and exploitation of the
Picture in the following territories: (i) German-speaking Europe (including,
without limitation, German language rights in all media in Switzerland); (ii)
Switzerland (in the Italian, English and French languages, excluding Italian and
French language Home Video Device rights and Italian and French language
Television rights); (iii) Japan; (iv) China; and (v) all of the respective
territories, protectorates and possessions of each of the aforementioned,
including planes and ships flying the flag of any of the respective nations,
wherever situated (altogether, the "BVI Territory"). For purposes of clarity,
the parties agree that the rights granted to BVI by Cinergi herein shall not
include "video" or computer games for platforms such as SEGA Genesis, Nintendo
SNES, 3DO Multiplayer system or any similar or new platform formats in relation
to which the user (x) is given interactive control over "virtual" actors and
surroundings, and/or (y) engages in contests of dexterity]. BVI acknowledges
that Cinergi has the right to distribute the Picture in all media, throughout
the world, except for the BVI Territory, subject to the terms of the agreement
between Cinergi and Buena Vista Pictures Distribution, Inc. ("BVD"), dated as of
July 9, 1990, as amended ("BVD Agreement")("Cinergi Territory"). Each party
shall be solely responsible for all distribution costs and expenses in
connection with the Picture in its respective territory including, without
limitation, advertising costs and costs associated with the manufacture of
prints and Home Video Devices. For purposes of reference herein, the BVI
Territory shall be comprised of the "BVI Territory "A"", "BVI Territory "B"",
"BVI Territory "C"" and "BVI Territory "D"". As used herein, the term "BVI
Territory "A"" shall refer to the following: (i) Germany; (ii) Austria; and
(iii) all of the respective territories, protectorates and possessions of each
of
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the aforementioned, including planes and ships flying the flag of any of the
respective nations, wherever situated. The parties agree that exploitation of
broadcast television rights in Alto Aldige hereunder by BVI shall be restricted
to such broadcasts as are simultaneous with BVI broadcasts of the Picture in
Germany and/or Austria. As used herein, the term "BVI Territory "B"" shall
refer to the following: (i) Switzerland (in the German, Italian, English and
French languages); and (ii) all of the respective territories, protectorates and
possessions of the aforementioned, including planes and ships flying the flag of
such nation, wherever situated. The parties agree that the initial theatrical
release of the Picture in the French language by BVI in Switzerland shall not
occur prior to the initial theatrical release of the Picture in France.
Furthermore, the parties agree that the initial theatrical release of the
Picture in the Italian language by BVI in Switzerland shall not occur prior to
the initial theatrical release of the Picture in Italy. As used herein, the
term "BVI Territory "C"" shall refer to the following: (i) Japan; and (ii) all
of the respective territories, protectorates and possessions of the
aforementioned, including planes and ships flying the flag of such nation,
wherever situated. As used herein, the term "BVI Territory "D"" shall refer to
the following: (i) China; and (ii) all of the respective territories,
protectorates and possessions of the aforementioned, including planes and ships
flying the flag of such nation, wherever situated.
b. The term of this Agreement (the "Term") shall commence as of the
date hereof and terminate Nineteen (19) years from the initial theatrical
release of the Picture in any country of the BVI Territory. In the event that
BVI has not recouped its Advance (as defined below), together with all other
recoupable sums hereunder (all of the foregoing, "Recoupable Sums") prior to the
expiration of the Term, the Rights Granted in the BVI Territory shall
automatically be extended on a year to year basis until the close of the
accounting period in which the amount of revenues received by BVI from the
exercise of the Rights Granted (as defined below) in the BVI Territory hereunder
("Recoupment Date") is equal to a sum which is One Hundred percent (100%) of the
Recoupable Sums, net of payments made to you by BVI hereunder pursuant to the
terms of subparagraph 3.b. below ("Extended Term"); provided, that the length of
the Extended Term shall not exceed a period of three (3) years. Furthermore,
Cinergi grants BVI a right of first negotiation to extend the Term in the BVI
Territory pursuant to the provisions of Paragraph 12. below.
c. BVI agrees to comply with the credit and billing requirements
specified by Cinergi, subject to applicable guild requirements (it is understood
and agreed that BVI will abide by any and all third party credit restrictions of
which it receives written notice, which Cinergi agrees to provide pursuant to
the delivery provisions of subparagraph 3.a. below). In the BVI
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Territory, the Picture shall include the following presentation credit: either
"Cinergi presents" or "Andrew G. Vajna presents" with a separate title card
which includes a logo, as determined by BVI. In the BVI Territory, Cinergi
agrees that the Picture may include, prior to the aforementioned presentation
credit, a BVI distributor's credit in a form to be determined by BVI in its sole
discretion on a separate title card which also includes a BVI logo (i.e. the
credit and logo for BVI shall be on one [1] card). BVI may use the
aforementioned distributor's credit both on-screen and in advertising and
promotion for the Picture. Cinergi agrees that a subdistributor in the BVI
Territory may include a distributor's credit on a separate title card which also
includes a logo selected by such subdistributor. Cinergi may not use the BVI
name, or the name of any parent, subsidiary or affiliate of BVI in connection
with Cinergi's distribution and/or exploitation of the Picture in the Cinergi
Territory. BVI may not use the Cinergi name, or the name of any parent,
subsidiary or affiliate of Cinergi in connection with BVI's distribution and/or
exploitation of the Picture in the BVI Territory (except as otherwise provided
herein). No casual or inadvertent failure by BVI or any of its subdistributors
or licensees to comply with the credit and billing requirements specified by
Cinergi shall constitute a breach of this Agreement.
d. Except as specifically set forth in Paragraph 2. above, all other
rights in the Picture are retained by Cinergi including, without limitation: (i)
literary publishing rights; (ii) soundtrack rights; (iii) music publishing
rights; (iv) the right to exploit so-called merchandising rights; and (v) theme
park attractions ("Reserved Rights"); provided, however, that BVI (and
affiliates) shall have the right to purchase and/or create promotional aids,
point of purchase materials, etc., to sell or give away in conjunction with the
marketing and publicizing of the Picture as contemplated hereunder; provided,
further, that BVI shall not have the right to sell such materials to the general
public.
e. BVI shall not authorize the exhibition of the Picture anywhere in
the world including, without limitation, film festivals and public previews at
any time prior to the initial general U.S. theatrical release of the Picture
without the prior approval of Oliver Stone ("Stone"), not to be unreasonably
withheld.
f. The rights granted by Cinergi to BVI in this Paragraph 2. shall
be referred to herein as the "Rights Granted".
g. BVI acknowledges the Home Video Device and Television holdbacks
specified in subparagraph 5.b. of the BVD Agreement. BVI shall be bound by such
holdbacks, subject only to obtaining permission from BVD to exempt certain
countries in the BVI Territory from the provisions of such holdbacks (in
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which event BVI shall have the right to release the Picture in accordance with
the terms of such permission from BVD).
3. COMPENSATION TO CINERGI:
a. ADVANCE: Provided that Cinergi makes Complete Delivery (as
defined below) of the Picture to BVI in accordance with Exhibit "DR" (free and
clear of any claims, liens or encumbrances, except as otherwise agreed to by the
parties hereto in advance and in writing) on or before the Delivery Date (as
defined below), BVI agrees to pay Cinergi and Cinergi agrees to accept as full
consideration for the rights granted to BVI by Cinergi herein an amount equal to
Eight Million Eight Hundred Seventy Five Thousand Dollars ($8,875,000)
("Advance"). The Advance shall be allocated in accordance with the following:
(i) Four Million Seven Hundred Seventy Five Thousand Dollars ($4,775,000) shall
be allocated to BVI Territory "A" together with BVI Territory "B" ("BVI
Territory "A/B" Advance"); (ii) Four Million One Hundred Thousand Dollars
($4,100,000) shall be allocated to BVI Territory "C" ("BVI Territory "C"
Advance"); and (iii) Zero Dollars ($0.00) shall be allocated to BVI Territory
"D". The Advance (together with interest thereon, which interest shall accrue at
the rate specified in Exhibit "NP" and shall be computed as provided for in
subparagraph V.C. of Exhibit "NP") shall be recouped by BVI pursuant to the
terms of subparagraphs 3.b., 3.c. and 3.d. below and Exhibit "NP", which is
attached hereto and incorporated herein by this reference (references to Exhibit
"NP" shall be deemed to include Rider "NP", which is attached hereto and
incorporated herein by this reference). The interest which accrues on the
Advance shall be allocated in accordance with the following: (i) interest on the
BVI Territory "A/B" Advance (""A/B" Interest"); and (ii) interest on the BVI
Territory "C" Advance (""C" Interest"). The Advance shall be payable to Cinergi
by BVI in accordance with the following: One Hundred percent (100%) on complete
execution of this Agreement by both parties.
b. CONTINGENT COMPENSATION FOR BVI TERRITORY "A", BVI TERRITORY "B"
AND BVI TERRITORY "C": "A/B/C Gross Receipts" shall be defined pursuant to the
applicable provisions of Exhibit "NP" throughout the BVI Territory "A", BVI
Territory "B" and BVI Territory "C". A/B/C Gross Receipts, which shall include
the Home Video Receipts, as set forth in subparagraphs 3.c. and 3.d. below,
shall be subject to the exclusions and deductions set forth in Exhibit "NP"
(provided, that for purposes of this Paragraph 3., Home Video Receipts shall
not be deemed to include receipts by BVI from distribution of the Picture
hereunder in the Video on Demand medium). BVI shall deduct and retain the
following from A/B/C Gross Receipts in the following order of priority and on a
continuing basis:
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(i) BVI shall first deduct and retain for its own account the
following distribution fees from the A/B/C Gross Receipts:
(A) Theatrical/Non-Theatrical -
FOR BVI TERRITORY "A" AND BVI TERRITORY "B"
Theatrical distribution fees shall be calculated according to Film Rentals, as
such term is defined in Exhibit "NP" with respect only to Theatrical/Non-
theatrical exhibitions, and shall include third party distribution fees, if any.
On Film Rentals received from the Theatrical/Non-theatrical exhibition of the
Picture in the BVI Territory "A" and BVI Territory "B" less than or equal to
Three Million Dollars ($3,000,000), BVI shall deduct and retain Twenty Five
percent (25%); on Film Rentals greater than Three Million Dollars ($3,000,000)
but less than or equal to Six Million Dollars ($6,000,000), BVI shall deduct and
retain Twenty Seven and One half percent (27.5%); on Film Rentals greater than
Six Million Dollars ($6,000,000), BVI shall deduct and retain a Thirty percent
(30%) distribution fee.
FOR BVI TERRITORY "C"
Theatrical distribution fees shall be calculated according to Film Rentals, as
such term is defined in Exhibit "NP" with respect only to Theatrical/Non-
theatrical exhibitions, and shall include third party distribution fees, if any.
On Film Rentals received from the Theatrical/Non-theatrical exhibition of the
Picture in the BVI Territory "C" less than or equal to Three Hundred Million Yen
(Y.300,000,000), BVI shall deduct and retain Twenty Five percent (25%); on Film
Rentals greater than Three Hundred Million Yen (Y.300,000,000) but less than or
equal to Five Hundred Million Yen (Y.500,000,000), BVI shall deduct and retain
Twenty Seven and One half percent (27.5%); on Film Rentals greater than Five
Hundred Million Yen (Y.500,000,000), BVI shall deduct and retain a Thirty
percent (30%) distribution fee.
The parties agree that all revenues received by BVI hereunder from the sale of
theatrical souvenir programs for the Picture in BVI Territory "C" shall be
contributed to Theatrical Gross Receipts and shall be deemed a part thereof.
(B) All Television - Twenty-Five percent (25%).
(C) Home Video Device - Zero percent (0%).
(D) Video on Demand - Thirty percent (30%).
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The respective distribution fees provided for in subparagraphs 3.b.(i)(A) and
3.b.(i)(B) above shall include all third party distributor fees, if any. By way
of example only, for Theatrical/Non-Theatrical distribution of the Picture in
BVI Territory "A", the maximum amount of distribution fees deducted and retained
by BVI and subdistribution fees retained by a third party distributor when Film
Rentals is greater than Six Million Dollars ($6,000,000) shall not exceed Thirty
percent (30%) of the A/B/C Gross Receipts derived from such Theatrical/Non-
Theatrical exploitation of the Picture in BVI Territory "A". Notwithstanding the
foregoing, the distribution fee provided for in subparagraph 3.b.(i)(B) above as
applied to BVI Territory "A" and to BVI Territory "B" shall be capped at Thirty
Two and One Half percent (32.5%) in the event of third party subdistribution of
Free Television product; provided, that BVI's fee shall in no event be less than
Ten percent (10%)(net of any third party subdistributor)(provided, that such cap
of Thirty Two and One Half percent [32.5%] is applied to the sum of the fees to
BVI on the one hand and to a third party distributor on the other hand for Free
Television product); provided, further, that the distribution fee provided for
in subparagraph 3.b.(i)(B) above as applied to BVI Territory "C" shall be capped
at Thirty Five percent (35%) in the event of third party subdistribution of
Television product. Notwithstanding the foregoing, the distribution fee
provided for in subparagraph 3.b.(i)(D) above as applied to BVI Territory "A"
and to BVI Territory "B" shall be capped at Thirty Seven and One Half percent
(37.5%) in the event of third party subdistribution of Video on Demand product;
provided, that BVI's fee shall in no event be less than Ten percent (10%)(net of
any third party subdistributor)(provided, that such cap of Thirty Seven and One
Half percent [37.5%] is applied to the sum of the fees to BVI on the one hand
and to a third party distributor on the other hand for Video on Demand product);
provided, further, that the distribution fee provided for in subparagraph
3.b.(i)(D) above as applied to BVI Territory "C" shall be capped at Forty Five
percent (45%) in the event of third party subdistribution of Video on Demand
product.
(ii) BVI shall next deduct and retain all Distribution Costs
paid or incurred by BVI in commercially exploiting the Picture including,
without limitation, residuals, so-called "off the tops", print and advertising
costs, delivery costs paid or incurred by BVI, subtitling and dubbing costs, and
all other customary Distribution Costs, as defined in Paragraph IV of Exhibit
"NP";
(iii) BVI shall next deduct and retain amounts equal to the
following: (x) the "A/B" Interest, as set forth in subparagraph 3.a. above; and
(y) the "C" Interest, as set forth in subparagraph 3.a. above; and
(iv) BVI shall next deduct and retain the Advance as set forth
in subparagraph 3.a. above.
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The A/B/C Gross Receipts remaining after continuing deduction of the amounts set
forth in subparagraphs 3.b.(i) through 3.b.(iv) above, if any, after BVI has
deducted its Distribution Fees, Distribution Costs, Interest and the Advance on
a continuing basis in accordance with Exhibit "NP", shall be payable One Hundred
percent (100%) to Cinergi. Cinergi shall be accorded audit and accounting
rights as set forth in Exhibit "NP". Accordingly, Cinergi agrees that it shall
not have the right to audit Home Video Device distribution costs under this
Agreement (including, without limitation, home video disc distribution
costs)(provided, that BVI shall upon request issue Cinergi an affidavit signed
by a Financial Officer of BVI with respect to such manufacturing and
distribution costs).
c. HOME VIDEO RECEIPTS FOR BVI TERRITORY "A" AND BVI
TERRITORY "B":
(i) With respect to sums actually received by or credited to
BVI or any subsidiary or affiliated company of BVI (less taxes actually paid
[excluding income taxes], credits, returns and a reasonable reserve for returns,
which shall be liquidated within Twelve (12) months in each instance) from the
distribution in the rental market of Home Video Devices embodying the Picture in
the BVI Territory "A" and BVI Territory "B", there shall be included in the
A/B/C Gross Receipts a royalty rate calculated in accordance with the following:
Units Royalty Rate
----- ------------
- 6,000 30%
6,001 - 10,000 32.5%
10,001 - 15,000 35%
15,001 - 20,000 37.5%
20,001 - 40%
(ii) With respect to sums actually received by or credited to
BVI or any subsidiary or affiliated company of BVI from the sales of Home Video
Devices embodying the Picture in the BVI Territory "A" and BVI Territory "B" in
the rental market by third party licensees, Fifty percent (50%) of revenues less
actual costs incurred by BVI or its affiliates, if any (e.g. mastering, artwork,
duplication, etc., but excluding all marketing, video duplication costs and
third party distribution fees)(such actual costs to be deducted "off the top"),
shall be included in the A/B/C Gross Receipts. Notwithstanding the foregoing,
contributions to the A/B/C Gross Receipts of revenue received by BVI or its
affiliates from such third party licensees shall in no event exceed the amount
which would be contributed by application of the royalty rates specified in the
immediately preceding subparagraph.
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(iii) With respect to sums actually received by or credited to
BVI or any subsidiary or affiliated company of BVI (less taxes actually paid
[excluding income taxes], credits, returns and a reasonable reserve for returns,
which shall be liquidated within Twelve (12) months in each instance) from the
distribution in the sell-through or repriced rental market of Home Video Devices
embodying the Picture in the BVI Territory "A" and BVI Territory "B", there
shall be included in the A/B/C Gross Receipts (without any deduction of a
distribution fee) a royalty rate equal Fifteen percent (15%).
(iv) With respect to sales of Home Video Devices embodying the
Picture in the BVI Territory "A" and BVI Territory "B" in the sell-through or
repriced rental market by third party licensees, Fifty percent (50%) of revenues
less actual costs incurred by BVI or its affiliates, if any (e.g. mastering,
artwork, duplication, etc., but excluding all marketing, video duplication costs
and third party distribution fees) (such actual costs to be deducted "off the
top"), shall be included in the A/B/C Gross Receipts. Notwithstanding the
foregoing, contributions to the A/B/C Gross Receipts of revenue received by BVI
from such third party licensees shall in no event exceed the amount which would
be contributed by application of the royalty rate specified in the immediately
preceding subparagraph.
d. HOME VIDEO RECEIPTS FOR BVI TERRITORY "C":
(i) With respect to sums actually received by or credited to
BVI or any subsidiary or affiliated company of BVI (less taxes actually paid
[excluding income taxes] credits, returns and a reasonable reserve for returns,
which shall be liquidated within Twelve (12) months in each instance) from the
distribution in the rental market of Home Video Devices embodying the Picture in
the BVI Territory "C", there shall be included in the A/B/C Gross Receipts a
royalty rate calculated in accordance with the following:
Units Royalty Rate
----- ------------
- 40,000 32.5%
40,001 - 65,000 35%
65,001 - 75,000 37.5%
75,001 40%
(ii) With respect to sums actually received by or credited to
BVI or any subsidiary or affiliated company of BVI from the sales of Home Video
Devices (including, without limitation, home video discs) embodying the Picture
in the BVI Territory "C" in the rental market by third party licensees, Fifty
percent (50%) of revenues less actual costs incurred by BVI or its affiliates,
if any (e.g. mastering, artwork, duplication, etc., but excluding all marketing,
video
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duplication costs and third party distribution fees) (such actual costs to be
deducted "off the top"), shall be included in the A/B/C Gross Receipts.
Notwithstanding the foregoing, contributions to the A/B/C Gross Receipts of
revenue received by BVI from such third party licensees shall in no event exceed
the amount which would be contributed by application of the royalty rates
specified in the immediately preceding subparagraph.
(iii) With respect to sums actually received by or credited to
BVI or any subsidiary or affiliated company of BVI (less taxes actually paid
[excluding income taxes], credits, returns and a reasonable reserve for returns,
which shall be liquidated within Twelve (12) months in each instance) from the
distribution in the sell-through or repriced rental market of Home Video Devices
embodying the Picture in the BVI Territory "C", there shall be included in the
A/B/C Gross Receipts (without any deduction of a distribution fee) a royalty
rate equal Fifteen percent (15%).
(iv) With respect to sums actually received by or credited to
BVI or any subsidiary or affiliated company of BVI from the sales of Home Video
Devices (including, without limitation, home video discs) embodying the Picture
in the BVI Territory "C" in the sell-through or repriced rental market by third
party licensees, Fifty percent (50%) of revenues less actual costs incurred by
BVI or its affiliates, if any (e.g. mastering, artwork, duplication, etc., but
excluding all marketing, video duplication costs and third party distribution
fees)(such actual costs to be deducted "off the top"), shall be included in the
A/B/C Gross Receipts. Notwithstanding the foregoing, contributions to the A/B/C
Gross Receipts of revenue received by BVI from such third party licensees shall
in no event exceed the amount which would be contributed by application of the
royalty rate specified in the immediately preceding subparagraph.
e. CONTINGENT COMPENSATION FOR BVI TERRITORY "D":
(i) "D Gross Receipts" shall be defined pursuant to the
applicable provisions of Exhibit "NP" throughout the BVI Territory "D". D Gross
Receipts, which shall include the Home Video Receipts (but shall exclude
receipts from the exploitation by BVI [or subsidiary or licensee of BVI] of home
video discs embodying the Picture in BVI Territory "D"), as set forth in this
subparagraph 3.e.(i), shall be subject to the exclusions and deductions set
forth in Exhibit "NP". BVI shall deduct and retain the following from D Gross
Receipts in the following order of priority and on a continuing basis:
(x) BVI shall deduct and retain all Distribution Costs
paid or incurred by BVI in commercially exploiting the Picture in BVI Territory
"D" (excluding the D Disc Rights [as defined below]) including, without
limitation,
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residuals, so-called "off the tops", print and advertising costs, delivery costs
paid or incurred by BVI, subtitling and dubbing costs, all Home Video Device
(excluding home video discs) distribution costs (including, without limitation,
all actual and direct costs incurred in relation to the duplication, sales,
distribution, creative costs, marketing, advertising and publicity of home video
devices embodying the Picture in the Territory [including third party
distribution fees]), all costs, fees, commissions and taxes withheld at the
source, and all other customary Distribution Costs, as defined in Paragraph IV
of Exhibit "NP".
The D Gross Receipts remaining after continuing deduction of the amounts set
forth in subparagraph 3.e.(i)(x) above, if any, after BVI has deducted its
Distribution Costs on a continuing basis in accordance with Exhibit "NP", shall
be payable as follows: Sixty percent (60%) to Cinergi and Forty percent (40%)
to BVI. Cinergi shall be accorded audit and accounting rights as set forth in
Exhibit "NP". Accordingly, Cinergi agrees that it shall not have the right to
audit Home Video Device distribution costs hereunder (including, without
limitation, home video disc distribution costs)(provided, that BVI shall upon
request issue Cinergi an affidavit signed by a Financial Officer of BVI with
respect to such manufacturing and distribution costs).
(ii) "D Gross Receipts" with respect to exploitation by BVI (or
subsidiary or licensee of BVI) of the Rights Granted with respect to the sale
and distribution of home video discs embodying the Picture in BVI Territory "D"
(such rights, the "D Disc Rights"), shall be defined pursuant to the applicable
provisions of Exhibit "NP" throughout the BVI Territory "D" ("D Gross Disc
Receipts"). D Gross Disc Receipts, as set forth in this subparagraph 3.e.(ii),
shall be subject to the exclusions and deductions set forth in Exhibit "NP".
BVI shall deduct and retain the following from D Gross Disc Receipts in the
following order of priority and on a continuing basis:
(x) BVI shall next deduct and retain all Distribution
Costs paid or incurred by BVI in exercising the D Disc Rights including, without
limitation, residuals, so-called "off the tops", print and advertising costs,
delivery costs paid or incurred by BVI, subtitling and dubbing costs, all
distribution costs (including, without limitation, all actual and direct costs
incurred in relation to the duplication, sales, distribution, creative costs,
marketing, advertising and publicity of home video discs embodying the Picture
in the Territory [including third party distribution fees]), all costs, fees,
commissions and taxes withheld at the source, and all other customary
Distribution Costs, as defined in Paragraph IV of Exhibit "NP"
The D Gross Receipts remaining after continuing deduction of the amounts set
forth in subparagraph 3.e.(ii)(x) above, if any, after BVI has deducted its
Distribution Costs on a continuing
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basis in accordance with Exhibit "NP", shall be payable as follows: Fifty
percent (50%) to Cinergi and Fifty percent (50%) to BVI. Cinergi shall be
accorded audit and accounting rights as set forth in Exhibit "NP". Accordingly,
Cinergi agrees that it shall not have the right to audit Home Video Device
distribution costs hereunder (including, without limitation, home video disc
distribution costs)(provided, that BVI shall upon request issue Cinergi an
affidavit signed by a Financial Officer of BVI with respect to such
manufacturing and distribution costs).
f. CROSS-COLLATERALIZATION: All sources of revenue from all
countries in the BVI Territory "A" and BVI Territory "B" shall be fully cross-
collateralized from and against the Distribution Fees and Distribution Costs
from BVI Territory "A" and BVI Territory "B", the BVI Territory "A/B" Advance
and the "A/B" Interest. All sources of revenue from the BVI Territory "C" shall
be fully cross-collateralized from and against the Distribution Fees and
Distribution Costs from BVI Territory "C", the BVI Territory "C" Advance and the
"C" Interest; provided, up to Six Hundred Thousand Dollars ($600,000) from any
and all sources of revenue from all countries in the BVI Territory "A" and BVI
Territory "B" shall be fully cross-collateralized from and against the
Distribution Costs in Territory "C", the BVI Territory "C" Advance and the "C"
Interest. Cinergi agrees that all sources of revenue from BVI Territory "D"
shall be fully cross-collateralized from and against the Distribution Costs
incurred by BVI in BVI Territory "D" pursuant to the terms of subparagraphs
3.e.(i)(x) and 3.e.(ii)(x) above. The cross-collateralization allowed under
this Agreement shall be that specified in this subparagraph 3.f.
g. THIRD PARTY PARTICIPATIONS: Cinergi shall be solely responsible
for the preparation of accounting statements and payments and other required
documentation and the issuance of payments to third parties in connection with
all executory obligations of the Picture, including, without limitation, the
payment of all applicable profit participations, deferments, credit bonuses,
corporate and income taxes and the like derived from the pre-production,
production, and post-production (except as otherwise provided above) of the
Picture. Cinergi agrees that no third parties shall have the right to audit
and/or otherwise examine BVI's books and records for any purpose whatsoever.
The parties agree that BVI shall be responsible for making all applicable guild,
residuals and performing rights payments with respect to the BVI Territory
during the period of BVI's exploitation of the Picture, and such payments shall
be deemed Distribution Costs hereunder.
h. DELIVERY: "Complete Delivery" shall include delivery by Cinergi
and acceptance by BVI of all items in Exhibit "DR" and Exhibit "P" ("Complete
Delivery"), which are attached hereto and incorporated herein by this reference.
Cinergi agrees that it shall, at its own cost and expense,
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deliver to BVI all materials required to make Complete Delivery. In accordance
with Exhibit "NP", any delivery costs incurred by BVI in connection with the
delivery of the Picture shall be deemed a Distribution Cost and shall be
recouped in the manner set forth in subparagraphs 3.b. and 3.e. above. Cinergi
agrees that as part of Complete Delivery it shall tender to BVI executed copies
of Exhibit "A" and Exhibit "B", which are attached hereto and incorporated
herein by this reference. Cinergi agrees (subject to the limits of pertinent
rights under contract) to grant BVI access to any dubbed or subtitled versions
of the Picture in any and all languages spoken in the BVI Territory as and when
such foreign language dubbed or subtitled versions are available including,
without limitation, the French and Italian languages; provided, that BVI shall
to pay all of its own access and duplication costs incurred in accessing the
materials.
4. BVI DISTRIBUTION CONTROL: BVI shall have, subject to the terms of
this Agreement, complete, exclusive and unqualified discretion and control as to
the time, manner and terms of distribution, exhibition and exploitation of the
Picture, separately or in connection with other motion pictures, in accordance
with such policies, terms and conditions and through such parties as BVI in its
sole business judgment may determine proper or expedient and the decision of BVI
in all such matters shall be binding and conclusive upon Cinergi. BVI
acknowledges that it is BVI's general intent that the Picture shall be
distributed by BVI in the BVI Territory (taking into account, among other
things, such factors as the applicable budget, genre, release date, market
conditions, quality, performance, etc. of the Picture), subject to BVI's
customary and reasonable business practices with respect thereto. Subject to
the foregoing, BVI grants Cinergi a right of prior and meaningful consultation
with respect to BVI's general initial theatrical release plans for the Picture
in the BVI Territory. BVI shall make no "flat sale" of the Picture in Germany
until five (5) years after the initial general theatrical release of the Picture
by BVI in the BVI Territory (unless BVI determines in the exercise of BVI's good
faith business judgment to distribute substantially all of BVI's motion pictures
in such manner). Except as expressly set forth herein, BVI makes no express or
implied representation or warranty as to the manner or extent of any
distribution or exploitation of the Picture nor as to any maximum or minimum
amount of monies to be expended in connection therewith. BVI does not guarantee
the performance by any subdistributor, licensee or exhibitor of any contract
regarding the distribution and exploitation of the Picture. Cinergi shall on
request use its best efforts to provide BVI such documents as may be necessary
or desirable for BVI to secure licenses and permits for the importation,
exportation and distribution of the Picture. During the theatrical exhibition
of the Picture in the BVI Territory, Cinergi may request and receive copies of
applicable box office and flash reports. BVI
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agrees that with respect to Alto Adige, BVI shall use reasonable efforts to
cause the broadcast television exhibition, if any, of the German language
version of the Picture in Alto Adige to occur simultaneously with the broadcast
television exhibition of the German language version of the Picture in Germany
and/or Austria.
5. INTENTIONALLY OMITTED.
6. REPRESENTATIONS AND WARRANTIES:
a. Cinergi hereby represents and warrants that: (i) it owns or
controls all distribution rights in and to the Picture in the BVI Territory and
all literary, dramatic and original musical material contained therein; (ii)
neither the Picture nor any part thereof nor the exercise by an authorized party
of any right granted to BVI hereunder will violate or infringe the copyright,
trademark, trade name, patent or any literary, dramatic, musical, artistic,
personal, private, civil or property right or right of privacy, right of
publicity, or any other right of any person, firm or corporation or constitute
unfair competition or defame any person, firm or corporation; (iii) Cinergi has
not entered into and will not enter into any agreement which is inconsistent
with any of the provisions of this Agreement and will not exercise any right or
take any action or license or authorize any other person to exercise any right
or take any action or license which conflicts with or knowingly prejudices the
rights herein granted to BVI; (iv) the negative cost of the Picture is an "all
in" figure of not less than Thirty Million Dollars ($30,000,000); (v) BVI shall
not be obligated to make payments to any third party except with respect to
music public performance fees calculated and due in the particular country and
as specifically provided in subparagraph 3.e. above; (vi) the choice of the
Director of the Picture shall be subject to prior written approval of BVI (Stone
is hereby approved by BVI); (vii) Cinergi shall deliver all items specified in
Exhibit "DR", at its cost; (viii) the Picture shall be shot in color and on 35
millimeter or 70 millimeter film stock, suitable for first class theatrical
distribution; (ix) the Picture has an MPAA (or successor organization) rating no
more restrictive than "R" rating ; (x) the Picture will be delivered by Cinergi
to BVI by no later than December 31, 1995 (subject to force majeure)("Delivery
Date"); (xi) the Picture will be no less than Ninety (90) minutes and not more
than One Hundred Fifty (150) minutes including credits; (xii) in the BVI
territory, BVI will be named jointly with Cinergi in any public relations,
advertising, promotional and trade announcement covering the Picture; (xiii)
Cinergi shall obtain all synchronization, performance and master use music
licenses reasonably required by BVI on a buy-out basis for all media to exercise
any and all of the rights granted in this Agreement including the right to
advertise and promote the Picture without payment by BVI to any third party,
excluding performing rights
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<PAGE>
payments (BVI shall pay such obligations to local performance societies as arise
from BVI's exercise of the Rights Granted; provided, that all such amounts paid
shall be deemed Distribution Costs pursuant to the terms of subparagraph
3.b.(ii) above); (xiv) subject to applicable guild restrictions and to the
extent permitted by pertinent talent agreements (which Cinergi agrees to deliver
pursuant to the terms of subparagraph 3.a. above), with respect to all persons
appearing in the Picture, or performing production services therein, BVI has the
right to issue and authorize publicity concerning such persons and the right to
use, reproduce, transmit, broadcast, exploit, publicize and exhibit their names,
likenesses, transcriptions, films and other reproductions thereof in connection
with the distribution, exhibition, advertising and exploitation of the Picture
including the right to exhibit trailers and excerpts from the Picture; (xv) the
Picture is unpublished and capable of copyright protection in the BVI Territory,
subject to the agreement by BVI not to copyright the Picture in its own name;
and (xvi) the Picture as delivered to BVI shall be free and clear of any claims,
liens or encumbrances except those expressly permitted hereunder (or as
expressly approved in writing by BVI).
b. Cinergi agrees to indemnify and hold BVI harmless from any and all
claims, actions or proceedings of any kind and from any and all damages,
liabilities, costs and expenses (including reasonable attorney's fees and costs)
relating to or arising: (i) out of any breach of any of the warranties,
representations and/or agreements made by Cinergi contained in this Agreement;
(ii) out of any claim alleging facts which if true would constitute such a
material breach of this Agreement by Cinergi, if and to the extent that such
claim is of a type not ordinarily covered by so-called errors and omissions or
producer's liability insurance policies; and/or (iii) in connection with the
pre-production, production and/or post-production of the Picture, including, but
not limited to, Cinergi's failure to supply BVI with a complete list of the
Picture's credits.
c. BVI agrees to indemnify and hold Cinergi harmless from any and
all claims, actions, proceedings of any kind and from any and all damages,
liabilities, costs and expenses (including reasonable attorney's fees and costs)
relating to or arising: (i) out of any breach of any of the warranties,
representations and/or agreements made by BVI contained in this Agreement; (ii)
out of any claim alleging facts which if true would constitute such a material
breach of this Agreement by BVI, if and to the extent that such claim is of a
type not ordinarily covered by so-called errors and omissions or producer's
liability insurance policies.
7. PUBLICITY RESPONSIBILITIES OF CINERGI: Cinergi agrees to use its
reasonable efforts make Stone available for press and
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interviews in the BVI Territory at a reasonable time prior to the initial
theatrical release of the Picture in the BVI Territory.
8. COPYRIGHT: Cinergi represents and warrants that the copyright(s) in
the Picture and in the literary, dramatic and musical material upon which it is
based or which are contained therein will be valid and subsisting during the
Term and during the maximum period of copyright in the United States and those
countries party to the Universal Copyright Convention, and that Cinergi has not
done or permitted any act or omission which would impair or diminish the
validity or duration of such copyright. Cinergi further represents and warrants
that no part of the Picture (other than clips and music of which BVI is given
written notice at the time of delivery of the Picture) or any such literary or
dramatic material or musical material provided by Cinergi in connection with the
Picture is or will be in the public domain during the maximum period of
applicable copyright as a result of any act or omission by BVI. The Picture
when delivered to BVI shall contain a copyright notice in compliance with the
Universal Copyright Convention in the BVI Territory and the Copyright Law of the
United States. Cinergi agrees to secure or have secured and register such
copyright in the Picture and related properties as BVI reasonably requests with
respect to copyrights which are eligible for copyright registration prior to
delivery of the Picture in the BVI Territory. BVI shall not be liable to
Cinergi for any action or failure to act on behalf of Cinergi within the scope
of authority conferred on BVI pursuant to this Paragraph 8. BVI agrees to give
Cinergi timely notice of any legal challenges to Cinergi's copyright in the
Picture in the BVI Territory in which BVI is duly served as a party.
9. PRESS ANNOUNCEMENTS AND PREVIEWS: Cinergi shall not (and Cinergi
shall not authorize any person to) release information concerning the Picture to
the press in the BVI Territory or preview the Picture in the BVI Territory
either before or after delivery of the Picture to BVI without the express prior
written consent of BVI; provided, however, that BVI and Cinergi shall issue a
joint press release with respect to the Picture, the time and place of which
shall be mutually determined by the parties. Cinergi and BVI agree that the
initial press announcement regarding BVI's acquisition of the Picture shall be
subject to the mutual prior approval of the parties hereunder. BVI acknowledges
that certain press in the Cinergi Territory are effectively pan-European in
scope.
10. ERRORS AND OMISSIONS INSURANCE: Cinergi agrees that BVI shall be an
additional named insured on any and all Errors and Omissions insurance policies
issued to Cinergi in connection with the Picture, subject to applicable policy
conditions, terms and restrictions, for at least three (3) years following
complete delivery of the Picture to BVI and liability limits of
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One Million Dollars ($1,000,000) per claim and Three Million Dollars
($3,000,000) in the aggregate, with a Ten Thousand Dollar ($10,000) deductible.
Nothing contained in this Paragraph 10 shall modify or otherwise affect any
representation or warranty made by Cinergi hereunder.
11. SECURITY INTEREST/COPYRIGHT MORTGAGE/COMPLETION BOND:
a. Cinergi shall grant and assign to BVI a continuing first priority
lien and security interest in and to and copyright mortgage on the Picture and
all underlying materials, elements, properties, contract rights, inventories,
accounts and general intangibles associated with the Picture, all the foregoing
only to the extent needed by BVI to exercise the distribution rights in the
Picture granted herein by Cinergi to BVI ("Picture Items") in the BVI Territory,
in a form to be mutually agreed to by the parties hereto and subject to the
Interparty Agreement.
b. Prior to complete delivery of the Picture by Cinergi to BVI
pursuant to the terms of Paragraph 3. above, any such security interest of BVI
shall be subordinate to any security interest granted by Cinergi to any bank or
financial institutions or other persons providing financing for the Picture
("Financier[s]") and to any completion bond company; provided, that any such
Financier(s) or completion bond company shall acknowledge that the respective
lien(s) and/or security interest(s) in the Picture, shall at all times be
subject to this Agreement and any and all of BVI's rights under this Agreement.
BVI's acknowledgment of the foregoing security interest shall be conditioned
upon the above-referenced lienholders agreeing that if any or all of them
foreclose on their respective liens, that they and/or any purchaser of the
Picture will be subject to terms of this Agreement and that BVI shall quietly
and peacefully enjoy and possess, during the entire period of its exclusive
rights hereunder, all of the distribution and other rights herein granted and
agreed to be granted to BVI.
c. Subsequent to payment by BVI to Cinergi of the sum specified in
subparagraph 3.a. above, and pursuant to the terms of the Interparty Agreement
(as defined below), the security interest of the Financier(s) in the Picture
Items shall be subordinate to the security interest of BVI.
d. It is the intention of BVI to enter into an agreement with the
aforementioned Financier(s) in order to effect the terms of this Paragraph 11
("Interparty Agreement").
e. Cinergi agrees to obtain a completion bond with
respect to the Picture.
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f. BVI shall enter into a distributor's assumption agreement with
any of the applicable unions or guild, if required.
12. FIRST NEGOTIATION TO EXTEND TERM: Cinergi hereby grants to BVI a
Right of First Negotiation to extend the Term in the BVI Territory in accordance
with the following provisions: If, at the end of the Term, Cinergi desires to
grant any of the Rights Granted to a third party other than BVI, then Cinergi
shall, by written notice within three (3) months prior to the expiration of the
Term, notice BVI of such desire and immediately thereafter negotiate with BVI
with respect to such rights and if, after the expiration of three (3) months
following such notice from Cinergi to BVI, no agreement shall have been reached,
then Cinergi shall be free to negotiate elsewhere with respect to such of the
aforementioned Rights Granted.
13. WAIVER OF INJUNCTIVE RELIEF: As between Cinergi and BVI, Cinergi
hereby waives any right to injunctive relief or rescission of rights, and hereby
agrees that Cinergi's sole and exclusive remedy in the event of any breach or
alleged breach of this Agreement by BVI and/or its parent and/or subsidiaries of
its parent shall be solely an action for damages; provided, however, that the
terms of this Paragraph 13. are subject to the terms of the Interparty Agreement
and/or Intercreditor Agreement.
14. NO THIRD PARTY BENEFICIARIES: This Agreement is not made and shall
not inure to the benefit of any person not a party hereto and shall not be
deemed to give any right or remedy to any third party (including any audit
rights).
15. GOVERNING LAW: This Agreement shall be governed by the laws of the
State of California applicable to agreements executed and to be wholly performed
therein. Cinergi's consent to such jurisdiction is with respect to this
Agreement only.
16. ASSIGNMENT: BVI shall have the right to assign this Agreement in
whole or in part only to affiliates, subsidiaries and corporations owning all
the stock of BVI.
17. CONFIDENTIALITY: BVI and Cinergi mutually agree that the terms
of this Agreement are confidential and shall not, without the prior written
consent of the applicable party, be disclosed to any unauthorized person(s),
firm(s), corporation(s) or other entity, all of whom shall be informed of
the confidential nature of this Agreement and shall agree to be bound by the
terms and conditions of this Agreement including, without limitation, this
Paragraph 17.
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18. PAYMENTS: All payments to Cinergi hereunder shall be made care of the
following address:
Cinergi Production N.V. Inc.
2308 Broadway
Santa Monica, CA 90404
Attention: Erick Feitshans
19. EXHIBIT "NP": In the event that the terms of this Agreement conflict
with the terms of Exhibit "NP", the terms set forth in the Agreement will
control.
Please confirm your acceptance of the foregoing by signing in the space provided
below.
BUENA VISTA INTERNATIONAL, INC.
By: /s/ Jeffery S. Graup
---------------------------
Its: Sr. VP
---------------------------
ACCEPTED AND AGREED TO:
CINERGI PRODUCTIONS N.V. INC.
By: /s/ Erick J. Feitshans
------------------------------
Erick J. Feitshans
Its: Vice President
------------------------------
I.D.#
----------------------------
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DEAL MEMORANDUM
THIS AGREEMENT dated as of the 26 January 1996 between Cinergi Productions N.V.
Inc. ("Cinergi") and Buena Vista Distribution International, Inc. ("BVI") is
entered into between the parties relating to the distribution of the theatrical
motion picture "Evita" ("the picture") in the Territory set forth below, as
follows:
1. ADVANCE: Three Million US Dollars (US$3,000,000) payable on a cash flow
basis. BVI's advance will be covered by the completion bond and
Five Hundred Thousand US Dollars (US$500,000) of the advance
shall be crossed against any overages payable to Cinergi in
Latin America;
2. TERRITORY: Spain, Spanish speaking Andora, The Balaeric and Canary Islands;
3. TERM: Nineteen (19) years from delivery (plus right of first
negotiation to extend the Term);
4. RIGHTS: All theatrical, non-theatrical, home video (including DVD, near
VOD), ship, hotel/motel, pay TV, free TV, pay-per-view and
video-on-demand rights. Airline and all other rights will be
retained by Cinergi;
5. BACK END TERMS:
a. THEATRICAL, NON-THEATRICAL: Twenty-five percent (25%) fee to Ptas.
One Hundred Fifty Million film rental, Twenty-seven and one-half
percent. (27.5%) fee from Ptas. One Hundred Fifty Million to Two
Hundred Fifty Million rental and thirty percent (30%) fee over Ptas.
Two Hundred Fifty Million for any and all film rentals actually
received.
b. The "out of pocket" sub-distribution fees which BVI actually pays to
Laurenfilm for Catalonia, shall be treated as an additional fee
hereunder.
c. VIDEO: Rental: 0-4,000 units -- Thirty percent (30%) royalty; 4,000 -
6,000 units -Thirty-two and one-half percent (32.5%) royalty; 6,000 -
8,000 units -- Thirty -five percent (35%) royalty and 8,000 + units
--Forty percent (40%) royalty. The above is on prospective basis.
Sell-through --We can accept a Fifteen percent (15%) royalty if the
picture is first released on rental. However, if BVI goes straight to
sell-through, the royalty should be Seventeen and one-half percent
(17.5%).
d. VIDEO-ON DEMAND: Thirty percent (30%) fee.
e. TELEVISION: Twenty-five percent (25%) fee.
<PAGE>
Please acknowledge your acceptance of the terms and conditions of this deal
memorandum by signing in the space provided for below.
CINERGI PRODUCTIONS, N.V. INC.
BY:/s/ Warren Braverman
------------------------------
ITS:Executive Vice President
-----------------------------
APPROVED AND ACCEPTED BY:
BUENA VISTA DISTRIBUTION
INTERNATIONAL INC.
By:/s/ Jeffery S. Graup
------------------------------
Its:Senior Vice President
-----------------------------
<PAGE>
SUBSIDIARIES OF CINERGI PICTURES ENTERTAINMENT INC.
Cinergi Film Productions Co., a Delaware corporation
Cinergi International N.V., a Netherlands Antilles corporation
Cinergi Productions Inc., a Delaware corporation
Cinergi Productions Inc. (California), a California corporation
Cinergi Productions N.V. Inc., a Delaware Corporation
Cinergi Service Inc., a Delaware corporation
E.P. Distribution Inc., a California corporation
Igrenic Music Publishing, a California corporation
J.D. Distribution Inc., a California corporation
SUBSIDIARIES OF CINERGI FILM PRODUCTIONS CO.
Alan Smithee Productions Inc., a California corporation
Bishop-MacGuire Productions Inc., a California corporation
Casa Rosata Productions Inc., a California corporation
Color of Night Productions Inc., a California corporation
Hester Prynne's Production Company, a California corporation
Renaissance Man Productions Inc., a California corporation
Scarlet Letter Productions Inc., a Canadian corporation
Simon Says Productions Inc., a California corporation
Tombstone Productions Inc., a California corporation
Track 2 Productions, Inc., a California corporation
Wondervale Limited, a United Kingdom corporation
18 Hands Productions Inc., a California corporation
Summit Entertainment Group Inc., a California corporation (33.3%
interest only)
SUBSIDIARIES OF CINERGI PRODUCTIONS N.V. INC.
Cinergi Productions Kft., a Hungarian corporation
Kala International Sales, Inc., a U.S. Virgin Islands corporation
Summit Export Group (M.E.V.) N.V., a Netherlands Antilles corporation
Summit Export (U.K.) Ltd., a United Kingdom corporation
EXHIBIT 21
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CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-90660) pertaining to the 1994 Basic Stock Option and Stock
Appreciation Rights Plan and the 1994 Special Stock Option and Stock
Appreciation Rights Plan of Cinergi Pictures Entertainment Inc. of our report
dated April 11, 1997, with respect to the consolidated financial statements of
Cinergi Pictures Entertainment Inc. included in the Annual Report (Form 10-K)
for the year ended December 31, 1996.
ERNST & YOUNG LLP
Los Angeles, California
April 11, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 27,364
<SECURITIES> 0
<RECEIVABLES> 11,649
<ALLOWANCES> 0
<INVENTORY> 103,792
<CURRENT-ASSETS> 143,256
<PP&E> 7,703
<DEPRECIATION> 2,884
<TOTAL-ASSETS> 156,548
<CURRENT-LIABILITIES> 66,559
<BONDS> 0
131
0
<COMMON> 0
<OTHER-SE> 36,476
<TOTAL-LIABILITY-AND-EQUITY> 156,548
<SALES> 133,000
<TOTAL-REVENUES> 133,907
<CGS> 139,612
<TOTAL-COSTS> 149,364
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 448
<INCOME-PRETAX> (15,905)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,905)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,905)
<EPS-PRIMARY> (1.12)
<EPS-DILUTED> (1.12)
</TABLE>
