0000801441-95-000013.txt : 19950821 0000801441-95-000013.hdr.sgml : 19950821 ACCESSION NUMBER: 0000801441-95-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950818 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAROLCO PICTURES INC CENTRAL INDEX KEY: 0000801441 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 954046437 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09264 FILM NUMBER: 95565158 BUSINESS ADDRESS: STREET 1: 8800 SUNSET BLVD CITY: LOS ANGELES STATE: CA ZIP: 90069 BUSINESS PHONE: 3108598800 MAIL ADDRESS: STREET 1: 8800 SUNSET BLVD CITY: LOS ANGELES STATE: CA ZIP: 90069 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1995 Commission File No. 1-9264 CAROLCO PICTURES INC. (Exact name of registrant as specified in its charter) Delaware 95-4046437 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8800 Sunset Blvd., Los Angeles, CA 90069 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 859-8800 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 The number of shares outstanding of registrant's Common Stock, $.01 par value, at August 15, 1995 was 140,015,109 shares, including 2,373,756 shares of treasury stock. CAROLCO PICTURES INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - December 31, 1994 and June 30, 1995 (unaudited) Condensed Consolidated Statements of Operations - Three and six months ended June 30, 1994 and 1995 (unaudited) Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 1994 and 1995 (unaudited) Notes to Unaudited Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K CAROLCO PICTURES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS A S S E T S December 31, June 30, 1994 1995 (Unaudited) (In Thousands) Cash and cash equivalents. . . . . . . $27,336 $15,052 Restricted cash. . . . . . . . . . . . . . . -- 303 Accounts receivable, net . . . . . . . . . . .13,835 5,414 Accounts receivable, related parties . . . . . 340 200 Film costs, less accumulated amortization (Notes B and C). . . . . . . 89,145 119,136 Property and equipment, at cost, less accumulated depreciation and amortization 17,413 5,056 Other assets . . . . . . . . . . . . . . . . 8,788 7,553 ------ ------- TOTAL ASSETS. . . . . . . . . . . . . . $156,857 $152,714 ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY LIABILITIES: Accounts payable and accrued liabilities . . $ 21,194 $ 10,040 Accrued residuals and participations . . . . . .34,315 12,484 Income taxes, current and deferred . . . . . . .15,000 15,472 Debt (Notes B and E) . . . . . . . . . . . . . .93,855 124,946 Advance collections on contracts . . . . . . . .15,047 13,534 Notes and amounts payable, related parties (Note D) 41,967 44,900 ------ ------ TOTAL LIABILITIES . . . . . . . . . . . . 221,378 221,376 COMMITMENTS AND CONTINGENCIES - (Note F) STOCKHOLDERS' DEFICIENCY - (Notes F and G) Preferred stock - $1.00 par value, 10,000,000 shares authorized: Series A Convertible Preferred Stock, 120,000 shares authorized, 82,500 shares issued and outstanding ($86,482,000 aggregate liquidation preference in 1994 and $88,658,000 aggregate liquidation preference in 1995). . . . . . . 88 90 Common stock - $.01 par value, 650,000,000 shares authorized, 140,015,109 shares issued and outstanding, including 2,373,756 shares in treasury . . . . . . . 1,400 1,400 Additional paid-in capital . . . . . . . . . .302,175 305,882 Treasury stock . . . . . . . . . . . . . . . (5,920) (5,920) Accumulated deficit. . . . . . . . . . . . (362,264) (370,114) -------- --------- TOTAL STOCKHOLDERS' DEFICIENCY. . . . . (64,521) (68,662) -------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY. . . . $156,857 $152,714 ======== ========
See notes to condensed consolidated financial statements. CAROLCO PICTURES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months ended Six Months Ended June 30, June 30, 1994 1995 1994 1995 (Unaudited) (In Thousands, Except per Share Data) Revenues: Feature films . . . . . . . . . . . . . $ 9,779 $ 7,287 $ 30,058 $ 13,065 Other income (Note H). . . . . . . . . . 1,255 956 3,979 1,700 --------- ---------- ---------- ---------- TOTAL REVENUES. . . . . . . . . . . . 11,034 8,243 34,037 14,765 Costs and expenses: Amortization of film costs, residuals and participations. . . . . . . 25,582 5,027 41,628 10,469 Selling, general and administrative. . . . . 4,223 3,369 9,024 6,886 Interest . . . . . . . . . . . . . . . . . 2,993 2,628 6,974 5,834 Other (Note I). . . . . . . . . . . . . . . . (620) 1,484 (161) 3,221 ------ ----- ------- ------- TOTAL COSTS AND EXPENSES. . . . . . . . 32,178 12,508 57,465 26,410 ------ ------ ------ ------ LOSS BEFORE BENEFIT FROM (PROVISION FOR)INCOME TAXES . . . . . . . . . . . (21,144) (4,265) (23,428) (11,645) Benefit from (provision for) income taxes. (47) (457) 206 (783) ------- ------- -------- ------- LOSS BEFORE EXTRAORDINARY ITEM . . . . . (21,191) (4,722) (23,222) (12,428) Extraordinary gain on extinguishment of debt (Notes B and D) . . . . . . . --- 4,642 --- 6,779 ------ ------ -------- -------- NET LOSS . . . . . . . . . . . . . . . $(21,191) $ (80) $(23,222) (5,649) ======== ====== ========= ======== Per Common Share: Loss before extraordinary item. . . $(0.16) $(0.04) $(0.18) $(0.11) Income from extraordinary item. . . . . --- 0.03 --- 0.05 --------- ------- ------- ------- Net Loss. . . . . . . . . . . . . $(0.16) $( 0.01) $(0.18) $(0.06) ========= ======= ======= ======= Weighted average shares outstanding. . 137,687,728 137,687,728 137,687,728 137,687,728
See notes to condensed consolidated financial statements. CAROLCO PICTURES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 1994 1995 (Unaudited) (In Thousands) Net cash flow from operating activities: NET CASH USED IN OPERATIONS. . . . . . . . . . . $ (21,876) $ (56,148) Cash flow from investing activities: Purchase of property and equipment . . . . . . . (346) (34) Proceeds from sale of aircraft, net of costs . . 1,775 --- ---------- ---------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. . 1,429 (34) Cash flow from financing activities: Payments on debt . . . . . . . . . . . . . . . (1,543) (2,809) Proceeds of Production Loan . . . . . . . . --- 44,938 Increase (decrease) in notes payable to related parties . . . . (403) 1,933 Decrease in receivables from related parties . . 991 140 (Increase) decrease in restricted cash . . . . 1,255 (303) Repurchase of Vista shares and Vista Partnership Units . . . . . . (625) --- Other. . . . . . . . . . . . . . . . . . . . . (2) (1) ------ ------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. . (327) 43,898 ------ --------- INCREASE (DECREASE) IN CASH . . . . . . . . . . (20,774) (12,284) Cash and cash equivalents at beginning of period . . 56,697 27,336 ------ ------- Cash and cash equivalents at end of period . . . . . $35,923 $ 15,052 ======= ======== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest (net of amounts capitalized in 1994 and 1995) . . . . . . $1,181 $4,305 ======== ======= Income taxes . . . . . . . . . . . . . . . . . . . $154 $328 ======== =======
See notes to condensed consolidated financial statements. (continued) CAROLCO PICTURES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Prior to March 29, 1995, Carolco owned the building housing its corporate headquarters in Los Angeles, California. In March 1988, Carolco entered into a $12,000,000 mortgage loan on its headquarters building with Equitable Life Assurance Society of the United States ("Equitable"). The mortgage provided for a balloon payment of the outstanding principal amount (approximately $11,500,000) on March 1, 1995. The mortgage loan, which was non-recourse to Carolco, was sold by Equitable to Dolphinshire, L.P. ("Dolphinshire"), an entity unaffiliated with Carolco, on March 29, 1995. Immediately thereafter, Carolco transferred the building to Dolphinshire in full satisfaction of the mortgage loan outstanding. At December 31, 1994, the net book value of the building and certain leasehold improvements was reduced to approximate the amount of the outstanding mortgage loan. In March 1995, upon the close of the transactions described above, the balance of the mortgage loan was offset against the carrying value of the assets. In May 1995, the Company and Le Studio Canal+ S.A. and its subsidiaries or affiliates ("Le Studio") entered into an agreement with Le Studio Canal+ (U.S.) ("Le Studio (U.S.)") and Cinepole Productions B.V. ("Cinepole"), subject to certain conditions, to settle certain disputes. (See Note D.) Pursuant to the settlement agreement, the Company recognized a benefit of $442,000 which has been recorded as additional paid-in capital. This benefit reflects a $3,702,000 reduction in participations payable, representing amounts due to Le Studio (U.S.) pursuant to various co-production agreements, offset by a $3,260,000 reduction in trade and other accounts receivable, representing amounts owed to the Company for, among other things, the license fees for distribution rights to certain of the Company's motion pictures and sales commissions for the motion picture Stargate. Note A - Basis of Presentation and Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements include the accounts of Carolco Pictures Inc. and its wholly-owned subsidiaries including Carolco International Inc. ("CII"), Carolco Television Inc. and The Vista Organization, Ltd. ("Vista"); The Vista Organization Partnership, L.P.; and Carolco Studios Inc. (Delaware) (collectively, the "Company" or "Carolco"), after elimination of material intercompany accounts and transactions. The Company is engaged in a single business segment, the entertainment industry, and its principal activities include the production and distribution of feature films. The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company's management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the Company's financial position as of June 30, 1995 and the results of its operations for the three and six months ended June 30, 1994 and 1995. The Company's independent auditors have included an explanatory paragraph in their report on the Company's consolidated financial statements for the year ended December 31, 1994 stating that such financial statements have been prepared assuming the Company will continue as a going concern and that the Company's financial condition raises substantial doubt about its ability to continue as a going concern. See Note B. The results of operations for the period ended June 30, 1995 are not necessarily indicative of the results to be expected for the year ending December 31, 1995. Certain reclassifications have been made in the amounts for 1994 to conform to 1995 presentation. For further information, refer to the Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1994. At June 30, 1995, LDC Films, Inc. ("LDC"), an affiliate of Pioneer Electronic Corporation ("Pioneer"), Cinepole, and RCS International Communications N.V. ("RCS Communications"), owned approximately 33.7%, 19.0% and 11.6%, respectively, of the issued and outstanding Common Stock of the Company (excluding the New CIBV Shares (as defined above)). Until May 8, 1995, New Carolco Investments B.V. ("New CIBV"), a corporation incorporated in The Netherlands, owned approximately 5.8% of the issued and outstanding Common Stock of the Company (the "New CIBV Shares"). On May 8, 1995, New CIBV notified each of Pioneer, Le Studio and RCS Video International Services B.V. ("RCS"), an affiliate of RCS Communications, of the surrender of the New CIBV Shares in fulfillment of the obligations under promissory notes made by New CIBV in favor of such companies, which were secured by the New CIBV Shares. Mario F. Kassar, Chairman of the Board of Directors and Chief Executive Officer of the Company has informed the Company that he no longer may be deemed to beneficially own the New CIBV Shares. In addition, Pioneer, Cinepole and MGM Holdings Corporation ("MGM Holdings") own 40,000, 12,500 and 30,000 shares, respectively, of Series A Convertible Preferred Stock, not including accrued "in-kind" dividends. MGM Holdings also owns $32,299,000 in aggregate principal amount of 5% Payment-In-Kind Convertible Subordinated Notes due 2002 (the "5% Notes"), not including accrued "in-kind" interest. Significant Accounting Policies Net Loss Per Common Share: Net loss per share is based on the weighted average number of common shares outstanding during the period, after appropriate inclusion in net loss of payment-in-kind dividends of $1,061,000 and $1,106,000 for the three months ended June 30, 1994 and 1995, respectively, and payment-in-kind dividends of $2,106,000 and $2,201,000 for the six months ended June 30, 1994 and 1995, respectively. Common equivalent shares, consisting of outstanding stock options, warrants and the Series A Convertible Preferred Stock, were excluded because the effect of their inclusion would be antidilutive. Other potentially dilutive securities, including the 5% Notes, were excluded because the effect of their inclusion would be antidilutive. Income Taxes: Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 109 "Accounting for Income Taxes". Previously, the Company used SFAS No. 96 "Accounting for Income Taxes". The adoption of SFAS No. 109 had no material effect on the Company's financial position or results of operations for the year ended December 31, 1993. Current and deferred federal income taxes are provided based on the Company and its U.S. subsidiaries owned 80% or more, filing a consolidated tax return. Deferred taxes, relating to differences in accounting for film rights and the related amortization for financial statement and tax return purposes, as well as from financial statement reserves not currently deductible for tax purposes, have historically been determined by applying the current tax rate to the cumulative temporary differences between the recorded carrying amounts and corresponding tax basis of assets and liabilities at the respective dates. Due to the reversal of prior book and tax differences, as of June 30, 1995, Carolco's deferred tax liability has been virtually eliminated. However, due to the potential liability arising form the ongoing examination of Carolco's 1988 through 1993 federal income tax returns by the Internal Revenue Service ("IRS") and the 1988 and 1989 state income tax returns by the California Franchise Tax Board ("FTB"), Carolco has not reduced the amount of its current and deferred income tax liability. See Note F for a discussion of these examinations. On October 18, 1993, the Company's wholly-owned subsidiary, Carolco International N.V. ("CINV") was domesticated as a Delaware corporation and its name was changed to CII. Due to the domestication of CINV, in future periods, foreign source income of the Company will be subject to United States income taxation which could result in a significant increase in the Company's effective tax rate. Note B - Liquidity and Going Concern Issues Carolco currently has one motion picture in production: Cutthroat Island starring Geena Davis and Matthew Modine and directed by Renny Harlin. Cutthroat Island completed principal photography in March 1995 and is scheduled to be completed and available for release in the fourth quarter of 1995. The direct negative cost of Cutthroat Island is expected to be in excess of $80,000,000. Carolco has completed certain financing arrangements in connection with Cutthroat Island. On February 6, 1995, the limited partnership formed by Carolco to produce and distribute Cutthroat Island ("Cutthroat Productions L.P.") satisfied the conditions necessary for it to draw funds under a production loan (the "Production Loan") provided by a group of 5 banks led by Berliner Bank AG (London Branch) and Credit Lyonnais Bank Nederland N.V. ("CLBN"). The Production Loan provides for financing of up to $60,238,000, of which CLBN is obligated to provide up to $10,072,000, in direct negative costs, including completion bond fees, certain contingencies and other financing related expenses. Based on current production cost estimates, the Company believes it will borrow less than the amount provided by the Production Loan. In February and March 1995, Carolco received approximately $25,031,000 in proceeds from the Production Loan, representing reimbursement of a portion of the approximately $80,007,000, including capitalized interest and overhead, Carolco had spent in 1994 and 1995 to develop and begin production of Cutthroat Island. In addition, through June 1995, $18,171,000 in proceeds from the Production Loan have been provided directly to Cutthroat Productions L.P. The Production Loan is collateralized by certain pre-sales of foreign and domestic licensing rights of Cutthroat Island. Initial proceeds from the distribution of Cutthroat Island will be used exclusively to repay the Production Loan. In addition, in 1994 the Company received $7,500,000 in co-production investments from Tele-Communications, Inc. ("TCI"), LSC+ Investments Inc., a wholly owned subsidiary of Le Studio (U.S.), and RCS. These funds, together with the proceeds of the Production Loan, reduced Carolco's contribution to the negative cost of the film to approximately $47,500,000. In August 1992, Carolco entered into an agreement with the Screen Actors Guild, the Director's Guild of America, the Writers' Guild of America and the Motion Picture Industry Pension and Health Plan (collectively, the "Guilds") with respect to amounts owed to the Guilds under certain collective bargaining agreements. As of June 30, 1995, the balance due the Guilds pursuant to a promissory note made in favor of the Guilds (the "Guild Note") was $7,610,000, including accrued interest at 3-month LIBOR plus 1% per annum. The balance of the Guild Note is due in two remaining installments of $3,000,000 each, plus interest, on October 1, 1995 and October 1, 1996, with an additional $600,000 due on October 1, 1996. The Guild Note is secured by a lien on substantially all of the Company's assets, which lien is subordinated to the Existing Carolco Credit Facility. In addition to the Guild Note, the Company has on-going obligations to the Guilds, the American Federation of Musicians ("AFM") and the International Alliance of Theatrical Stage Employees ("IATSE") for amounts owed under similar collective bargaining agreements. In the first six months of 1995, the Company paid approximately $2,548,000 and $1,712,000 to the Guilds, AFM and IATSE representing residual obligations arising from cash received by the Company in the fourth quarter of 1994 and the first quarter of 1995, respectively. The Company estimates that its residual obligations for the second quarter of 1995 will be $683,000. The amount of residual obligations to be paid for future periods will be determined by the amount of cash receipts received by the Company. As long as the Guild Note is outstanding, the on-going obligations of Carolco under the collective bargaining agreements with the Guilds are secured by the same lien as the Guild Note. In connection with the production of its motion pictures, the Company entered into certain contingent compensation agreements with entities from which the Company acquired distribution rights in various motion pictures, as well as agreements with motion picture talent (actors, directors, producers, writers) and co-production investors (collectively, the "Participants") whereby the Company is obligated to pay to the Participants a share of the Company's receipts from the distribution of its released motion pictures. At March 31, 1995, the Company had recorded a liability of approximately $24,599,000 in connection with various Participants' contingent compensation arrangements. In April 1995, the Company reached settlements with certain Participants, whereby each such Participant agreed to accept a portion of the amount due at December 31, 1994 in exchange for the release of all claims against the Company for current and future participation obligations, subject to certain adjustments under certain circumstances. As a result of these settlement agreements, the Company recorded an extraordinary gain of $4,642,000 in the second quarter of 1995. Additional contingent compensation obligations due to other Participants will be recorded in future periods based on the film revenues recognized by the Company. Semi-annual interest of approximately $3,261,000 on the 11.5%/10% Reducing Rate Senior Notes due 2000 (the "New Senior Notes") and the 13%/12% Reducing Rate Senior Subordinated Notes due 1999 (the "New Senior Subordinated Notes") is due on April 15 and October 15 of each year. On May 2, 1995, the Company paid approximately $3,279,000 representing semi-annual interest due on the New Senior Notes and New Senior Subordinated Notes. Such interest payments were made prior to the end of the 30-day grace period provided in the indentures governing such issues of indebtedness. Semi-annual interest of approximately $224,000 on the 13% Senior Subordinated Notes due 1996 is due on June 1 and December 1 of each year. The Company paid such semi-annual interest on May 31, 1995. LDC, Cinepole and RCS own $10,000,000, $7,500,000 and $1,500,000 in 7% Convertible Subordinated Notes due 2006 (the "7% Notes"), respectively. Interest on the 7% Notes is payable semi-annually on June 30 and December 30. On July 28, 1995, the holders of the 7% Notes agreed to defer the payment of the June 30, 1995 interest payment to December 30, 1995. Going Concern Issues CII, with Carolco as principal guarantor, has $14,000,000 in principal amount outstanding under a credit facility with CLBN acting as agent and lender (the "Existing Carolco Credit Facility") as of the date hereof. The maturity date of the loan under the Existing Carolco Credit Facility, which is secured by substantially all of Carolco's assets, is September 29, 1995, provided certain events of default do not occur. CLBN has agreed to remit to CII all collections from accounts receivable pledged to CLBN, so long as certain defaults do not occur. No amounts are available for borrowing under the Existing Carolco Credit Facility. The Company has begun discussions with CLBN with respect to a restructuring or extension of all or a part of the Existing Carolco Credit Facility. There can be no assurances, however, that such a restructuring or extension will be successfully negotiated. In the event the entire amount of the Existing Carolco Credit Facility becomes due and payable on September 29, 1995, the Company may not have sufficient resources to pay such obligation and may be unable to continue as a going concern. As a result of its reduced production schedule, Carolco did not generate revenues from new production in 1994 and anticipates that it will continue to experience losses through the remainder of 1995. During the next 12 months, notwithstanding a restructuring or extension of the Existing Carolco Credit Facility, the Company will not have sufficient cash resources and existing financing sources to meet its operating expenses and scheduled debt service obligations, and to continue to fund its principal business activity -- the development, production and exploitation of motion pictures. Therefore, the Company is currently considering a plan which may allow it to continue to operate as a going concern. The plan being considered by the Company includes a combination of the following: the sale of certain assets; identifying and securing new equity investments and/or sources of financing; negotiating more advantageous distribution arrangements which would finance at least 100% of the development, production and distribution of new films; and restructuring the Company's outstanding obligations either outside of a Chapter 11 Bankruptcy filing, or within a Chapter 11 Bankruptcy filing (including a possible prenegotiated plan). If the Company is unable to successfully accomplish the aforementioned plan, or implement other similar strategies, the Company will be unable to continue as a going concern. The consolidated financial statements as of and for the six months ended June 30, 1995 do not include any adjustments to reflect the possible future effects on the recoverability of assets or amounts of liabilities that may result from the inability of the Company to continue as a going concern. Note C - Film Costs December 31, June 30, 1994 1995 (Unaudited) (In Thousands) Film costs are comprised of the following: Released, less amortization. . . . . . . . $ 20,925 $ 15,607 In process and development . . . . . . . . . . 68,220 103,529 ---------- --------- Total film costs . . . . . . . . . . $ 89,145 $119,136 ========= =========
Interest and production overhead capitalized to film costs during the six months ended June 30, 1995 totaled $971,000 and $1,616,000, respectively. Interest and production overhead capitalized to film costs during the six months ended June 30, 1994 totaled $612,000 and $2,590,000 respectively. Note D - Related Party Transactions LDC, Cinepole and RCS own $10,000,000, $7,500,000 and $1,500,000 in 7% Notes, respectively. Interest on the 7% Notes is payable semi-annually on June 30 and December 30. On July 28, 1995, the holders of the 7% Notes agreed to defer the payment of the June 30, 1995 interest payment to December 30, 1995. MGM: In 1993, MGM Holdings purchased from the Company $30,000,000 in aggregate principal amount of 5% Notes in exchange for $30,000,000. The $30,000,000 in principal amount of 5% Notes will mature in October 2002 and bears interest at 5% per annum, payable quarterly. Consistent with the treatment of MGM Holdings as a "principal shareholder," the Company recorded the 5% Notes in Notes and Amounts Payable, Related Parties, at its present value of $21,361,000 to yield a fair market interest rate of 10%. The discount of $8,639,000 was recorded as an increase to equity. The Company will recognize additional interest expense of approximately $960,000 per year related to the amortization of this discount. Interest accruing on or prior to the fifth anniversary of the date of issuance may be paid in cash or by payment in-kind of additional 5% Notes with a principal amount equal to the amount of such interest, or a combination thereof, at the election of the Company. Thereafter, interest shall be paid in cash. Through June 30, 1995, interest of approximately $2,299,000 has been paid in additional 5% Notes and interest of approximately $336,000 has been accrued. The 5% Notes, and any accrued and unpaid interest thereon, will automatically be converted into Common Stock of the Company on the 20th business day following the date on which Metro-Goldwyn-Mayer Inc. ("MGM") shall have received an aggregate of $100,000,000 in distribution fees under MGM's distribution agreement with the Company (the "MGM Distribution Agreement"). This conversion rate will be equal to 1,667 shares of Common Stock for each $1,000 principal amount of 5% Notes and each $1,000 of accrued and unpaid interest, subject to certain adjustments. Alternatively, the 5% Notes may be converted into Common Stock of the Company at the aforementioned conversion rate (subject to certain adjustments,) effective on the maturity date (October 2002) or upon certain defaults under the indenture governing the 5% Notes; or in the event that the Company (i) declares a dividend on its Common Stock in excess of $.05 per share, (ii) offers to redeem or repurchase Common Stock, (iii) merges or consolidates, unless the Company is the surviving corporation, or (iv) undertakes to sell all or substantially all its assets. As of June 30, 1995, approximately 53,842,000 shares of Common Stock of the Company would be issued upon conversion of the 5% Notes. In connection with the production of Cutthroat Island, CLBN, an affiliate of MGM, was one of the lead lenders providing the Production Loan. See Note B. In addition, MGM has agreed to distribute Cutthroat Island domestically and internationally pursuant to the MGM Distribution Agreement. RCS: In March 1992, CINV sold 50% ownership in one of its principal development projects to RCS in return for RCS's commitment to pay, subject to certain conditions, 50% of the costs of development and production of the project. Through March 31, 1995, RCS had advanced approximately $7,000,000, representing certain development and production commitments due pursuant to this agreement. In June 1990, the Company, through a nominee of CINV, and Le Studio Canal+ S.A. ("Le Studio"), formed a partnership (the "Carolco/Le Studio Partnership"). In January 1992, the Carolco/Le Studio Partnership entered into a co-financing arrangement with Le Studio and RCS pursuant to which CINV, Le Studio and RCS each made co-financing payments equal to one-third of the total production cost of the motion picture, Chaplin. In exchange for their co-financing payments, Le Studio and RCS are each entitled to one-third of the net receipts from Chaplin, reduced to one-sixth of the net receipts after they have each recouped their initial co-financing payments, plus interest. RCS asserted a claim of approximately $5,000,000 against Carolco alleging that Carolco guaranteed certain levels of performance and agreed to reimburse a portion of RCS's unrecouped investment in the motion picture Chaplin. Pursuant to an agreement between Carolco and RCS, in April 1995 Carolco paid RCS $4,000,000 and RCS quitclaimed to Carolco all of its ownership and other interest in the motion picture development project discussed above and also waived all claims relating to Chaplin. As a result, in the second quarter of 1995, the Company recorded a benefit of $1,065,000 relating to the Chaplin claims. This amount has been recorded as a capital contribution. Le Studio: Over a period of years, Le Studio (and its affiliates and subsidiaries) and the Company have entered into various arrangements with respect to the production, distribution and exploitation of motion pictures and other matters. Certain claims and disputes arose with respect to these arrangements. Among other things, the Company claimed that license fees for the distribution rights to certain of the Company's films in French-speaking territories, as well as sales commissions for the motion picture Stargate, were owed by Le Studio to the Company. Le Studio claimed that amounts were owed by the Company to Le Studio relating to, among other things, (i) Le Studio's participating investments in certain of the Company's motion pictures (the "Co-Production Agreements"), (ii) alleged performance guarantees with respect to the motion picture Chaplin, (iii) the obligation to reimburse legal fees incurred in connection with the 1992 financial restructuring of the Company, and (iv) the participation of Le Studio in the film project Spiderman. In May 1995, the Company and Le Studio entered into an agreement, subject to certain conditions, to settle these disputes. Pursuant to the settlement agreement, the Company recognized a benefit of $442,000, which has been included in additional paid-in capital. This benefit resulted from a reduction in participations payable of $3,702,000, representing amounts due to Le Studio pursuant to the Co-Production Agreements, offset by a reduction in trade and other accounts receivable of $3,260,000 representing amounts owed to the Company by Le Studio for, among other things, the license fees for distribution rights to certain of the Company's motion pictures and sales commissions for the motion picture Stargate. In addition, Le Studio has released the Company from any future obligations arising from the Co-Production Agreements and Le Studio has agreed to pay Carolco $600,000 in commissions to the motion picture Stargate. Other: Pursuant to a series of agreements (collectively, the "Domestic Video Output Agreement"), the Company granted to LIVE Home Video Inc. ("LHV"), a subsidiary of LIVE Entertainment Inc. ("LIVE"), a former subsidiary of the Company, domestic home video rights to the Company's feature films (except Cliffhanger and Iron Eagle III) on which principal photography commenced prior to July 31, 1995 or for which LHV has paid an advance to the Company prior to such date. Canadian home video rights were not granted to LHV in the case of several films produced by the Company. In consideration for the rights granted by the Company, LHV agreed to pay the Company certain advances for each picture. CINV entered into an agreement with an affiliate of LIVE pursuant to which LIVE's affiliates acquire home video rights in the German-speaking European markets for most of the Company's films for which principal photography has commenced or for which LHV paid an advance prior to July 31, 1995 (the "German Output Agreement"). In consideration for the rights granted by the Company, the LIVE affiliate agreed to pay CINV certain advances for each picture. In January 1995, in order to settle disputes between them with respect to the United States and Canadian video distribution rights to the film Cutthroat Island, LIVE and the Company agreed that Cutthroat Island would not be subject to the Domestic Video Output Agreement or the German Output Agreement. Pursuant to a separate agreement, LIVE obtained the video distribution rights to Cutthroat Island in the United States and Canada for a video advance to be paid by LIVE. In addition, LIVE agreed to certain amendments to the Domestic Video Output Agreement, whereby LIVE would no longer have certain rights of offset between prior films distributed pursuant to such agreement. In exchange for the aforementioned arrangements and resolution, the Company paid $3,500,000 to LIVE against accrued liabilities of approximately $5,600,000 and recognized an extraordinary gain of approximately $2,137,000. On January 1, 1995, the Company retained Daniels & Associates ("Daniels") and Jefferson Capital Group ("Jefferson") to act as the Company's non-exclusive financial advisors and agents of the Company to assist the Company in locating capital sources, to market for sale substantially all of the Company's film library rights, to make recommendations with respect to any transactions which may result and to consider a possible restructuring of the Company's capital structure. Michael E. Garstin, a principal in Daniels, is a member of Carolco's Board of Directors. In consideration of the services to be provided by Daniels and Jefferson, Carolco agreed to pay $1,800,000 payable over twelve months at the rate of $150,000 per month. Carolco is required to make a minimum of six monthly payments under the agreement, with 60% of all fees paid to Daniels and 40% paid to Jefferson. In addition, Carolco agreed to pay all reasonable out-of-pocket expenses incurred by Daniels and Jefferson up to $100,000. During the six months ended June 30, 1995, the Company paid $550,000 to Daniels and $384,000 to Jefferson. Note E - Debt Prior to March 29, 1995, Carolco owned the building housing its corporate headquarters in Los Angeles, California. In March 1988, Carolco entered into a $12,000,000 mortgage loan on its headquarters building with Equitable. The mortgage provided for a balloon payment of the outstanding principal amount (approximately $11,500,000) on March 1, 1995. The mortgage loan, which was non-recourse to Carolco, was sold by Equitable to Dolphinshire on March 29, 1995. Immediately thereafter, Carolco transferred the building to Dolphinshire in full satisfaction of the mortgage loan outstanding. At December 31, 1994, the net book value of the building and certain leasehold improvements was reduced to approximate the amount of the outstanding mortgage loan. In March 1995, upon the close of the transactions described above, the balance of the mortgage loan was offset against the carrying value of the assets. In connection with the motion picture Cutthroat Island, through June 30, 1995, the Production Loan provided motion picture financing of approximately $44,938,000, including approximately $1,736,000 in loan costs and fees. The Production Loan provides for financing of up to $60,238,000 in direct negative costs, including completion bond fees, certain contingencies and other financing related expenses. Based on current production cost estimates, the Company believes it will borrow less than the amount provided by the Production Loan. The Production Loan bears interest at LIBOR, plus 2 % per annum and is payable on the earlier of (i) March 1, 1997 or (ii) fifteen months following the initial United States theatrical release of Cutthroat Island. Initial proceeds from the distribution of Cutthroat Island will be used exclusively to repay the Production Loan. CII, with Carolco as principal guarantor, has $14,000,000 in principal amount outstanding under the Existing Carolco Credit Facility as of the date hereof. The maturity date of the loan under the Existing Carolco Credit Facility, which is secured by substantially all of Carolco's assets, is September 29, 1995, provided certain events of default do not occur. CLBN has agreed to remit to CII all collections from accounts receivable pledged to CLBN, so long as certain defaults do not occur. No amounts are available for borrowing under the Existing Carolco Credit Facility. The Company has begun discussions with CLBN with respect to a restructuring or extension of all or a part of the Existing Carolco Credit Facility. There can be no assurances, however, that such a restructuring or extension will be successfully negotiated. In the event the entire amount of the Existing Carolco Credit Facility becomes due and payable on September 29, 1995, the Company may not have sufficient resources to pay such obligation and may be unable to continue to operate as a going concern. Note F - Commitments and Contingencies As of June 30, 1995, the Company has received approximately $937,000 in deposits on canceled licensing agreements and on certain films which the Company may not produce. Historically, the Company has been able to allocate advances of this nature to other pictures being produced by the Company which contain elements similar to the original film. However as a result of reduced production commitments, the Company may be required to return these deposits. In June 1993, the Company entered into a non-exclusive consulting agreement with Anthony J. Scotti, Chairman of the Company's former subsidiary/affiliate, LIVE, and Chairman and Chief Executive Officer of All American Communications, an unaffiliated company, for the period commencing immediately after the Company's October 1993 restructuring and ending twelve months thereafter. This agreement was extended to June 30, 1995 under the same terms and conditions as the original consulting agreement. Pursuant to the agreement, Mr. Scotti consulted with management of the Company with respect to the operation of the Company's business and such other matters as may have been agreed upon between the Company and Mr. Scotti. In consideration for the services provided by Mr. Scotti, the Company paid Mr. Scotti $40,000 per month plus reimbursement of all expenses incurred by Mr. Scotti in connection with the services provided by him under the agreement. Mr. Scotti was entitled to participate in any and all of the Company's employee stock option plans during the term of the agreement, and was granted options to purchase shares of the Company's Common Stock (the terms and number of options to be negotiated in the future) at an exercise price per share equal to 1.25 times the market value of the Common Stock at the date of commencement of the consulting period. In addition, Mr. Scotti was indemnified from certain liabilities in connection with the performance of his duties under the agreement. During the six months ended June 30, 1995, the Company paid $240,000 to Mr. Scotti for his services under this agreement. This agreement was not renewed at June 30, 1995. Spiderman Litigation: On April 20, 1993, 21st-Century Film Corporation ("21st") and Menahem Golan ("Golan") filed an action against Carolco, CINV and Spiderman Productions Ltd. ("SPL") in Los Angeles County Superior Court alleging claims for breach of contract, anticipatory breach of contract and fraud relating to the motion picture project Spiderman. Plaintiffs allege that on or about May 19, 1990, 21st entered into an agreement with Carolco (the "Carolco/21st Agreement") whereby 21st transferred to Carolco rights relating to the comic book character Spiderman, and Carolco agreed, among other things, to accord credit to Golan as a producer of the motion picture to be produced by defendants. Plaintiffs further allege that on or about June 19, 1992, the parties entered into a second agreement settling certain other litigation and wherein it was agreed that Carolco and CII could assign the Carolco/21st Agreement to RCS Video Service Antilles N.V. ("RCS NV") and provided that Carolco and CII remain jointly and severally liable with RCS NV under the Carolco/21st Agreement. Plaintiffs alleged that Carolco and the other defendants breached the foregoing agreements by denying any obligation to accord producer credit to Golan, by assigning the Carolco/21st Agreement to a party other than RCS NV, and by failing to provide plaintiffs with a written document showing that Carolco and the other defendants have assumed the obligations of the Carolco/21st Agreement. Finally, plaintiffs alleged that Carolco and the other defendants entered into the foregoing agreements fraudulently in that they did not intend to perform their alleged promises at the time they entered into the agreements. Based on the foregoing allegations, plaintiffs sought compensatory damages in excess of $5,000,000, unspecified punitive damages, attorneys' fees, rescission of the Carolco/21st Agreement, a declaration as to the plaintiffs' alleged rights and a preliminary and permanent injunction preventing Carolco and the other defendants from distributing Spiderman upon completion without according producer screen credit to Golan and from issuing press releases or other information to the media without according producer credit to Golan. On October 22, 1993, the plaintiffs, following several successful demurrers by the defendants to the plaintiffs' previous complaints, filed a Third Amended Complaint against Carolco, CII, SPL and RCS NV. On November 19, 1993, all four defendants filed an answer to the Third Amended Complaint in which they agreed that the Carolco/21st Agreement had been rescinded, thereby accepting the demand and offer of rescission contained in the Third Amended Complaint. The defendants also filed a cross-complaint seeking restitution of the more than $5,000,000 that plaintiffs were paid under the rescinded agreement. The plaintiffs contend that assuming they make such restitution to Carolco and its co-defendants and co-cross-complainants, the plaintiffs would be entitled to recover the rights, or the monetary value of the rights, that were transferred under the Carolco/21st Agreement. On December 14, 1993, 21st became a debtor under Chapter 7 of the United States Bankruptcy Code as a result of petitions for involuntary bankruptcy that were filed by various creditors of 21st (other than the parties to the above-described litigation). On December 15, 1993, such bankruptcy proceedings were converted to voluntary reorganization proceedings under Chapter 11 of the Bankruptcy Code. These bankruptcy filings resulted in an automatic stay of the Los Angeles Superior Court litigation. On July 21, 1994, the Chapter 11 Trustee for 21st and the defendants in this action stipulated to relief from the automatic stay as a result of which the litigation resumed. On February 3, 1994, Carolco, CII, SPL and RCS NV filed declaratory relief actions against Viacom International Inc., its division, Viacom Enterprises, and various Doe defendants (collectively "Viacom"), and against CPT Holdings, Inc. and Columbia Pictures Home Video, Inc. jointly doing business as Columbia Tri-Star Home Video, and various Doe defendants (collectively "Columbia Tri-Star"), seeking declarations that such defendants do not have certain motion picture distribution rights in Spiderman. Both Viacom and Columbia Tri-Star contend that they acquired certain distribution rights from 21st prior to Carolco's and 21st's entering into the Carolco/21st Agreement, and allegedly continue to hold such rights. Viacom and Columbia Tri-Star each have answered Carolco's complaints against them, denying the material allegations of the complaints. In addition, on April 8, 1994, Columbia Tri-Star served a cross-complaint on Carolco and its co-plaintiffs for anticipatory repudiation of contract, specific performance, breach of the implied covenant of good faith and fair dealing, and declaratory relief. Columbia Tri-Star is seeking a judicial declaration that Carolco and its co-plaintiffs are contractually obligated to accord to Columbia Tri-Star the home video distribution rights in Spiderman that Columbia Tri-Star alleges it has, an order commanding the performance of those alleged obligations, and, alternatively, damages "in a sum not less than $5,000,000" if those alleged obligations are not performed. On May 18, 1994, Viacom filed an action in the Superior Court of the State of California for the County of Los Angeles against Carolco, CII, SPL and RCS NV alleging, among other things, that Viacom is contractually entitled to all rights to produce and exploit the motion picture Spiderman. Based on this claim, Viacom is seeking damages for breach of contract, specific performance, declaratory relief, interference with contractual relations and interference with prospective economic advantage. The Court has ordered this action consolidated with the action brought by 21st and Golan and with the actions brought by Carolco, CII, SPL and RCS NV against Viacom and Columbia Tri-Star. Carolco is unable to place a monetary value on the rights claimed by Viacom. Viacom asserts that the distribution rights in Spiderman could potentially generate distribution fees to Viacom in excess of $2,000,000. Discovery has commenced in all related cases. On March 6, 1995, the court granted the motion of Carolco, CII, SPL and RCS NV for summary adjudication on 21st's and Golan's cause of action for an injunction, thereby dismissing those parties' claims for an injunction. The time for 21st and Golan to seek review of that order by the Court of Appeal has not yet expired. MGM, an indirect subsidiary of MGM Holdings, has filed a declaratory relief action seeking declarations that certain named defendants do not have rights in Spiderman. The named defendants do not include Carolco. A hearing originally set for May 25, 1995, in the U.S. Bankruptcy Court, Central District of California, has been continued from time to time and is now scheduled for August 17, 1995, to consider the motion of the Chapter 11 Trustee for 21st to sell all of the rights and interest of 21st in the Spiderman motion picture project to a designee of CLBN for $2,000,000 plus 10% of all proceeds realized by CLBN or its designee from the sale of such rights in excess of $2,000,000. According to the Notice of Hearing filed with the Bankruptcy Court by the Chapter 11 Trustee for 21st, CLBN has a secured claim in the 21st bankruptcy estate estimated to be $18,000,000. Class Action Litigation: On January 9, 1992, a purported class action lawsuit was filed in the U.S. District Court, Central District of California, by alleged stockholders of LIVE against Carolco, LIVE and certain of Carolco's and LIVE's past and present executive officers and directors. The complaint alleges, among other things, that the defendants violated Section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder (i) by concealing the true value of certain of Carolco's and LIVE's assets, and overstating goodwill, stockholders' equity, operating profits and net income in Carolco's and LIVE's Forms 10-K for the year ended December 31, 1990, in their 1990 Annual Reports and in their Forms 10-Q for the quarters ended March 31, 1991 and June 30, 1991, and (ii) by materially understating the true extent of the write-off of goodwill in connection with the sale of Lieberman Enterprises Incorporated to Handleman Company in July 1991. In addition, the complaint alleges that certain of the defendants are liable as controlling persons under Section 20 of the Exchange Act and alleges that certain other defendants are liable for aiding and abetting the primary violations. Subsequently, two additional lawsuits were filed in the U.S. District Court, Central District of California, by alleged stockholders of LIVE against the same persons and entities who were defendants in the original action, making substantially the same allegations as were made in the first lawsuit. On March 30, 1992, these lawsuits were consolidated. Further in April 1992, an amended complaint was filed in the consolidated action, (the "Amended Complaint"). The Amended Complaint contains substantially the same allegations as the three original complaints. In addition, the Amended Complaint lengthened the alleged class period and added as defendants certain substantial shareholders (New CIBV, Pioneer LDCA, Inc., an affiliate of Pioneer, and Le Studio), directors and former directors of Carolco (Messrs. Frans Afman, Rene Bonnell, Satoshi Matsumoto, and Ryuichi Noda) and a lender to Carolco. In addition to the claims asserted in the individual actions, a claim for respondeat superior liability was added. On June 17, 1992, the U.S. District Court, Central District of California, entered an order conditionally certifying the class, subject to possible decertification after discovery is completed. On or about January 27, 1993, a second amended complaint was filed in the consolidated action expanding the allegations against certain directors, CLBN and Pioneer LDCA, Inc. On April 19, 1993, the Court granted Pioneer's Motion to Dismiss the second amended complaint as against Pioneer. In February 1992, a purported class action lawsuit was filed in the U.S. District Court, District of Delaware, by an alleged holder of Carolco's public debt, against Carolco, LIVE and certain executive officers and directors of Carolco and LIVE. The Delaware complaint alleges, among other things, that the defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by concealing the true value of certain of LIVE's assets, and overstating goodwill, stockholders' equity, operating profits and net income in LIVE's Form 10-K for the year ended December 31, 1990 and in its Forms 10-Q for the quarters ended March 31, 1991 and June 30, 1991. In April 1992, this lawsuit was transferred to the U.S. District Court, Central District of California. The proceedings are being coordinated with the consolidated action described in the preceding paragraph. On June 17, 1992, the U.S. District Court, Central District of California, entered an order conditionally certifying the class, subject to possible decertification after discovery is completed. The purported class action complaints do not contain a damage claim of any specific dollar amount. Discovery has commenced, including the taking of depositions. Cliffhanger Litigation: On October 27, 1993, Gene P. Hines and James R. Zatolokin filed an action in Los Angeles Superior Court against Michael Anthony France, Jr. ("France"), one of the writers for the motion picture Cliffhanger. The plaintiffs alleged various causes of action against France based on the theory that the plaintiffs have legal rights in some of the literary material contributed by France to the Cliffhanger screenplay. On September 9, 1994, the plaintiffs filed a first amended complaint whereby they added claims against, among other defendants, Carolco, CII (erroneously sued as its predecessor, CINV), and Cliffhanger B.V. (collectively, the "Carolco Entities"). The claims against the Carolco Entities are based upon the theory that the Carolco Entities breached certain alleged obligations to the plaintiffs under an agreement whereby the Carolco Entities settled claims by the plaintiffs arising out of the plaintiffs' contention that the Cliffhanger screenplay contained material in which the plaintiffs had legal rights. The plaintiffs alleged that under that settlement agreement, the Carolco Entities were obligated and failed to pay the plaintiffs certain contingent compensation from the proceeds of Cliffhanger, to cooperate with the plaintiffs in attempting to obtain for plaintiff Hines a screen credit on the picture, to provide the plaintiffs with certain sequel rights, to cause various assignees of the Carolco Entities to assume the obligations of the Carolco Entities, to act in the plaintiffs' best interests, not to enter into agreements with individuals having interest adverse to the plaintiffs, and to disclose to the plaintiffs the fact that the Carolco Entities entered into agreements with individuals having interests adverse to the plaintiffs. The plaintiffs do not allege any specific monetary amount by which they allegedly were damaged, except that they alleged in their cause of action against France for breach of oral contract that France should have known that his actions would damage the plaintiffs' reputation, career and future earning capacity in a sum not less that $1,000,000. The plaintiffs have not alleged any specific amount of damage against the Carolco Entities. However, the Carolco Entities have agreed to indemnify France in connection with any judgement that might be entered against him in the action. On December 9, 1994, the trial court sustained without leave to amend the demurrers of France and the Carolco Entities to all of the plaintiffs' causes of action. On January 19, 1995, the court denied plaintiffs' motion for reconsideration of that order. The plaintiffs have not appealed from these rulings but their time to do so has not yet expired. On December 29, 1994, the plaintiffs filed an action in the United States District Court for the Central District of California that is virtually identical to their state court action. The named defendants are identical, as are the claims alleged, with the exception that the federal action includes a federal copyright infringement claim and an accompanying accounting claim, and does not include a purported common law copyright infringement claim. The complaint in that case was served on Carolco and France on April 22, 1995. The complaint was served on Cliffhanger B.V. on or about June 4, 1995. On July 31, 1995, the Carolco Entities and France filed a motion to dismiss all claims set forth in the complaint other than the contract claims. The motion is scheduled to be heard by the Court on September 11, 1995. An early meeting of counsel was held on August 11, 1995, at which time the parties engaged in a preliminary exchange of documents and discussed a tentative discovery schedule. A trial date will be set by the court on or about August 28, 1995. TriStar Arbitration: On March 22, 1995 Carolco delivered a demand to TriStar Pictures, Inc. ("TriStar") under the Commercial Arbitration Rules of the American Arbitration Association for arbitration of various claims by Carolco against TriStar arising out of TriStar's distribution of certain of Carolco's motion pictures in various territories and media. The motion pictures include Basic Instinct, Cliffhanger, Terminator 2: Judgment Day, Total Recall and Universal Soldier and certain other titles. In general, Carolco has claimed that TriStar has not paid all of the amounts due to Carolco pursuant to those agreements under which TriStar distributed these films theatrically in the United States and Canada and in various media in certain foreign territories. Because TriStar has not permitted Carolco's auditors to complete the audit of TriStar's books and records as they relate to the Carolco films distributed by TriStar, Carolco is not able to specify the amount of these claims. On April 17, 1995, TriStar filed with the American Arbitration Association its Answering Statement and Counterclaim which, in general, denied all of Carolco's claims and made certain counterclaims against Carolco. In its counterclaim, TriStar alleged that by entering into a new foreign distribution agreement with MGM, Carolco breached a May 1990 agreement between Carolco and TriStar under which Carolco granted to TriStar a right of first negotiation/first refusal for Carolco's future films in certain territories. TriStar's counterclaim seeks substantial lost profits, which are to be proved at the arbitration proceeding, or in the alternative an order (i) directing that Carolco specifically perform its obligations under the May 1990 Agreement, (ii) enjoining any performance by Carolco of the purported MGM Agreement and (iii) imposing a constructive trust upon and requiring Carolco to account for and pay to TriStar the amounts by which Carolco and MGM have been unjustly enriched by virtue of Carolco's breach of the May 1990 agreement. Carolco believes that TriStar's counterclaim is without merit. Discovery has commenced in the action, but the date for the formal arbitration has not been set. Management and counsel to the Company are unable to predict the ultimate outcome of these actions at this time. However, the Company and the other defendants believe that these lawsuits are without merit and are defending them vigorously. Accordingly, no provision for any liability which may result has been made in the Company's consolidated financial statements. In the opinion of management, these actions, when finally concluded and determined, will not have a material adverse effect upon the Company's financial position or results of operations. Tax Matters: The Company's tax position for prior taxable years may be adversely affected by an audit presently being conducted by the Internal Revenue Service ("IRS") for the Company's 1988 through 1993 federal income tax returns. In addition, the California Franchise Tax Board ("FTB") is conducting an examination of the Company's 1988 and 1989 State income tax returns. The Company has received notices from the IRS regarding proposed adjustments ("Proposed Adjustments") to the Company's income tax returns for the 1988, 1989 and 1990 taxable years. As of June 30, 1995, the Company has responded or is in the process of preparing responses to all of the Proposed Adjustments by supplying the IRS with additional facts and technical analyses which will be considered by the IRS before it makes a decision whether to propose to assess deficiencies attributable to the Proposed Adjustments. It is anticipated that the IRS will issue additional proposed adjustments. Several of the Proposed Adjustments would disallow deductions or increase income for certain of the Company's taxable years. Many of these Proposed Adjustments affect the timing of income and deductions, i.e., the Company would be required to include income in an earlier taxable year than originally reported or take deductions in a later taxable year than originally reported. Other Proposed Adjustments would reallocate various items of income and deductions between Carolco and CINV (which the Company believes is not subject to federal income taxation), and would include in Carolco's income certain deemed dividends from CINV (the "Carolco/CINV Adjustments"). One of the Proposed Adjustments would subject CINV's income to United States federal income taxation on the basis that Carolco and CINV were engaged in a partnership for income tax purposes and CINV's share of the "partnership" income was foreign source income that was effectively connected with a trade or business conducted in the United States and therefore subject to United States federal income taxation. If the IRS were successful in asserting this theory, most of the Proposed Adjustments relating to the Carolco/CINV Adjustments would be duplicative, and therefore could not be asserted. The Company believes that a number of the Proposed Adjustments are without merit. Because the examination is at an early stage, and because many of the issues dealt with in the Proposed Adjustments are highly complex and unresolved under the current state of the law, the Company cannot predict with any reasonable degree of accuracy the actual tax liabilities that may result from the IRS and FTB examinations. The Company believes its current and non-current deferred income tax liability as of June 30, 1995 is adequate to cover any potential tax liability from such examinations. However, the ultimate tax liability may be substantially higher or lower. Note G - Stockholders' Deficiency In October 1993, Pioneer, Cinepole and MGM Holdings purchased from the Company 40,000, 12,500 and 30,000 shares, respectively, of Series A Convertible Preferred Stock ("New Preferred"), in exchange for cash payments of $40,000,000, $12,500,000 and $30,000,000, respectively. The New Preferred bears an annual dividend rate of 5%. Cumulative dividends are payable when and if declared by the Company's Board of Directors, either (a) out of any funds legally available therefore, or (b) for the first five years after issuance, to the extent legally available therefore, in additional shares of New Preferred equal to 1.25% multiplied by the liquidation preference of the New Preferred on the first day of the next succeeding quarterly dividend period. Through June 30, 1995, approximately $6,158,000 in dividends had been accrued, thereby increasing the aggregate liquidation preference of the New Preferred to $88,658,000. In addition, dividends of $1,106,000 payable on July 1, 1995 were accrued. However, since the Company did not have sufficient "surplus" as defined in the provisions of the General Corporation Law of the State of Delaware, the Company was unable to pay such dividends. Each share of New Preferred is convertible at the option of the holder into Common Stock of the Company at $.60 per share. As of June 30, 1995, 147,763,000 shares of Common Stock of the Company would be issuable upon conversion of the New Preferred. Holders of the New Preferred are entitled to the same voting rights as such holders would be entitled to if they had converted their New Preferred to Common Stock. The holders of the New Preferred are also be entitled to vote as a class on certain matters. During the three months ended June 30, 1995, additional paid-in capital was increased by $1,507,000. This amount consists of $1,065,000 relating to a settlement agreement with RCS and $442,000 relating to a settlement agreement with Le Studio. See Note D for further discussions of these settlement agreements. Note H - Other Income Other income in 1994 includes revenues from the operations of the Company's film studio in North Carolina ("Carolco Studios"), interest income, rental income and a gain of $1,275,000 recognized upon the sale of the Company's aircraft. Other income in 1994 also includes producers fees of approximately $500,000 related to the motion picture Stargate, paid to the Company pursuant to an agreement entered into with Hexagon Films (U.S.), an indirect, wholly-owned subsidiary of Le Studio. Other income for the first six months of 1995 includes interest income, rental income and producers fees related to the motion picture Last of the Dogmen, paid to the Company pursuant to an agreement entered into with Last of the Dogmen, Inc. Note I - Other Expenses Other expenses for the three and six months ended June 30, 1995 consist primarily of costs incurred by the Company in connection with the proposed plan for a financial restructuring discussed in Note B, including fees paid to financial advisors, legal fees, severance payments and other costs. Other expenses for the three and six months ended June 30, 1994 consist of costs incurred by the Company in connection with the financial restructuring that was consummated in October 1993, offset by the reversal of certain expenses accrued in 1993 in excess of the actual expenses. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Carolco is an entertainment company which finances, produces and leases motion pictures for exhibition in domestic and foreign theatrical markets and for later worldwide release in other media including home video and pay and free television. In 1994 and through June 30, 1995, Carolco had no theatrical releases. Feature film revenues are derived primarily from the distribution of feature films in both domestic and foreign markets. The Company recognizes minimum guaranteed amounts from theatrical exhibition and revenues from home video and pay television license agreements when the license period begins for each motion picture and such motion pictures are available pursuant to the terms of the license agreement. Revenues from theatrical exhibition in excess of minimum guaranteed amounts ("overages") are recognized as they are reported by the distributor. Results of Operation Six Months Ended June 30, 1994 as Compared to Six Months Ended June 30, 1995 Feature film revenues decreased from $30,058,000 for the six months ended June 30, 1994 to $13,065,000 for the six months ended June 30, 1995. This represents a decrease of $16,993,000, or approximately 56.5%. The Company had no theatrical releases during the first six months of 1995 or the first six months of 1994. Therefore, revenues for both periods principally represent license fees from theatrical overages and exploitation in secondary markets (i.e. pay television, video, free television, etc.) of films released theatrically in prior years. Feature film revenues for the six months ended June 30, 1995 include approximately $1,457,000 in foreign theatrical and video overages related to the 1992 theatrical release of Basic Instinct; approximately $1,750,000 from the foreign free television availability of Chaplin released theatrically in 1992; approximately $2,327,000 in foreign theatrical and video overages related to the 1991 theatrical release of Terminator 2: Judgment Day; and approximately $2,003,000 in foreign theatrical and video overages related to the 1992 theatrical release of Universal Soldier. Feature film revenues for the six months ended June 30, 1994 include approximately $8,250,000 from the domestic network television availability and $5,233,000 from foreign theatrical and video overages of Terminator 2: Judgment Day; $2,984,000 from the domestic syndication television availability of Rambo III, released theatrically in 1988; $1,274,000 from the domestic and foreign pay television availability of Chaplin; $901,000 from the foreign free television availability of Total Recall, released theatrically in 1990; and $512,000 and $930,000, respectively, from the foreign pay television availability and foreign theatrical overages related to the motion picture Universal Soldier. Amortization of film costs, residuals and participations decreased by $31,159,000, or 74.9%, from $41,628,000 for the six months ended June 30, 1994 to $10,469,000 for the comparable period in 1995. Amortization of film costs, residuals and participations, as a percentage of the Company's feature film revenues, decreased to 80.1% for the six months ended June 30, 1995 from 138.5% for the six months ended June 30, 1994. This decrease is due principally to the fact that in 1994 the Company recorded additional amortization of film costs of $13,000,000 related to the abandonment of the motion picture project Crusade. In 1995, the Company recorded additional amortization of $2,181,000 as a result of the abandonment of certain development projects. Selling general and administrative ("SG&A") expenses (which caption also includes production overhead costs), before capitalization of production overhead to film costs, decreased by $2,138,000 during the six months ended June 30, 1995 as compared to the six months ended June 30, 1994. In 1995, the Company capitalized approximately $1,616,000 of production overhead to film costs and in 1994, the Company capitalized $2,590,000 of production overhead to film costs. The amounts for 1995 represent a reduction in SG&A expenses of $3,112,000 as a result of reductions in the Company's work force and the downsizing of the operations of the Company. Interest expense decreased by $1,140,000, or 16.4%, from $6,974,000 during the six months ended June 30, 1994 to $5,834,000 during the six months ended June 30, 1995. This decrease is the result of lower debt levels in 1995, combined with the capitalization of $971,000 of interest expense to film costs in the six months ended June 30, 1995, as compared to $612,000 in the six months ended June 30, 1994. Other expenses for the six months ended June 30, 1995 consist primarily of costs incurred by the Company in connection with the proposed plan for a financial restructuring discussed in Note B, including fees paid to financial advisors, legal fees, severance payments and other costs. Other expenses for the six months ended June 30, 1994 consist of costs incurred by the Company in connection with the financial restructuring that was consummated in October 1993, offset by the reversal of certain expenses accrued in 1993 in excess of the actual expenses. On February 3, 1994, the Company sold its aircraft for $1,925,000 and the remaining loan balance of $900,000, including accrued interest, was paid in full. The Company recognized a gain, which is included in other income, of $1,275,000 as a result of the sale of the aircraft. The Company incurred a consolidated net loss for the six months ended June 30, 1994 of $23,222,000. The Company incurred a consolidated net loss for the six months ended June 30, 1995 of $5,649,000. This amount includes an extraordinary gain of $4,642,000 relating to settlement agreements entered into with certain Participants (see Note B) and $2,137,000 relating to certain agreements entered into with LIVE (see Note D). At June 30, 1995, the Company had a deficiency in assets of $68,662,000. Three Months Ended June 30, 1994 as Compared to Three Months Ended June 30,1995 Feature film revenues decreased from $9,779,000 for the three months ended June 30, 1994 to $7,287,000 for the three months ended June 30, 1995. This represents a decrease of $2,492,000, or approximately 25.5%. The Company had no theatrical releases during the three months ended June 30, 1995 or 1994. Therefore, revenues for both periods principally represent license fees from theatrical overages and exploitation in secondary markets (i.e. pay television, video, free television, etc.) of films released theatrically in prior years. Feature film revenues for the three months ended June 30, 1995 include approximately $366,000 in foreign theatrical and video overages related to the 1992 theatrical release of Basic Instinct; approximately $1,750,000 from the foreign free television availability of Chaplin; and approximately $1,605,000 in foreign theatrical and video overages related to Terminator 2: Judgment Day. Feature film revenues for the three months ended June 30, 1994 include approximately $5,233,000 from foreign theatrical and video overages of Terminator 2: Judgment Day; $607,000 from the domestic and foreign pay television availability of Chaplin; $726,000 from the foreign free television availability of Total Recall, released theatrically in 1990; and $736,000 from the foreign pay television availability and foreign theatrical overages related to the motion picture Universal Soldier. Amortization of film costs, residuals and participations decreased by $20,555,000, or 80.3%, from $25,582,000 for the three months ended June 30, 1994 to $5,027,000 for the comparable period in 1995. Amortization of film costs, residuals and participations, as a percentage of the Company's feature film revenues, decreased to 69.0% for the three months ended June 30, 1995 from 261.6% for the three months ended June 30, 1994. This decrease is due principally to the fact that in 1994 the Company recorded additional amortization of film costs of $13,000,000 related to the abandonment of the motion picture project Crusade. In 1995, the Company recorded additional amortization of $889,000 as a result of the abandonment of certain development projects. Selling general and administrative ("SG&A") expenses (which caption also includes production overhead costs), before capitalization of production overhead to film costs, decreased by $854,000 during the three months ended June 30, 1995 as compared to the three months ended June 30, 1994. In 1995, the Company capitalized approximately $704,000 of production overhead to film costs and in 1994, the Company capitalized $1,757,000 of production overhead to film costs. The amounts for 1995 represent a reduction in SG&A expenses of $1,907,000 as a result of reductions in the Company's work force and the downsizing of the operations of the Company. Other expenses for the three months ended June 30, 1995 consist primarily of costs incurred by the Company in connection with the proposed plan for a financial restructuring discussed in Note B, including fees paid to financial advisors, legal fees, severance payments and other costs. Other expenses for the three months ended June 30, 1994 consist of costs incurred by the Company in connection with the financial restructuring that was consummated in October 1993, offset by the reversal of certain expenses accrued in 1993 in excess of the actual expenses. Interest expense decreased by $365,000, or 12.2%, from $2,993,000 during the three months ended June 30, 1994 to $2,628,000 during the three months ended June 30, 1995. This decrease is the result of lower debt levels in 1995, combined with the capitalization of $674,000 of interest expense to film costs in the three months ended June 30, 1995, as compared to $456,000 in the three months ended June 30, 1994. The Company incurred a consolidated net loss for the three months ended June 30, 1994 of $21,191,000. The Company incurred a consolidated net loss for the three months ended June 30, 1995 of $80,000. This amount includes an extraordinary gain of $4,642,000 relating to settlement agreements entered into with certain Participants (see Note B). At June 30, 1995, the Company had a deficiency in assets of $68,662,000. Liquidity and Capital Resources Carolco currently has one motion picture in production: Cutthroat Island starring Geena Davis and Matthew Modine and directed by Renny Harlin. Cutthroat Island completed principal photography in March 1995 and is scheduled to be completed and available for release in the fourth quarter of 1995. The direct negative cost of Cutthroat Island is expected to be in excess of $80,000,000. Carolco has completed certain financing arrangements in connection with Cutthroat Island. On February 6, 1995, Cutthroat Productions L.P. satisfied the conditions necessary for it to draw funds under the Production Loan. The Production Loan provides for financing of up to $60,238,000 in direct negative costs, including completion bond fees, certain contingencies and other financing related expenses. Based on current production cost estimates, the Company believes it will borrow less than the amount provided by the Production Loan. In February and March 1995, Carolco received approximately $25,031,000 in proceeds from the Production Loan, representing reimbursement of a portion of the approximately $80,007,000, including capitalized interest and overhead, Carolco had spent in 1994 and 1995 to develop and begin production of Cutthroat Island. In addition, through June 1995, $18,171,000 in proceeds from the Production Loan have been provided directly to Cutthroat Productions L.P. The Production Loan is collateralized by certain pre-sales of foreign and domestic licensing rights of Cutthroat Island. Initial proceeds from the distribution of Cutthroat Island will be used exclusively to repay the Production Loan. In addition, in 1994 the Company received $7,500,000 in co-production investments from TCI, LSC+ Investments Inc., and RCS. These funds, together with the proceeds of the Production Loan, reduced Carolco's contribution to the negative cost of the film to approximately $47,500,000. In August 1992, Carolco entered into an agreement with the Guilds with respect to amounts owed to the Guilds under certain collective bargaining agreements. As of June 30, 1995, the balance due the Guilds pursuant to the Guild Note was $7,610,000, including accrued interest at 3-month LIBOR plus 1% per annum. The balance of the Guild Note is due in two remaining installments of $3,000,000 each, plus interest, on October 1, 1995 and October 1, 1996, with an additional $600,000 due on October 1, 1996. The Guild Note is secured by a lien on substantially all of the Company's assets, which lien is subordinated to the Existing Carolco Credit Facility. In addition to the Guild Note, the Company has on-going obligations to the Guilds, the AFM and IATSE for amounts owed under similar collective bargaining agreements. In the first six months of 1995, the Company paid approximately $2,548,000 and $1,712,000 to the Guilds, AFM and IATSE representing residual obligations arising from cash received by the Company in the fourth quarter of 1994 and the first quarter of 1995, respectively. The Company estimates that its residual obligations for the second quarter of 1995 will be $683,000. The amount of residual obligations to be paid for future periods will be determined by the amount of cash receipts received by the Company. As long as the Guild Note is outstanding, the on-going obligations of Carolco under collective bargaining agreements with the Guilds are secured by the same lien as the Guild Note. In connection with the production of its motion pictures, the Company entered into certain contingent compensation agreements with Participants whereby the Company is obligated to pay to the Participants a share of the Company's receipts from the distribution of its released motion pictures. At March 31, 1995, the Company had recorded a liability of approximately $24,599,000 in connection with various Participants' contingent compensation arrangements. In April 1995, the Company reached settlements with certain Participants, whereby each such Participant agreed to accept a portion of the amount due at December 31, 1994 in exchange for the release of all claims against the Company for current and future participation obligations, subject to certain adjustments under certain circumstances. As a result of these settlement agreements, the Company recorded an extraordinary gain of $4,642,000 in the second quarter of 1995. Additional contingent compensation obligations due to other Participants will be recorded in future periods based on the film revenues recognized by the Company. Semi-annual interest of approximately $3,261,000 on the New Senior Notes and the New Senior Subordinated Notes is due on April 15 and October 15 of each year. On May 2, 1995, the Company paid approximately $3,279,000 representing the semi-annual interest due on the New Senior Notes and New Senior Subordinated Notes. Such interest payments were made prior to the end of the 30-day grace period provided in the indentures governing such issues of indebtedness. Semi-annual interest of approximately $224,000 on the 13% Notes is due on June 1 and December 1 of each year. The Company paid such semi-annual interest on May 31, 1995. LDC, Cinepole and RCS own $10,000,000, $7,500,000 and $1,500,000 in 7% Notes, respectively. Interest on the 7% Notes is payable semi-annually on June 30 and December 30. On July 28, 1995, the holders of the 7% Notes agreed to defer the payment of the June 30, 1995 interest payment to December 30, 1995. Pursuant to certain distribution agreements with TriStar, certain payments were due to the Company or its affiliates from TriStar at December 31, 1994. In February and March of 1995, TriStar paid approximately $14,147,000 pursuant to these distribution agreements. See Note F regarding pending litigation with TriStar. A portion of the amounts paid by TriStar related to the distribution of Cliffhanger, which was produced through a less-than-50%-owned joint venture with Pioneer, Cinepole and RCS. Pursuant to the terms of the agreements between the Company, Pioneer, Cinepole and RCS, the Company is entitled to receive a portion of the funds related to the distribution of Cliffhanger. As of August 15, 1995, the Company had received $2,415,000 pursuant to these agreements. Pursuant to the Domestic Video Output Agreement, the Company granted to LHV, domestic home video rights to the Company's feature films (except Cliffhanger and Iron Eagle III) on which principal photography commenced prior to July 31, 1995 or for which LHV has paid an advance to the Company prior to such date. Canadian home video rights were not granted to LHV in the case of several films produced by the Company. In consideration for the rights granted by the Company, LHV agreed to pay the Company certain advances for each picture. CINV entered into the German Output Agreement pursuant to which LIVE's affiliates acquire home video rights in the German-speaking European markets for most of the Company's films for which principal photography has commenced or for which LHV paid an advance prior to July 31, 1995. In consideration for the rights granted by the Company, the LIVE affiliate agreed to pay CINV certain advances for each picture. In January 1995, in order to settle disputes between them with respect to the United States and Canadian video distribution rights to the film Cutthroat Island, LIVE and the Company agreed that Cutthroat Island would not be subject to the Domestic Video Output Agreement or the German Output Agreement. Pursuant to a separate agreement, LIVE obtained the video distribution rights to Cutthroat Island in the United States and Canada for a video advance to be paid by LIVE. In addition, LIVE agreed to certain amendments to the Domestic Video Output Agreement, whereby LIVE would no longer have certain rights of offset between prior films distributed pursuant to such agreement. In exchange for the aforementioned arrangements and resolution, the Company paid $3,500,000 to LIVE against accrued liabilities of approximately $5,600,000 and recognized an extraordinary gain of approximately $2,137,000. Going Concern Issues CII, with Carolco as principal guarantor, has $14,000,000 in principal amount outstanding under the Existing Carolco Credit Facility as of the date hereof. The maturity date of the loan under the Existing Carolco Credit Facility, which is secured by substantially all of Carolco's assets, is September 29, 1995, provided certain events of default do not occur. CLBN has agreed to remit to CII all collections from accounts receivable pledged to CLBN, so long as certain defaults do not occur. No amounts are available for borrowing under the Existing Carolco Credit Facility. The Company has begun discussions with CLBN with respect to a restructuring or extension of all or a part of the Existing Carolco Credit Facility. There can be no assurances, however, that such a restructuring or extension will be successfully negotiated. In the event the entire amount of the Existing Carolco Credit Facility becomes due and payable on September 29, 1995, the Company may not have sufficient resources to pay such obligation and may be unable to continue as a going concern. As a result of its reduced production schedule, Carolco did not generate revenues from new production in 1994 and anticipates that it will continue to experience losses through the remainder of 1995. During the next 12 months, notwithstanding a restructuring or extension of the Existing Carolco Credit Facility, the Company will not have sufficient cash resources and existing financing sources to meet its operating expenses and scheduled debt service obligations, and to continue to fund its principal business activity -- the development, production and exploitation of motion pictures. Therefore, the Company is currently considering a plan which may allow it to continue to operate as a going concern. The plan being considered by the Company includes a combination of the following: the sale of certain assets; identifying and securing new equity investments and/or sources of financing; negotiating more advantageous distribution arrangements which would finance at least 100% of the development, production and distribution of new films; and restructuring the Company's outstanding obligations either outside of a Chapter 11 Bankruptcy filing, or within a Chapter 11 Bankruptcy filing (including a possible prenegotiated plan). If the Company is unable to successfully accomplish the aforementioned plan, or implement other similar strategies, the Company will be unable to continue as a going concern. The consolidated financial statements as of and for the six months ended June 30, 1995 do not include any adjustments to reflect the possible future effects on the recoverability of assets or amounts of liabilities that may result from the inability of the Company to continue as a going concern. CAROLCO PICTURES INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. Legal Proceedings Reference is made to PART I - FINANCIAL INFORMATION, Item 1. Financial Statements, Note F - Commitments and Contingencies, which is incorporated herein by reference. Item 3. Defaults Upon Senior Securities Because the Company did not have sufficient "surplus" as defined in and computed in accordance with the provisions of the General Corporation Law of the State of Delaware, the Company was unable to pay dividends in the amount of $818,000, $1,042,000, $1,061,000, $1,061,000, $1,081,000, and $1,095,000 due January 1, 1994, April 1, 1994, July 1, 1994, October 1, 1994, January 1, 1995 and April 1, 1995, respectively, on its Series A Convertible Preferred Stock. As a result, as of June 30, 1995, approximately $6,158,000 in unpaid dividends had been added to the liquidation preference of the Series A Convertible Preferred Stock. In addition, at June 30, 1995, $1,106,000 in accrued dividends payable had been recorded. On July 1, 1995, these unpaid dividends were also added to the liquidation preference of the Series A Convertible Preferred Stock. Item 4. Submission of Matters to a Vote of Security Holders LDC, Cinepole and RCS own $10,000,000, $7,500,000 and $1,500,000 in 7% Notes, respectively. Interest on the 7% Notes is payable semi-annually on June 30 and December 30. On July 28, 1995, each of the holders of the 7% Notes agreed to defer the payment of the June 30, 1995 interest payment to December 30, 1995. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The Exhibits listed below are filed as part of this Report. Sequentially Exhibit No. Description of Exhibit Numbered Page 4.1 Supplemental Indenture and Waiver dated as of July 28, 1995 between Carolco Pictures Inc. and American Stock Transfer & Trust Company 10.1 Memorandum of Le Studio Canal+/ _____ Carolco Settlement Agreement as of May 31, 1995 CAROLCO PICTURES INC. AND SUBSIDIARIES PART II - OTHER INFORMATION (Continued) 11.1 Computation of Loss per ___ Common Share 27 Financial Data Schedule ___ (b) No Reports on Form 8-K were filed during the quarter ended June 30, 1995. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAROLCO PICTURES INC. Registrant Date: August 15, 1995 /s/ Karen A. Taylor Karen A. Taylor, Senior Vice President and Acting Chief Financial Officer
EX-11.1 2 EXHIBIT EXHIBIT 11.1 CAROLCO PICTURES INC. COMPUTATION OF EARNINGS PER COMMON SHARE Three Months Ended June 30, Six Months Ended June 30, 1994 1995 1994 1995 -------------------------- ------------------------ Weighted average shares outstanding 140,015,109 140,015,109 140,015,109 140,015,109 Less Treasury shares (2,327,381) (2,327,381) (2,327,381) (2,327,381) ------------ ------------ ------------ ------------ Total 137,687,728 137,687,728 137,687,728 137,687,728 ============ ============ ============ ============ Loss before extraordinary item ($21,191,000) ($4,722,000) ($23,222,000) ($12,428,000) Preferred Dividends (1,061,000) (1,106,000) (2,106,000) (2,201,000) ------------ ------------ ------------- ------------ Loss before extraordinary item attributable to common shares ($22,252,000) ($5,828,000) ($25,328,000) ($14,629,000) ============= ============ ============= ============ Loss before extraordinary item per common share $(0.16) ($0.04) ($0.18) ($0.11) ============= ============ ============= ============ Income from Extraordinary Gain $0 $4,642,000 $0 $6,779,000 ============= ============ ============= ============ Income from Extraordinary Gain per common share $0.00 $0.03 $0.00 $0.05 ============ ============ ============= ============ Net loss ($21,191,000) ($80,000) ($23,222,000 ($5,649,000) Preferred Dividends (1,061,000) (1,106,000) (2,106,000) (2,201,000) ------------- ------------ ------------- ------------ Net loss attributable to common shares ($22,252,000) ($1,186,000) ($25,328,000) ($7,850,000) ============= ============ ============= ============ Net loss per common share ($0.16) ($0.01) ($0.18) ($0.06) ============= ============ ============= ============ Page 32
EX-27 3 ART.5 FDS FOR 2ND QUARTER 10-Q WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1000 6-MOS JAN-01-1995 JUN-30-1995 15,355 0 6,804 (1,390) 119,136 0 15,223 (10,167) 152,714 0 124,946 1,400 0 90 (70,152) 152,714 13,065 14,765 10,469 10,469 10,107 0 5,834 (11,645) 783 (12,428) 0 6,779 0 (5,649) (.06) (.06) EX-10.1 4 MEMORANDUM OF LE STUDIO CANAL+/ CAROLCO SETTLEMENT AGREEMENT This memorandum of agreement sets out the essential terms of the settlement of various claims and disputes between Carolco Pictures Inc. and its subsidiaries and affiliates ("Carolco" or "the Carolco Group"), and Le Studio Canal+ and its subsidiaries and affiliates ("LSC+" or "Le Studio Group"). PRELIMINARY STATEMENT A. Members of the Le Studio Group and members of the Carolco Group have over a period of years entered into various contractual and other legal relationships with respect to the production, distribution and exploitation of motion pictures and other matters, and certain claims and disputes have arisen with respect thereto which the parties wish to resolve. B. The Carolco Group claims that amounts aggregating approximately USD 6,640,000 are owed as of the date hereof to members of the Carolco Group by members of the Le Studio Group arising out of such relationships, including: (i) license fees owed to Carolco/Le Studio Canal+ V.O.F. for distribution rights in French-speaking territories to the film "Chaplin"; (ii) license fees owed for distribution rights in French-speaking territories to the films "Career Opportunities", "Opportunity Knocks", "Dark Wind" and "Peltier"; (iii) license fees under Atalanta Film International B.V.'s Multiple Pictures Packages No. 2 and No. 3 with respect to certain disputed films thereunder; (iv) sales commissions due on the film "Stargate", (v) reimbursement of sales costs for the film "Murder in the First" and certain matters relating to the foregoing. In addition the Carolco Group estimates that it will be owed in the future further amounts in respect of sales commissions on "Stargate". The foregoing claims and estimated amounts are collectively referred to herein as the "Carolco Claims". Le Studio Group disputes some or all of the Carolco Claims. C. The Le Studio Group claims that amounts aggregating approximately USD 12, 618,000 are owed as of the date hereof to members of the Le Studio Group by members of the Carolco Group arising out of such relationships, including (i) the Le Studio Group's share of revenues generated from participation interests in the films "Terminator 2", "Basic Instinct", "Chaplin" and "Dark Wind"; (ii) certain revenue and shortfall guarantees provided by members of the Carolco Group with respect to the films "Chaplin" and "Dark Wind"; (iii) the obligation to reimburse legal fees incurred in connection with the 1992 financial restructuring of Carolco Pictures Inc. ("CPI"), (iv) the participation of the Le Studio Group in respect of the film project "Spiderman, " and certain matters relating to the foregoing. In addition Le Studio Group estimates that it will be owed in the future further amounts in respect of participation interests in the films "Terminator 2", "Basic Instinct", "Chaplin" and "Dark Wind". The foregoing claims and estimated amounts are collectively referred to herein as the "Le Studio Claims". The Carolco Group disputes some or all of Le Studio Claims. D. In the interest of resolving amicably and without litigation the foregoing claims and disputes the parties wish to reach a settlement on the terms and conditions set forth below. 1. Agreements by Carolco Subject to Sections 4 and 5 below, in consideration of the agreements by Le Studio Group set forth in this agreement, the Carolco Group agrees as follows: 1.1 The Carolco Group approves the license by LSC+ of "Basic Instinct" to TF-1. LSC+ will be entitled to retain 100% of the first USD 700,000 otherwise payable to Carolco under the license agreement known as "Atalanta Multiple-Picture Package No. 3" in respect of any "Basic Instinct" revenues from any source. Without limiting the extent of Carolco's obligations to pay applicable residuals in respect of such film, Carolco confirms that it will pay applicable residuals relating to such USD 700,000. 1.2 Carolco acknowledges that the agreements between Carolco and LSC+ regarding French TV distribution rights as to the films listed below are terminated and of no force and effect, and that neither party has any obligation or liability to the other of any kind thereunder, because the films were not released theatrically in France as required under the applicable agreements. Without limiting the generality of the foregoing, LSC+ has no obligation to pay any license fees as to these "cancelled films" under the applicable agreements. The films are: - Confidence - Long Walk Home - Queen's Logic - Rooftops - Defenseless - Collision Course - Blood Moon - Two Fisted Tales 1.3 Carolco agrees that LSC+ will have no obligation to pay any minimum guarantees/advance rentals remaining unpaid pursuant to the relevant agreements on "Chaplin", "Dark Wind", "Opportunity Knocks", "Career Opportunities", and "Peltier", but all such minimum guarantees/advance rentals will be deemed to have been fully paid for purposes of recoupment by LSC+ under the relevant license agreements. Carolco releases LSC+ from all claims arising prior to the date hereof with respect to such films. 1.4 Carolco releases LSC+ from all claims for sales commissions on "Stargate", whether arising before or after the date hereof in excess of USD 600,000, which amount shall be payable by LSC+ as provided in Section 5. 1.5 Carolco releases any claim for any past or future commissions, for reimbursement of expenses or for any other matter relating to "Murder in the First". 1.6 Carolco agrees that LSC+ shall have no further obligations with respect to the arrangements set forth in the TCI/Le Studio Canal+/Carolco Film Fund facility for films produced after "Cutthroat Island". 2. Agreement by LSC+ Subject to Sections 4 and 5 below in consideration of the agreements by Carolco set forth in this agreement LSC+ agrees as follows: 2.1 Carolco will have no further obligations to LSC+ under any output/right of first refusal agreement or co-production agreement or otherwise with respect to any Carolco films produced after "Cutthroat Island". LSC+ reconfirms that it has agreed that "Showgirls" and "Lolita" were not subject to any such agreements. 2.2 The Carolco Group will have no obligations under the revenue and shortfall guarantees which LSC+ claims were provided by members of the Carolco Group with respect to the films "Chaplin" and "Dark Wind" and which LSC+ claims are currently in effect. 2.3 The Carolco Group has no obligation to reimburse LSC+ for legal fees incurred in connection with the various financial restructurings of Carolco. 2.4 The Carolco Group has no obligations (including interest through May 28, 1995) in respect of LSC+ participation in "Spiderman". LSC+ hereby releases the security interest in "Spiderman" securing such participation and will transfer to Carolco on a quitclaim basis any and all right, title and interest LSC+ has or may have relating to "Spiderman". 2.5 LSC+ releases Carolco from all obligations to pay to LSC+ its share of revenues generated from LSC+'s its participation interests in "Terminator 2," "Basic Instinct", "Chaplin" and "Dark Wind". LSC+ transfers to Carolco on a quitclaim basis all of LSC+'s right, title and interest in these films provided that LSC+ retains its rights in such films under the existing lease agreements in respect thereof. LSC+ will release all security interests relating to such pictures in the manner provided in Section 4.2. 2.6 The Carolco Group has no obligation or liability to LSC+ of any kind under the agreements referred to in Section 1.2. or in respect of "Murder in the First". 3. Existing Agreements Except as specifically provided for herein all agreements between Le Studio Group and the Carolco Group remain in full force and effect including but not limited to the agreements relating to "Cutthroat Island" and, subject to any other agreement of the parties. "Cliffhanger", and all of Carolco's and LSC+'s respective claims, rights interests and defences in respect thereof are preserved and reserved. 4. Conditionality; Restoration of Rights 4.1 It is of the essence of this settlement agreement that all of the agreements set forth in Sections 1 and 2 are conditional on none of such agreements being, or attempting to be, rescinded or terminated by the parties or by any custodian for Carolco or any member of the Carolco Group. 4.2 Until the earlier of such time as (i) all of the agreements set forth above are specifically approved by a court of competent jurisdiction and such approval becomes final and not subject to appeal or (ii) the expiration of the longest applicable period during which any person or entity is permitted to bring an action (a "Challenge") to challenge, rescind, reject, annul or otherwise terminate this agreement or any of the provisions hereof, provided however no Challenge and no appeal of a court approval as set forth in the foregoing clause (i) is then pending, neither of the parties shall (A) take any action to enforce any rights or security interests the release of which by such party is contemplated hereby or (B) take any action which could adversely affect the validity, enforceability or priority of the rights and security interests of the other party, the release of which by such other party is contemplated hereby, including but not limited to transfer of rights or assets or the granting of security interests. Until the occurrence of the events described in either clause (i) or (ii) above (but in the case of clause (ii) subject to no Challenge and no appeal of a court approval being pending) all of LSC+ security interests relating to "Chaplin", "Basic Instinct" and "Dark Wind" (but not the LSC+ security interest relating to "Spiderman", as to which the irrevocable termination and release by LSC+ will be effective upon satisfaction or waiver of the conditions precedent under Section 5 hereof) will remain in full force and effect. Upon the occurrence of the earlier of such events (in the case of clause (ii) subject to no Challenge and no appeal of a court approval being pending LSC+ shall sign and deliver to Carolco UCC-2 Termination Statement and Release of Copyright Mortgages and assignments and such other document as may be necessary to effectuate the releases and transfers referred to in Section 2.5. 4.3 In the event all or any portion of this agreement is rescinded, invalidated or set aside by a court of competent jurisdiction, including, without limitation, a bankruptcy court in the event any of the members of the Carolco Group is subject to the jurisdiction of such court, then the parties hereto shall each have the right to be fully restored to their legal position prior to execution of this agreement (except as to the LSC+ security interest relating to "Spiderman") and shall have the right to reserve and pursue all rights, remedies, defenses and interests available to them under contract, at law or in equity, as if this agreement had never existed (except as to the LSC+ security interest relating to "Spiderman"). 5. Conditions Precedent 5.1 Carolco's agreements set forth in Section 1 shall become effective upon satisfaction of the following conditions precedent, all or any of which conditions may be waived by Carolco in its sole discretion: (i) delivery to Carolco of signed UCC-2 Termination Statements, a Quitclaim and Copyright Mortgage Release relating to the security interests of LSC+ in "Spiderman" and any instrument required under the laws of the British Virgin Islands to release the security interest of LSC+ in "Spiderman"; and (ii) payment of USD 600,000 by LSC+ in respect of commissions on "Stargate". 5.2 LSC+'s agreements set forth in Section 2 shall become effective upon satisfaction of the following conditions precedent, all or any of which conditions may be waived by LSC+ in its sole discretion: (i) delivery to LSC+ by Carolco of a version of the film "Basic Instinct" authorized by Paul Verhoeven (such authorization to be evidenced by an approval in reasonably satisfactory form) and which TF-1 accepts to broadcast in prime time together with the following film materials with respect to such version having a quality customarily required by TF1: Digital Video PALD1 Master, the U.S. English language version of the fully-mixed magnetic stereo soundtrack, a separate music and effects magnetic track and a spotting list corresponding to the version delivered. (ii) signature by Carolco and Credit Lyonnais Bank Nederland of an Escrow Agreement and Instructions in the form attached as Exhibit 1; and (iii) the written confirmation of Atalanta Films International B.V. ("Atalanta") addressed to LSC+ that Atalanta agrees to be bound by the terms of this agreement which affect Atalanta's rights and/or obligations or reasonably satisfactory evidence that a member of the Carolco Group is the assignee or successor in interest to Atalanta under the license agreements referred to in Sections 1.1, 1.2 and 1.3. 6. General 6.1 Successors and Assigns: This Agreement shall be binding upon and inure to the benefit of each party to this agreement, and to all employees, agents, servants, insurers, attorneys, predecessors, heirs, executors, administrators, successors, assigns, spouses, partners, parents, subsidiaries, affiliates, officers, directors, shareholders and joint venturers of each party to this agreement. 6.2 Arbitration: Except for the right of either party to apply to a court of competent jurisdiction for a Temporary Restraining Order or injunctive relief to enforce the confidentiality provisions of this agreement, any dispute or controversy between the parties under this agreement involving its interpretation or the obligations of a party hereto, shall be determined by binding arbitration in accordance with the commercial arbitration rules of the American Arbitration Association, in the County of Los Angeles, State of California. The resulting arbitration award may be enforced, or injunctive relief may be sought, in any court of competent jurisdiction. Any action arising out of or relating to this Agreement may be filed only in the Superior Court of the County of Los Angeles, California or the United States District Court for the Central District of California. 6.3 Binding Agreement; Further Documents: LSC+ and Carolco will promptly enter into one or more formal agreements to effectuate the intent of this agreement in accordance with its terms. Unless and until they do so, this agreement shall constitute a binding agreement between the parties. 6.4 Attorney's Fees: Should any action, suit or proceeding (including, but not limited to, arbitration pursuant to paragraph 6.2 herein) be commenced by any party to this agreement to enforce any provision hereof, the prevailing party shall be entitled to recover, in addition to any other relief, reasonable attorney's fees and costs and expenses incurred in said action, suit or proceeding. 6.5 Integration Clause: Each party warrants that no promise, inducement, or agreement not expressed herein has been made to it in connection with this agreement and that this agreement constitutes the complete and exclusive statement of the entire agreement between the parties and supersedes all prior or contemporaneous written or oral communications, understandings and agreements with respect to the subject matter hereof. It is expressly understood and agreed that this agreement may not be altered, amended, modified or otherwise changed in any respect whatsoever except by a written agreement duly executed by authorized representatives of each of the parties. Each party hereby agrees that it will make no claim at any time or place that this agreement has been orally altered or modified or otherwise changed by oral communication of any kind or character. 6.6 No Admission of Liability: Each party acknowledges that nothing in this agreement is intended to constitute an admission or concession of liability, and that the agreements set forth herein represent a compromise of asserted claims. 6.7 Confidentiality: The parties agree that neither they nor their officers, directors, shareholders, partners, principals, agents, representatives, assignees, affiliates or attorneys will disclose the terms and conditions of this agreement, except (i) as required by law or governmental regulations; (ii) to accountants, attorneys and other professional advisers bound by obligations of professional secrecy or (iii) to financial advisers and other persons engaging in a review of the affairs of Carolco with Carolco's consent provided that such persons have signed a confidentiality agreements covering this agreement. 6.8 Counsel: Each party warrants that it has been represented and advised by counsel or has had full opportunity to be represented and advised by counsel with respect to this Agreement and all matters covered by it. 6.9 California Law: This Agreement shall take effect under, and be construed and enforced pursuant to, the laws of the State of California. 6.10 Headings: The headings on this Agreement are for convenience only and do not modify or affect the paragraph to which they refer. 6.11 Counterparts: This Agreement may be executed in counterparts. IN WITNESS WHEREOF, the parties have executed this Agreement as of May 31, 1995. LE STUDIO CANAL+ S.A. By: /s/ Pierre Lescure Its: Chief Executive Officer/director LE STUDIO CANAL+ (U.S.) By: /s/ Pierre Lescure Its: Chairman/Chief Executive Officer CINEPOLE PRODUCTIONS B.V. By: /s/ Dominique Jeunot Its: Co-Managing Director CAROLCO PICTURES INC. By: /s/ Lynwood Spinks Its: Executive Vice President/President of Production CAROLCO INTERNATIONAL INC. By: /s/ Lynwood Spinks Its: Executive Vice President/President of Production CAROLCO SERVICE INC. By: /s/ Lynwood Spinks Its: Executive Vice President/ Business and Production Affairs CAROLCO / LE STUDIO CANAL+ V.O.F. By: /s/ Lynwood Spinks Its: Managing Director By: /s/ Dominique Jeunot Its: Managing Director SPIDERMAN PRODUCTIONS LTD. By: /s/ Lynwood Spinks Its: Managing Director EX-4.1 5 SUPPLEMENTAL INDENTURE AND WAIVER This SUPPLEMENTAL INDENTURE AND WAIVER (the "Waiver") is dated as of July 28, 1995 between CAROLCO PICTURES INC., a Delaware corporation (the "Company"), and AMERICAN STOCK TRANSFER & TRUST COMPANY, as Trustee (the "Trustee"). WITNESSETH: WHEREAS, the Company has heretofore executed and delivered to the Trustee an Indenture dated as of October 14, 1994 (the "Indenture") providing for the issuance of the Company's 7% Convertible Subordinated Notes due 2006 (the "Securities"); WHEREAS, Section 11.2 of the Indenture authorizes the Trustee, with the written consent of the Holders of all of the then outstanding Securities, to waive compliance by the Company with any provision of the Indenture relating to payment of interest; WHEREAS, all acts and proceedings required by law, by the Indenture and by the Certificate of Incorporation of the Company to constitute this Waiver a valid and binding agreement for the uses and purposes herein set forth, in accordance with its terms, have been done and taken, and the execution and delivery of this Waiver have been in all respects duly authorized by the Company; WHEREAS, the Company has obtained the unrevoked consent of the Holders of all of the Securities outstanding as of the date hereof to the Waiver provided for herein; and WHEREAS, the foregoing recitals are made as representations or statements of fact by the Company and not by the Trustee. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Company covenants and agrees with the Trustee, for the equal and proportionate benefit of all present and future holders of Securities, as follows: SECTION 1. For all other purposes of this Waiver, except as otherwise herein expressly provided or unless the context otherwise requires: (i) the terms and expressions used herein shall have the same meanings as corresponding terms and expressions used in the Indenture; and (ii) the words "herein," "hereof" and "hereby" and other words of similar import used in this Waiver, refer to the amendment of the Indenture as a whole and not to any particular Section hereof. SECTION 2. Acting upon instruction of the Holders of all of the Securities outstanding as of the date hereof, the Trustee hereby: (a) waives any Default or Event of Default under the Indenture occurring as a result of the Company's failure to pay the interest due on the Securities on June 30, 1995 in the aggregate amount of $647,500 (the "June Payment"); and (b) agrees that, notwithstanding anything to the contrary contained in the Indenture or the Securities, (i) the June Payment is hereby deferred and is not payable until December 30, 1995, at which time it will be paid with interest and (ii) for all other purposes other than as set forth in clause (i), the June Payment is and shall be treated as accrued but unpaid interest on the Securities. SECTION 3. The Trustee accepts the waiver and modification of certain provisions of the Indenture effected by this Waiver and agrees to execute the trust created by the Indenture as hereby waived and modified, but only upon the terms and conditions set forth in the Indenture, including the terms and provisions defining and limiting the liabilities and responsibilities of the Trustee, which terms and provisions shall in like manner define and limit its liabilities and responsibilities in the performance of the trust created by the Indenture as hereby waived and modified, and, without limiting the generality of the foregoing, the Trustee has no responsibility for the correctness of the recitals of fact herein contained which shall be taken as the statements of the Company, and makes no representations as to the validity or sufficiency of this Waiver and shall incur no liability or responsibility in respect of the validity thereof. SECTION 4. Except as hereby expressly waived and modified, the Indenture and the Securities issued thereunder are in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect. SECTION 5. This Waiver shall form a part of the Indenture and the Securities for all purposes, and every holder of Securities heretofore or hereafter authenticated and delivered shall be bound hereby. SECTION 6. This Waiver may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and all of such counterparts shall together constitute one and the same instrument. SECTION 7. The internal laws of the State of New York shall govern this Waiver, without regard to the conflicts of laws rules thereof. IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be duly executed, and their respective seals to be hereunto affixed and attested, all as of the day and year first above written. CAROLCO PICTURES INC. By:/s/ Robert W. Goldsmith Attest: /s/ Karen A. Taylor AMERICAN STOCK TRANSFER & TRUST COMPANY, as Trustee By: /s/ Herbert J. Lemmer Attest: /s/ Susan Silber State of California ) ) County of Los Angeles ) On before me, (here insert name and title of the officer), personally appeared , personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS by hand and official seal. Signature (Seal) State of California ) ) County of Los Angeles ) On before me, _______________________________________, personally appeared , personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS by hand and official seal. Signature (Seal)