-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DaUFbqR+cy2AYvIRbTV7Pe4qrKLvxcR2I9Yv+10NtAiM+b5Rfvj71jrVUW4y09cU RjKBNjxiY7GyHnqeSfwaDA== 0000912057-97-013165.txt : 19970423 0000912057-97-013165.hdr.sgml : 19970423 ACCESSION NUMBER: 0000912057-97-013165 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970415 DATE AS OF CHANGE: 19970422 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CINERGI PICTURES ENTERTAINMENT INC CENTRAL INDEX KEY: 0000922519 STANDARD INDUSTRIAL CLASSIFICATION: 7812 IRS NUMBER: 954247952 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23958 FILM NUMBER: 97581624 BUSINESS ADDRESS: STREET 1: 2308 BROADWAY CITY: SANTA MONICA STATE: CA ZIP: 90404 BUSINESS PHONE: 3103156000 MAIL ADDRESS: STREET 1: 2308 BROADWAY CITY: SANTA MONICA STATE: CA ZIP: 90404 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 ----------------------------- FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(c) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(c) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-23958 ----------------------------- CINERGI PICTURES ENTERTAINMENT INC. (Exact name of registrant as specified in its charter) DELAWARE 95-4247952 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 2308 BROADWAY, SANTA MONICA, CA 90404 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (310) 315-6000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated herein by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the voting stock held by non-affiliates of the Registrant (assuming for these purposes, but without conceding, that all executive officers, directors and greater than 10% stockholders are "affiliates" of the Registrant) as of April 10, 1997 (based on the closing sale price as reported on the NASDAQ National Market System on such date) was $6,149,002. The number of shares of Common Stock outstanding as of April 10, 1997 was 13,446,874. DOCUMENTS INCORPORATED BY REFERENCE NO DOCUMENTS ARE INCORPORATED BY REFERENCE INTO PARTS I, II OR III. PART I THIS ANNUAL REPORT ON FORM 10-K (INCLUDING, WITHOUT LIMITATION, PARTS I, II AND III) CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS MAY CONSIST OF ANY STATEMENT OTHER THAN A RECITATION OF HISTORICAL FACT AND CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "EXPECT," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE READER IS CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS ARE NECESSARILY SPECULATIVE AND THERE ARE CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL EVENTS OR RESULTS TO DIFFER MATERIALLY FROM THOSE REFERRED TO IN SUCH FORWARD-LOOKING STATEMENTS. AS SET FORTH HEREIN UNDER "RECENT DEVELOPMENTS," THE REGISTRANT HAS RECENTLY ENTERED INTO AN AGREEMENT TO SELL SUBSTANTIALLY ALL OF THE FILMS IN THE REGISTRANT'S MOTION PICTURE LIBRARY AND CERTAIN OTHER ASSETS AND IS CONSIDERING ITS ALTERNATIVES ASSUMING CONSUMMATION OF SUCH SALE (WHICH INCLUDE DISPOSING OF ADDITIONAL ASSETS IN ONE OR A SERIES OF TRANSACTIONS). THE AGREEMENT TO SELL SUBSTANTIALLY ALL OF THE FILMS IN THE REGISTRANT'S MOTION PICTURE LIBRARY IS SUBJECT TO NUMEROUS CONDITIONS AND MAY ALSO BE TERMINATED IN CERTAIN CIRCUMSTANCES. NO ASSURANCES CAN BE GIVEN THAT SUCH SALE OR ANY ADDITIONAL SALE OF ASSETS OR OTHER TRANSACTIONS WILL BE CONSUMMATED. IN ADDITION, THE REGISTRANT ALSO HAS ANNOUNCED THAT IT DOES NOT PRESENTLY INTEND TO COMMENCE PRODUCTION ON ANY ADDITIONAL MOTION PICTURES. AS A RESULT, THE REGISTRANT'S RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 ARE NOT NECESSARILY INDICATIVE OF THE RESULTS THAT MAY BE EXPECTED IN FUTURE PERIODS. ADDITIONAL RISKS AND UNCERTAINTIES ARE DISCUSSED ELSEWHERE IN APPROPRIATE SECTIONS OF THIS REPORT. THE RISKS HIGHLIGHTED ABOVE AND ELSEWHERE IN THIS REPORT SHOULD NOT BE ASSUMED TO BE THE ONLY THINGS THAT COULD AFFECT FUTURE PERFORMANCE OF THE REGISTRANT. THE REGISTRANT DOES NOT HAVE A POLICY OF UPDATING OR REVISING FORWARD-LOOKING STATEMENTS AND THUS IT SHOULD NOT BE ASSUMED THAT SILENCE BY MANAGEMENT OF THE REGISTRANT OVER TIME MEANS THAT ACTUAL EVENTS ARE BEARING OUT AS ESTIMATED IN SUCH FORWARD-LOOKING STATEMENTS. ITEM 1. BUSINESS Cinergi Pictures Entertainment Inc., a Delaware corporation ("Cinergi" or the "Company"), was formed in November 1989 to develop, finance, produce and license "event" motion pictures for exhibition in domestic and international theatrical markets and for later worldwide release in all media, including home video and pay and free television. Except where the context otherwise requires, the terms "Cinergi" and the "Company" refer to Cinergi Pictures Entertainment Inc. and its wholly owned subsidiaries. The Company's executive offices are located at 2308 Broadway, Santa Monica, California 90404, and its telephone number is (310) 315-6000. RECENT DEVELOPMENTS AGREEMENT TO SELL SUBSTANTIALLY ALL OF THE FILMS IN THE COMPANY'S FILM LIBRARY AND CERTAIN OTHER ASSETS. On April 3, 1997, the Company entered into a Purchase and Sale Agreement (the "Library Sale Agreement") with Walt Disney Pictures and Television, a subsidiary of The Walt Disney Company, to sell to Walt Disney Pictures and Television substantially all of the films in the Company's motion picture library and certain other assets (referred to herein as the "Film Library Sale"; "Disney" is used herein to refer to Walt Disney Pictures and Television and/or its affiliates, including The Walt Disney Company, as applicable). In exchange for the assets being sold to Disney, Disney has agreed to relinquish its equity interest in the Company (555,556 shares of the Company's Common Stock and a warrant to purchase 150,000 shares of the Company's Common Stock at an exercise price of $9.00 per share) and cancel its outstanding loans to the Company (approximately $38,400,000 as of March 31, 1997). In addition, Disney has agreed to assume with respect to the films and rights therein being sold to Disney, all residuals and participation obligations, as well as all scheduled obligations relating to the Company's existing exploitation agreements. Disney has also agreed to assume the outstanding debt under the Company's credit facility relating to the soon to be completed AN ALAN SMITHEE FILM (one of the films included in the Film Library 2 Sale) up to a maximum amount of $10,000,000 (which the Company anticipates will not be exceeded) and the Company has agreed to transfer to Disney all minimum guarantee payments and any overages paid or to be paid with respect to such film. The film library being sold to Disney includes primarily all of the Company's rights (except minimum guarantee payments for films other than AN ALAN SMITHEE FILM) to the following eleven motion pictures: MEDICINE MAN, TOMBSTONE, RENAISSANCE MAN, COLOR OF NIGHT, JUDGE DREDD, THE SCARLET LETTER, NIXON, EVITA (excluding soundtrack rights, which will be retained by the Company), AMANDA, THE SHADOW CONSPIRACY, and AN ALAN SMITHEE FILM. Disney will also retain overages otherwise payable to the Company by Disney after January 1, 1997 with respect to certain distribution rights to DIE HARD, WITH A VENGEANCE previously licensed to Disney. In addition, upon consummation of the Film Library Sale, the Company's twenty-five film domestic distribution arrangement with an affiliate of Disney, Buena Vista Pictures Distribution, Inc. ("BVPD"), under which nine films have been delivered, will be terminated. Please see "Motion Picture Production" and "Distribution of Motion Pictures - Other Production and Distribution Arrangements" below for additional information regarding the Company's motion picture library, "Financing of Motion Picture Production" for an explanation of minimum guarantee payments and overages, "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information regarding residuals and participations, "Distribution of Motion Pictures" for additional information regarding the Company's domestic distribution arrangement with BVPD and other exploitation arrangements, "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for additional information regarding Disney's loans to the Company and the Company's credit facility, and "Item 13 -- Certain Relationships and Related Transactions - Certain Transactions with BVPD and Disney" for additional information regarding certain other transactions between the Company and Disney. The Film Library Sale is subject to numerous conditions including, among other things, completion of certain due diligence by Disney, expiration of any applicable Hart-Scott-Rodino waiting period, and the approval of the Company's stockholders. The Library Sale Agreement and related Film Library Sale may also be terminated by the Company or Disney in certain circumstances, including, among other things, upon failure to consummate the Film Library Sale by September 15, 1997. Management of the Company (including Chairman of the Board and Chief Executive Officer, Andrew G. Vajna), which owns approximately 43.7% of the outstanding Common Stock of the Company, has agreed to vote its shares in favor of the transaction in accordance with the terms of the Library Sale Agreement. Certain additional information regarding the Library Sale Agreement is contained in applicable sections throughout this Report. The foregoing description of the Library Sale Agreement and the other information regarding the Library Sale Agreement contained herein are only summaries of the material terms of the Library Sale Agreement and are qualified in their entirety by reference to the Library Sale Agreement which is Exhibit 2 to this Report. ANNOUNCEMENT REGARDING INTENTION TO CEASE PRODUCTION ON ADDITIONAL FILMS. On April 3, 1997, the Company also announced that it does not presently intend to commence production on any additional motion pictures (although the Library Sale Agreement does not preclude the Company, pending consummation of the Film Library Sale, from commencing production on films that would not be distributed by Disney) and that it is in the process of considering its alternatives assuming consummation of the Film Library Sale to Disney. Such alternatives include disposing of those assets which are not being sold to Disney, in one or a series of transactions. In connection therewith, the Company is presently in discussions regarding the potential sale of a substantial portion of the assets that would remain assuming consummation of the Film Library Sale. Not included in the Film Library Sale to Disney are the Company's slate of approximately forty development projects, the Company's visual effects facility, and Cinergi's rights in DIE HARD, WITH A VENGEANCE (which the Company owns with Twentieth Century Fox which controls the sequel rights to the film). See "Motion Picture Production" and "Distribution of Motion Pictures - Other Production and Distribution Arrangements" and "Item 13 -- "Certain Relationships and Related Transactions -- Certain 3 Transactions with BVPD and Disney." The Company is entitled to significant overages from Twentieth Century Fox with respect to those territories and media (including the United States, Canada and Japan) for which Fox controls distribution rights. The Company controls distribution rights to DIE HARD, WITH A VENGEANCE in certain international territories. The Company has previously granted Disney distribution rights to the film in a portion of those territories and, in connection with the Library Sale Agreement, the Company has agreed, upon consummation of the Film Library Sale, to relinquish overages payable by Disney after January 1, 1997 with respect thereto. The Company's announcement and the execution of the Library Sale Agreement follows a year long strategic review initiated by the Company to assess its goals and business strategies in the context of, among other things, the continuing increase in motion picture production and releasing costs, an increased number of motion pictures released by motion picture companies domestically, the development projects available in the marketplace, and the Company's financial capabilities. The financial advisory firm of Jefferson Capital Group, Ltd. assisted Cinergi in its strategic review, which included discussions with other parties regarding the sale of an interest in the Company or of the entire Company. The Company currently anticipates that any decision made regarding its alternatives assuming consummation of the Film Library Sale, will effectively result, after provision for the Company's remaining liabilities, in a cash payment to the Company's stockholders in exchange for their equity interests in the Company. However, certain factors could cause actual events to be different from those set forth in the forward-looking statement. No assurance can be given that the Film Library Sale or any additional transactions will be consummated or that a cash payment of any type will be made to the Company's stockholders and no assurances can be given as to the amount of any cash payment, if made. No agreements have been entered into or record date set with respect to any additional transactions, and any such transaction or series of transactions would be subject to, among other things, consummation of the Film Library Sale and receipt of applicable, including stockholder, approvals. Assuming consummation of the Film Library Sale and receipt of all applicable approvals with respect to any additional transactions, the amount of any payment to the Company's stockholders would depend upon, among other things, the terms of such additional transactions (including any transactions to dispose of the Company's remaining assets) and the provisions made to satisfy the Company's remaining liabilities. The Company does not anticipate that any payment will be made to the Company's stockholders until at least the third or fourth quarter of 1997. However, any such payment could be significantly delayed depending upon, among other things, the form of any additional transactions and the time required to obtain any necessary approvals. Any such delay could reduce the amount of any payment ultimately to be made to the Company's stockholders. MOTION PICTURE PRODUCTION The Company has released ten motion pictures to date: MEDICINE MAN, TOMBSTONE, RENAISSANCE MAN, COLOR OF NIGHT, DIE HARD WITH A VENGEANCE, JUDGE DREDD, THE SCARLET LETTER, NIXON, EVITA and THE SHADOW CONSPIRACY. Of such films, EVITA, based on the music of Andrew Lloyd Weber, starring Madonna and Antonio Banderas and directed by Alan Parker, was released in 1996 (Christmas Day) with domestic box office receipts through March 31, 1997 of approximately $49,146,000, and THE SHADOW CONSPIRACY, directed by George Cosmatos, was released in 1997 (January 31) with domestic box office receipts of approximately $1,371,000. In addition, AMANDA was completed by the Company in 1996 and delivered to Family Channel Pictures, Inc. ("FCP") in July 1996 for domestic distribution and to an international sales company (assisting the Company in the international distribution of the film) in connection with the film's international distribution. FCP has not yet obtained domestic theatrical distribution of the film. See "Distribution of Motion Pictures - Other Production and Distribution Arrangements." The Company is currently in post-production on AN ALAN SMITHEE FILM, a satirical look at the making of big budget action/adventure Hollywood films. In February 1997, the Company also commenced principal photography on the film BROADWAY BRAWLER, starring Bruce Willis, however, due to circumstances beyond the Company's control, production ceased 4 approximately three weeks after commencement of principal photography. The Company is currently in discussions with certain parties involved in the production of BROADWAY BRAWLER regarding settlement of various obligations in connection therewith. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." The Film Library Sale to Disney does not include any rights to BROADWAY BRAWLER. The Company also has approximately forty projects in various stages of development. The Company's slate of development projects are not part of the assets included in the Film Library Sale. Pursuant to the Library Sale Agreement, Disney has received the right of first negotiation, and in certain cases, a right of last refusal to acquire or participate in the financing and distribution of one of the development projects, SMOKE AND MIRRORS, and will also be entitled to reimbursement of its development costs in such project if the project is made into a film. See "Item 13 -- "Certain Relationships and Related Transactions -- Certain Transactions with BVPD and Disney." The Company does not own or operate sound stages and related production facilities generally referred to as a "studio" and instead has generally utilized, as needed in the production of its motion pictures, creative and technical personnel (such as screenwriters, directors and performers), production and editing facilities and laboratories available in the market. The Company acquired certain visual effects equipment to complete the visual effects for JUDGE DREDD and also used such equipment for visual effects for DIE HARD WITH A VENGEANCE. The Company's visual effects facility is located in Lenox, Massachusetts. See "Item 2 -- Properties." FINANCING OF MOTION PICTURE PRODUCTION The Company has generally financed the production costs of its motion pictures through loans obtained under its credit facility with The Chase Manhattan Bank ("Chase") and a syndicate of lenders, advances and loans from BVPD pursuant to the Company's distribution agreement and certain related agreements with BVPD (collectively, the "BVPD Agreement") and direct investments by the Company, as necessary. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations." In connection with such financing, prior to the commencement of production of a motion picture, the Company has generally entered into license agreements with distributors pursuant to which distributors acquire the right to distribute such motion picture (or series of motion pictures pursuant to an output agreement) in a certain geographic territory and media for a specific term. In consideration for these distribution rights, the distributor is typically required to pay to the producer a fixed amount upon delivery of the motion picture to the distributor ("Minimum Guarantee"). The Company would assign the right to receive the Minimum Guarantees for such motion picture to its lenders as collateral to secure loans used to finance a portion of the production costs of the motion picture. This manner of financing (referred to herein as "pre-licensing") guarantees a minimum return from distribution in each such territory which is the subject of a license agreement prior to completion of a picture, while still allowing the Company to retain the right to share in certain distribution revenues. Once the distributor has recouped an amount equal to its Minimum Guarantee and costs of distribution, the distributor is entitled to retain ongoing distribution fees computed as a percentage of the gross revenues generated from the distribution of the motion picture. The Company is thereafter entitled to receive all remaining revenues received by the distributor from distribution of the picture in such territory in excess of the ongoing distribution fee retained by the distributor. Such remaining revenues received by the Company are commonly referred to as "overages." DISTRIBUTION OF MOTION PICTURES DISTRIBUTION IN THE AMERICAS -- THE BVPD AGREEMENT. The Company has not engaged in domestic theatrical distribution of its motion pictures due to the substantial costs involved. Instead, in July 1990, 5 the Company entered into the BVPD Agreement, which was last amended in April 1994. Upon consummation of the Film Library Sale, the BVPD Agreement will be terminated. Pursuant to the BVPD Agreement, in exchange for exclusive distribution rights in all media throughout the United States and its possessions, Canada and Latin America (the "Americas"), BVPD is required, subject to the terms and conditions of the BVPD Agreement, to advertise, promote and exploit in all such media 25 "qualified" motion pictures produced by the Company that meet certain criteria specified in the BVPD Agreement. In general, "qualified" motion pictures have budgets exceeding $25,000,000, feature star performers meeting certain criteria, and do not include foreign language films or films receiving ratings from the Motion Picture Association of America, an industry trade association (the "MPAA"), more restrictive than "R." During the term of the BVPD Agreement, BVPD also has the right to elect to distribute any non-qualified motion pictures produced by the Company which BVPD exercised in the case of AN ALAN SMITHEE FILM. The term of the BVPD Agreement extends until the Company has delivered 25 qualified motion pictures, although BVPD's right to distribute in the Americas motion pictures produced during the term of the BVPD Agreement continues in perpetuity if BVPD continues to actively exploit the motion pictures. The Company has delivered nine films to date which count toward the 25 qualified motion pictures, and AN ALAN SMITHEE FILM will count as the tenth such film. Under the BVPD Agreement, BVPD is obligated to provide the Company with advances and loans (at the Company's option, subject to certain conditions) for the production of qualified motion pictures based upon scaled percentages of each film's budgeted direct negative cost, subject to certain maximums and the other terms of the BVPD Agreement. Subject to the terms of the BVPD Agreement, BVPD is also obligated to advance amounts to cover the costs of the initial theatrical release of each such picture in the United States and Canada, including specified minimum amounts to cover the costs of manufacturing release prints, advertising and publicity. All advances and distribution costs are recoupable out of the revenues generated by the motion picture in the Americas, except that distribution costs expended for home video distribution and Latin American distribution are recoupable only out of the respective revenues generated in each such media or market. As set forth in the BVPD Agreement, BVPD is entitled to receive certain specified percentages of gross revenues generated in each media as distribution fees and is entitled to recoup the amounts advanced to the Company, together with interest thereon, as well as its costs of distribution. The Company is thereafter entitled to receive the remainder of all revenues received by BVPD generated by the Company's films in excess of BVPD's ongoing distribution fees. The repayment of each production loan made by BVPD with respect to each qualified motion picture is secured by certain rights in such qualified picture and all proceeds from the exploitation of such qualified motion picture in all media in the Americas. The BVPD Agreement provides that it may be terminated by BVPD in the event that the Company fails to deliver a qualified picture to BVPD for a period of three years or in the event of the loss of Mr. Vajna's services; provided, however, that if the loss of Mr. Vajna's services is due to death or disability, BVPD may not terminate the BVPD Agreement with respect to qualified pictures for which the Company has already engaged certain creative elements. BVPD has assumed the obligation to pay the residuals arising out of the exploitation of the Company's motion pictures in the Americas, subject to BVPD's right to recoup such payments pursuant to the BVPD Agreement. The Company, which is obligated to pay all other residuals, grants security interests to the guilds and unions in each of its motion pictures. Pursuant to the Library Sale Agreement, the Company has agreed that any motion picture on which the Company commences pre-production or production during the term of the Library Sale Agreement will not be a "qualified" motion picture under the BVPD Agreement, and, accordingly, BVPD shall not be obligated to finance or distribute any such motion pictures. OTHER PRODUCTION AND DISTRIBUTION ARRANGEMENTS. The Company produced DIE HARD WITH A VENGEANCE which was released in May 1995. The Company and Twentieth Century Fox jointly own DIE 6 HARD WITH A VENGEANCE, but Twentieth Century Fox retained all sequel rights to the film. Although the Company's qualified motion pictures are usually distributed in the Americas by BVPD, Twentieth Century Fox has the right to distribute DIE HARD WITH A VENGEANCE in all media, in perpetuity, in the United States, Canada and Japan, and worldwide in certain ancillary media. The Company received advances in 1995 from Twentieth Century Fox in exchange for the distribution rights granted to Twentieth Century Fox. Twentieth Century Fox has assumed the obligation to pay the residuals arising out of the United States, Canadian and Japanese exploitation of DIE HARD WITH A VENGEANCE, subject to Twentieth Century Fox's right to recoup such payments pursuant to the distribution agreement with the Company. The Company also received advances in 1995 from Disney in exchange for the right of Disney to distribute the film in a portion of the international territories for which the Company controls distribution rights. Upon consummation of the Film Library Sale, the Company will relinquish to Disney all overages payable by Disney after January 1, 1997 with respect thereto. As AMANDA did not meet the criteria under the BVPD Agreement to be a "qualified" motion picture, in 1995 the Company entered into a production and distribution agreement with Family Channel Pictures ("FCP") granting FCP all distribution rights in the U.S. and Canada to the film AMANDA in exchange for payment of approximately one-half of the negative cost of the picture, while the Company retained the distribution rights for the rest of the world. The Company used Summit, an unaffiliated international sales company, to assist in the international distribution of the film. The Company financed this motion picture by borrowings under its Credit Facility and assigned to the Lenders thereunder, FCP's payment due on delivery of the motion picture and Minimum Guarantees from international distributors. In 1996, AMANDA was delivered to FCP for domestic distribution and to Summit in connection with the film's international distribution. FCP has not yet obtained domestic theatrical distribution of AMANDA, which, if not obtained, could adversely affect certain foreign revenues ultimately realized by the Company from the exploitation of the international distribution rights to AMANDA in the event the Film Library Sale is not consummated. In addition, the Company and Hollywood Pictures Company ("HPC"), a subsidiary of The Walt Disney Company have an arrangement whereby the Company is financially obligated to pay to HPC the lesser of 50% of the cost of the picture or $22,500,000 in exchange for (i) a 50% equity participation in the motion picture tentatively entitled DEEP RISING (a high seas action-adventure, thriller starring Treat Williams which is currently in production and anticipated to be released in Fall 1997) and (ii) a sales fee for international distribution of such motion picture. In connection with the Library Sale Agreement, upon consummation of the Film Library Sale, the Company will no longer be obligated to pay the latter amount and will relinquish the equity participation and sales fee. INTERNATIONAL DISTRIBUTION. The Company arranges for international distribution of its motion pictures (in territories other than Canada and Latin America) by licensing them to various local distributors in those territories either on a picture-by-picture basis or pursuant to selected output agreements. Under the BVPD Agreement, BVPD receives the exclusive distribution rights in all media in the territories of Canada and Latin America for all qualified motion pictures. In the past, the Company has generally arranged for international distribution of motion pictures on a territory-by-territory basis by entering into licensing agreements with distributors (including, in some circumstances, affiliates of Disney) in territories such as England, France, Germany, Japan, Italy, Australia and others. The Company has either entered into such agreements directly or has utilized the services of an international sales company. Under such license agreements, the Company typically receives a Minimum Guarantee prior to the release of the picture in a particular territory, which is then recouped by the distributor out of the revenues generated by the picture in such territory. The distributor typically receives certain fees for its distribution of the picture and recoups its costs of distribution and Minimum Guarantee before remitting the remaining revenues received by it to the Company. The Company must rely on the distributor's ability to successfully exploit the film in order to receive any proceeds in excess of any 7 applicable Minimum Guarantee. Often the Company obtains letters of credit from acceptable banks guaranteeing payment of the Minimum Guarantees under the license agreements. The Company has entered into output agreements with distributors in certain major territories whereby the distributor agrees for a period of years or for a specified number of pictures to advance or guarantee, in many cases backed by letters of credit, a portion of the final budget of each motion picture produced by the Company and available for release during the term of the relevant agreement in exchange for the right to distribute in a particular territory allsuch motion pictures. These output agreements include an output agreement in Australia, New Zealand and Greece with Village Roadshow Netherlands B.V., in Scandinavia with AB Svensk Filmindustri, in Italy with Medusa Film S.p.A., in the United Kingdom with Entertainment Film Distributors Ltd. and in South Korea with SKC America, Inc. The output agreement for France expired after the delivery of EVITA. See Note 13 of Notes to the Company's Consolidated Financial Statements for certain geographic information regarding the Company's operations. Upon consummation of the Film Library Sale, Disney will acquire all of the rights and benefits arising under the Company's existing exploitation agreements with respect to the films and rights therein being sold to Disney and will assume scheduled liabilities under such existing exploitation agreements. With respect to the Company's output agreements, Disney will not acquire the right (or have any obligation) to have any additional motion pictures of Disney or its affiliates be distributed by such distributors party to the Company's output agreements. MAJOR CUSTOMERS In 1996, BVPD and Twentieth Century Fox accounted for $43,454,000 (or 33%) and $12,937,000 (or 10%), respectively, of the Company's consolidated revenues. In 1995, BVPD and Twentieth Century Fox accounted for $57,808,000 (or 30%) and $44,053,000 (or 23%), respectively, of the Company's consolidated revenues. In 1994, BVPD was the only customer that accounted for more than 10% of the Company's consolidated revenues with $43,207,000 (or 40%). See Note 13 of Notes to the Company's Consolidated Financial Statements. EMPLOYEES The Company, like other independent production companies, has not maintained a substantial staff of creative or technical personnel. At March 31, 1997, the Company employed a total of 30 full-time employees. Additional employees have also been hired by the Company on a picture-by-picture basis in connection with the production of the Company's motion pictures. The salaries of these additional employees, as well as portions of the salaries of certain full-time employees of the Company who provide direct production services, are typically allocated to the capitalized cost of the related pictures. As the Company does not presently intend to commence production on any additional motion pictures, management of the Company is currently considering reductions in personnel to achieve staff size commensurate with the Company's current level of activity. The Company and certain of its subsidiaries are subject to the terms in effect from time to time of various industry-wide collective bargaining agreements, including the Writers Guild of America, the Directors Guild of America, the Screen Actors Guild and the International Alliance of Theatrical Stage Employees. REGULATION Audiovisual works, such as television programs and motion pictures, are not included under the terms of the General Agreement on Trade and Tariffs Treaty. As a result, many countries (including members of the European Union) are able to enforce quotas that restrict the amount of United States produced television programming which may be aired on television in such countries. Although these quotas generally apply only to television programming and not to theatrical exhibition of motion pictures, there can be no assurance that additional or more restrictive theatrical or television quotas will not be 8 enacted or that existing quotas will not be more strictly enforced. Additional or more restrictive quotas or more stringent enforcement of existing quotas could materially and adversely limit the ability of the Company to exploit fully its motion pictures. Motion picture and distribution rights to motion pictures are granted legal protection under the copyright laws of the United States and most foreign countries, which laws provide substantial civil and criminal sanctions for unauthorized duplication and exhibition of motion pictures. The Company takes appropriate and reasonable measures to secure, protect and maintain or obtain agreements to secure, protect and maintain copyright protection for all Company pictures under the laws of applicable jurisdictions. Extensive unauthorized misappropriation of videocassette rights to motion pictures, which may include Company pictures, is an industry-wide problem. Motion picture piracy is extensive in many parts of the world. Voluntary industry embargoes or United States government trade sanctions to combat piracy, if enacted, could impact the amount of revenue that the Company realizes from the international exploitation of its motion pictures. If not enacted or if other measures are not taken, the motion picture industry (including the Company) may continue to lose an indeterminate amount of revenues as a result of motion picture piracy. The Code and Ratings Administration of the MPAA assigns ratings indicating age-group suitability for theatrical distribution of motion pictures. The Company has submitted its pictures for such ratings. United States television stations and networks, as well as foreign governments, impose additional restrictions on the content of motion pictures which may restrict in whole or in part theatrical or television exhibition in particular territories. Management's policy has been to produce motion pictures for which there will be no material restrictions on exhibition in any major territories or media. There can be no assurance that current and future restrictions on the content of the Company's pictures may not limit or affect the Company's ability to exhibit certain of its pictures in certain territories and media. See "Item 1 -- Business -- Recent Developments." COMPETITION Motion picture production and distribution are highly competitive businesses. The competition comes from both companies within the same business and companies in other entertainment media which create alternative forms of leisure entertainment. The Company competes with several "major" film studios (The Walt Disney Company, Paramount Pictures Corporation, Universal Pictures, Columbia Pictures, Tri-Star Pictures, Twentieth Century Fox, Warner Bros. Inc. and MGM/UA) which are dominant in the motion picture industry, as well as numerous independent motion picture and television production companies, television networks and pay television systems for the acquisition of literary properties, the services of performing artists, directors, producers and other creative and technical personnel and production financing. Many of the organizations with which the Company competes have significantly greater financial and other resources than does the Company. In addition, the Company's films compete for audience acceptance and exhibition outlets with motion pictures produced and distributed by other companies, including numerous motion pictures distributed by BVPD which distributes the Company's motion pictures in the Americas. As a result, the success of any of the Company's films is dependent not only on the quality and acceptance of that particular film, but also on the quality and acceptance of other competing films released into the marketplace at or near the same time. In addition, there have been significant technological developments effecting the entertainment industry in general, and the motion picture industry in particular. These developments have resulted in the availability of alternative and competing forms of leisure time entertainment, including pay/cable television services, satellite television and home entertainment equipment such as videocassettes, video games, computers, and now digital video discs. Such technological developments have also resulted in the creation of additional revenue sources through the licensing of rights with respect to such new media, however, the theatrical success of a motion picture remains a crucial factor in generating revenues in other media such as videocassettes and television. 9 ITEM 2. PROPERTIES The Company leases the building housing its corporate headquarters in Santa Monica, California from Andrew G. Vajna under a lease (which expired in May 1996.) Subsequent thereto, the Company has been leasing its corporate headquarters on the same general terms but on a month-to-month basis. See "Item 13 -- "Certain Relationships and Related Transactions." The Company leases space from an unaffiliated party in Lenox, Massachusetts housing its facility for producing visual effects under a lease which expired in August 1996. Subsequent thereto, the Company has been leasing its visual effects facility on the same general terms but on a month-to-month basis. The Company also leases office space from unaffiliated parties on an as-needed basis in connection with the production of specific motion picture projects. ITEM 3. LEGAL PROCEEDINGS On January 16, 1997, two purported class action lawsuits, which had been filed on May 13, 1996 in the Superior Court of California for the County of Los Angeles by alleged stockholders of the Company (and later consolidated into one action), against the Company and certain of its current and former executive officers and directors were dismissed. The lawsuits had alleged, among other things, that the defendants negligently misrepresented (or omitted) material facts about the business, financial condition, future growth and profitability of the Company in connection with the Company's 1995 public offering of Common Stock, and in alleged statements by certain of the individual defendants. In December 1995, the U.S. Attorney for the Central District of California served subpoenas ("Subpoenas") on the Company relating to a grand jury investigation of federal tax aspects of various transactions involving Andrew G. Vajna, President, Chief Executive Officer and Chairman of the Board of Directors of the Company, and certain other persons and entities (the "Investigation"). The Company believes the Investigation is focusing primarily on (i) the 1988 and 1989 personal tax returns of Mr. Vajna and the tax returns of certain other persons and entities, and (ii) the ongoing audits of Mr. Vajna's tax returns since 1990 by the Internal Revenue Service. The Company has not been identified by the U.S. Attorney as being a target of the Investigation; however, there can be no assurance that the Company's status will not change in the future. The Company engaged counsel to represent it in connection with the Investigation and is in the process of responding to the Subpoenas. Given the uncertainty of the Investigation, there is currently no basis upon which to estimate the impact, if any, the Investigation may have on the Company. The Company had an output agreement in France with Le Film Office ("LFO") (which expired after the delivery of EVITA). Pursuant to the output agreement with LFO, a $3,071,000 advance was payable to the Company upon delivery of THE SHADOW CONSPIRACY to LFO. On August 27, 1996, LFO filed for and obtained a temporary restraining order in California Superior Court, in Los Angeles, California (the "Court") restraining the Company, Summit (the international sales company handling the international distribution of THE SHADOW CONSPIRACY) and Chase (one of the lenders under the Company's credit facility), from drawing down the letter of credit securing LFO's advance on the basis of LFO's allegations that the Company failed to give proper notice to LFO for extending the delivery date of THE SHADOW CONSPIRACY. On September 20, 1996, the Court issued a preliminary injunction against the Company, Summit and Chase. The parties agreed to stay the Court proceedings and submit the dispute to binding arbitration by the American Film Marketing Association, as required by the output agreement. However, LFO filed a motion with the Court seeking to dismiss the arbitration and proceed with the litigation in the Court. On April 10, 1997, such motion was denied by the Court. 10 An arbitration hearing is scheduled for April 17, 1997. The Company believes that LFO's allegations are without merit and intends to defend them vigorously. In light of the disappointing domestic box office performance of THE SHADOW CONSPIRACY and the adverse publicity generated in France by LFO's refusing to accept delivery of THE SHADOW CONSPIRACY, in the event the Company does not prevail in the arbitration, it believes that it will be difficult to obtain alternative distribution of THE SHADOW CONSPIRACY in France. In addition, even if an alternative distribution arrangement is obtained it is unlikely any such arrangement will provide for an advance on delivery or otherwise be on terms as advantageous as those under the Company's output agreement with LFO. Trial is scheduled for August 11, 1997 in Los Angeles Superior Court, in a lawsuit by Laurence Fishburne and The LOA Productions, Inc., Mr. Fishburne's loan-out corporation, against the Company, a subsidiary of the Company and Randolph M. Paul, Senior Vice President, Business Affairs and a Director of the Company. The action, for breach of oral contract, fraud and deceit, and civil conspiracy and declaratory relief, was originally filed on July 11, 1994. The plaintiffs claim that the Company entered into an oral contract for Mr. Fishburne to appear in the motion picture, DIE HARD WITH A VENGEANCE, but repudiated the contract the following day. On September 4, 1994, the Company successfully demurred to all of the plaintiffs' causes of action except the breach of contract claim and on November 29, 1994, the Company successfully demurred to an amended complaint for bad faith denial of existence of contract. On December 29, 1994, the Company and the other defendants answered the First Amended Complaint for breach of contract, fraud and deceit and civil conspiracy. Summary adjudication has been obtained in favor of Mr. Vajna, who was named as an additional defendant in the original complaint. Plaintiffs are claiming damages of $1,750,000, representing the fixed compensation to which they alleged they are entitled, additional compensatory damages of up to $350,000 and general and punitive damages. The Company believes it has meritorious defenses and is defending the action vigorously. An adverse arbitration finding in the arbitration with LFO or an adverse judgment in the foregoing litigation could have a material adverse effect on the Company's financial condition, and the amount of cash payment, if any, ultimately paid to the Company's stockholders in accordance with the future plans currently being considered by the Company. The Company is a party to various other legal proceedings arising in the ordinary course of its business. The Company does not currently believe that any such proceedings will have a material adverse effect on the Company's operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No items were submitted to a vote of the Company's security holders during the final quarter of the year ended December 31, 1996. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET PRICE Since the Company's initial public offering in June 1994, the Company's Common Stock has been traded on the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System. The following table sets forth the high and low reported sale prices of the Common Stock on the NASDAQ National Market System in each of the periods indicated. The prices represent quotations between dealers without adjustment for mark-up, mark-down or commission, and may not necessarily represent actual transactions. HIGH LOW ------- ------- Fiscal 1995 First Quarter . . . . . . . . . . . . . . $11-3/8 $5-7/8 Second Quarter . . . . . . . . . . . . . . 11-1/4 5-7/8 Third Quarter . . . . . . . . . . . . . . . 6-5/8 3-3/8 Fourth Quarter . . . . . . . . . . . . . . 6 2-17/32 Fiscal 1996 First Quarter . . . . . . . . . . . . . . . $ 2-11/16 $1-1/16 Second Quarter . . . . . . . . . . . . . . 3- 5/16 1-1/16 Third Quarter . . . . . . . . . . . . . . . 2- 3/8 1-9/16 Fourth Quarter . . . . . . . . . . . . . . 2- 3/16 1-7/16 Fiscal 1997 First Quarter . . . . . . . . . . . . . . . $2- 1/16 $1-1/16 Second Quarter (through April 10, 1997) . . 1- 1/2 3/8 HOLDERS As of March 31, 1997, there were approximately 37 holders of record of the Company's Common Stock, and there were 13,446,874 shares issued and outstanding of the 20,000,000 shares authorized. DIVIDENDS Since the Company's incorporation in November 1989, the Company has not paid cash dividends on its Common Stock. The Company has no present intention to pay any cash dividends on its Common Stock. 12 ITEM 6. SELECTED FINANCIAL DATA. Set forth below are selected financial data of the Company. The financial data for each of the years ended December 31, 1992 through 1996 have been derived from the consolidated financial statements of the Company which have been audited by Ernst & Young LLP, independent auditors. The data should be read in conjunction with the consolidated financial statements and related notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Form 10-K.
Year Ended December 31, -------------------------------------------------------------------- 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- (in thousands, except per share amounts) STATEMENT OF OPERATIONS DATA: Revenues: Feature films . . . . . . . . . . . $ 39,566 $ 8,064 $108,517 $192,582 $132,940 Fee income . . . . . . . . . . . . . - 942 511 298 60 -------- -------- -------- -------- -------- Total Revenues . . . . . . . . . . . 39,566 9,006 109,028 192,880 133,000 Costs and Expenses: Amortization of film costs, residuals and participations . . . . 39,447 7,899 103,422 204,544 139,612 Selling, general and administrative expenses . . . . . . . 7,863 3,779 2,694 5,098 9,752 -------- -------- -------- -------- -------- Operating (loss) income . . . . . . . . (7,744) (2,672) 2,912 (16,762) (16,364) Interest expense . . . . . . . . . . . (3,774) (1,875) (281) (241) (448) Interest income . . . . . . . . . . . 568 111 264 941 907 -------- -------- -------- -------- -------- (Loss) income before equity in income (loss) of affiliated company . . . . . . . . . . . . . . . (10,950) (4,436) 2,895 (16,062) (15,905) Equity in income (loss) of affiliated company . . . . . . . . . 146 (387) - - - -------- -------- -------- -------- -------- Net (loss) income . . . . . . . . . . $(10,804) $ (4,823) $ 2,895 $(16,062) $(15,905) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net (loss) income per share . . . . . . $ (.64) $ .30 $ (1.23) $ (1.12) -------- -------- -------- -------- -------- -------- -------- -------- Weighted average number of shares outstanding . . . . . . . . . . 7,518 9,494 13,025 14,169 -------- -------- -------- -------- -------- -------- -------- -------- BALANCE SHEET DATA: Cash . . . . . . . . . . . . . . . . $ 1,985 $ 1,840 $ 2,665 $ 29,832 $ 27,364 Restricted cash . . . . . . . . . . . 1,000 500 - - 5,654 Film costs, net of amortization . . . 18,665 115,108 223,827 160,756 103,792 Total assets . . . . . . . . . . . . 27,102 119,992 253,891 206,257 156,548 Total debt . . . . . . . . . . . . . 32,711 93,991 143,146 73,202 47,420 Stockholders' (deficiency) equity. . . (14,808) (18,506) 44,434 51,717 36,607
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL As indicated under "Item 1 -- Business -- Recent Developments," on April 3, 1997 the Company entered into the Library Sale Agreement with Disney to sell to Disney, subject to certain conditions, substantially all of the film's in the Company's motion picture library and certain other assets. The Company also announced that it does not presently intend to commence production on any additional motion pictures and that it is in the process of considering its alternatives assuming consummation of the Film Library Sale to Disney, including disposing of those assets which are not being sold to Disney, in one or a series of transactions. In connection therewith, the Company is presently in discussions regarding the potential sale of a substantial portion of the assets that would remain assuming consummation of the Film Library Sale. The Company's announcement and the execution of the Library Sale Agreement follows a year long strategic review initiated by the Company to assess its goals and business strategies. The strategic review included discussions with other parties regarding the sale of an interest in the Company or of the entire Company. Prior to the initiation of the strategic review, the Company's goal had been to produce and arrange for release of three to five commercially successful "event" motion pictures per year. "Event" motion pictures, which feature major film stars, high quality production values and other exploitable qualities which appeal to the largest segment of the motion picture audiences in both the United States and international markets, also typically involve direct negative costs (excluding capitalized interest and overhead) substantially in excess of the industry average direct negative cost. The industry average direct negative cost in 1996 for members of the Motion Picture Association of America ("MPAA") which includes the major studios with which the Company competes was $39,835,000 (an increase of approximately 16.2% from 1994 and approximately 69.9% from 1989) and the industry average prints and advertising costs per picture in 1996 for members of the MPAA was $19,838,000 (an increase of approximately 23.4% from 1994 and approximately 114.5% from 1989). The Company has generally financed the production costs of its motion pictures through loans obtained under its credit facility with Chase and a syndicate of lenders (as described under "Liquidity and Capital Resources" below), advances and production loans from BVPD pursuant to the BVPD Agreement, and direct investments by the Company, as necessary. Typically the Company obtained advances (before commencement and during production of its motion pictures, but generally payable upon delivery of the applicable film) from pre-licensing, pursuant to single picture output agreements, as well as the BVPD Agreement, in an amount equal to a substantial percentage of the aggregate direct negative cost of each motion picture. For motion pictures with budgeted direct negative cost exceeding approximately $40,000,000, however, such advances available from third parties and BVPD would not typically cover the direct production costs of such films, thereby necessitating direct investment by the Company. In light of, among other things, the disappointing financial results of three of the Company's four 1995 releases (JUDGE DREDD, THE SCARLET LETTER and NIXON) and the 1997 releases of THE SHADOW CONSPIRACY and the continuing increase in motion picture production and releasing costs, which could necessitate increased direct investment by the Company in its motion pictures if it were to produce additional "event" motion pictures, the Company determined the Film Library Sale and cessation of production of additional motion pictures to be in the best interests of the Company's stockholders. The Company currently anticipates, as indicated under "Item 1 -- Business -- Recent Developments" and subject to the risks and considerations set forth therein, that any decision by the Company regarding its alternatives assuming consummation of the Film Library Sale, will effectively result, after provision for the Company's remaining liabilities, in a cash payment to the Company's shareholders in exchange for their equity interests in the Company. The Company reflects advances and Minimum Guarantees as income for financial reporting purposes when a picture is available for exploitation in the applicable media or territory. See Note 2 of Notes to the Company's Consolidated Financial Statements. As a matter of custom and practice and contractual requirements, the Company delays the exploitation of home video rights and television rights for a period of time after initial theatrical distribution in the applicable territory. This results in a delay in the recognition of advances and Minimum Guarantees from those media as income for financial reporting purposes. Costs accumulated in the production of a film ("unamortized film costs"), including direct negative costs, marketing costs, capitalized interest and overhead, represent a major component of the Company's assets. Unamortized film costs are amortized in the proportion that gross revenues realized bear to management's estimate of total gross revenues expected to be received. Currently, based on the Company's estimate of future revenues, approximately 92% of unamortized released film costs at December 31, 1996 will be amortized during the three year period ending December 31, 1999. The following table sets forth the unamortized film costs for the last three years: Year Ended December 31, ---------------------------- (in thousands) 1994 1995 1996 -------- -------- -------- Released films (net of amortization). . . . $ 30,082 $101,238 $ 52,077 Completed, not released . . . . . . . . . . - - 37,025 Production & development . . . . . . . . . 193,745 59,518 14,690 -------- -------- -------- Film costs, net of amortization . . . . . $223,827 $160,756 $103,792 -------- -------- -------- -------- -------- -------- A substantial portion of the unamortized film costs attributable to RENAISSANCE MAN, COLOR OF NIGHT and TOMBSTONE were amortized in 1994 due to the domestic theatrical release and international availability of these pictures in 1994. 14 The decrease in unamortized film costs in 1995 reflects the domestic theatrical release and international availability of DIE HARD WITH A VENGEANCE, JUDGE DREDD, and THE SCARLET LETTER, and the resulting amortization of a substantial portion of the unamortized film costs attributable to such pictures. Although NIXON was initially released on December 20, 1995 and is, therefore, included in "Released Films" in the amount of $43,000,000, no revenues were recognized in 1995. Unamortized film costs for 1995 also includes the production costs of AMANDA, THE SHADOW CONSPIRACY and EVITA incurred through December 31, 1995. The decrease in unamortized film costs in 1996 reflects the domestic theatrical release and international availability of EVITA and the international availability of NIXON (as described above). Although THE SHADOW CONSPIRACY was initially released on January 31, 1997, it was completed in 1996, available for release as of December 31, 1996 and accordingly included completed, not relevant in "Released Films" in the amount of $37,000,000 which reflects an adjustment to reduce the film cost to its net realizable value. Unamortized film costs for 1996 also includes the production costs of THE SHADOW CONSPIRACY, AN ALAN SMITHEE FILM and BROADWAY BRAWLER incurred through December 31, 1996. As is customary in the motion picture industry, the Company has granted and may grant to certain key creative talent involved in the production of a particular motion picture (which includes certain key officers of the Company), rights to participate in the revenues generated by such motion picture. See "Item 1 -- Business -- Distribution of Motion Pictures," and "Item 11 --Executive Compensation -- Employment Agreements." In many cases, these participation rights, and the Company's obligation to pay such participations, will not be incurred until the Company has recouped its costs of production, including capitalized interest and overhead, however, in some cases, such as with certain creative talent involved in EVITA, the Company may be obligated to pay participations before it has recouped such costs. In addition, residuals based on revenues from video and pay, cable and free television are required to be paid by the Company pursuant to the terms of collective bargaining agreements to which the Company may be subject. For purposes of determining the total amortization of film costs for each motion picture, the Company includes its estimated obligations to pay residuals and participations. Pursuant to the Library Sale Agreement, upon consummation of the Film Library Sale, Disney will assume all residuals and participation obligations with respect to the films and rights therein being sold to Disney which constitute substantially all of the Company's residuals and participation obligations. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Feature film revenues decreased from $192,582,000 for the year ended December 31, 1995 to $132,940,000 for the year ended December 31, 1996 primarily because of the lower revenues associated with NIXON, AMANDA and EVITA in 1996 as compared to the revenues from DIE HARD WITH A VENGEANCE, JUDGE DREDD and THE SCARLET LETTER in 1995. Feature film revenues for the year ended December 31, 1995 consisted mainly of domestic and international revenues from the theatrical release of DIE HARD WITH A VENGEANCE, JUDGE DREDD and THE SCARLET LETTER and domestic and certain international home video revenue from DIE HARD WITH A VENGEANCE. Although NIXON was initially released on December 20, 1995, no revenues were recognized until 1996. Feature film revenues in 1995 also included $5,000,000 received in October 1995 from a major studio in exchange for an actor relinquishing an acting commitment to the Company. Feature film revenues for the year ended December 31, 1996 consisted mainly of domestic and international revenues from the theatrical release of NIXON, home video revenues from NIXON and international revenues from the theatrical release of EVITA. Feature film revenues in 1996 also included certain domestic television revenues from TOMBSTONE, certain domestic revenues from THE SCARLET LETTER and AMANDA and continuing domestic and foreign overages from DIE HARD WITH A VENGEANCE. 15 Amortization of film costs, residuals and participations decreased from $204,544,000 for the year ended December 31, 1995 to $139,612,000 for the year ended December 31, 1996 primarily due to the decrease in feature film revenue recognized in the year ended December 31, 1996 as compared to the year ended December 31, 1995. As described in Note 2 of Notes to the Company's Consolidated Financial Statements, the Company estimates the total projected revenues to be received from the exploitation of a motion picture in all territories and media. As revenues from a motion picture are recognized, the percentage of revenues recognized to total projected revenues is applied to film costs for such motion picture to record amortization. Where applicable,unamortized film costs for a picture are written down to net realizable value for such picture based upon the Company's appraisal of current market conditions. The amortization of film costs, residuals and participations for the year ended December 31, 1996 included $10,086,000 of adjustments to reduce the cost of two films (EVITA and THE SHADOW CONSPIRACY) released in 1996 and 1997, respectively, to their net realizable values compared to $32,452,000 of adjustments for the year ended December 31, 1995 to reduce the costs of three films released in 1995 (JUDGE DREDD, THE SCARLET LETTER and NIXON) to their net realizable value. It is the Company's policy to write-off development costs incurred on projects which do not enter production within three years after development costs are first incurred and to capitalize these costs to motion pictures currently in production. In 1996, development costs of $3,246,000 were written off and were allocated to current motion pictures in production as compared to write-offs of such costs of $668,000 in 1995. Selling, general and administrative ("SG&A") expenses (excluding production overhead costs capitalized to film costs) increased from $5,098,000 for the year ended December 31, 1995 to $9,752,000 for the year ended December 31, 1996. The difference is primarily because indirect costs attributable to the special effects facility were included in general and administrative expense in the year ended December 31, 1996. For the year ended December 31, 1995, substantially all of the indirect costs attributable to the special effects facility were included in film costs, as the special effects for JUDGE DREDD, which was in production during such period, were primarily created at the facility. The increase in overhead during the year ended December 31, 1996 was also due to approximately $1,461,000 in legal expenses in connection with the Investigation and lawsuits described in Note 10 of Notes to the Company's Consolidated Financial Statements. The Company capitalizes production overhead incurred in connection with the production of a motion picture by adding such costs to the capitalized film costs of the motion picture. Production overhead being capitalized to film costs increased from $6,591,000 in the year ended December 31, 1995 to $7,918,000 in the year ended December 31, 1996, and the total of SG&A expenses and production overhead costs capitalized to film costs increased from $11,689,000 for the year ended December 31, 1995 to $17,670,000 for the year ended December 31, 1996, primarily due to the factors described above. Interest expense increased from $241,000 for the year ended December 31, 1995 to $448,000 for the year ended December 31, 1996 because certain interest expense paid to a related party was not capitalizable. The Company capitalizes applicable interest expense incurred in connection with the production of each motion picture. The Company determines the amount of interest expense to be capitalized to each motion picture in production by multiplying the average cumulative film cost of each motion picture in a given period by the overall effective interest rate paid by the Company on the aggregate amount of debt outstanding for such period. Interest expense, including interest capitalized to film costs, decreased from $11,106,000 for the year ended December 31, 1995 to $6,836,000 for the year ended December 31, 1996. This decrease was due to the lower average outstanding balance of the Company's production loans in the year ended December 31, 1996 as compared to the year ended December 31, 1995. Four films were in various stages of production during the year ended December 31, 1996 as compared to six films during the year ended December 31, 1995. 16 Fee income decreased from $298,000 for the year ended December 31, 1995 to $60,000 for the year ended December 31, 1996. Fee income represents fees earned in connection with an arrangement to collect accounts receivable on behalf of and to distribute motion pictures produced by an unrelated third party. As a result of the above, the Company had a net loss for the year ended December 31, 1996 of $15,905,000 as compared to a net loss of $16,062,000 for the year ended December 31, 1995. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Feature film revenues increased from $108,517,000 for the year ended December 31, 1994 to $192,582,000 for the year ended December 31, 1995 primarily because of the higher revenues associated with DIE HARD WITH A VENGEANCE, JUDGE DREDD and THE SCARLET LETTER as compared to the revenues from TOMBSTONE, RENAISSANCE MAN and COLOR OF NIGHT in 1994. Feature film revenues for the year ended December 31, 1994 include domestic and international revenues from the release of TOMBSTONE, RENAISSANCE MAN and COLOR OF NIGHT, the domestic home video revenues from TOMBSTONE and domestic pay television and international television revenues for MEDICINE MAN. Feature film revenues for the year ended December 31, 1995 include principally domestic and international revenues from the theatrical release of DIE HARD WITH A VENGEANCE, JUDGE DREDD and THE SCARLET LETTER and domestic and certain international home video revenue from DIE HARD WITH A VENGEANCE. Although NIXON was initially released on December 20, 1995, no revenues were recognized until 1996. Feature film revenues in 1995 also included $5,000,000 received in October 1995 from a major studio in exchange for an actor relinquishing an acting commitment to the Company. Amortization of film costs, residuals and participations increased from $103,422,000 for the year ended December 31, 1994 to $204,544,000 for the year ended December 31, 1995 primarily due to the increase in feature film revenues recognized in the year ended December 31, 1995 as compared to the year ended December 31, 1994. The amortization of film costs, residuals and participations for the year ended December 31, 1995 included $32,452,000 of adjustments to reduce the cost of two films released in 1994 (COLOR OF NIGHT and RENAISSANCE MAN) and three films released in 1995 (JUDGE DREDD, THE SCARLET LETTER and NIXON) to their net realizable value compared to $6,343,000 of adjustments for the year ended December 31, 1994 to reduce the costs of the two films released in 1994 indicated above to their net realizable value. In addition, in 1995, development costs of $668,000 were written off and were allocated to current motion pictures in production as compared to write-offs of such costs of $1,187,000 in 1994. SG&A expenses (excluding production overhead costs capitalized to film costs) increased from $2,694,000 for the year ended December 31, 1994 to $5,098,000 for the year ended December 31, 1995. This difference is primarily due to a substantial portion of the overhead attributable to the Company's visual effects facility, which was acquired in late 1994, not being capitalized into film costs in 1995. Production overhead being capitalized to films decreased from $7,236,000 for year ended December 31, 1994 as compared to $6,591,000 for the year ended December 31, 1995. The total of SG&A expenses and production overhead costs capitalized to film costs increased from $9,930,000 for the year ended December 31, 1994 to $11,689,000 for the year ended December 31, 1995 primarily due to the overhead costs associated with operations of the visual effects facility. Interest expense decreased from $281,000 for the year ended December 31, 1994 to $241,000 for the year ended December 31, 1995. This decrease was due primarily to a greater percentage of total interest expense being capitalized to film costs due to the Company's having more films in production in 1995. Interest expense of $5,465,000 was capitalized into film costs in 1994 compared to $10,865,000 in 1995. Interest expense, including interest capitalized into film costs, increased from $5,746,000 for the year ended December 31, 1994 to $11,106,000 for the year ended December 31, 1995. This increase 17 was due to the larger average outstanding balances of the Company's production loans in the year ended December 31, 1995 as compared to the year ended December 31, 1994. Six films were in various stages of production during 1995 as compared to only three films in 1994. Fee income decreased from $511,000 for the year ended December 31, 1994 to $298,000 for the year ended December 31, 1995. Fee income represented fees earned in connection with an arrangement to collect accounts receivable on behalf of, and to distribute motion pictures produced by, an unrelated third party. See Note 6 of Notes to the Company's Consolidated Financial Statements. Interest income increased from $264,000 for the year ended December 31, 1994 to $941,000 for the year ended December 31, 1995 due to higher cash balances during 1995 resulting from the Company's public offering of CommonStock which was completed in May 1995. As a result of the above, the Company had a net loss for the year ended December 31, 1995 of $16,062,000 as compared to net income of $2,895,000 for the year ended December 31, 1994. LIQUIDITY AND CAPITAL RESOURCES The Company has a Credit, Security, Pledge and Guaranty Agreement dated as of August 16, 1994 with Chase and a syndicate of lenders (collectively, the "Lenders") which provides the Company with a revolving credit facility (the "Credit Facility") initially in the amount of $150,000,000, but which has been reduced to $50,000,000 at the request of the Company in order to conserve fees on the unused portion of the commitment in light of the Company's present intention not to commence production on any additional motion pictures. The interest rate payable to Lenders on borrowings under the Credit Facility is selected by the Company as either (i) 1.50% above the London Inter-Bank Offered Rate ("LIBOR") in effect from time-to-time for one, two, three or six months (if available as determined by Chase) as selected by the Company, or (ii) a rate equal to the greatest of the prime rate plus 0.5%, the base CD rate plus 1.5%, and the federal funds rate plus 1%, as such rates are in effect from time-to-time. The commitment fee on the average daily unused portion of the commitment is 3/8ths of one percent per annum. Under the Credit Facility, the Lenders have committed to make loans available until August 31, 1997, although the Company does not currently contemplate any additional borrowings under the Credit Facility. The Credit Facility (which is secured by substantially all of the assets of the Company, including $5,000,000 in proceeds from $10,000,000 in aggregate "key man" life insurance on Mr. Vajna) matures on February 28, 1999. As of March 31, 1997, approximately $15,707,000 in borrowings were outstanding under the Credit Facility, as of the same date, the interest rate on the amounts outstanding under the Credit Facility was 7.15% per annum. Substantially all of the amounts outstanding under the Credit Facility as of March 31, 1997 relate to borrowings incurred in the production of the soon to be completed AN ALAN SMITHEE FILM and in the production of BROADWAY BRAWLER (on which production ceased after commencement of principal photography). The Company is currently in discussions with certain parties involved in the production of BROADWAY BRAWLER regarding settlement of various obligations in connection therewith including, among other things, debt incurred under the Credit Facility in connection with production of the film (approximately $8,300,000) and advances (approximately $3,000,000) received from BVPD as part of funding production (repayment of which is guaranteed in both cases by the completion guarantor for the film), as well as shutdown costs and other commitments made in connection with production of the film (approximately $4,700,000). The completion guarantor for BROADWAY BRAWLER guaranteed completion and delivery of a motion picture containing certain essential elements. As the motion picture could not be completed without such essential elements the completion guarantor is required to pay an amount equal to the amount loaned by the Lenders and advanced by BVPD to make the motion picture and such additional amounts as were required to complete delivery of the motion picture and which had been committed prior to the shut down. The Company anticipates that no significant amounts will be outstanding under its Credit Facility 18 assuming payment of the debt relating to BROADWAY BRAWLER and the assumption by Disney, in accordance with the Library Sale Agreement, of the debt (up to a maximum of $10,000,000, which the Company anticipates will not be exceeded) relating to AN ALAN SMITHEE FILM. Management of the Company believes, although no assurances can be given, that a settlement of the obligations relating to BROADWAY BRAWLER will be reached. In the event a settlement is not reached, management of the Company believes a substantial portion of any obligations the Company might otherwise have with respect to BROADWAY BRAWLER will be borne by the completion guarantor. The failure of the parties involved in the production of BROADWAY BRAWLER to settle the various obligations in connection therewith and any failure of the completion guarantor to perform under the completion guaranty could have a material adverse effect on the Company's financial condition. The Company is not in compliance with three covenants under the Credit Facility (the minimum consolidated net worth covenant, the limitation on capital expenditures and the limitation on unallocated overhead costs) at December 31, 1996 and is therefore in default under the Credit Facility. The Company intends to seek waivers of such defaults from the lenders under the Credit Facility, however there can be no assurance that lenders under the Credit Facility willgrant such waivers. If the lenders were to accelerate the amounts outstanding under the Credit Facility as a result of such defaults, such acceleration would also constitute a default under the Company's term loan agreements with BVPD described below. The Company, however, believes that it currently has sufficient resources to satisfy the amounts outstanding under the Credit Facility in the event the lenders were to accelerate the amounts outstanding thereunder as a result of such defaults. Pursuant to the BVPD Agreement, the Company currently has outstanding term loan agreements with BVPD, the proceeds of which were used to finance a portion of the costs of COLOR OF NIGHT, THE SCARLET LETTER, NIXON, THE SHADOW CONSPIRACY and EVITA. Each loan bears interest at the prime rate in effect from time to time (8.5% at March 31, 1997) plus 1.5%, and must be repaid with accrued interest on or before the earlier of (i) four years after the loan proceeds are first made available to the Company or (ii) three years after the initial domestic theatrical release of such picture. Each of these loans is secured by rights to distribute the respective motion picture in the Americas and, except for the term loan with respect to COLOR OF NIGHT which is personally guaranteed by Mr. Vajna, certain other distribution rights related to the other motion pictures financed by BVPD. The COLOR OF NIGHT term loan with a balance of $6,265,000 at March 31, 1997 is scheduled to mature in May 1997, however Disney has agreed pursuant to the Library Sale Agreement that no repayment of such loan or any other term loan is required unless the Library Sale Agreement is terminated. None of the remaining currently outstanding term loans with BVPD mature in the ordinary course in the next twelve months. At March 31, 1997, the aggregate amount outstanding under all term loans from BVPD plus accrued interest was approximately $38,400,000. The Company also has an outstanding promissory note in favor of Valdina Corporation N.V. ("Valdina") which is currently due and payable and under which an aggregate of $3,393,000 in principal and accrued interest was outstanding at March 31, 1997. See "Item 13 -- Certain Relationships and Related Transactions." In September 1995, the Company sold its interest in JUDGE DREDD to the British corporation Lloyds Commercial Leasing Ltd. and concurrently leased the film back pursuant to a 12 year lease. A portion of the sale proceeds was placed on deposit with ABN AMRO Bank (the "ABN Bank") to be used as security for a guaranty of the lease payments issued by the ABN Bank. Under the original terms of such transaction, depending on the level of the UK corporate tax rate over various time periods, the Company could have been liable for additional lease payments or entitled to a return of a portion of the amount on account at the ABN Bank. In October 1996, the parties to such transaction agreed to amend the terms of such transaction to eliminate the adjustments for changes in the UK corporate tax rate. As a result, in October 1996, $1,388,000 (net of related fees) of the funds on account at the ABN Bank were returned to the Company. In November 1996, the Company also completed a sale-leaseback transaction with respect to its motion picture EVITA. The Company sold its interest in EVITA to Lloyds General Leasing Limited and concurrently leased the film back pursuant to a 15 year lease. The Company retained approximately 19 $5,769,000 of the sale proceeds (after payment of related expenses) and placed the remainder of the sale proceeds (an amount sufficient to satisfy the anticipated aggregate lease payments over the term of the lease assuming certain adjustments do not occur) on deposit with ABN Bank to be used as security for a guaranty of the lease payments issued by the ABN Bank. The amount retained by the Company reduced unamortized film costs. The sale-leaseback transactions with respect to JUDGE DREDD and EVITA may be unwound by Lloyds in certain circumstances relating to British tax treatment of the transactions, and the Company could be liable for certain unwind costs which could be substantial, although based upon Lloyd's discussions with British taxing authorities prior to the JUDGE DREDD transaction, the Company believes it is unlikely the transactions will be unwound. Pursuant to the Library Sale Agreement, Disney has agreed, upon consummation of the Film Library Sale to either acquire the Company's subsidiaries that are the lessees in such sale-leaseback transactions or assume all of such subsidiaries' rights and obligations under such leases, however, the Company would remain responsible for any of the foregoing unwind costs. The Company's cash flows provided by / (used in) operating, investing and financing activities in 1994, 1995 and 1996 were as follows: Year Ended December 31 ----------------------- 1994 1995 1996 ------ ------ ------ Operating................. (106,973,000) 76,200,000 21,438,000 Investing................. (1,402,000) (2,434,000) (587,000) Financing................. 109,700,000 (46,599,000) (23,319,000) Cash flow from operating activities consists primarily of cash collections generated by the license or other exploitation of distribution and other film rights by the Company. Investing activities consist primarily of expenditures on property and equipment. Financing activities includes bank and other borrowings, including loans from BVPD, and other activities that give rise to additional cash to the Company (including offerings of securities). At December 31, 1996, the Company had cash on hand of approximately $27,364,000 (exclusive of restricted cash of $5,654,000). CAPITAL COMMITMENTS Management estimates that the direct negative cost of the one motion picture currently in production and scheduled for release in 1997 (AN ALAN SMITHEE FILM, which is now in post-production) will be approximately $9,500,000 (of which, through March 31, 1997, $7,845,000 in direct negative costs had been incurred). The Company estimates, based on information currently available to management, that it will receive in excess of $9,500,000 in advances and Minimum Guarantees with respect to such 1997 release and, therefore, the Company currently anticipates that it will not have made an aggregate direct investment in such picture, through the date of its release, excluding capitalized interest and overhead. There can be no assurance that the motion picture will be completed or that completion will occur in accordance with the anticipated schedule or budget, as the production, completion and distribution of motion pictures is subject to numerous uncertainties, including financing requirements, personnel availability and the release schedule of competitive films. Adjustments to the advances and Minimum Guarantees may occur on the above motion picture with respect to currently 20 licensed territories, although it is not possible to estimate at the present time whether the amount of such will be significant and whether as a result of any such adjustments the Company will have made an aggregate direct investment (excluding capitalized interest and overhead) in such film. In the event the Film Library Sale is consummated, Disney has agreed to assume the outstanding debt under the Company's Credit Facility relating to AN ALAN SMITHEE FILM (up to a maximum of $10,000,000, which the Company anticipates will not be exceeded), and the Company will transfer to Disney all Minimum Guarantees and any overages paid or to be paid with respect to the film. See Note 10 of Notes to the Company's Consolidated Financial Statements for information regarding certain additional commitments and contingencies, including, among other things, commitments in connection with motion picture projects in development and commitments under existing employment agreements and the Company's Deferred Compensation Plan. See also "Item 11 -- Executive Compensation - Employment Agreements." In addition, as described under "Item 1 -- Business -- Distribution of Motion Pictures -- Other Production and Distribution Arrangements," the Company and HPC have an arrangement whereby the Company is financially obligated to pay to HPC the lesser of 50% of the cost of the picture or $22,500,000, in exchange for (i) a 50% equity participation in DEEP RISING and (ii) a sales fee for international distribution of such motion picture. In connection with the Library Sale Agreement, upon consummation of the Film Library Sale, the Company will no longer be obligated to pay the latter amount, will relinquish the equity participation and sales fee, and will no longer serve as sales agent with respect to such motion picture. In the event the Film Library Sale is not consummated, the Company currently anticipates that it will have obtained sufficient advances and Minimum Guarantees with respect to its interest in the film to satisfy the payment obligation. The Company has a "first-look" arrangement with Oliver Stone and certain of his affiliated entities (collectively, "Stone") pursuant to which Stone submits to the Company all theatrical motion picture projects owned or controlled by Stone for the Company's development and consideration of possible production and, as consideration for Stone's submitting such projects to the Company, the Company pays certain amounts annually to Stone for overhead and development. Disney has reimbursed the Company for all amounts payable to Stone through February 10, 1997, however, pursuant to the Library Sale Agreement, if the Film Library Sale is consummated, the Company will be responsible for all payments due to Stone from February 10, 1997 through expiration of the arrangement in February 1998. The Company currently estimates the payments due under the Stone Agreement during such period will be approximately $1,875,000. The Company has a Tax Reimbursement Agreement with Mr. Vajna for the purpose of reimbursing him for certain tax liabilities he may incur which relate to the termination of the Company's S Corporation election. See "Certain Tax Matters" below. The Company believes that its existing capital, funds from operations, and other available sources of capital (including cash on hand), will be sufficient to enable the Company to fund its overhead related expenditures and currently intended reduced level of activities for up to the next 12 months. INFLATION Management believes that neither the Company's operating revenues nor costs have materially increased in the last fiscal year due to inflation or general price changes and, in particular, management believes that no material increases in revenue were attributable to increases in ticket prices for admission to motion picture theatres. 21 CERTAIN TAX MATTERS The Company and each of its domestic subsidiaries were S Corporations from their incorporation through the tax year ended December 31, 1993. Taxable income and the loss of the Company for 1993 and prior years was included in the computation of the taxable income or loss of Mr. Vajna, the Company's sole stockholder during those years. The corporate income tax returns of the Company for its 1990, 1991, 1992 and 1993 fiscal years are currently under audit by the Internal Revenue Service ("IRS") and California Franchise Tax Board, and returns for the 1995 and 1996 fiscal years remain open to audit. The Company anticipates no federal tax liability and only minimal, if any, California tax liability as a result of any income tax audits for pre-1994 years because of the S Corporation election in effect for such years. In the absence of the agreement described below, Mr. Vajna, the sole stockholder of the Company during such period, and not the Company would be responsible for any tax liability assessed as a result of such audits of pre-1994 years. The Company received approximately $20,000,000 of advances (the "Advances") during the fiscal year ended December 31, 1993. The Advances were received in connection with motion pictures that were released during the fiscal year ended December 31, 1994. Consistent with its financial accounting for the Advances and prior tax reporting practices, the Company did not include the Advances in its 1993 taxable income, and instead included such amounts -- and deducted the related costs -- in computing its taxable income for the year in which the underlying motion pictures were released, in this case 1994. It is possible, however, that the IRS will challenge the Company's tax treatment of the Advances, and if the IRS were successful in that challenge, the Company would be required to include the Advances in the computation of its 1993 taxable income without an offsetting deduction in 1993 for costs associated with those motion pictures. As a result of the S Corporation election then in effect, such an adjustment (an "Adjustment") to the Company's 1993 taxable income would cause acorresponding increase in the taxable income of Mr. Vajna and, therefore, a significant increase in Mr. Vajna's tax liability for 1993. However, if the Company has cumulative taxable income in 1994 through 1997 (exclusive of the Advances), it would obtain a benefit from the Adjustment in the form of a reduction in its 1994 taxable income and related tax liability as it would not be required to include the Advances in its 1994 taxable income. Therefore, should Mr. Vajna's tax liability for 1993 increase as a result of the Adjustment (i.e., acceleration of 1994 income into 1993) and only if the Company does have cumulative taxable income in 1994 through 1997 (exclusive of the Advances) and thereby obtains a corresponding decrease in its tax liability, the Company has agreed to reimburse Mr. Vajna for the increase in his 1993 income tax liability. For purposes of calculating cumulative taxable income for the period 1994 through 1997, the effect of any post-1997 net operating loss carrybacks will not be taken into account. From January 1, 1994 through December 31, 1996, the Company had a cumulative taxable loss (treating income relating to the Advances as taxable income in 1994) in excess of $20,000,000. In order to allow the reimbursement, if required, to be paid to Mr. Vajna under tax free provisions of the tax law, the Company paid $10,000,000 to Mr. Vajna on June 8, 1994. Mr. Vajna previously loaned the Company $10,000,000 to assist in funding the distribution. Pursuant to the Company's agreement with Mr. Vajna, should the Company not receive the tax benefit as described above, the Company may offset the $10,000,000 loan payable to Mr. Vajna against a receivable from Mr. Vajna created to reflect the possibility that the Company will not get such benefit. Pursuant to the legal right of offset, such loan payable and corresponding receivable are netted against 22 one another for financial reporting purposes. See "Item 13 -- Certain Relationships and Related Transactions -- Tax Reimbursement Agreement with Mr. Vajna." At December 31, 1996, the Company had a federal net operating loss carryforward of approximately $59,406,000 which expires in 2011. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Report of Independent Auditors, Consolidated Financial Statements and Notes to the Company's Consolidated Financial Statements appear in a separate section of this report (beginning on page F-1) following Part IV. See the Index to Financial Statements under "Item 14 -- Exhibits, Financial Statement Schedules, and Reports on Form 8-K". ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth information with respect to the current directors and executive officers of the Company: NAME AGE POSITION DATE JOINED - - ----- --- -------- CINERGI ---------- Andrew G. Vajna 52 Chairman of the Board of Directors, November 1989 President and Chief Executive Officer Warren Braverman 58 Chief Operating Officer, Chief March 1990 Financial Officer, Executive Vice President and Director Fred R. Feitshans 60 President of Production October 1991 Randolph M. Paul 45 Senior Vice President, Business April 1993 Affairs and Director Dianne Caplan 43 Director March 1990 Lebovits R. Timothy 41 Director March 1994 O'Donnell Gregory R. Paul 39 Director March 1994 The directors of the Company are divided into three classes having terms expiring at the annual meetings of the Company's stockholders in 1997 (Messrs. Braverman and Vajna), 1998 (Ms. Lebovits and Mr. Gregory R. Paul), and 1999 (Messrs. Randolph M. Paul and R. Timothy O'Donnell) or such later dates as their successors are elected and have qualified. At each annual meeting of the stockholders, successors to the class of directors whose terms expire at such meeting will be elected to serve for three-year terms and until their successors are elected and have qualified. All officers serve at the discretion of the Board of Directors, subject to any applicable employment agreements. Mr. Vajna's employment agreement with the Company provides that he will serve as Chairman of the Board and a member of the supervisory or comparable committee (including the Executive Committee), in addition to serving as Chief Executive Officer. Mr. Braverman's employment agreement provides that, during the term of the agreement, he will be included in management's slate of directors nominated for approval by the Company's stockholders. His employment agreement also provides that he is entitled to be a member of the Executive Committee during the term thereof. See "Employment Agreements" below. Randolph M. Paul and Gregory R. Paul are not related. CURRENT DIRECTORS AND EXECUTIVE OFFICERS ANDREW G. VAJNA founded the Company in November 1989 and has served as Chairman of the Board of Directors, President and Chief Executive Officer of the Company since such date. He is the producer of MEDICINE MAN, THE SCARLET LETTER, NIXON, AN ALAN SMITHEE FILMY and EVITA, and he is executive producer of TOMBSTONE, RENAISSANCE MAN, COLOR OF NIGHT, JUDGE DREDD, THE SHADOW CONSPIRACY and DIE HARD WITH A VENGEANCE. Mr. Vajna co-founded the motion picture company Carolco Pictures Inc. ("Carolco") in 1986 (and Carolco's predecessor in 1975) and served as Co-Chairman of its Board of Directors until November 1989 when he sold virtually all of his interest at that time in Carolco. During such period, Mr. Vajna was co-executive producer of many well known films, including FIRST 24 BLOOD, RAMBO: FIRST BLOOD PART II and TOTAL RECALL. In 1982, Mr. Vajna was a founder and subsequently served as President of the American Film Marketing Association. WARREN BRAVERMAN joined the Company in March 1990 and has served as Chief Operating Officer, Chief Financial Officer, Executive Vice President and a Director of the Company since such date. From 1985 through February 1990, Mr. Braverman was the Chief Financial Officer and Executive Vice President of Carolco, and he served as a director of Carolco from 1986 through February 1990. FRED R. FEITSHANS joined the Company in October 1991 and has served asPresident of Production since such date. Mr. Feitshans also served as a Director of the Company from March 1994 through May 1996. From 1986 until joining the Company, Mr. Feitshans served as Executive Vice President and a director of Carolco. Mr. Feitshans has been a film producer for 19 years with credits including CONAN THE BARBARIAN, RED DAWN, 1941, FIRST BLOOD, RAMBO: FIRST BLOOD PART II, EXTREME PREJUDICE, RAMBO III, TOTAL RECALL, TOMBSTONE, COLOR OF NIGHT, THE SHADOW CONSPIRACY and DIE HARD WITH A VENGEANCE. RANDOLPH M. PAUL has served as Senior Vice President, Business Affairs since January 1994 and a Director of the Company since March 1994. Mr. Paul began providing business affairs services to the Company in April 1993 (when he joined the Company). From 1991 through 1992, Mr. Paul was Senior Vice President of Business Affairs for Sovereign Pictures, Inc., a production company and distributor of motion pictures in international markets. From January 1, 1993 through March 31, 1993, Mr. Paul provided business affairs services to the Company as an independent contractor. From 1986 through 1990, he served as Senior Vice President of Business Affairs at Miramax Film Corp., a production and domestic distribution company. DIANNE CAPLAN LEBOVITS joined the Company in March 1990 and has served as a Director of the Company since such date. Ms. Lebovits also served as General Counsel, Executive Vice President and Corporate Secretary of the Company from March 1990 until her resignation from such positions in August 1996. From 1984 through 1988, Ms. Lebovits was a principal in, and from 1989 until joining the Company "of counsel" to, the law firm of Gipson Hoffman & Pancione, P.C. in Los Angeles, California. R. TIMOTHY O'DONNELL became a Director of the Company in March 1994. He is currently President of Jefferson Capital, a privately-held investment banking group which he co-founded in August 1989. Mr. O'Donnell serves on the board of directors of Shorewood Packaging Corporation (a specialty packaging company), and All American Communications Inc. (a diversified entertainment company). GREGORY R. PAUL became a Director of the Company in March 1994. Mr. Paul is a Managing Director of BT Securities Corporation, an affiliate of Bankers Trust Company. Mr. Paul joined Bankers Trust Company in 1981. Since 1985, Mr. Paul has specialized in the financing of media and entertainment companies. 25 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers and persons who own more than 10% of the Company's Common Stock ("10% Stockholders") to file with the Securities and Exchange Commission (the "Commission") initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Executive officers, directors and 10% Stockholders of the Company are required by Commission regulations to furnish the Company with copies of Section 16(a) forms they file. Based on a review of the copies of Section 16(a) forms furnished to the Company during and with respect to the fiscal year ended December 31, 1996, the following directors of the Company, Messrs. R. Timothy O'Donnell and Gregory R. Paul and Ms. Dianne Caplan Lebovits each filed late with the Commission their Form 5 (Annual Statement of Beneficial Ownership of Securities) with respect to the year ended December 31, 1996. In each such case, the Form 5 was required to be filed by such director solely to report an automatic grant to the director on December 1, 1996 of options to purchase 5,000 shares of Common Stock of the Company pursuant to the Company's 1994 Special Stock Option and Stock Appreciation Rights Plan. Except for the foregoing, to the Company's knowledge, based solely upon a review of the Forms 3 and 4 and amendments thereto furnished to the Company during its most recent fiscal year, the Forms 5 furnished to the Company with respect to its most recent fiscal year, and written representations of the Company's directors, executive officers and 10% Stockholders, during the fiscal year ended December 31, 1996, all Section 16(a) filing requirements applicable to the Company's executive officers, directors and 10% Stockholders were complied with. 26 ITEM 11. EXECUTIVE COMPENSATION The following "Summary Compensation Table" sets forth individual compensation information with respect to the Company's Chief Executive Officer, Andrew G. Vajna, and four other executive officers of the Company during the fiscal year ended December 31, 1996 whose total salary and bonus compensation during fiscal 1996 was in excess of $100,000, including three individuals who were serving as executive officers at the end of fiscal 1996 (Messrs. Braverman, Feitshans and Randolph M. Paul) and Ms. Lebovits, who resigned as an executive officer and employee of the Company in August 1996. Such five executives are referred to herein as the "Named Executives." The Summary Compensation Table includes compensation information with respect to the Named Executives for services rendered as executive officers to the Company and its subsidiaries during the fiscal years ended December 31, 1994, 1995 and 1996. Following the Summary Compensation Table are certain additional charts and tables detailing other aspects of the compensation of the Named Executives including (i) an Option/SAR Grants Table that includes information regarding individual grants of options made to the Named Executives during fiscal 1996 along with the grant date present value of such options, (ii) a table that indicates whether any of the Named Executives exercised options in fiscal 1996 and includes the number and value of unexercised options held by the Named Executives at December 31, 1996, and (iii) a Long-Term Incentive Plans ("LTIP") Table that includes information on LTIPs awarded during fiscal 1996 to the Named Executives. SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION ------------------------------------------ OTHER ANNUAL NAME AND COMPENSATION PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) - - ------------------ ---- ---------- ----------- ----------- ANDREW G. VAJNA 1996 $1,000,000 $250,000(1) $224,421(2) CHAIRMAN OF THE BOARD, 1995 1,000,000 250,000(1) 86,000(3) PRESIDENT AND CHIEF 1994 1,000,000 250,000(1) 67,963(3) EXECUTIVE OFFICER WARREN BRAVERMAN 1996 $531,000 $150,000 (12) CHIEF OPERATING 1995 508,000 150,000 130,000(8) OFFICER, CHIEF 1994 465,000 96,000(10) 300,000(8) FINANCIAL OFFICER AND EXECUTIVE VICE PRESIDENT DIANNE CAPLAN LEBOVITS 1996 $250,000 $ 50,000 (12) EXECUTIVE VICE 1995 387,000 100,000 130,000(8) PRESIDENT, GENERAL 1994 350,000 100,000(13) 300,000(8) COUNSEL AND CORPORATE SECRETARY (THROUGH AUGUST 1996) FRED R. FEITSHANS 1996 $500,000 -0- (12) PRESIDENT OF PRODUCTION 1995 500,000 -0- (12) 1994 500,000 -0- (12) RANDOLPH M. PAUL 1996 $215,089 $ 12,000 (12) SENIOR VICE PRESIDENT, 1995 177,000 10,000 (12) BUSINESS AFFAIRS 1994 168,759 12,500 (12) LONG TERM COMPENSATION ------------------------------------------ AWARDS PAYOUTS ------------------------- ------------ SECURITIES RESTRICTED UNDERLYING ALL OTHER NAME AND STOCK OPTIONS/ LTIP COMPENSATION PRINCIPAL POSITION AWARDS($) SARS(#) PAYOUTS($) ($) - - ------------------ ---------- ----------- ------------ ------------ ANDREW G. VAJNA -0- -0- $293,147(4) $33,350(5) CHAIRMAN OF THE BOARD, -0- -0- 32,278(4) 33,350(5) PRESIDENT AND CHIEF -0- -0- -0- 16,700(5) EXECUTIVE OFFICER WARREN BRAVERMAN -0- -0- -0- $ 5,760(9) CHIEF OPERATING -0- -0- -0- 4,260(9) OFFICER, CHIEF $450,000(11) -0- -0- 4,260(9) FINANCIAL OFFICER AND EXECUTIVE VICE PRESIDENT DIANNE CAPLAN LEBOVITS -0- 5,000 -0- $ 2,656(9) EXECUTIVE VICE -0- -0- -0- 4,260(9) PRESIDENT, GENERAL $450,000(11) -0- -0- 4,260(9) COUNSEL AND CORPORATE SECRETARY (THROUGH AUGUST 1996) FRED R. FEITSHANS -0- 10,000 -0- -0- PRESIDENT OF PRODUCTION -0- 50,000 -0- -0- -0- 10,000(14) -0- -0- RANDOLPH M. PAUL -0- 5,000 -0- -0- SENIOR VICE PRESIDENT, -0- 10,000 -0- -0- BUSINESS AFFAIRS -0- 4,000(15) -0- -0- - - --------------------- (FOOTNOTES TO THE TABLE ARE SET FORTH ON THE FOLLOWING PAGE) 27 FOOTNOTES TO THE SUMMARY COMPENSATION TABLE (1) Represents commencement fees paid pursuant to Mr. Vajna's employment agreement (described under "Employment Agreements" below) in the amount of $125,000 for each of THE SHADOW CONSPIRACY and EVITA in 1996, for each of THE SCARLET LETTER and NIXON in 1995 and for each of DIE HARD WITH A VENGEANCE and JUDGE DREDD in 1994. Although principal photography commenced on a third motion picture during 1995 (THE SHADOW CONSPIRACY), Mr. Vajna's employment agreement limits his commencement fees to $250,000 per year. The employment agreement permits the carryover of such fees to future years during the term of the agreement, subject to the $250,000 yearly maximum. Mr. Vajna has agreed to forego his commencement fee for AMANDA. Mr. Vajna received a commencement fee for AN ALAN SMITHEE FILM in 1997. (2) Includes the cost of past financial planning, legal and related services provided by the Company to Mr. Vajna in the amount of $162,000 and for which the Company's Audit Committee to determine reimbursement by Mr. Vajna will not be required. (3) Includes legal fees in the amount of $50,000 incurred by Mr. Vajna and paid by the Company pursuant to Mr. Vajna's employment agreement. Also includes in 1995, Company paid health insurance and medical reimbursements for Mr. Vajna and his family in the amount of $23,000. (4) Represents Producer's performance fees paid in connection with TOMBSTONE. See the "Long-Term Incentive Plans -- Awards in Last Fiscal Year" table below. (5) Represents Company paid term life insurance for which designees of Mr. Vajna are the beneficiaries. (8) Represents the amount paid by the Company on behalf of the Named Executive to assist the Named Executive in discharging federal and state income taxes in connection with the stock purchase disclosed in the "Restricted Stock Awards" column and described in footnote 11 below. Perquisites with respect to such Named Executive did not exceed the lesser of $50,000 or 10% of such executive officer's salary and bonus. (9) Represents imputed interest for the fiscal year (at the applicable federal rate) on an outstanding $50,000 non-interest bearing loan to the Named Executive and on an $18,000 non-interest bearing advance. (10) Represents a bonus equal to 3% of the Company's earnings before interest and taxes (but exclusive of investment income) earned pursuant to Mr. Braverman's employment agreement. (11) Represents the difference between the price paid by the Named Executive for 372,341 shares of restricted Common Stock purchased from the Company in 1994 and the value of such Common Stock on the date of purchase, which was prior to the establishment of a public trading market for the Company's Common Stock. All of Mr. Braverman's shares are vested. Ms. Lebovits' shares have been repurchased by the Company. See "Item 13 -- Certain Relationships and Related Transactions." (12) Perquisites with respect to such Named Executive did not exceed the lesser of $50,000 or 10% of such executive officer's salary and bonus. (FOOTNOTES CONTINUE ON THE FOLLOWING PAGE) 28 (13) Paid pursuant to Ms. Lebovits' employment contract which expired on March 12, 1995. (14) Represents an option for 5,000 shares of Common Stock granted in 1994 and an option for an identical number of underlying shares granted upon cancellation of such prior grant as part of a stock option cancellation and reissuance program. (15) Represents an option for 2,000 shares of Common Stock granted in 1994 and an option for an identical number of underlying shares granted upon cancellation of such prior grant as part of a stock option cancellation and reissuance program. (COMPENSATION TABLES CONTINUE ON THE FOLLOWING PAGE) 29 OPTION/SAR GRANTS IN FISCAL 1996
GRANT DATE INDIVIDUAL GRANTS VALUE -------------------------------------------------- ---------- % OF TOTAL NUMBER OF OPTIONS/SARS SECURITIES GRANTED TO EXERCISE GRANT DATE UNDERLYING EMPLOYEES OR BASE PRESENT OPTIONS/SARS IN FISCAL PRICE EXPIRATION VALUE(2) NAME GRANTED(#)(1) YEAR ($/SH) DATE ($) - - ------------------- ------------- ------------ -------- ---------- ---------- Andrew G. Vajna 0 -- -- -- -- Warren Braverman 0 -- -- -- -- Dianne Caplan Lebovits 5,000(3) (4) $2.00(6) 12/1/06 $ 8,800 Fred R. Feitshans 10,000(5) 20% $2.00(6) 9/18/06 $17,600 Randolph M. Paul 5,000(5) 10% $2.00(6) 9/18/06 $ 8,800
- - ------------------- (1) Although the Company's stock option plans provide for the granting of stock appreciation rights, no grant of such rights has been made by the Company. (2) These values were established using the modified Black-Scholes stock option valuation model which modifies the Black-Scholes model to include the impact of the right to exercise options prior to their maturity. The actual value, if any, an executive may realize upon exercise of such options will depend upon the excess of the stock price over the exercise price on the date the option is exercised. Therefore, there can be no assurance that the value realized by an executive will be at or near the value estimated by this Black-Scholes model. The estimated values under the model are based on arbitrary assumptions as to variables and as to interest rates, stock price volatility and future dividend yield. The above model assumes a period of three years after grant until exercise, a volatility of the stock price equal to that experienced in 1996 (standard deviation 0.9425), an interest rate of 6.48% (rate as of the grant date of U.S. Treasury Notes with a term of three years) and a dividend yield of 0%. (3) Options for these shares vested immediately on the date of grant (December 2, 1996). (4) These options were granted after Ms. Lebovits resigned as Executive Vice President, General Counsel and Corporate Secretary of the Company and represent an automatic grant of options pursuant to the Company's 1994 Special Stock Option and Stock Appreciation Rights Plan to Ms. Lebovits as a non-employee member of the Company's Board of Directors. See "Board Fees" below. (5) Options for one-third of these shares vest one year after the date of grant (September 18, 1996), options for another one-third vest two years after the date of grant and options for the final one-third vest three years after the date of grant. (6) Market price of the Company's Common Stock on the date of grant (September 18, 1996 in the case of Messrs. Feitshans and Paul and December 2, 1996 in the case of Ms. Lebovits). 30 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES(1)
NUMBER OF VALUE OF SECURITIES UNEXERCISED UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS/SARS OPTIONS/SARS AT AT DECEMBER 31, DECEMBER 31, 1996 1996 SHARES ACQUIRED ON EXERCISABLE/ EXERCISABLE/ EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE NAME (#) ($) (#) ($) - - ---------------- ----------- -------------- ------------- ------------- Andrew G. Vajna 0 $ 0 0 (2) $ 0 Warren Braverman 0 0 0 (2) 0 Dianne Caplan Lebovits 0 0 5,000/0 0/0 Fred R. Feitshans 0 0 29,999/65,000 0/0 Randolph M. Paul 0 0 7,001/17,000 0/0
- - -------------------------- (1) Although the Company's stock option plans provide for the granting of stock appreciation rights, no grant of such rights has been made by the Company. (2) The Named Executive did not hold any options at December 31, 1996. LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE-BASED PLANS --------------------------------- PERFORMANCE OR NUMBER OF OTHER PERIOD SHARES, UNITS UNTIL OR OTHER RIGHTS MATURATION OR THRESHOLD TARGET MAXIMUM NAME (#) PAYOUT ($ OR #) ($ OR #) ($ OR #) - - ---------------- --------------- ------------- --------- ------- -------- Andrew G. Vajna (1) (1) (3) (2) (3) Warren Braverman 0 -- -- -- -- Dianne Caplan 0 -- -- -- -- Lebovits Fred R. Feitshans 0 -- -- -- -- Randolph M. Paul 0 -- -- -- --
- - -------------------------- (1) Pursuant to his employment agreement, Mr. Vajna is entitled to receive producer's performance fees with respect to each of the Company's motion pictures for which principal photography has (FOOTNOTES CONTINUE ON THE FOLLOWING PAGE) 31 commenced after January 1, 1993 but before December 31, 1998, in an amount equal to three percent of "Gross Receipts" commencing at "Actual Break-Even" (as defined in Mr. Vajna's employment agreement and described below under "Employment Agreements") and payable solely out of the Company's receipts from the exploitation of such motion picture in excess of Actual Break-Even. (2) As of December 31, 1996, Mr. Vajna had earned producer's performance fees only on TOMBSTONE ($32,278 and $293,147 in such fees were paid in 1995 and 1996, respectively). See "Summary Compensation Table" above. (3) Not Applicable. BOARD FEES Pursuant to one of the Company's stock option plans, each member of the Compensation Committee of the Board of Directors and each other member of the Board of Directors who is not employed by the Company receives an automatic annual grant on December 1 of each year of non-qualified stock options to purchase 5,000 shares of Common Stock at the fair market value of the Common Stock on the date of grant. In addition, each member of the Board of Directors who is not employed by the Company and who serves on a committee of the Board (other than the Executive Committee) receives $20,000 per year for committee service, and the Company reimburses all directors for travel expenses incurred in connection with their activities on behalf of the Company. Directors of the Company are not otherwise compensated for serving on the Board of Directors. In addition to the foregoing, please see "Item 13 -- Certain Relationships and Related Transactions" for a description of certain transactions involving certain directors and their affiliates and the Company and its affiliates. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company's Compensation Committee was established in March 1994 and currently consists of Gregory R. Paul and R. Timothy O'Donnell. Harry M. Brittenham, formerly a Director of the Company, was appointed to the Compensation Committee in May 1996 but attended no meetings of such committee and took no action as a member of such committee prior to his resignation from such committee as of September 1, 1996. Mr. O'Donnell is the President of Jefferson Capital, a privately-held investment banking group, which was retained by the Company in 1996 to assist the Company in its strategic review. As agreed in connection therewith, in 1996, Jefferson Capital received a retainer of $75,000 and was reimbursed expenses amounting to approximately $13,000. In the event the Film Library Sale is successfully consummated, Jefferson Capital will be entitled to receive an additional fee of approximately $472,000. In the event additional dispositions of assets or other similar transactions are consummated, Jefferson Capital will also be entitled to additional fees based upon the size of such transactions. 32 INDEMNIFICATION Pursuant to Article Tenth of the Company's Restated Certificate of Incorporation, Article V of the Company's Bylaws, indemnity agreements entered into between the Company and certain of its officers and directors, and the provisions of Section 145 of the Delaware General Corporation Law, the Company is advancing the expenses of certain of its employees, officers and directors other than Mr. Vajna ("Indemnitees") which they may incur in connection with the Investigation. The Indemnitees have undertaken to reimburse the Company for their expenses if it is ultimately determined that they are not entitled to be indemnified. In addition, Mr. Vajna has undertaken to reimburse the Company under certain circumstances with respect to the expenses of the Indemnitees. Given the current uncertainty regarding the scope and duration of the Investigation and the amount of expenses which may be incurred by the Indemnitees in connection with the Investigation, there is no basis upon which to estimate the financial impact which the foregoing may have on the Company. The Company also advanced the expenses of certain of its employees, officers and directors in connection with the purported class action lawsuits which were dismissed in January 1997. See "Item 3 -- Legal Proceedings" and "Item 13 -- Certain Relationships and Related Transactions." EMPLOYMENT AGREEMENTS ANDREW G. VAJNA. Andrew G. Vajna has an employment agreement with the Company, dated as of January 1, 1994, which was amended as of December 16, 1994 (all references to his employment agreement herein are to the employment agreement, as amended). The employment agreement provides for his services as Chairman of the Board of Directors, Chief Executive Officer, and a member of the Executive (or comparable) Committee, for a term which commenced as of January 1, 1994 and ends December 31, 1998 (the "Term"). Although Mr. Vajna's production services are exclusive to the Company during the Term, the agreement permits Mr. Vajna to continue to be actively involved in the management of certain corporations in which he has a direct or indirect ownership interest and which include Intercom KFT, a distributor of motion pictures in Hungary to which the Company licenses Hungarian distribution rights in various media for its motion pictures and Blackburn International Casino KFT, the operator of a casino in Hungary. See "Item 13 -- Certain Relationships and Related Transactions." As compensation for his services, Mr. Vajna receives fixed compensation of $1,000,000 per year. Mr. Vajna is also entitled to receive a commencement fee of $125,000 for each motion picture produced by the Company for which principal photography commences after January 1, 1994, up to a maximum of $250,000 per year (but with carryovers of such fees allowed subject to the yearly maximum). Mr. Vajna is also entitled to receive producer's performance fees with respect to each of the Company's motion pictures for which principal photography has commenced after January 1, 1993 but before the end of the Term in an amount equal to three percent of Gross Receipts commencing at Actual Break-Even and payable solely out of the Company's receipts from the exploitation of such motion picture in excess of Actual Break-Even. "Gross Receipts" are all amounts received by or credited to the account of the Company or an affiliate in connection with the worldwide exploitation of a motion picture. "Actual Break-Even" for each picture is the sum of (i) the Company's and its affiliates' actual production costs and interest thereon, (ii) certain related financing fees and costs, (iii) overhead and (iv) certain distribution costs and participations. Mr. Vajna's agreement also provides for such additional incentive compensation as may be approved by the Company's Board of Directors, demand registration rights for Common Stock held by Mr. Vajna or his affiliates, and certain fringe benefits, including reimbursement of Mr. Vajna's personal, legal and accounting expenses in an amount not to exceed $50,000 per year. 33 If the agreement is terminated by Mr. Vajna due to a material breach by the Company or by the Company other than for "Cause," "Death," or "Disability" (as such terms are defined in the agreement), Mr. Vajna will receive a payment equal to 200% of the aggregate of all fixed annual compensation discounted to its then present value at a discount rate of five percent per annum with respect to each future payment, plus any commencement fees, producer's performance fees and additional incentive compensation due and payable to Mr. Vajna as of the date of termination. Mr. Vajna will also receive any commencement fees and producer's performance fees to which he may thereafter become entitled relating to motion pictures for which principal photography commenced prior to termination. Mr. Vajna will also be entitled, under limited circumstances, to acquire from the Company all rights to certain projects in development at the time of such termination upon reimbursement of all costs incurred by the Company in connection with the projects, plus interest, and payment to the Company of a percentage of the revenues thereafter generated by each such project. Mr. Vajna's employment agreement, which provides that Mr. Vajna's production services will be exclusive to the Company, permits Mr. Vajna to continue to be involved in the management of certain corporations in which he has direct and indirect ownership interests. The Company does not anticipate that Mr. Vajna's other activities will occupy a material portion of Mr. Vajna's time and the BVPD Agreement provides that such activities may not materially interfere with Mr. Vajna's activities on behalf of the Company. WARREN BRAVERMAN. Warren Braverman has an employment agreement, dated as of January 1, 1994, which was amended as of December 16, 1994 and as of January 1, 1997 (all references to his employment agreement herein are to the employment agreement, as amended). The employment agreement provides for his services as Chief Operating Officer of the Company from January 1, 1994 through December 31, 1999. Under the agreement, Mr. Braverman receives an annual base salary of $556,000 for 1997, $584,000 for 1998 and $613,000 for 1999 ("Fixed Annual Compensation"). Pursuant to the last amendment, Mr. Braverman also received a signing bonus of $600,000 of which $300,000 was used to fully repay two loans previously made by the Company to Mr. Braverman (a $250,000 loan bearing interest at 7% per annum, which matured December 31, 1996 and a $50,000 interest free loan maturing September 30, 1997). Mr. Braverman is also entitled to annual incentive compensation in an amount equal to 3% of the Company's earnings before interest and taxes (but exclusive of investment income) ("EBIT") until Mr. Braverman has received $1,000,000 of such incentive compensation, 2% of EBIT for the next $1,000,000 of such incentive compensation, and 1% of EBIT thereafter ("Incentive Compensation"). If Mr. Braverman's employment is terminated by the Company for any reason other than material breach, death or disability or by Mr. Braverman due to a material breach by the Company, Mr. Braverman is entitled to receive all (i) Fixed Annual Compensation, (ii) Incentive Compensation and (iii) health insurance benefits due under the agreement through the term. If Mr. Vajna's employment agreement is terminated due to a material breach of such agreement by the Company, Mr. Braverman will be entitled to terminate his employment agreement (subject to a twelve month transition period during which he shall continue to serve thereunder) and to receive all compensation described in the preceding sentence. Mr. Braverman is not required to mitigate his damages in the event he is entitled under the employment agreement to terminate his employment. 34 CERTAIN INFORMATION CONCERNING STOCK OPTION AND OTHER PLANS STOCK OPTION PLANS. The Company has two stock-based incentive compensation plans for the Company's employees and certain other persons providing services to the Company: the Cinergi Pictures Entertainment Inc. 1994 Basic Stock Option and Stock Appreciation Rights Plan (the "Basic Plan") and the Cinergi Pictures Entertainment Inc. 1994 Special Stock Option and Stock Appreciation Rights Plan (the "Special Plan") (collectively, the "Plans"). All of the Company's regular full-time employees, and all other persons (including directors and consultants) providing services to the Company on a regular or substantial basis, are eligible to participate in the Basic Plan. The Special Plan is designed to provide alternative procedures in meeting special requirements imposed by federal income tax law relating to compensation expense deductions for making grants to certain key or highly compensated employees. Accordingly, only officers, directors who are also employed by the Company and non-clerical salaried employees of the Company are eligible to participate in the Special Plan. As of March 31, 1997, options to purchase an aggregate of 255,000 shares of Common Stock were outstanding under the Plans with exercise prices ranging from $2 to $8 per share. DEFERRED COMPENSATION PLAN. Under the Company's Deferred Compensation Plan, the executive officers of the Company may elect by written notice to the Company on or before the close of the fiscal year to credit to an account such portion of the employee's base annual compensation and/or incentive compensation for the succeeding year as may be selected by the employee. Amounts credited tothis account shall be kept in cash or invested in mutual funds, stocks, bonds, securities or such other assets as may be selected by the Board of Directors of the Company or an investment advisor selected by the Company. The return (if any) or loss from these investments will be credited or debited (as the case may be) to such account. To date, Mr. Braverman is the only executive officer of the Company who has elected to participate in the Deferred Compensation Plan. 35 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of March 31, 1997 by (i) each person known to the Company to be the beneficial owner of more than 5% of the Common Stock, (ii) each director of the Company, (iii) each of the Named Executives listed in the Summary Compensation Table under "Item 11 -- Executive Compensation" above, and (iv) all executive officers and directors as a group. Unless otherwise indicated in the footnotes following the table, the persons as to whom the information is given had sole voting and investment power over the shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable. PERCENT OF NUMBER OF SHARES COMMON STOCK OF COMMON STOCK BENEFICIALLY BENEFICIALLY OWNED OWNED NAME (1)(2) (1)(2) - - ---- ------------------ -------------- Andrew G. Vajna . . . . . . . . 5,863,872 (3)(4) 43.6% Valdina Corporation N.V.(5) . . 957,446 7.1% Warren Braverman . . . . . . . . 373,591 (6) 2.8% Dianne Caplan Lebovits . . . . . 7,500 (7) * Fred R. Feitshans . . . . . . . 29,999 (8) * Randolph M. Paul . . . . . . . . 7,001 (8) * R. Timothy O'Donnell . . . . . . 76,250 (9) * Gregory R. Paul . . . . . . . . 15,000 (8) * The Walt Disney Company . . . . . 705,556 (10) 5.2% All executive officers & directors as a group (seven persons) 6,000,872 (11) 44.2% - - ------------------ * Less than 1% (1) The number of shares and percentages in this table and accompanying footnotes are based on 13,446,874 shares of Common Stock outstanding as of March 31, 1997. (2) The shares of Common Stock underlying immediately exercisable options, warrants or rights, or immediately convertible securities, or shares of Common Stock underlying options, warrants, rights or convertible securities that become exercisable or convertible within 60 days of March 31, 1997, are deemed to be outstanding for the purpose of calculating the number and percentage beneficially owned by the holder of such options, warrants, rights or convertible securities, but are not deemed to be outstanding for the purpose of computing the percentage beneficially owned by any other person. (FOOTNOTES CONTINUE ON THE FOLLOWING PAGE) 36 (3) Includes the right to vote 372,341 shares of Common Stock pursuant to an irrevocable proxy granted to Mr. Vajna by Mr. Braverman (which continues during Mr. Braverman's ownership of the shares for the maximum period permitted by applicable law). See footnote 6 below. Does not include any shares of Common Stock held by Valdina which is indirectly owned 49.9% by Mr. Vajna and 50.1% by The Mong Family Trust. See footnote 5 below. Mr. Vajna has disclaimed beneficial ownership of any such shares as he does not have voting, investment or dispositive power with respect to such shares. In the event Mr. Vajna were deemed to beneficially own the shares of Common Stock held by Valdina, he could be deemed to beneficially own 6,821,318 (50.7%) of the shares outstanding as of March 31, 1997. (4) The business address of Mr. Vajna is in care of the Company, 2308 Broadway, Santa Monica, California 90404. (5) Valdina Corporation N.V. is indirectly beneficially owned 49.9% by Mr. Vajna and 50.1% by The Mong Family Trust, which benefits certain descendants of Mong Hing Yan, including the son of Mr. Vajna, and the trustee of which is BT Trustees (Jersey) Ltd. The address of Valdina is Castorweg 22-24, Suite 10, P.O. Box 155, Curacao, Netherlands Antilles, and the address of The Mong Family Trust is P.O. Box 634, Kensington Place, 46- 50 Kensington Place, St. Helier, Jersey, JE4 8YZ, Channel Islands. (6) Of the shares indicated, 372,341 shares are subject in the event of transfer to a right of first refusal in favor of Mr. Vajna at the then current market price. In addition, Mr. Braverman has granted the right to vote such 372,341 shares to Mr. Vajna pursuant to an irrevocable proxy (which continues during Mr. Braverman's ownership of the shares for the maximum period permitted by applicable law). (7) Includes 5,000 shares of Common Stock subject to immediately exercisable options granted under the Special Plan. (8) Represents shares of Common Stock subject to immediately exercisable options granted under the Special Plan. (9) Includes 50,000 shares of Common Stock issuable pursuant to a warrant held by Jefferson Capital Group, Ltd. ("Jefferson Capital"), of which Mr. O'Donnell serves as President. Also includes 15,000 shares of Common Stock subject to immediately exercisable options granted under the Special Plan. (10) Includes 150,000 shares of Common Stock issuable pursuant to a warrant beneficially owned by The Walt Disney Company. See "Item 13 -- Certain Relationships and Related Transactions -- Certain Transactions with BVPD and Disney." The address of The Walt Disney Company is 500 South Buena Vista Street, Burbank, California 91521. (11) Includes 50,000 shares of Common Stock issuable pursuant to a warrant held by Jefferson Capital (see footnote 9 above) and an aggregate of 72,000 shares of Common Stock underlying options granted to Mr. Feitshans, Mr. Randolph M. Paul, Ms. Lebovits, Mr. Gregory R. Paul and Mr. O'Donnell (see footnotes 7, 8 and 9 above). 37 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CERTAIN TRANSACTIONS WITH MANAGEMENT (OTHER THAN MR. VAJNA) On December 30, 1996 and January 2, 1997, respectively, the Company repurchased 372,341 shares of the Company's Common Stock held by Dianne Caplan Lebovits, a Director and former executive officer of the Company, and 372,341 shares of the Company's Common Stock held by the law firm of Ziffren, Brittenham, Branca & Fischer ("ZBBF"), which provides legal services to the Company. Harry M. Brittenham, a partner in ZBBF, was a member of the Company's Board of Directors from July 1994 until March 13, 1997. Ms. Lebovits, ZBBF and Warren Braverman, a Director and executive officer of the Company, had each originally acquired 372,341 shares of the Company's Common Stock pursuant to separate Stock Purchase Agreements dated as of January 1, 1994 (each an "Original Purchase Agreement") and in exchange for payment of the aggregate par value of such shares in cash and a full recourse secured promissory note in the principal amount of $450,000, bearing interest at the rate of 6% per annum, and secured by a pledge of the 372,341 shares of Common Stock purchased (each a "Purchase Note"). The principal of each note was payable to the Company on December 31, 1998 or, in the event of the earlier termination of the purchaser's relationship with the Company (continued employment by the Company with respect to Mr. Braverman and Ms. Lebovits and continued engagement by the Company with respect to ZBBF), upon the date any shares vest and can be sold without restrictions under the Securities Act of 1933 or pursuant to Rule 144 thereunder. Ms. Lebovits subsequently split her Purchase Note into two separate notes (the "Purchase Notes"), one secured by new collateral consisting of marketable securities and one secured by shares of Common Stock of the Company. Pursuant to the terms of the repurchase, in consideration for the sale by ZBBF of its 372,341 shares to the Company, the Company canceled the Purchase Note of ZBBF under which $450,000 was then outstanding. Pursuant to the terms of Ms. Lebovits' Original Purchase Agreement, 51,714 shares of the Common Stock held by Ms. Lebovits which were not vested at the time of her resignation as Executive Vice President, General Counsel and Corporate Secretary of the Company in August 1996, were repurchased at the original purchase price (approximately $1.21 per share) by reducing the aggregate balance due under her Purchase Notes by approximately $62,500. In consideration for the sale by Ms. Lebovits to the Company of the other 320,627 shares repurchased, the Company canceled the remaining balances of her Purchase Notes under which approximately $468,000 was then outstanding (after the $62,500 reduction). The largest amount of all indebtedness owed to the Company by ZBBF at any time during 1996 was $484,000 (which consisted solely of amounts owing under its Purchase Note). The largest amount of all indebtedness owed to the Company by Ms. Lebovits at any time during 1996 was $571,000 (which consisted of amounts owing under her Purchase Notes, as well as a $50,000 non-interest bearing loan extended to Ms. Lebovits in March 1990 and canceled by the Company in connection with her resignation as an executive officer and employee). The largest amount of all indebtedness owed to the Company by Mr. Braverman at any time during 1996 was $848,000, which consisted of a non-interest bearing advance of $18,000, amounts owing under his Purchase Note, as well as amounts owing under a $250,000 interest bearing (7%) loan and a $50,000 non-interest bearing loan entered into pursuant to the terms of his employment agreement, which latter two loans were repaid by Mr. Braverman in January 1997 upon receipt of the signing bonus in connection with the latest amendment to his employment agreement. See "Item 11 -- Executive Compensation - Employment Agreements." As of March 31, 1997, the total amount outstanding under Mr. Braverman's Purchase Note was $538,000. 38 In connection with the Investigation described herein under "Item 3 - - --Legal Proceedings," the Company has determined to advance the expenses of certain of the Company's employees, officers and directors other than Mr. Vajna ("Indemnitees") which the Indemnitees may incur in connection with the Investigation. See "Item 11 -- Executive Compensation -- Indemnification." As of March 31, 1997, the Company had advanced an aggregate of $157,000 on behalf of the Indemnitees. The Company also advanced the expenses of the current and former officers and directors named as defendants in two purported class action lawsuits filed in May 1996 and dismissed in January 1997 (the "Litigation Indemnitees") which they incurred in the defense of the litigation. See "Item 3 -- Legal Proceedings." The Litigation Indemnitees were jointly represented with the Company. As of March 31, 1997, total fees incurred on behalf of the Company and the Litigation Indemnitees in connection with this litigation were approximately $330,000. As the lawsuits were dismissed, no reimbursement of such advances is due to the Company from the Litigation Indemnitees. CERTAIN TRANSACTIONS WITH BVPD AND DISNEY The BVPD Agreement (which, in accordance with the Library Sale Agreement, will be terminated upon consummation of the Film Library Sale) provides for BVPD to distribute 25 of the Company's qualified films in all media, including theatrical, in the Americas. As of March 31, 1997, nine of the Company's motion pictures had been distributed pursuant thereto. See "Item 1 -- Business --Recent Developments" "-- Motion Picture Production," and "-- Distribution of Motion Pictures -- Distribution in the Americas -- The BVPD Agreement." In addition to the BVPD Agreement, the Company has also separately licensed to Disney certain distribution rights to EVITA in Spain and to NIXON in Japan, China, Switzerland and German speaking Europe. In addition, by a letter agreement between the Company and Buena Vista International, Inc. ("BVI"), an affiliate of BVPD, dated as of August 1, 1994, the Company granted to BVI certain distribution rights in DIE HARD WITH A VENGEANCE in certain foreign territories (including the Banelux region, French speaking Europe and Africa, German speaking Europe, the United Kingdom, Spain, Latin America, Scandinavia, Taiwan, Switzerland, Portugal and Greece) in exchange for advances paid upon delivery of such picture to BVI in 1995. BVI is obligated to pay all costs associated with distribution of the picture in the territories specified and is entitled to receive certain specified percentages of gross revenues generated in each media as distribution fees, and then to recoup the amounts advanced to the Company, together with interest thereon, as well as its costs of distribution. The Company is thereafter entitled, with certain exceptions, to receive overages, i.e., the remainder of all revenues generated by the picture in excess of BVI's ongoing distribution fees and costs. In accordance with the Library Sale Agreement, upon consummation of the Film Library Sale, the Company will relinquish its rights to such overages otherwise payable to the Company by BVI after January 1, 1997. Pursuant to the BVPD Agreement, the separate license agreements with respect to distribution of EVITA and NIXON in certain international territories, and the DIE HARD WITH A VENGEANCE letter agreement, during the year ended December 31, 1996, BVPD earned aggregate fees of $14,909,000 with respect to distribution of the Company's motion pictures (including DIE HARD WITH A VENGEANCE). BVPD is a wholly owned subsidiary of The Walt Disney Company which beneficially owns, as of March 31, 1997, approximately 5.2% of the Company's Common Stock. See "Item 12 -- Security Ownership of Certain Beneficial Owners and Management." In 1996, BVPD paid the Company $3,016,000 in overages with respect to certain of the Company's previously released motion pictures, $18,168,000 in advances and minimum guarantees (including $3,000,000 with respect to Broadway Brawler). See also "Item 1 - Business - Major "Customers" for additional information regarding the portion of the Company's Consolidated revenues represented by the Company's transactions with Disney, as well as the Company's Consolidated Financial Statements. In accordance with the BVPD 39 Agreement, in 1996, BVPD also advanced amounts to cover the costs of theatrical release of two films in the United States and Canada, including certain amounts to cover the costs of manufacturing release prints, advertising and publicity. The Company has also assisted Disney in the international pre-licensing of the motion picture UP CLOSE AND PERSONAL. All sales agency fees paid to the Company by Disney in 1996 with respect thereto were paid by the Company to an international sales company unaffiliated with the Company utilized in connection with such pre-licensing. Upon consummation of the Film Library Sale, the Company will no longer serve as sales agent and will relinquish all sales agency fees with respect to such arrangement. As described in "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," the Company has entered into term loan agreements with BVPD to finance motion pictures. During 1996, the Company borrowed $7,907,000 under three existing term loan agreements to fund certain production costs of NIXON, THE SHADOW CONSPIRACY and EVITA. Each BVPD term loan bears interest at the prime rate in effect from time to time (8.5% at March 31, 1997) plus 1.5% and is to be repaid with accrued interest on or before the earlier of (i) four years after the loan proceeds are first made available to the Company or (ii) three years after the initial domestic theatrical release of such picture. Although the term loan with respect to one film is scheduled to mature on May 9, 1997, Disney has agreed pursuant to the Library Sale Agreement that no repayment of such loan or any other term loan is required unless the Library Sale Agreement is terminated. Each of these loans is secured by rights to distribute the respective motion picture in the Americas and, except for one term loan which is personally guaranteed by Mr. Vajna, certain other distribution rights related to the other motion pictures financed by BVPD. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for a discussion of additional term loans with BVPD. In 1996, one term loan was reduced by $575,000 by offsetting certain funds due to the Company from BVPD. At March 31, 1997, the aggregate amount outstanding (including accrued interest) under all such term loans was $38,400,000. In July 1996, the Company assigned to Disney the development project EATERS OF THE DEAD in exchange for the following upon production and release of a theatrical motion picture based on such project: reimbursement of $767,298 (plus interest) of the Company's development costs relating to such project, fixed compensation of $1,500,000 if the Company provides the executive producing services of Mr. Vajna in connection with such production, and a participation interest in such project. Disney has informed the Company that production of such motion picture will commence in the near future. Pursuant to the Library Sale Agreement, the Company agreed, upon consummation of the Film Library Sale, to relinquish such amounts due in connection with production and release of the film and the participation interest. In addition, through March 31, 1997, Disney had advanced approximately $2,504,000 to assist in the development of the Company's motion picture project SMOKE AND MIRRORS. Pursuant to the Library Sale Agreement, upon consummation of the Film Library Sale, Disney will receive a right of first negotiation, and in certain cases, a right of last refusal to acquire or participate in the financing and distribution of such project and will also be entitled to reimbursement of its development costs in such project in the event the project is made into a film. In addition, the Library Sale Agreement provides that the amounts contributed by Disney to the project will continue to accrue interest at $528 per day and that all such obligations will be secured. In connection with the Company's decision to produce the film project EVITA, the Company became obligated to repay the development costs previously expended on such project by certain parties, including $3,900,000 by Disney. The Company and Disney have agreed that such amount will be offset against production advances otherwise due to the Company from BVPD and a reduction in the unused availability under the term loans with BVPD for Nixon, Evita and The Shadow Conspiracy. During 1996, Disney also paid the Company $2,685,000 to reimburse the Company for its costs during such period under its first look arrangement with Oliver Stone and his affiliates. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." In 1996, the Company also entered into an arrangement with a subsidiary of Disney with 40 respect to a motion picture tentatively entitled DEEP RISING. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." CERTAIN TRANSACTIONS WITH MR. VAJNA AND CERTAIN OTHER STOCKHOLDERS In 1994, the Company acquired all of the outstanding stock of one of the Company's principal subsidiaries, from Valdina Corporation N.V. ("Valdina") for consideration consisting of a $3,300,000 promissory note of the Company (bearing interest at the rate of 6% per annum, with principal and interest originally due January 17, 1995) and 957,446 shares of Common Stock. The maturity date of the promissory note was subsequently extended first until July 17, 1996 and then until January 17, 1997, and the interest rate after January 17, 1996 was 7% per annum. During 1996, $600,000 was paid under the promissory note. The promissory note is currently due and payable in its entirety. As of March 31, 1997, an aggregate of $3,393,000 in principal and accrued interest was outstanding under the promissory note. Valdina beneficially owns, as of March, 31, 1997, approximately 7.1% of the Company's Common Stock. See "Item 12--Security Ownership of Certain Beneficial Owners and Management." Valdina is indirectly beneficially owned 49.9% by Mr. Vajna and 50.1% by the Mong Family Trust, which benefits certain descendants of Mong Hing Yan, including the son of Mr. Vajna, and the trustee of which is BT Trustees (Jersey) Limited ("The Mong Family Trust"). In 1994, in order to assist the Company in obtaining financing for and completion bonds on certain films, Valdi Corporation N.V. ("Valdi") entered into an arrangement with the Company (which has since expired) whereby Valdi undertook to have letters of credit issued for the benefit of the Company's lenders to provide additional collateral under the Company's credit facility. Valdi is owed a facility fee of $110,220 in connection therewith. In addition, the Company has non-interest bearing receivables of $258,000 from Valdi and or affiliate representing amounts due from Valdi and or affiliate to reimburse the Company for financial planning and related services provided to Valdi. The Company has subsequently agreed to forgive $33,000 of such amount. Valdi is indirectly beneficially owned 49.9% by Mr. Vajna and 50.1% by The Mong Family Trust. Valdi beneficially owns approximately 84.7% of Intercom KFT ("Intercom"), a distributor of motion pictures in Hungary to which the Company licenses Hungarian distribution rights to its motion pictures in various media. The Company and Intercom have an agreement in principle for an output agreement for the Hungarian distribution of all of the Company's films, beginning with NIXON. The agreement in principle provides for a distribution fee to Intercom of 17.5% of the gross receipts of Intercom from distribution of such films plus reimbursement of distribution expenses. During the Company's fiscal year ended December 31, 1996, Intercom received distribution fees of approximately $189,000 with respect to this distribution arrangement with the Company. In addition, Intercom has assisted the Company by paying to the Hungarian tax authorities on behalf of the Company value added taxes incurred by the Company in connection with its distribution of films through its Hungarian subsidiary, Cinergi Productions KFT ("CPKFT"). Intercom subsequently files for and receives the refund of such taxes. During 1996, the Company paid Intercom approximately $349,000 representing the aggregate accrued interest on amounts advanced in 1996 and certain prior year by Intercom to the Hungarian tax authorities from the date of payment of each such advance until receipt by Intercom of the applicable refund, and Intercom's out of pocket costs incurred in connection iwth Intercom's activities on behalf of the Company 1996 and prior years. The Company believes that the terms of such arrangements are no less favorable to the Company than those that could have been obtained from an independent third party at the time such arrangements were entered into. 41 The Company leases the building housing its corporate headquarters in Santa Monica, California from Mr. Vajna. During the calendar year 1996, the Company made total lease payments of $462,000 to Mr. Vajna under the lease, which provides for monthly rental payments of $38,500 (approximately $1.75 per square foot) and expired on May 1, 1996. Subsequent thereto, the Company has been leasing its corporate headquarters on the same general terms but on a month-to-month basis. The Company believes that the terms of such lease are no less favorable to the Company than those that could have been obtained from an independent third party at the time such lease was entered into. The Company and its affiliates have also obtained air charter services in the past from a corporation owned by Mr. Vajna and may obtain future air charter services from such corporation. During the Company's fiscal year ended December 31, 1996, the Company incurred air charter expenses to such corporation in the amount of $229,000, pursuant to a protocol approved by the independent members of the Company's Board of Directors. At March 31, 1997, no amounts were owed by the Company for such air charter expenses. During 1996, Mr. Vajna also received financial planning, legal and related services from the Company on terms approved by the Company's Audit Committee including the agreement of Mr. Vajna to pay $142,000 to the Company. See also, the "Summary Compensation Table." Mr. Vajna is engaged in preliminary discussions with the Company with respect to (and he has indicated in a Schedule 13D filed with the Securities and Exchange Commission that he may seek to bid for) certain of the assets that would remain assuming consummation of the Film Library Sale including, without limitation, certain development projects and the "Cinergi" name. No agreements have been entered into with respect thereto and any such agreement would be subject to approval of the Company's independent Board members, as well as other applicable approvals. TAX REIMBURSEMENT AGREEMENT WITH MR. VAJNA As described above under "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Tax Matters," the Company received approximately $20,000,000 of advances (the "Advances") during the fiscal year ended December 31, 1993. The Advances were received in connection with motion pictures that were released during the fiscal year ending December 31, 1994. Consistent with its financial accounting for the Advances and prior tax reporting practices, the Company did not include the Advances in its 1993 taxable income, and instead included such amounts -- and deducted the related costs -- in computing its taxable income for the year in which the underlying motion pictures were released, in this case 1994. It is possible, however, that the IRS will challenge the Company's tax treatment of the Advances, and if the IRS were successful in that challenge, the Company would be required to include the Advances in the computation of its 1993 taxable income without an offsetting deduction in 1993 for costs associated with those motion pictures. As a result of the S Corporation election then in effect, such an adjustment (an "Adjustment") to the Company's 1993 taxable income would cause a corresponding increase in the taxable income of Mr. Vajna and, therefore, a significant increase in Mr. Vajna's tax liability for 1993. However, if the Company has cumulative taxable income in 1994 through 1997 (exclusive of the Advances), it would obtain a benefit from the Adjustment in the form of a reduction in its 1994 taxable income and related tax liability as it would not be required to include the Advances in its 1994 taxable income. In order to alleviate the additional tax burden on Mr. Vajna relating solely to the Adjustment for the Advances, the Company and Mr. Vajna entered into a Tax Reimbursement Agreement (the "Tax Agreement"), dated as of December 30, 1993. Pursuant to the terms of the Tax Agreement, the Company paid Mr. Vajna $10,000,000 (the "Reimbursement Payment") on June 8, 1994. Such amount represents the tax liability which could be imposed on Mr. Vajna, exclusive of interest and penalties, if the Advances are included in 1993 taxable income. The tax associated with the increase in taxable income 42 to Mr. Vajna resulting from the Adjustment will exceed the potential reduction in taxes realized by the Company due to the difference between personal and corporate tax rates and approximately $1,500,000 of the Reimbursement Payment is intended to reimburse Mr. Vajna for such difference. In order to assist the Company in funding the Reimbursement Payment, Mr. Vajna loaned $10,000,000 to the Company on May 12, 1994 in exchange for a promissory note (the "Stockholder Note"). The Tax Agreement provides that Mr. Vajna will be required to repay all of the Reimbursement Payment to the Company in the following circumstances: (i) a final determination by the IRS or the courts either that the Company is not required to make an Adjustment or is required to include the Advances in 1993 taxable income but also is permitted to deduct all capitalized costs incurred with respect to the Advances in 1993, (ii) lapse of the applicable statutes of limitation with no Adjustment having been made or (iii) the Company does not have cumulative taxable income for the period 1994 through 1997 taking into account the Advances, even if Mr. Vajna is assessed additional taxes with respect to the Adjustment. The Tax Agreement also provides for a pro rata repayment of the Reimbursement Payment by Mr. Vajna if the Company earns cumulative taxable income for the 1994 through 1997 period (including the Advances in 1994 income for this purpose) that is greater than zero but less than $20,000,000. If, on the other hand, there is an Adjustment and the Company has earned cumulative taxable income for the 1994 through 1997 period of $20,000,000 or more (treating income relating to the Advances as taxable income in 1994), then Mr. Vajna will not be required to repay any portion of the Reimbursement Payment. The Tax Agreement also permits the Company after April 15, 1995 to amend its 1993 tax return with Mr. Vajna's concurrence to take into account the Advances in 1993; provided, however, that Mr. Vajna will be subject to the obligation to repay the Reimbursement Payment in the same manner as set forth above. For purposes of calculating cumulative taxable income for the period 1994 through 1997, the effect of any post-1997 net operating loss carrybacks will not be taken into account. From January 1, 1994 through December 31, 1996, the Company had a cumulative taxable loss (treating income relating to the Advances as taxable income in 1994) in excess of $20,000,000. In the event Mr. Vajna repays all or any portion of the Reimbursement Payment to the Company, then, until December 31, 2010, the Company will be obligated to return to Mr. Vajna a portion (up to 100%) of the Reimbursement Payment equal to the reduction in taxes thereafter realized by the Company to the extent a net operating loss in 1994 (or carried back to 1994) is subsequently utilized to reduce the Company's tax obligations. Such determination will be made on March 15, 2011 and any amount to be paid by Mr. Vajna as a result will be paid at that time. Interest and principal under the Stockholder Note will become due and payable on April 30, 1998 unless it has not been finally determined whether Mr. Vajna will have to pay some or all of the Reimbursement Payment pursuant to the Tax Agreement, in which case the maturity date will be extended. The Stockholder Note, which bears interest at a floating rate equal to the federal short term rate plus two percent (2%) per annum, is subject to offset against amounts that may be owed to the Company by Mr. Vajna pursuant to the Tax Agreement. If at the maturity date of the Stockholder Note it has not been finally determined whether Mr. Vajna will have to repay some or all of the Reimbursement Payment, then the maturity date of the Stockholder Note will be extended to coincide with the date the Company receives a tax refund as a result of including the Advances in 1993 taxable income and not in 1994 taxable income. 43 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)1. INDEX TO FINANCIAL STATEMENTS Page(s) in Form 10-K ---------- Report of Independent Auditors . . F-1 Consolidated Financial Statements: Consolidated Balance Sheets -- December 31, 1995 and 1996 . . . . F-2 Consolidated Statements of Operations -- Years Ended December 31, 1994, 1995 and 1996 . . . . . . F-3 Consolidated Statements of Stockholders' Equity (Deficiency) -- Years Ended December 31, 1994, 1995 and 1996 . . . . . . . . . . . F-4 Consolidated Statements of Cash Flows -- Years Ended December 31, 1994, 1995 and 1996 . . . . . . . . F-5 Notes to Consolidated Financial Statements . . . . . . . . . . . . F-7 (a)2. INDEX TO FINANCIAL STATEMENTS SCHEDULES The schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 44 (a)3. EXHIBITS EXHIBIT NUMBER DESCRIPTION ------- ----------- 2 Purchase and Sale Agreement, dated April 3, 1997, by and between the Company and Cinergi Productions N.V. Inc. and Walt Disney Pictures and Television Incorporated. Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, dated April 3, 1997, filed with the Commission on April 4, 1997. 3.1 Restated Certificate of Incorporation. Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 3.2 By-Laws. Filed herewith. 4 Specimen Certificate for Common Stock. Incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-1, Amendment No. 1, filed with the Commission on June 9, 1994 (File No. 33-78386). 10.1 Employment Agreement, dated as of January 1, 1994, between the Company and Andrew G. Vajna. Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.2 Letter Agreement, dated as of December 16, 1994, by and between the Company and Andrew G. Vajna amending his Employment Agreement dated as of January 1, 1994. Incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10.3 Employment Agreement, dated as of January 1, 1994, between the Company and Warren Braverman. Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.4 Letter Agreement, dated as of December 16, 1994, by and between the Company and Warren Braverman amending his Employment Agreement dated as of January 1, 1994. Incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10.5 Cinergi Pictures Entertainment Inc. 1994 Basic Stock Option and Stock Appreciation Rights Plan. Incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 45 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.6 Cinergi Pictures Entertainment Inc. 1994 Special Stock Option and Stock Appreciation Rights Plan. Incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.7 Form of Cinergi Service Inc. Deferred Compensation Plan Agreement. Incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.8 Form of Indemnity Agreement. Incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.9 Lease, dated April 1, 1991, between the Company and Andrew G. Vajna. Incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.10 Amendment, dated June 30, 1991, to lease between the Company and Andrew G. Vajna. Incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.11 Tax Reimbursement Agreement, dated as of December 30, 1993, by and between the Company and Andrew G. Vajna. Incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.12 Memorandum of Agreement, dated as of July 9, 1990, between Buena Vista Pictures Distribution, Inc. and the Company. Incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386).+ 10.13 Amendment to Memorandum of Agreement between Buena Vista Pictures Distribution, Inc. and the Company. Incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386).+ 46 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.14 Second Amendment to Memorandum of Agreement between Buena Vista Pictures Distribution, Inc. and the Company. Incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.15 Third Amendment to Memorandum of Agreement between Buena Vista Pictures Distribution, Inc. and the Company. Incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386).+ 10.16 Letter Agreement dated July 13, 1990 between Buena Vista Pictures Distribution, Inc. and the Company. Incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386).+ 10.17 Letter Agreement dated April 8, 1994 between Buena Vista Pictures Distribution, Inc. and the Company. Incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386).+ 10.18 Form of Warrant for Buena Vista Pictures Distribution, Inc. to purchase shares of Common Stock of the Company. Incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.19 Stock Sale and Repurchase Agreement dated as of January 1, 1994 between the Company and Warren Braverman. Incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.20 Letter Agreement dated April 27, 1994 by and between the Company and Warren Braverman. Incorporated by reference to Exhibit 10.22 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.21 Security and Stock Pledge Agreement dated as of January 1, 1994 between the Company and Warren Braverman. Incorporated by reference to Exhibit 10.23 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 47 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.22 Secured Promissory Note of Warren Braverman dated as of January 1, 1994 payable to the Company. Incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.23 Letter Agreement dated as of December 31, 1993 between the Company and Warren Braverman. Incorporated by reference to Exhibit 10.25 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.24 Promissory Note of Warren Braverman dated as of July 22, 1994, payable to the Company. Incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10.25 Stock Sale and Repurchase Agreement dated as of January 1, 1994 between the Company and Dianne Caplan Lebovits. Incorporated by reference to Exhibit 10.26 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.26 Letter Agreement dated April 27, 1994 by and between the Company and Dianne Caplan Lebovits. Incorporated by reference to Exhibit 10.27 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.27 Security and Stock Pledge Agreement dated as of January 1, 1994 between the Company and Dianne Caplan Lebovits. Incorporated by reference to Exhibit 10.28 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.28 Secured Recourse Promissory Note of Dianne Caplan Lebovits dated as of January 1, 1994 payable to the Company. Incorporated by reference to Exhibit 10.29 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.29 Letter Agreement dated as of December 31, 1993 between the Company and Dianne Caplan Lebovits. Incorporated by reference to Exhibit 10.30 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 48 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.30 Promissory Note of Dianne Caplan Lebovits dated February 28, 1995 payable to the Company. Incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10.31 Security and Pledge Agreement dated February 28, 1995 between the Company and Dianne Caplan Lebovits. Incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10.32 Stock Sale and Repurchase Agreement dated January 1, 1994 between the Company and Ziffren, Brittenham & Branca. Incorporated by reference to Exhibit 10.31 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.33 Letter Agreement dated April 27, 1994 by and between the Company and Ziffren, Brittenham and Branca. Incorporated by reference to Exhibit 10.32 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.34 Security and Stock Pledge Agreement dated as of January 1, 1994 between the Company and Ziffren, Brittenham and Branca. Incorporated by reference to Exhibit 10.33 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.35 Secured Recourse Promissory Note of Ziffren, Brittenham & Branca dated as of January 1, 1994 payable to the Company. Incorporated by reference to Exhibit 10.34 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.36 Form of Motion Picture Lease Agreement between Summit Export (U.K.) Ltd. and Intercom Kft. Incorporated by reference to Exhibit 10.35 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386). 10.37 Sales Agency, Collection and Services Agreement dated as of December 1, 1993 among Summit Entertainment N.V., Summit Entertainment L.P. and the Company. Incorporated by reference to Exhibit 10.36 to the Company's Registration Statement on Form S-1, filed with the Commission on April 29, 1994 (File No. 33-78386).+ 49 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.38 Non-negotiable Promissory Note of the Company dated May 12, 1994 payable to Andrew G. Vajna. Incorporated by reference to Exhibit 10.41 to the Company's Registration Statement on Form S-1, Amendment No. 1, filed with the Commission on June 9, 1994 (File No. 33-78386). 10.39 Form of Warrant for Jefferson Capital Group, Ltd. to purchase shares of Common Stock of the Company. Incorporated by reference to Exhibit 10.43 to the Company's Registration Statement on Form S-1, Amendment No. 1, filed with the Commission on June 9, 1994 (File No. 33-78386). 10.40 Credit, Security, Pledge and Guaranty Agreement, dated as of August 16, 1994, among Cinergi Productions N.V., Chemical Bank and certain other parties. Incorporated by reference to Exhibit 10.44 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. 10.41 Reimbursement and Term Loan Agreement, dated as of August 16, 1994 among Valdi Corporation N.V., Chemical Bank and certain other parties. Incorporated by reference to Exhibit 10.45 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. 10.42 Letter Loan Agreement, dated as of August 16, 1994, by and between the Company and Valdi Corporation N.V. Incorporated by reference to Exhibit 10.46 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. 10.43 Quitclaim Agreement dated as of October 7, 1994 among The Walt Disney Company, Walt Disney Pictures and Television, Buena Vista Pictures Distribution, Inc., the Company and Cinergi Productions N.V. Incorporated by reference to Exhibit 10.50 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.+ 10.44 Form of Term Loan Agreement between the Company and Buena Vista Pictures Distribution, Inc. Incorporated by reference to Exhibit 10.51 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 50 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.45 Letter Agreement dated as of August 1, 1994 between Buena Vista International, Inc. and Cinergi Productions N.V. with respect to DIE HARD WITH A VENGEANCE. Incorporated by reference to Exhibit 10.52 to the Company's Form 10-K/A, Amendment No. 1, to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.+ 10.46 Restated Promissory Note dated as of January 17, 1994 executed by the Company in favor of Valdina Corporation N.V. in the principal amount of $3,300,000. Incorporated by reference to Exhibit 10.53 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. 10.47 Engagement Letter dated May 8, 1996 between Jefferson Capital Group, Ltd. and the Company. Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. 10.48 Stock Purchase Agreement dated as of January 2, 1997 by and between Ziffren, Brittenham, Branca & Fischer and the Company. Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, dated December 30, 1996, filed with the Commission on January 9, 1997. 10.49 Stock Purchase Agreement dated as of December 30, 1996 by and between Dianne Caplan Lebovits and the Company. Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, dated December 30, 1996, filed with the Commission on January 9, 1997. 10.50 Amendment to Restated Employment Agreement of Warren Braverman, dated as of January 1, 1997, by and between Warren Braverman and the Company. Incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K, dated December 30, 1996, filed with the Commission on January 9, 1997. 10.51 Undertaking, dated March 5, 1996, by Andrew G. Vajna to reimburse certain indemnification costs. Incorporated by reference to Exhibit 10.54 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. 10.52 Equipment Lease dated February 8, 1996 between the Company and Brentwood Credit Corporation. Incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. 51 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.53 Letter Agreement dated as of July 3, 1996, between Walt Disney Pictures and Cinergi Pictures Entertainment Inc. with respect to the motion picture project currently entitled, EATERS OF THE DEAD. Filed herewith. 10.54 Letter Agreement dated as of April 1, 1995, between Buena Vista International, Inc. and Cinergi Productions N.V. Inc. with respect to the motion picture, NIXON. Filed herewith. 10.55 Deal Memorandum dated as of January 26, 1996, between Cinergi Productions N.V. Inc. and Buena Vista Distribution International, Inc. with respect to the motion picture, EVITA. Filed herewith. 21 Subsidiaries of the Registrant. Filed herewith. 23 Consent of Ernst & Young LLP. Filed herewith. 27 Financial Data Schedule (Filed electronically only). Filed herewith. - - ---------------- + Confidential treatment has been granted for portions of such exhibit. (b) No reports on Form 8-K were filed by the Registrant during the during the last quarter of the period covered by this Report. (c) See Item 14(a)3 above. (d) Not applicable. 52 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CINERGI PICTURES ENTERTAINMENT INC. By: /s/ Andrew G. Vajna ---------------------------------------------------- Andrew G. Vajna, Chairman of the Board of Directors, President and Chief Executive Officer Dated: April 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Andrew G. Vajna Chairman of the Board of April 14, 1997 - - --------------------------- Directors, President and Andrew G. Vajna Chief Executive Officer (Principal Executive Officer) /s/ Warren Braverman Chief Operating Officer, April 14, 1997 - - --------------------------- Chief Financial Officer, Warren Braverman Executive Vice President and Director (Principal Financial and Accounting Officer) /s/ Randolph M. Paul Sr. Vice President, Business April 14, 1997 - - --------------------------- Affairs, and Director Randolph M. Paul /s/ Dianne Caplan Lebovits - - --------------------------- Director April 14, 1997 Dianne Caplan Lebovits /s/ R. Timothy O'Donnell - - --------------------------- Director April 14, 1997 R. Timothy O'Donnell /s/ Gregory R. Paul - - --------------------------- Director April 14, 1997 Gregory R. Paul S-1 Report of Independent Auditors Board of Directors Cinergi Pictures Entertainment Inc. We have audited the accompanying consolidated balance sheets of Cinergi Pictures Entertainment Inc. and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cinergi Pictures Entertainment Inc. and subsidiaries at December 31, 1995 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Ernst & Young LLP Los Angeles, California April 11, 1997 F-1 Cinergi Pictures Entertainment Inc. Consolidated Balance Sheets
DECEMBER 31, ---------------------------- 1995 1996 ------------ ------------ ASSETS (NOTE 5) Cash and cash equivalents $29,832,000 $27,364,000 Restricted cash (Note 1) - 5,654,000 Accounts receivable (including $745,000 (1995) and $3,074,000 (1996) from a related party) 7,494,000 10,850,000 Accounts receivable, related parties (NOTE 7) 682,000 799,000 Film costs, less accumulated amortization (NOTE 3) 160,756,000 103,792,000 Property and equipment, at cost, less accumulated depreciation (NOTE 4) 4,381,000 4,819,000 Other assets 3,112,000 3,270,000 ------------ ------------ Total assets $206,257,000 $156,548,000 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable $1,785,000 $2,141,000 Accrued interest 81,000 23,000 Accrued residuals and participations 8,781,000 13,045,000 Deferred revenue (including $44,949,000 (1995) and $29,582,000(1996) from a related party) (NOTES 2 AND 10) 68,791,000 46,568,000 Loans payable (NOTE 5) 41,578,000 6,026,000 Capital lease obligation - 291,000 Notes and amounts payable to related parties (NOTE 7) 31,624,000 49,747,000 ------------ ------------ Total liabilities 152,640,000 117,841,000 Common Stock, with certain redemption features, $.01 par value, 1,117,023 (1995) and 744,692 (1996) shares issued and outstanding, less notes receivable from related parties amounting to $1,350,000 (1995) and $900,000 (1996) (NOTE 9) 1,900,000 2,100,000 Commitments and contingencies (NOTE 10) Stockholders' equity (NOTES 1 AND 9): Preferred Stock, $.01 par value, 5,000,000 shares authorized, no shares issued - - Common Stock, $.01 par value, 20,000,000 shares authorized, 13,075,000 (1995) and 13,075,000 (1996) shares issued and outstanding 131,000 131,000 Additional paid-in capital 64,753,000 65,548,000 Retained deficit (13,167,000) (29,072,000) ------------ ------------ Total stockholders' equity 51,717,000 36,607,000 ------------ ------------ Total liabilities and stockholders' equity $206,257,000 $156,548,000 ------------ ------------ ------------ ------------
SEE ACCOMPANYING NOTES. F-2 Cinergi Pictures Entertainment Inc. Consolidated Statements of Operations
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1994 1995 1996 ------------ ------------ ------------ Revenues: Feature films (including $43,207,000 (1994), $57,808,000 (1995) and $43,454,000 (1996) from a related party) $108,517,000 $192,582,000 $132,940,000 Fee income (NOTE 6) 511,000 298,000 60,000 ------------ ------------ ------------ 109,028,000 192,880,000 133,000,000 Costs and expenses: Amortization of film costs, residuals and 103,422,000 204,544,000 139,612,000 participations Selling, general and administrative expense (including $102,000 (1994), $93,000 (1995) and $274,000 (1996) from related parties) (NOTES 7 AND 10) 2,694,000 5,098,000 9,752,000 ------------ ------------ ------------ Operating income (loss) 2,912,000 (16,762,000) (16,364,000) Interest expense (including $91,000 (1994), $61,000 (1995) and $323,000 (1996) from related parties) NOTES 5 AND 7) (281,000) (241,000) (448,000) Interest income (including $81,000 (1994), $85,000 (1995) and $98,000 (1996) from a related party) (NOTE 7) 264,000 941,000 907,000 ------------ ------------ ------------ Net income (loss) $2,895,000 $(16,062,000) $(15,905,000) ------------ ------------ ------------ ------------ ------------ ------------ Net income (loss) per share $.30 $(1.23) $ (1.12) ------------ ------------ ------------ ------------ ------------ ------------ Weighted average number of shares outstanding 9,494,000 13,025,000 14,169,000 ------------ ------------ ------------ ------------ ------------ ------------ SEE ACCOMPANYING NOTES.
F-3 Cinergi Pictures Entertainment Inc. Consolidated Statements of Shareholder's Equity
COMMON STOCK ADDITIONAL RETAINED ------------------------ PAID-IN (DEFICIT) SHARES AMOUNT CAPITAL EARNINGS TOTAL ----------- ----------- ------------ ------------ ------------ Balance at December 31, 1993 6,383,000 $64,000 $10,256,000 $(28,826,000) $(18,506,000) Additional capital contribution - - 33,661,000 - 33,661,000 Distribution - - - (3,300,000) (3,300,000) Reclassification of Subchapter S retained deficit - - (32,126,000) 32,126,000 - Issuance of Common Stock in initial public offering 3,692,000 37,000 29,647,000 - 29,684,000 Net income - - - 2,895,000 2,895,000 ---------- ------- ----------- ----------- ----------- Balance at December 31, 1994 10,075,000 101,000 41,438,000 2,895,000 44,434,000 Issuance of Common Stock in public offering 3,000,000 30,000 23,315,000 - 23,345,000 Net loss - - - (16,062,000) (16,062,000) ---------- ------- ----------- ----------- ----------- Balance at December 31, 1995 13,075,000 131,000 64,753,000 (13,167,000) 51,717,000 Repurchase of Common Stock, with certain redemption features - - 795,000 - 795,000 Net loss - - - (15,905,000) (15,905,000) ---------- ------- ----------- ----------- ----------- Balance at December 31, 1996 13,075,000 $131,000 $65,548,000 $(29,072,000) $36,607,000 ---------- ------- ----------- ----------- ----------- ---------- ------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES. F-4 Cinergi Pictures Entertainment Inc. Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1994 1995 1996 ------------ ------------- ------------- OPERATING ACTIVITIES Net income (loss) $ 2,895,000 $ (16,062,000) $ (15,905,000) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation 402,000 731,000 1,251,000 Amortization of unearned compensation 1,250,000 650,000 1,076,000 Amortization of film costs 94,246,000 200,591,000 129,843,000 Changes in operating assets and liabilities: Accounts receivable (20,074,000) 12,939,000 (3,356,000) Accounts receivable, related parties (704,000) 267,000 (198,000) Film costs additions (202,965,000) (137,520,000) (73,454,000) Other assets (2,577,000) 227,000 (158,000) Accounts payable and accrued interest 2,223,000 (1,219,000) 298,000 Accrued residuals and participations 7,925,000 311,000 4,264,000 Deferred revenue 10,406,000 15,285,000 (22,223,000) ------------- ------------- ------------- Net cash (used in) provided by operating activities (106,973,000) 76,200,000 21,438,000 INVESTING ACTIVITIES Purchase of property and equipment (1,402,000) (2,434,000) (587,000) ------------- ------------- ------------- Net cash used in investing activities (1,402,000) (2,434,000) (587,000) FINANCING ACTIVITIES Increase in loans payable 140,748,000 77,380,000 37,899,000 Payments on loans payable (69,622,000) (146,709,000) (73,451,000) Decrease (Increase) in restricted cash 500,000 - (5,654,000) Increase in notes and amounts payable to related parties 20,496,000 16,291,000 19,493,000 Payments on notes and amounts payable to related parties (12,106,000) (16,906,000) (795,000) Proceeds from public offering 29,684,000 23,345,000 - Payments on capital lease obligations - - (811,000) ------------- ------------- ------------- Net cash provided by (used in) financing activities 109,700,000 (46,599,000) (23,319,000) ------------- ------------- ------------- Increase (Decrease) in cash 1,325,000 27,167,000 (2,468,000) Cash and cash equivalents at beginning of year 1,340,000 2,665,000 29,832,000 ------------- ------------- ------------- Cash and cash equivalents at end of year $ 2,665,000 $ 29,832,000 $ 27,364,000 ------------- ------------- ------------- ------------- ------------- ------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest (net of amount capitalized) $ - $ - $ 808,000 ------------- ------------- ------------- ------------- ------------- ------------- Income taxes $ 2,000 $ 60,000 $ 23,000 ------------- ------------- ------------- ------------- ------------- -------------
F-5 Cinergi Pictures Entertainment Inc. Consolidated Statements of Cash Flows (continued) SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING AND FINANCING ACTIVITIES 1994: Notes and amounts payable to related parties decreased by $33,661,000 and additional paid-in capital increased by $33,661,000 due to a capital contribution by Mr. Vajna, Valdina Corporation N.V. (Valdina) and Valdi Corporation N.V. (Valdi) (See Note 1). Notes and amounts payable to related parties increased by $3,300,000 and retained deficit decreased by $3,300,000 due to a distribution to Valdina (see Note 1). Two executive officers and a law firm engaged by the Company purchased an aggregate of 1,117,000 shares of Common Stock of the Company in exchange for three notes totaling $1,350,000 (see Note 9). 1995: In 1995, a term loan of $7,500,000 and accrued interest amounting to $585,000 for one motion picture was canceled as consideration for the Company's sale to Buena Vista Pictures Distribution, Inc. (BVPD) of an equity interest in the picture. During 1995, the Company and BVPD mutually agreed to reduce a term loan from BVPD relating to one motion picture by $4,655,000 by offsetting the present value of certain funds due to the Company from BVPD. 1996: In December 1996, the Company repurchased 372,341 shares of Common Stock of the Company from a former executive officer through the forgiveness of a note and accrued interest due from the former executive officer amounting to $531,000. During 1996, the Company and BVPD mutually agreed to reduce a term loan from BVPD relating to one motion picture by $575,000 by offsetting certain funds due to the Company from BVPD. During 1996, the Company entered into a capital lease agreement for special effects equipment amounting to approximately $1,102,000 (see Note 10). SEE ACCOMPANYING NOTES. F-6 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements December 31, 1996 1. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ORGANIZATION The accompanying consolidated financial statements include the accounts of Cinergi Pictures Entertainment Inc. and subsidiaries (the Company). The Company is engaged in the business of developing, financing, producing and licensing feature-length motion pictures worldwide. All significant intercompany balances and transactions have been eliminated. In January 1994, Andrew G. Vajna, Chairman of the Board of Directors, President and Chief Executive Officer of the Company, contributed to the Company all of the Common Stock of certain domestic corporations which were previously 100% owned by Mr. Vajna. Further, in January 1994, the Company acquired all the outstanding Common Stock of the foreign corporation from Valdina, a company indirectly beneficially owned 49.9% by Mr. Vajna, in consideration for 18 shares (pre-split) of Company Common Stock and a note in the principal amount of $3,300,000 (of which $600,000 in principal amount was paid) at 6% due January 17, 1995. The maturity date of the note was subsequently extended until July 17, 1996, from which date the promissory note was due on demand until January 17, 1997 and is currently due and payable in its entirety. The note bears interest at the rate of 7% per annum after January 17, 1996. At December 31, 1995 and 1996, accrued interest relating to this obligation amounted to $396,000 and $655,000, respectively. Mr. Vajna has entered into an employment agreement with the Company for a five year term commencing January 1, 1994, pursuant to which he will receive base compensation of $1,000,000 per year. In addition, Mr. Vajna may also receive commencement fees and producer's performance fees with respect to motion pictures produced by the Company. 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-7 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION The Company recognizes revenues in accordance with the provisions of Statement of Financial Accounting Standards (FAS) No. 53. Minimum guaranteed amounts from theatrical exhibition and revenues from home video, television and pay television license agreements are recognized when the applicable license period begins for each motion picture and such motion picture is made available to the distributor for exploitation pursuant to the terms of the applicable license agreement. Amounts in excess of the minimum guarantee under such license agreements and other amounts (where no minimum guarantee was given) are recognized when earned. Accounts receivable represent amounts due from domestic and international distributors. Cash collected in advance of the time of availability is recorded as deferred revenue. Once completed, a typical theatrical film will generally be made available for licensing as follows: MONTHS AFTER INITIAL DOMESTIC APPROXIMATE MARKETPLACE THEATRICAL RELEASE RELEASE PERIOD - - -------------------------------------------------------------------------------- Domestic theatrical 4 - 6 months International theatrical 6 - 12 months Domestic home video (initial release) 4 - 6 months 6 months Domestic pay-per-view 6 - 9 months 2 months International video (initial release) 6 - 12 months 6 - 12 months Domestic pay television 12 - 15 months 18 months International television (pay or free) 18 - 24 months 12 - 36 months Domestic free television* 30 - 33 months 1 - 5 years *Includes network, barter syndication, syndication and basic cable. F-8 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FILM COSTS Costs incurred in connection with the acquisition of story rights, the development of stories, production, print and advertising costs (which benefit future periods) and allocable interest and production overhead are capitalized as film costs. Film costs are stated at the lower of cost or net realizable value. The individual film forecast method is used to amortize film costs. Costs accumulated in the production of a film are amortized in the proportion that gross revenues realized bear to management's estimate of the total gross revenues expected to be received. Estimated liabilities for residuals and participations are accrued as the Company amortizes film cost inventories and expensed in the same manner as film cost inventories. Revenue estimates on a film-by-film basis are reviewed periodically by management and are revised, if warranted, based upon management's appraisal of current market conditions. Unamortized film costs are written down to net realizable value based on this appraisal, where applicable. PROPERTY AND EQUIPMENT Property and equipment are carried at cost and are depreciated or amortized over their estimated useful lives (which range from 5 to 10 years) using the following methods: Editing equipment Double declining balance Office furniture and equipment Double declining balance Computer equipment Double declining balance Computer software Straight-line Vehicles Straight-line Leasehold improvements Straight-line Special effects equipment Straight-line INCOME TAXES The Company records its income tax provision in accordance with Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes." Deferred income taxes are provided on transactions which are reported in the financial statements in different periods than they are for income tax purposes. F-9 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET INCOME (LOSS) PER COMMON SHARE The per share data are based on the weighted average number of common and common share equivalents outstanding during the period. Common Stock with certain redemption features are considered common share equivalents. Stock options and warrants are considered common share equivalents if dilutive. Fully diluted amounts for each period do not materially differ from the amounts presented herein. FOREIGN CURRENCY TRANSLATION All of the Company's transactions are expressed in U.S. dollars. CONCENTRATION OF CREDIT RISKS AND CASH EQUIVALENTS The Company licenses various rights in its motion pictures to distributors throughout the world. Generally, upon the Company's delivery of the picture to the distributor, the minimum guarantee is received in full. In most instances, letters of credit secure the payment of minimum guarantees from international distributors prior to delivery. The Company places its temporary cash investments with high credit quality financial institutions and mutual funds. Generally, the investments made mature within 30 days and therefore are subject to little risk. The Company has not incurred any losses related to these investments. As of December 31, 1995 and 1996, the Company had no significant concentration of credit risk. FAIR VALUE OF FINANCIAL INSTRUMENTS At December 31, 1996, the carrying value of the Company's financial instruments, which consist primarily of loans payable, approximates the fair value thereof. RESTRICTED CASH At December 31, 1996, restricted cash represents cash collections made by the Company on behalf of BVPD (see Note 10) and cash subject to restrictions relating to film production in connection with the Company's distribution agreement with BVPD. F-10 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK BASED COMPENSATION Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock Based Compensation", encourages, but does not require companies to recognize expense for stock-based awards based on their fair value on the date of grant. The Company has elected to continue to account for its stock compensation arrangements under the provision of APB 25, "Accounting for Stock Issued to Employees. Accordingly, compensation expense for stock compensation arrangements is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount the recipient of the stock award must pay to acquire the stock. If the Company measured compensation expense using the fair value method prescribed in FAS 123, there would be no material impact on reported net loss or loss per share. 3. FILM COSTS Film costs consist of the following: DECEMBER 31, ----------------------------------- 1995 1996 ---------------- ------------ Released, less amortization $101,238,000(1) $52,077,000 Completed, not released - 37,025,000 In production 53,545,000 9,373,000 Development 5,973,000 5,317,000 ---------------- ------------ $160,756,000 $103,792,000 ---------------- ------------ ---------------- ------------ Interest capitalized into film costs during the years ended December 31, 1995 and 1996 totaled $10,865,000 and $6,156,000, respectively. Based on the Company's estimate of future revenues, approximately 92% of unamortized released film costs at December 31, 1996 will be amortized during the three years ending December 31, 1999. (1) Includes approximately $43 million in connection with the motion picture "Nixon", which was released in December 1995 for which no revenues were recognized in 1995. F-11 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following: DECEMBER 31, ---------------------------- 1995 1996 ---------- --------- Editing equipment $130,000 $130,000 Office furniture and equipment 765,000 769,000 Computer equipment and software 371,000 433,000 Vehicles 260,000 260,000 Leasehold improvements 932,000 932,000 Special effects equipment, including $1,102,000 in equipment under capital lease (1996) 3,555,000 5,179,000 ---------- ---------- 6,013,000 7,703,000 Less accumulated depreciation and amortization 1,632,000 2,884,000 ---------- ---------- $4,381,000 $4,819,000 ---------- ---------- ---------- ---------- 5. LOANS PAYABLE The Company entered into a Credit, Security, Pledge and Guaranty Agreement dated as of August 16, 1994 with Chase Manhattan Bank (Chase) and a syndicate of lenders (collectively, the Lenders) which provides the Company with a revolving credit facility initially in the amount of $150,000,000, but which has been reduced to $50,000,000 on March 31, 1997 (the Credit Facility). Under the Credit Facility, the Lenders have committed to make loans available until August 31, 1997, although the Lenders will continue to make loans to finance any motion picture in which principal photography has commenced or that has otherwise satisfied certain conditions prior to such date. The Credit Facility, which is secured by substantially all of the assets of the Company (including $5,000,000 of "key man" life insurance on Mr. Vajna), matures on February 28, 1999. The amount available under the Credit Facility for borrowing at any time is limited in accordance with a formula based upon the value of collateral in the Company's borrowing base as defined in the agreement. As of December 31, 1995 and 1996, approximately $41,578,000 and $6,026,000, respectively, in borrowings were outstanding under the Credit Facility. The interest rate payable to Lenders on borrowings under the Credit Facility is selected by the Company as either (i) 1.5% above the London Interbank Offering Rate (LIBOR) (5.5% at December 31, 1996) in effect from time to time for one, two, three or six months (if available as determined by Chase) as selected by the Company, or (ii) a rate equal to the greatest of the prime rate (8.25% at December 31, 1996) plus 0.5%, the base CD rate (5.55% at December 31, 1996) plus 1.5% and the F-12 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 5. LOANS PAYABLE (CONTINUED) federal funds rate (6.26% at December 31, 1996) plus 1%, as such rates are in effect from time to time. Interest is payable quarterly. The commitment fee on the average daily unused portion of the commitment is 3/8 of one percent per annum. The Credit Facility also requires the Company to meet certain financial ratios. At December 31, 1996, the Company is not in compliance with three covenants under the Credit Facility (the minimum consolidated net worth covenant, the limitation on capital expenditures and the limitation on unallocated overhead costs) and is therefore in default under the Credit Facility. The Company intends to seek waivers of such defaults from the lenders under the Credit Facility, however, there can be no assurance that lenders under the Credit Facility will grant such waivers. If the lenders were to accelerate the amounts outstanding under the Credit Facility as a result of such defaults, such acceleration would also constitute a default under the Company's term loan agreements with BVPD described below. The Company, however, believes that it currently has sufficient resources to satisfy the amounts outstanding under the Credit Facility in the event the lenders were to accelerate the amounts outstanding thereunder as a result of such defaults. The Credit Facility restricts the Company's ability to declare and pay dividends. 6. FEE INCOME On November 24, 1992, the Company and The Summit Group (M.E.V.) N.V. (Summit) entered into a sales agency agreement, collection agency agreement and a consulting services agreement (collectively, the Sovereign Agreement) with Sovereign Pictures, Inc. (Sovereign) whereby the Company agreed to perform certain services for Sovereign for a fee. Such services consisted of sale of product, collection of accounts receivable, and resolution of Sovereign liabilities. The Company and Summit agreed to share all fees earned equally. The term of the agreement is for 15 years. The Company earned fees totaling $511,000, $298,000 and $60,000 for the years ended December 31, 1994, 1995 and 1996, respectively, in connection with the Sovereign Agreement. 7. RELATED PARTY TRANSACTIONS The Company incurred air charter expenses from Airborne Charter Inc. (ACI), a company owned 100% by Mr. Vajna, amounting to $1,199,000, $747,000 and $229,000 for the years ended December 31, 1994, 1995 and 1996, respectively. Of such amounts, the Company capitalized to film costs $1,199,000 (1994), $580,000 (1995) and $226,000 (1996). A liability in connection with unpaid air charter expenses of $195,000 to ACI was included in notes and amounts payable to related parties at December 31, 1995. F-13 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 7. RELATED PARTY TRANSACTIONS (CONTINUED) Mr. Vajna also received financial planning, legal and related services from the Company on terms approved by the Company's Audit Committee. The Company had notes payable to Mr. Vajna aggregating $24,126,000 at December 31, 1993. The notes bore interest at 10% and were payable on demand. Such funds were used to fund operations and development of motion picture properties. On January 17, 1994, Mr. Vajna contributed $21,126,000 of such amount to equity which resulted in a balance of $3,000,000 at December 31, 1994. In December 1995, the Company paid Mr. Vajna the full amount of the note and related accrued interest. During 1995 and 1996, the Company entered into term loan agreements with BVPD to finance three motion pictures. The maximum amount to be borrowed is based upon a certain percentage of each production budget. Each loan bears interest at the prime rate in effect from time to time (8.25% at December 31, 1996) plus 1.5% and shall be repaid with accrued interest on or before the earlier of (i) four years after the loan proceeds are first made available to the Company or (ii) three years after the initial domestic theatrical release of such picture. The loans are secured by certain distribution rights of the Company and one of the loans is also guaranteed by Mr. Vajna. In 1995, a term loan of $7,500,000 and accrued interest amounting to $585,000 for one motion picture was canceled as consideration for the Company's sale to BVPD of an equity interest in the picture. As additional consideration to BVPD for its purchase of an equity interest in this picture, the Company also assigned to BVPD substantially all of its profit participation in another motion picture. During 1995, the Company and BVPD mutually agreed to reduce a term loan from BVPD relating to one motion picture by $4,655,000 by offsetting the present value of certain funds due to the Company from BVPD. In 1996, the Company and BVPD mutually agreed to reduce a term loan from BVPD relating to one motion picture by $575,000 by offsetting certain funds due to the Company from BVPD. At December 31, 1995 and 1996, the aggregate principal loan balances including accrued interest were $26,314,000 and $36,564,000, respectively. In connection with the Company's decision to produce Evita, the Company became obligated to pay the development costs previously expensed on such project by certain partners, including $3,900,000 by Disney. Such amount will be offset against obligations of Disney to the Company. Interest expense incurred by the Company in connection with these obligations amounted to $1,849,000, $2,844,000 and $2,882,000 in 1994, 1995 and 1996, respectively. Of such amounts $1,758,000, $2,783,000 and $2,797,000 were capitalized to film costs, respectively. F-14 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 7. RELATED PARTY TRANSACTIONS (CONTINUED) The Company has a nonqualified deferred compensation plan in which one key officer participates. Such obligation at December 31, 1995 and December 31, 1996 was $1,230,000 and $1,475,000, respectively (which includes bonuses or partial bonuses of $150,000 and $75,000 for the years ended December 31, 1995 and 1996, respectively). The Company leases office space from Mr. Vajna under an agreement which expired on April 30, 1996 (see Note 10). R. Timothy O'Donnell, a Director of the Company, is the President of Jefferson Capital Group, Ltd. (Jefferson Capital), a privately-held investment banking group, which provided financial advisory services to the Company in connection with the issuance of common stock in the initial public offering (Offering) and the sale of common stock to BVPD. In connection therewith, the Company reimbursed Jefferson Capital's expenses amounting to $20,000, paid Jefferson Capital a $150,000 fee and issued a warrant to purchase 50,000 shares of Common Stock, expiring in June 1999, at an exercise price per share equal to $9.00, the initial public offering price. Jefferson Capital was retained by the Company in 1996 to assist the Company in its strategic review. In connection therewith, the Company paid Jefferson Capital a retainer of $75,000 and reimbursed Jefferson Capital's expenses amounting to $13,000. In the event the Film Library Sale or other dispositions of assets or similar transactions are consummated, Jefferson Capital will also be entitled to additional fees based upon the size of such transactions. In 1994, the Company sold a previously written off project to BVPD for the Company's costs in the project of approximately $4,145,000. Ziffren, Brittenham & Branca (Ziffren), a law firm of which a director is a partner, received an annual retainer of $250,000 for each of the years ended December 31, 1994 and 1995 in connection with legal services rendered for the Company. For the year ended December 31, 1996, Ziffren was paid $156,000. F-15 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 7. RELATED PARTY TRANSACTIONS (CONTINUED) The Company had noninterest bearing receivables of $100,000 and $50,000 from executive officers at December 31, 1995 and December 31, 1996, respectively, and at those respective dates had additional noninterest bearing receivables of $197,000 and $246,000, respectively, from Mr. Vajna and other entities owned or partially owned by Mr. Vajna. In 1994, an additional loan amounting to $250,000 was made to a key officer bearing interest at 7% due December 31, 1996. Such loan and noninterest bearing receivable were paid on January 2, 1997 pursuant to an amendment to such key officer's employment agreement. Interest receivable amounting to $135,000 and $81,000 was outstanding at December 31, 1995 and 1996, respectively, from two executive officers and Ziffren. Further, at December 31, 1996, a noninterest bearing advance of $18,000 was due from a key officer. The Company entered into an agreement with Twentieth Century Fox for the production of "Die Hard, With a Vengeance." The Company granted Buena Vista International, Inc. (BVI), an affiliate of BVPD, certain distribution rights in such motion picture in certain foreign territories (including Belgium, France, Germany, the United Kingdom, Spain, Latin America, Scandinavia, Taiwan, Switzerland, Portugal and Greece) for an aggregate of $23,200,000 in advances to be paid upon delivery of such picture to BVI. Such amount was recognized as revenue in 1995. In order to assist the Company in obtaining financing for and completion bonds on the pictures "Die Hard, With a Vengeance," "Judge Dredd" and "The Scarlet Letter," Valdi entered into a Reimbursement and Term Loan Agreement (Letter of Credit Facility) dated as of August 16, 1994 whereby Valdi undertook to have letters of credit issued for the benefit of Chase in an amount not to exceed $22,044,000 to provide additional collateral for the Company's Credit Facility with respect to the financing of the pictures listed above. The Letter of Credit Facility and the letter of credit provided thereunder expired on November 15, 1995 without any monies having been drawn thereunder. There is no obligation on the part of any stockholder or affiliate of the Company to guarantee borrowings under the Credit Facility or any other future loan obtained by the Company or to enter into any future arrangements similar to the Letter of Credit Facility. In consideration for providing the Letter of Credit Facility, the Company agreed to pay Valdi a one time facility fee of $110,220 and a utilization fee. As no amounts were drawn under the Letter of Credit Facility prior to its expiration, no utilization fees were paid to Valdi. F-16 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 7. RELATED PARTY TRANSACTIONS (CONTINUED) Valdi beneficially owns approximately 84.7% of Intercom KFT ("Intercom"), a distributor of motion pictures in Hungary to which the Company licenses Hungarian distribution rights to its motion pictures in various media. The Company and Intercom have an agreement in principle for an output agreement for the Hungarian distribution of all of the Company's films, beginning with "Nixon." The agreement in principle provides for a distribution fee to Intercom of 17.5% of the gross receipts of Intercom from distribution of such films plus reimbursement of distribution expenses. During the Company's fiscal year ended December 31, 1996, Intercom received distribution fees of approximately $189,000 with respect to this distribution arrangement with the Company. In addition, Intercom has assisted the Company by paying to the Hungarian tax authorities on behalf of the Company value added taxes incurred by the Company in connection with its distribution of films through its Hungarian subsidiary, Cinergi Productions KFT ("CPKFT"). Intercom subsequently files for and receives the refund of such taxes. During 1996, the Company paid Intercom approximately $349,000 representing the aggregate accrued interest on amounts advanced by Intercom to the Hungarian tax authorities from the date of payment of each such advance until receipt by Intercom of the applicable refund and Intercom's out of pocket costs incurred in connection with Intercom's activities on behalf of the Company in 1996 and in prior years. 8. INCOME TAXES The components of pretax income (loss) for the Company are as follows: YEAR ENDED DECEMBER 31, --------------------------------------------- 1994 1995 1996 ---------- ------------- ------------- Domestic $ (394,000) $(16,062,000) $(15,905,000) International 3,289,000 - - ---------- ------------- ------------- $2,895,000 $(16,062,000) $(15,905,000) ---------- ------------- ------------- ---------- ------------- ------------- F-17 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 8. INCOME TAXES (CONTINUED) Current and noncurrent deferred income taxes generally reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's current and noncurrent deferred tax liabilities and assets are as follows: DECEMBER 31, 1995 1996 -------------------------- Current and noncurrent deferred tax liabilities: Film costs $ 6,904,000 $ 6,813,000 Amortization of film costs 27,075,000 23,457,000 ----------- ----------- 33,979,000 30,270,000 Current and noncurrent deferred tax assets: Accruals not currently deductible 1,091,000 1,381,000 Deferred revenues 25,835,000 17,815,000 Net operating loss carryover 12,915,000 22,574,000 Other 38,000 38,000 ----------- ----------- 39,879,000 41,808,000 Valuation allowance (5,900,000) (11,538,000) ----------- ----------- 33,979,000 30,270,000 ----------- ----------- Net deferred tax $ - $ - ----------- ----------- ----------- ----------- A reconciliation of income tax computed at the statutory federal income tax rate to income tax expenses for the Company is as follows: YEAR ENDED DECEMBER 31, 1995 1996 -------------------------- Provision assuming federal income tax rate of 35% $(5,622,000) $(5,567,000) Effect of net operating loss for which no benefit was received 5,622,000 5,567,000 Non-deductible items without tax benefit and other - - ----------- ----------- $ - $ - ----------- ----------- ----------- ----------- At December 31, 1996, the Company had a federal net operating loss carryover of approximately $59,406,000 which expires in 2011 F-18 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 9. STOCKHOLDERS' EQUITY On January 1, 1994, two executive officers of the Company and Ziffren each purchased 372,341 shares of Common Stock from the Company. The two executive officers and Ziffren are hereafter referred to as "Purchasers." Each Purchaser acquired the Common Stock in exchange for payment of the aggregate par value of such shares (pre-split) in cash and a full recourse promissory note in the amount of $450,000 (approximately $1.21 per share of Common Stock). The principal of each note is payable to the Company on December 31, 1998 or upon the earlier termination of Purchaser's relationship with the Company. Each promissory note accrues interest at the rate of 6% per annum, payable annually, and is secured by a pledge of all of the Common Stock so purchased by the Purchaser. The Company paid on behalf of each of the executive officers $300,000 in 1994 and $130,000 in 1995, to assist them in discharging federal and state income taxes relating to the stock purchase transaction. Each of the Purchasers has granted to Mr. Vajna the right to vote the Common Stock purchased pursuant to an irrevocable proxy which continues during such Purchaser's ownership of the shares for the maximum period permitted by applicable law. Each of the Purchasers also received certain "piggyback" registration rights which, with certain exceptions, require the Company to use its best efforts to include in any of the Company's registration statements any shares requested by such Purchaser to be so included. The Purchaser will pay all expenses directly incurred on its behalf in connection with such registration. Until January 1, 1997, the Company was obligated to repurchase the Common Stock purchased by each Purchaser, except for vested shares, at the original purchase price if such Purchaser's relationship with the Company terminated for any reason other than death, disability or discharge without cause. Until such date, such shares could not be transferred to third parties. For one executive officer and Ziffren, one-third of the shares vested free of such restrictions for each full year of continued employment from and after December 31, 1993 (or, in the case of Ziffren, the continued engagement of Ziffren by the Company for each full year from and after December 31, 1993). For the other executive officer (Other Executive Officer), two-thirds of the shares vested as of December 31, 1995, and the remaining balance vested monthly until the Other Executive Officer resigned in August 1996 (see below). Also, in the case of the executive officers, all shares of the Common Stock were to vest upon their death, disability or discharge without cause. F-19 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 9. STOCKHOLDERS' EQUITY (CONTINUED) On December 30, 1996 the Company repurchased the 372,341 shares held by the Other Executive Officer. The 51,714 shares of the Common Stock held by the other executive officer that were not vested at the time of resignation were repurchased at the original purchase price (approximately $1.21 per share) by reducing the aggregate balance due under the Other Executive Officer's promissory note to the Company by approximately $62,500. In consideration for the sale to the Company of the remaining 320,627 shares, the Company canceled the remaining balance of the Other Executive Officer's promissory note of approximately $468,000 (after the $62,500 reduction). The aggregate difference between the fair value of the Common Stock purchased on January 1, 1994 and the $1.21 consideration given per share was $3,750,000 and was recognized as expense using the straight-line method over the vesting period of the related shares. The promissory notes amounting to $1,350,000 and $900,000 at December 31, 1995 and 1996, respectively, have been netted against Common Stock with certain redemption features in the balance sheet. In January 1997, the shares held by Ziffren were repurchased by the Company and the Company cancelled the promissory note from Ziffren amounting to $450,000. The Preferred Stock is issuable in one or more series by the Board of Directors which may fix, among other things, the designation of and number of shares to comprise each series and the relative rights, preferences and privileges of shares of each series, including the dividends payable thereon, voting rights, conversion rights, the price and terms on which shares may be redeemed, the amounts payable upon such shares in the event of voluntary or involuntary liquidation and any sinking fund provisions for redemption of purchases of such shares. The Board of Directors, without stockholder approval, may issue Preferred Stock with voting and/or conversion rights which could adversely affect the voting power of the holders of the Common Stock, or which could be used as a defensive measure in connection with an attempted hostile takeover of the Company. Such shares could be privately placed with purchasers who might align themselves with the Board of Directors in opposing a hostile takeover bid. In addition, the Board could authorize holders of a series of Preferred Stock to vote as a class, either separately or with the holders of Common Stock, on any merger, sale or exchange of assets by the Company or any other extraordinary corporate transaction. The Board could also issue Preferred F-20 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 9. STOCKHOLDERS' EQUITY (CONTINUED) Stock having terms that could discourage an acquisition attempt or other transaction that some stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then current market price of such stock. Although the Company has no present intention to issue any shares of Preferred Stock, there can be no assurance that the Company will not do so in the future. 10. COMMITMENTS AND CONTINGENCIES The Company has employment contracts with Mr. Vajna and one of its key officers with the longest term extending through 1999. Collectively, these agreements provide for minimum annual compensation of approximately $1,500,000 that can be increased for incentives based on the Company's achieving specified levels of earnings or the receipt of specific revenues attributable to the commencement of production and distribution of its motion pictures. Pursuant to an amendment to the agreement with the key officer dated January 1, 1997, the key officer received a signing bonus of $600,000, of which $300,000 was used to fully repay two loans previously made by the Company (see Note 7). In addition, Mr. Vajna is entitled to receive additional amounts payable solely out of the revenues of each picture produced after January 1, 1993 after "actual breakeven," as defined in his employment agreement with the Company. At December 31, 1995 and 1996, the Company had commitments totaling $1,985,000 and $3,205,000 (excluding amounts to Mr. Stone (see below)), respectively in connection with motion picture projects in development and certain other assets. The Company has leases for certain equipment and office space which expire through 1998. The Company leases its office space from Mr. Vajna under an agreement which expired in 1996. Since such expiration, the Company has been leasing its office space from Mr. Vajna on a month-to-month basis. Rent expense paid in connection with this lease amounted to $462,000 for each of the years ended December 31, 1994, 1995 and 1996. Total rent expense for the years ended December 31, 1994, 1995 and 1996 was $581,000, $702,000 and $868,000, respectively. Of such amounts, the Company capitalized to film costs $508,000 (1994), $497,000 (1995) and $383,000 (1996). Future minimum payments under noncancelable operating leases are as follows: 1997 $ 82,000 1998 30,000 Thereafter - -------- $112,000 -------- -------- F-21 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) During 1996, the Company entered into a one year capital lease for certain special effects equipment. Such lease, which expires in March 1997, includes an option to purchase the leased equipment for $153,000. Future minimum lease payments under this capital lease amount to $291,000. Amortization of assets recorded under this lease is included in depreciation expense. In 1990, the Company entered into a distribution agreement and certain related agreements with BVPD (collectively, the BVPD Agreement) whereby BVPD agreed to distribute certain motion pictures produced by the Company in the United States and its possessions, Canada and Latin America. At December 31, 1995 and 1996, $44,949,000 and $29,582,000, respectively, in advances had been recorded as deferred revenue in connection with the BVPD Agreement. The advances for each motion picture bear interest at the Bank of America prime rate (8.25% at December 31, 1996) plus 1.5%. In connection with an April 1994 amendment of the BVPD Agreement, the Company granted BVPD a warrant to purchase 150,000 shares of the Company's Common Stock at an exercise price equal to $9.00 per share, the initial public offering price, expiring in June 1999. BVPD also purchased concurrently with the Offering at $9.00 per share, the initial public offering price, 555,556 shares of Common Stock for approximately $5,000,000. The Company and each of its domestic subsidiaries have been S Corporations from their incorporation through the tax year ended December 31, 1993. As a result, the Company and its domestic subsidiaries were not subject to federal income taxes and were subject to a reduced rate of state income taxes through that date. In addition, due to the S Corporation elections, the Company and its domestic subsidiaries have no net operating loss carryforwards for federal and state tax purposes for years prior to 1994. Rather, taxable income and loss of the Company for 1993 and prior years was included in the computation of the taxable income or loss of Mr. Vajna, the Company's sole stockholder during those years. Effective January 1, 1994, the Company and each of the domestic subsidiaries revoked their S Corporation elections. The Company therefore expects that it will be subject to federal and state corporate income tax in 1994 and future tax years. The corporate income tax returns of the Company for its 1990, 1991, 1992 and 1993 fiscal years are currently under audit by the Internal Revenue Service (IRS) and California Franchise Tax Board, and returns for the 1993 and 1994 fiscal years remain open to audit. The Company anticipates no federal tax liability and only minimal, if any, California tax liability F-22 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) as a result of any income tax audits for pre-1994 years because of the S Corporation election in effect for such years. In the absence of the agreement described below, Mr. Vajna, the sole stockholder of the Company during such period, and not the Company would be responsible for any tax liability assessed as a result of such audits of pre-1994 years. The Company received approximately $20,000,000 of advances (the Advances) during the fiscal year ended December 31, 1993. The Advances were received in connection with motion pictures that were released during the fiscal year ending December 31, 1994. Consistent with its financial accounting for the Advances and prior tax reporting practices, the Company did not include Advances in its 1993 taxable income, and instead included such amounts - and deducted the related costs - in computing its taxable income for the year in which the underlying motion pictures were released, in this case 1994. It is possible, however, that the IRS will challenge the Company's tax treatment of the Advances, and if the IRS were successful in that challenge, the Company would be required to include the Advances in the computation of its 1993 taxable income without an offsetting deduction in 1993 for costs associated with those motion pictures. As a result of the S Corporation election then in effect, such an adjustment (an Adjustment) to the Company's 1993 taxable income would cause a corresponding increase in the taxable income of Mr. Vajna and, therefore, a significant increase in Mr. Vajna's tax liability for 1993. However, if the Company has cumulative taxable income in 1994 through 1997 (exclusive of the Advances), it would obtain a benefit from the Adjustment in the form of a reduction in its 1994 taxable income and related tax liability as it would not be required to include the Advances in its 1994 taxable income. Therefore, should Mr. Vajna's tax liability for 1993 increase as a result of the Adjustment (i.e., acceleration of 1994 income into 1993) and only if the Company does have cumulative taxable income in 1994 through 1997 (exclusive of the Advances) and thereby obtains a corresponding decrease in its tax liability, the Company has agreed to reimburse Mr. Vajna for the increase in his 1993 income tax liability. For purposes of calculating cumulative taxable income for the period 1994 through 1997, the effect of any post-1997 net operating loss carrybacks will not be taken into account. In order to allow the reimbursement, if required, to be paid to Mr. Vajna under tax free provisions of the tax law, the Company paid $10,000,000 to Mr. Vajna in June 1994. Mr. Vajna loaned the Company $10,000,000 to assist in funding the distribution. From January 1, 1994 through December 31, 1996, the Company had a cumulative taxable loss (treating income relating to the Advances as taxable income in 1994) in excess of $20,000,000. F-23 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) Should the Company not receive the tax benefit as described above, the Company may offset the $10,000,000 loan payable to Mr. Vajna against a receivable from Mr. Vajna created to reflect the possibility that the Company will not get such benefit. Pursuant to the legal right of offset, such loan payable and corresponding receivable will be netted against one another for financial reporting purposes. In 1995, the Company completed a transaction structured as a sale-leaseback with respect to its motion picture "Judge Dredd." The Company sold its interest in "Judge Dredd" to British corporation Lloyds Commercial Leasing Ltd. and concurrently leased the film back pursuant to a 12 year lease. The Company retained approximately $3,000,000 of the sale proceeds (after payment of related expenses) and placed the remainder of the sale proceeds (an amount sufficient to satisfy the anticipated aggregate lease payments over the term of the lease assuming certain adjustments do not occur) on deposit with ABN AMRO Bank (the ABN Bank) to be used as security for a guaranty of the lease payments issued by the ABN Bank. The amount retained by the Company reduced unamortized film costs. Under the original terms of such transaction, depending on the level of the UK corporate tax rate over various time periods, the Company could have been liable for additional lease payments or entitled to a return of a portion of the amount on account at the ABN Bank. In October 1996, the parties to such transaction agreed to amend the terms of such transaction to eliminate the adjustments for changes in the UK corporate tax rate. As a result, in October 1996, $1,388,000 (net of related fees) of the funds on account at the ABN Bank were returned to the Company. In 1996, the Company also completed a sale-leaseback transaction with respect to its motion picture "Evita." The Company sold its interest in "Evita" to Lloyds General Leasing Limited (Lloyds General) and concurrently leased the film back pursuant to a 15 year lease. The Company retained approximately $5,769,000 of the sale proceeds (after payment of related expenses) and placed the remainder of the sale proceeds (an amount sufficient to satisfy the anticipated aggregate lease payments over the term of the lease assuming certain adjustments do not occur) on deposit with the ABN Bank to be used as security for a guaranty of the lease payments issued by the ABN Bank. The amount retained by the Company reduced unamortized film costs. The sale-leaseback transactions with respect to "Judge Dredd" and "Evita" may be unwound by Lloyds General in certain circumstances relating to British tax treatment of the transactions, and the Company could be liable for certain unwind costs which could be substantial, although based upon Lloyds General's discussion with British taxing authorities prior to the respective transactions, the Company believes it unlikely the transactions will be unwound. Pursuant to the Library Sale Agreement (see Note 12), F-24 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) Disney has agreed, upon consummation of the Film Library Sale, to either acquire the Company's subsidiaries that are the lessees in such sale-leaseback transactions or assume all of such subsidiaries rights and obligations under such leases; however, the Company would remain responsible for any of the foregoing unwind costs. In December 1995, the U.S. Attorney for the Central District of California served subpoenas (Subpoenas) on the Company relating to a grand jury investigation of federal tax aspects of various transactions involving Andrew G. Vajna, President, Chief Executive Officer and Chairman of the Board of Directors of the Company, and certain other persons and entities (the Investigation). The Company believes the Investigation is focusing primarily on (i) the 1988 and 1989 personal tax returns of Mr. Vajna and the tax returns of certain other persons and entities, and (ii) the ongoing audits of Mr. Vajna's tax returns since 1990 by the Internal Revenue Service. The Company has not been identified by the U.S. Attorney as being a target of the Investigation; however, there can be no assurance that the Company's status will not change in the future. The Company engaged counsel to represent it in connection with the Investigation and is in the process of responding to the Subpoenas. Given the uncertainty of the Investigation, there is currently no basis upon which to estimate the impact, if any, the Investigation may have on the Company. Pursuant to Article Tenth of the Company's Restated Certificate of Incorporation, Article V of the Company's Bylaws, indemnity agreements entered into between the Company and certain of its officers and directors, and the provisions of Section 145 of the Delaware General Corporation Law, the Company is advancing the expenses of certain of its employees, officers and directors other than Mr. Vajna (Indemnitees) which they may incur in connection with the Investigation. The Indemnitees have undertaken to reimburse the Company for their expenses if it is ultimately determined that they are not entitled to be indemnified. In addition, Mr. Vajna has undertaken to reimburse the Company under certain circumstances with respect to the expenses of the Indemnitees. Given the current uncertainty regarding the scope and duration of the Investigation and the amount of expenses which may be incurred by the Indemnitees in connection with the Investigation, there is no basis upon which to estimate the financial impact which the foregoing may have on the Company. F-25 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) In connection with the Investigation, the Company has determined to advance the expenses of the Indemnitees which the Indemnitees may incur in connection with the Investigation. As of December 31, 1996, the Company had advanced an aggregate of $154,000 on behalf of the Indemnitees. In February 1997, the Company ceased production on one of its motion pictures after commencement of principal photography. The Company is currently in discussions with certain parties involved in the production of "Broadway Brawler" regarding settlement of various obligations in connection therewith including, among other things, debt incurred under the Credit Facility in connection with production of the film (approximately $8.3 million at March 31, 1997) and advances (approximately $3 million at March 31, 1997) received from BVPD as part of funding production (repayment of which is guaranteed in both cases by the completion guarantor for the film), as well as shutdown costs and other commitments made in connection with production of the film (approximately $4.7 million at March 31, 1997). The completion guarantor for "Broadway Brawler" guaranteed completion and delivery of a motion picture containing certain essential elements. As the motion picture could not be completed with such essential elements, the completion guarantor is required to pay an amount equal to the amount loaned by the Lenders and advanced by BVPD to make the motion picture and such additional amounts as were required to complete delivery of the motion picture and which had been committed prior to the shut down. Management of the Company believes, although no assurances can be given, that a settlement of the obligations relating to "Broadway Brawler" will be reached. In the event a settlement is not reached, management believes a substantial portion of any obligations the Company might otherwise have with respect to "Broadway Brawler" will be borne by the completion guarantor. The Company had an output agreement in France with Le Film Office ("LFO") (which expired after the delivery of "Evita"). Pursuant to the output agreement with LFO, a $3,071,000 advance was payable to the Company upon delivery of "The Shadow Conspiracy" to LFO. On August 27, 1996, LFO filed for and obtained a temporary restraining order in California Superior Court in Los Angeles, California (the "Court"), restraining the Company, Summit (the international sales company handling the international distribution of "The Shadow Conspiracy") and Chase (one of the lenders under the Company's Credit Facility), from drawing down the letter of credit securing LFO's advance on the basis of LFO's allegations that the Company failed to give proper notice to LFO for extending the delivery date of "The Shadow Conspiracy". On September 20, 1996, the Court issued a preliminary injunction against the Company, Summit and Chase. The parties agreed to stay the Court F-26 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) proceedings and submit the dispute to binding arbitration by the American Film Marketing Association, as required by the output agreement. However, LFO filed a motion with the Court seeking to dismiss the arbitration and proceed with the litigation in Court. On April 10, 1997, such motion was denied by the Court. An arbitration hearing is scheduled for April 17, 1997. The Company believes that LFO's allegations are without merit and intends to defend them vigorously. In light of the disappointing domestic box office performance of "The Shadow Conspiracy" and the adverse publicity generated in France by LFO's refusing to accept delivery of "The Shadow Conspiracy", in the event the Company does not prevail in the arbitration, it believes that it will be difficult to obtain alternative distribution of "The Shadow Conspiracy" in France. In addition, even if an alternative distribution arrangement is obtained, it is unlikely any such arrangement will provide for an advance on delivery or otherwise be on terms as advantageous as those under the Company's output agreement with LFO. Accordingly, if the Company does not prevail in the arbitration, the Company could be required to write down the carrying value of the film by an amount equal to the difference between the amount of LFO advance not received and amounts actually received by the Company pursuant to alternative distribution arrangements, if any. Trial is scheduled for August 11, 1997, in Los Angeles Superior Court, in a lawsuit by Laurence Fishburne and the LOA Productions, Inc., Mr. Fishburne's loan-out corporation, against the Company, a subsidiary of the Company and Randolph M. Paul, Senior Vice President, Business Affairs and a Director of the Company. The action, for breach of oral contract, fraud and deceit, and civil conspiracy and declaratory relief, was originally filed on July 11, 1994. The plaintiffs claim that the Company entered into an oral contract for Mr. Fishburne to appear in the motion picture, "Die Hard, with a Vengeance," but repudiated the contract the following day. On September 4, 1994, the Company successfully demurred to all of the plaintiffs' causes of action except the breach of contract claim, and on November 29, 1994, the Company successfully demurred to an amended complaint for bad faith denial of existence of contract. On December 29, 1994, the Company and the other defendants answered the First Amended Complaint for breach of contract, fraud and deceit and civil conspiracy. Summary adjudication has been obtained in favor of Mr. Vajna, who was named as an additional defendant in the original complaint. Plaintiffs are claiming damages of $1,750,000, representing the fixed compensation to which they alleged they are entitled, additional compensatory damages of up to $350,000 and general and punitive damages. The Company believes it has meritorious defenses and is defending the action vigorously. F-27 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company has a "first-look" arrangement with Oliver Stone and certain of his affiliated entities pursuant to which Mr. Stone submits to the Company all theatrical motion picture projects owned or controlled by Mr. Stone for the Company's development and consideration of possible production and, as consideration for Mr. Stone's submitting such projects to the Company, the Company pays certain amounts annually to Mr. Stone for overhead and development. Disney has reimbursed the Company for all amounts paid to Mr. Stone ($2,685,000 in 1996); however, pursuant to the Library Sale Agreement, the Company will be responsible for all future payments due to Mr. Stone for the duration of the arrangement, which expires February 10, 1998. The Company currently estimates the payments due under Mr. Stone's agreement during such period will be approximately $1,875,000. In 1996, the Company and Hollywood Pictures Company (HPC), as subsidiary of The Walt Disney Company, entered into a Financing and Distribution Agreement whereby the Company is financially obligated to pay to HPC the lesser of 50% of the cost of the motion picture tentatively entitled "Deep Rising" or $22,500,000, in exchange for (i) a 50% equity participation in such motion picture and (ii) a sales fee for international distribution of such motion picture. In connection with the Library Sale Agreement (see Note 12), upon consummation of the Film Library Sale, the Company will no longer be obligated to pay the latter amount, will relinquish the equity participation and sales fee, and will no longer serve as sales agent with respect to such motion picture. At December 31, 1996, the Company had an obligation to BVPD in connection with this arrangement amounting to $3,675,000. The Company is a party to various other legal proceedings arising in the ordinary course of its business. The Company does not currently believe that any such proceedings will have a material adverse effect on the Company's operations or financial condition. 11. STOCK OPTION PLANS In 1994, the Company adopted two stock option plans. The Basic Stock Option and Stock Appreciation Rights Plan (the Basic Plan) is for regular full-time employees, directors and consultants. The Special Stock Option and Stock Appreciation Rights Plan (the Special Plan) is for certain key or highly compensated employees and is designed to provide alternative procedures for meeting special requirements imposed by federal income tax law in connection with making grants to certain key or highly compensated employees. Furthermore, grants of options or stock appreciation rights (SARs) under the Special Plan will reduce the maximum amount of options and SARs that can be issued in the aggregate and to the recipient under the Basic Plan. Both the Basic Plan and the Special Plan provide for the grant of "incentive stock options" (ISOs) and "nonqualified stock options" (NSOs) to acquire the Company's Common Stock, as well as SARs entitling the recipient on exercise to receive payment of increases in the market value of the Company's Common F-28 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 11. STOCK OPTION PLANS (CONTINUED) Stock from the date of grant to the date of exercise. ISOs may only be issued to employees of the Company and its subsidiaries, whereas NSOs and SARs may be issued to employees and other persons. The maximum number of shares subject to the Basic Plan and the Special Plan are 500,000 and both plans by their terms will expire on December 31, 2003 unless terminated sooner by the Company. On October 28, 1994, the Company's compensation committee, which consisted of two outside Directors of the Company adopted a program for the cancellation of certain options granted under the Basic Plan and Special Plan prior to such date (the Reissuance Date) and the reissuance of new options for the same number of shares for which the old options could have been exercised with exercise prices equal to the closing price of the Company's Common Stock on the Reissuance Date. A summary of stock option activity under all plans relating to certain employees and other persons who provide services to the Company is as follows: WEIGHTED- AVERAGE EXERCISE SHARES PRICE -------------------------- Balance at January 1, 1994 - $ - Granted 78,350(1) 7.26 -------------------------- Balance at December 31, 1994 78,350 7.26 Granted 129,000(2) 3.96 Canceled (8,350) 6.73 -------------------------- Balance at December 31, 1995 199,000 $5.14 Granted 66,000(3) 2.00 Canceled (10,500) 4.17 -------------------------- Balance at December 31, 1996 254,500 $4.37 -------------------------- -------------------------- F-29 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 11. STOCK OPTION PLANS (CONTINUED) DECEMBER 31, ------------------------------------ 1994 1995 1996 ------ ------ ------- Exercisable 78,350 98,334 128,660 Weighted Average Exercise Price $7.26 $6.43 $5.45 (1) These options fully vested on the date of grant. (2) Options relating to 1994 service vest one-third on the date of grant, one-third one year after the date of grant, and one-third two years after the date of grant. Options relating to 1995 service vest one-third one year after the date of grant, one-third two years after the date of grant, and one-third three years after the date of grant. Certain options granted under the Special Plan vest in full on the date of grant. (3) These options vest one-third one year after the date of grant, one-third two years after the date of grant, and one-third three years after the date of grant. The following table summarizes information about stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------------------ NUMBER WEIGHTED- OUTSTANDING AVERAGE WEIGHTED- WEIGHTED- AT REMAINING AVERAGE AVERAGE EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE NUMBER EXERCISE PRICE 1996 LIFE PRICE EXERCISABLE PRICE - - ------------------------------------------------------------------------------------------------------- $2.00 66,000 9.9 years $2.00 15,000 $2.00 3.88 109,500 9.0 years 3.88 40,540 3.88 4.88 10,000 8.9 years 4.88 10,000 4.88 6.63 10,000 7.9 years 6.63 10,000 6.63 6.88 29,000 7.8 years 6.88 23,120 6.88 8.00 30,000 2.3 years 8.00 30,000 8.00
At December 31, 1996, 1995 and 1994, 78,350, 199,000 and 254,500 shares of Common Stock were reserved for future issuance under the Basic Plan and Special Plan. Options to purchase 421,650 (1994), 301,000 (1995) and 245,000 (1996) were available for grant under the Basic Plan and Special Plan. F-30 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 12. SUBSEQUENT EVENTS On April 3, 1997, the Company entered into a Purchase and Sale agreement (the "Library Sale Agreement") with Walt Disney Pictures and Television, a subsidiary of The Walt Disney Company, to sell to Walt Disney Pictures and Television substantially all of the films in the Company's motion picture library and certain other assets (referred to herein as the "Film Library Sale"; "Disney" is used herein to refer to Walt Disney Pictures and Television and/or its affiliates, including The Walt Disney Company, as applicable). In exchange for the assets being sold to Disney, Disney has agreed to relinquish its equity interest in the Company (555,556 shares of the Company's Common Stock and a warrant to purchase 150,000 shares of the Company's Common Stock at an exercise price of $9.00 per share) and cancel its outstanding loans and outstanding interest to the Company (approximately $36,654,000 as of December 31, 1996). In addition, Disney has agreed to assume with respect to the films and rights therein being sold to Disney all residuals and participation obligations, as well as all scheduled obligations relating to the Company's existing exploitation agreements. Disney has also agreed to assume the outstanding debt under the Company's credit facility relating to the soon to be completed "An Alan Smithee Film," (one of the films included in the Film Library Sale) up to a maximum amount of $10,000,000 (which the Company anticipates will not be exceeded), and the Company has agreed to transfer to Disney all minimum guarantee payments and any overages paid or to be paid with respect to such film. The film library being sold to Disney includes primarily all of the Company's rights (except minimum guarantee payments for films other than "An Alan Smithee Film") to the following eleven motion pictures: "Medicine Man," "Tombstone," "Renaissance Man," "Color of Night," "Judge Dredd," "The Scarlet Letter," "Nixon," "Evita" (excluding soundtrack rights, which will be retained by the Company), "Amanda," "The Shadow Conspiracy," and "An Alan Smithee Film." Disney will also retain overages otherwise payable to the Company by Disney after January 1, 1997 with respect to certain distribution rights to "Die Hard, With a Vengeance" previously licensed to Disney. In addition, upon consummation of the Film Library Sale, the Company's twenty-five film domestic distribution arrangement with BVPD, under which nine films have been delivered, will be terminated. The Film Library Sale is subject to numerous conditions, including, among other things, completion of certain due diligence by Disney, expiration of any applicable Hart-Scott-Rodino waiting period, and the approval of the Company's stockholders. The Library Sale Agreement and related Film Library Sale may also be terminated by the Company or Disney in certain circumstances, including, among other things, upon failure to consummate the Film Library Sale by September 15, 1997. Management of the Company F-31 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 12. SUBSEQUENT EVENTS (including Chairman of the Board and Chief Executive Officer, Andrew G. Vajna), which owns approximately 43.7% of the outstanding Common Stock of the Company, has agreed to vote its shares in favor of the transaction in accordance with the terms of the Library Sale Agreement. On April 3, 1997, the Company also announced that it does not presently intend to commence production on any additional motion pictures (although the Library Sale Agreement does not preclude the Company, pending consummation of the Film Library Sale, from commencing production on films that would not be distributed by Disney) and that it is in the process of considering its alternatives assuming consummation of the Film Library Sale to Disney. Such alternatives include disposing of those assets which are not being sold to Disney, in one or a series of transactions. Not included in the Film Library Sale to Disney are the Company's slate of approximately forty development projects, the Company's visual effects facility, and Cinergi's rights in "Die Hard, With a Vengeance" (which the company owns with Twentieth Century Fox which controls the sequel rights to the film). 13. GEOGRAPHICAL INFORMATION The Company's operations are principally developing, financing, producing and licensing feature-length motion pictures worldwide. In 1994, the Company earned revenues from one significant customer of approximately $43,207,000 (40%). In 1995, the Company earned revenues from two significant customers of approximately $57,808,000 (30%) and $44,053,000 (23%). In 1996, the Company earned revenues from two significant customers of approximately $43,454,000 (33%) and $12,937,000 (10%). Export revenues by geographic area are as follows: YEAR ENDED DECEMBER 31, ------------------------------------------ 1994 1995 1996 ------------------------------------------ Europe $45,200,000 $72,648,000 $41,964,000 Asia 16,248,000 51,970,000 19,377,000 South America 4,058,000 3,813,000 4,428,000 Other 4,373,000 9,897,000 4,927,000 ------------------------------------------ Total export revenue $109,028,000 $192,880,000 $70,696,000 ------------------------------------------ ------------------------------------------ F-32 Cinergi Pictures Entertainment Inc. Notes to Consolidated Financial Statements (continued) 14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Certain quarterly financial information is presented below:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER(1)(2) YEAR ----------------------------------------------------------------------------- 1995: Revenues $12,706,000 $50,960,000 $51,528,000 $77,686,000 $192,880,000 Gross profit (loss) 905,000 (8,936,000) (8,162,000) 4,529,000 (11,664,000) Operating income (loss) 336,000 (9,756,000) (9,217,000) 1,875,000 (16,762,000) Net income (loss) 233,000 (9,435,000) (9,059,000) 2,199,000 (16,062,000) .02 (.76) (.64) .15 (1.23) Net income (loss) per share 1996: Revenues $37,116,000 $22,467,000 $30,189,000 $43,228,000 $133,000,000 Gross profit (loss) 781,000 391,000 1,646,000 (9,430,000) (6,612,000) Operating income (loss) (695,000) (1,012,000) (465,000) (14,192,000) (16,364,000) Net income (loss) (637,000) (716,000) (294,000) (14,258,000) (15,905,000) Net income (loss) per share (.04) (.05) (.02) (1.01) (1.12)
(1) In the fourth quarter of 1995, the Company revised its revenue and certain cost estimates related to released films, the effect of which decreased the net income in the quarter ended December 31, 1995, by approximately $3,700,000. (2) In the fourth quarter of 1996, the Company revised its revenue and certain cost estimates related to released films, the effect of which decreased the net income in the quarter ended December 31, 1996, by approximately $5,964,000. F-33 EX-3.2 2 BYLAWS BYLAWS for the regulation, except as otherwise provided by statute or the Certificate of Incorporation, of CINERGI PICTURES ENTERTAINMENT INC. (FORMERLY KNOWN AS CINERGI PRODUCTIONS INC.) a Delaware corporation TABLE OF CONTENTS Article I GENERAL PROVISIONS Section 1.01 PRINCIPAL EXECUTIVE OFFICE....................... 1 Section 1.02 NUMBER OF DIRECTORS.............................. 1 Section 1.03 REGISTRATION OF SHARES........................... 1 ARTICLE II SHARES AND STOCKHOLDERS Section 2.01 SHARE CERTIFICATES............................... 1 A. IN GENERAL....................................... 1 B. FORM OF CERTIFICATES............................. 2 C. FRACTIONAL SHARE INTERESTS....................... 2 Section 2.02 TRANSFER OF CERTIFICATES......................... 2 Section 2.03 LOST CERTIFICATES................................ 3 Section 2.04 MEETINGS OF STOCKHOLDERS......................... 3 A. PLACE OF MEETINGS................................ 3 B. ANNUAL MEETINGS.................................. 3 C. SPECIAL MEETINGS................................. 3 D. NOTICE OF MEETINGS............................... 3 E. ADJOURNED MEETINGS AND NOTICE THEREOF............ 4 F. WAIVER OF NOTICE................................. 4 G. QUORUM/MAJORITY VOTE............................. 4 H. CONDUCT OF MEETINGS.............................. 4 I. NOMINATIONS FOR DIRECTORS........................ 4 Section 2.05 ACTION WITHOUT A MEETING......................... 5 Section 2.06 VOTING OF SHARES................................. 5 A. IN GENERAL....................................... 5 B. SECRET VOTING BY BALLOT.......................... 5 C. VOTING OF SHARES BY CERTAIN HOLDERS.............. 5 Section 2.07 PROXIES.......................................... 6 Section 2.08 INSPECTORS OF ELECTION........................... 6 A. APPOINTMENT...................................... 6 B. DUTIES........................................... 6 Section 2.09 RECORD DATE...................................... 7 Article III DIRECTORS Section 3.01 POWERS........................................... 7 Section 3.02 COMMITTEES OF THE BOARD.......................... 7 Section 3.03 ELECTION AND TERM OF OFFICE...................... 8 Section 3.04 VACANCIES........................................ 8 Section 3.05 REMOVAL.......................................... 9 Section 3.06 RESIGNATION...................................... 9 Section 3.07 MEETINGS OF THE BOARD............................ 9 A. REGULAR MEETINGS................................. 9 B. ORGANIZATION MEETINGS............................ 9 C. SPECIAL MEETINGS................................. 9 D. NOTICE OF ADJOURNMENT............................ 9 E. PLACE OF MEETING................................. 10 F. PRESENCE BY CONFERENCE TELEPHONE CALL............ 10 G. QUORUM/VOTING.................................... 10 H. WAIVER OF NOTICE................................. 10 Section 3.08 ACTION WITHOUT MEETING........................... 10 Section 3.09 FEES AND COMPENSATION............................ 10 Section 3.10 INTERESTED DIRECTORS............................. 10 (i) Article IV OFFICERS Section 4.01 OFFICERS......................................... 11 Section 4.02 ELECTIONS........................................ 11 Section 4.03 OTHER OFFICERS................................... 11 Section 4.04 REMOVAL.......................................... 11 Section 4.05 RESIGNATION...................................... 11 Section 4.06 VACANCIES........................................ 11 Section 4.07 CHAIRMAN OF THE BOARD............................ 11 Section 4.08 PRESIDENT........................................ 12 Section 4.09 SECRETARY........................................ 12 Section 4.10 CHIEF FINANCIAL OFFICER.......................... 12 Section 4.11 TREASURER........................................ 12 Section 4.12 VICE PRESIDENT................................... 12 Article V INDEMNIFICATION AND INSURANCE Article VI MISCELLANEOUS Section 6.01 BOOKS OF ACCOUNT AND PROCEEDINGS................. 13 Section 6.02 RIGHTS OF INSPECTION............................. 13 A. BY STOCKHOLDERS.................................. 13 B. BY DIRECTORS..................................... 14 Section 6.03 CHECKS, DRAFTS, ETC.............................. 14 Section 6.04 AUTHORITY TO EXECUTE CONTRACTS................... 14 Section 6.05 REPRESENTATION OF SHARES OF OTHER CORPORATIONS... 14 Section 6.06 CONSTRUCTION AND DEFINITIONS..................... 14 Section 6.07 REIMBURSEMENT OF DISALLOWED COMPENSATION......... 14 Article VII AMENDMENTS Section 7.01 POWER OF STOCKHOLDERS............................ 15 Section 7.02 POWER OF DIRECTORS............................... 15 Article VIII EMERGENCY PROVISIONS Section 8.01 GENERAL.......................................... 15 Section 8.02 UNAVAILABLE DIRECTORS............................ 15 Section 8.03 AUTHORIZED NUMBER OF DIRECTORS................... 15 Section 8.04 QUORUM........................................... 16 Section 8.05 CREATION OF EMERGENCY COMMITTEE.................. 16 Section 8.06 CONSTITUTION OF EMERGENCY COMMITTEE.............. 16 Section 8.07 POWERS OF EMERGENCY COMMITTEE.................... 16 Section 8.08 DIRECTORS BECOMING AVAILABLE..................... 16 Section 8.09 ELECTION OF BOARD................................ 16 Section 8.10 TERMINATION OF EMERGENCY COMMITTEE............... 17 (ii) BYLAWS for the regulation, except as otherwise provided by statute or the Certificate of Incorporation of CINERGI PICTURES ENTERTAINMENT INC. (formerly known as CINERGI PRODUCTIONS INC.) ARTICLE I GENERAL PROVISIONS Section 1.01 PRINCIPAL EXECUTIVE OFFICE The principal executive office of the corporation shall be located at 2308 Broadway, Santa Monica, California 90404-2916. The Board of Directors shall have the power to change the principal office to another location and may fix and locate one or more subsidiary offices at any place. Section 1.02 NUMBER OF DIRECTORS A. The affairs of the corporation shall be managed by a Board of Directors (the "Board") consisting of not less than three (3) nor more than twenty (20) directors. Directors need not been Stockholders or citizens or residents of the United States. B. The exact number of directors within the limits specified shall be six (6) until changed by an amendment to these Bylaws duly adopted by the Board or by the Stockholders. Section 1.03 REGISTRATION OF SHARES The corporation shall recognize each person registered in its stock ledger as the exclusive owner and holder of the shares registered in his or her name as the "Stockholder" for all purposes hereunder with the exclusive rights INTER ALIA to vote the shares, to receive dividends declared with respect to the shares, to transfer the shares to others, and to exercise any other rights of Stockholders. The corporation shall have no obligation to recognize any equitable or other claim or interest in any shares on the part of any person or persons other than the registered owner, as set forth in the stock ledger, whether or not the corporation shall have any notice thereof, except as may otherwise be provided by the laws of the State of Delaware. "Shares" for purposes hereof, shall mean shares of the corporation's stock authorized by its Certificate of Incorporation and registered in the stock ledger as issued and outstanding, including any one or more classes of stock so authorized, and whether or not such share is deemed to have voting or other privileges. ARTICLE II SHARES AND STOCKHOLDERS Section 2.01 SHARE CERTIFICATES A. IN GENERAL The corporation shall issue a certificate or certificates representing shares of its capital stock. Each certificate so issued shall be signed by or in the name of the corporation by the Chairman or Vice Chairman of the 1. Board or the President or a Vice President and by the Chief Financial Officer, Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the corporation and shall state the name of the record owner thereof and represent the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. B. FORM OF CERTIFICATES There shall be set forth on the face or back of a certificate which the corporation shall issue to represent a class or series of stock one of the following: 1. A statement of the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights; or 2. A summary of the statement described in Subsection 2.01(B)(1) above. If a security of the corporation is subject to a restriction on the transfer or registration thereof, such restriction shall be noted, in writing, conspicuously upon the certificate representing the security. C. FRACTIONAL SHARE INTERESTS The corporation may, but shall not be required to, issue certificates representing a fraction of a share and, in this event, the holder thereof shall have the rights appurtenant to ownership of that interest in the corporation. If the corporation elects not to issue certificates representing a fraction of a share to the persons entitled thereto, it shall, at its election, either: 1. Arrange for disposition of the fractional interest by those entitled thereto. 2. Pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined. 3. Issue scrip or warrants in registered or bearer form which entitles the holder to receive a full share upon surrender of such scrip or warrants aggregating one or more full shares, which scrip or warrants may, if the Board elects, either become (i) void if not so surrendered on or before a specified date, or (ii) subject to such other conditions or limitations as may be designated by the Board. Section 2.02 TRANSFER OF CERTIFICATES Where a certificate for shares is presented to the corporation or its transfer clerk or transfer agent with a request to register a transfer of shares, the corporation is under a duty to register the transfer, cancel the certificate presented, and issue a new certificate if: A. The certificate is endorsed or the instructions originated by the appropriate person or persons; B. Reasonable assurance is given that those endorsements or instructions are genuine and effective; C. The corporation has no duty to inquire into adverse claims or has discharged any such duty; D. Any applicable law relating to the collection of taxes has been compiled with; and E. The transfer is in fact rightful or is to a bona fide purchaser. 2. Section 2.03 LOST CERTIFICATES Where a certificate is alleged to have been lost, destroyed or stolen, the corporation shall issue a new certificate in place of the original if the owner: A. So requests, in writing, before the corporation has notice that the certificate has been acquired by a bona fide purchaser; and B. If so requested by the Board, gives the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, destruction or theft of such certificate or the issuance of such new certificate. Except as provided above, no new certificate for shares shall be issued in lieu of an old certificate unless the corporation is ordered to do so by a court in a judgment in an action brought in a court of appropriate jurisdiction. Section 2.04 MEETINGS OF STOCKHOLDERS A. PLACE OF MEETINGS Meetings of Stockholders shall be held at any place within or without the State of Delaware designated by the Board. In the absence of any such designation, Stockholders' meetings shall be held at the principal executive office of the corporation. B. ANNUAL MEETINGS An annual meeting of the Stockholders of the corporation shall be held for the election of directors on the date and at the time fixed, from time to time, by the Board. The first annual meeting shall be held on a date within thirteen (13) months after the organization of the corporation and each subsequent annual meeting shall be held on a date within thirteen (13) months after the immediately preceding annual meeting. Any other proper subject for Stockholder consideration may be transacted which may be presented at the meeting, whether or not included in the notice of the meeting. C. SPECIAL MEETINGS Special meetings of the Stockholders may be called by the Board, the Chairman of the Board, the President, or by the holders of shares entitled to cast not less than twenty-five percent (25%) of the votes at the meeting. Upon request in writing to the Chairman of the Board, the President, any Vice President or the Secretary by any person (other than the Board) entitled to call a special meeting of Stockholders, the officer forthwith shall cause notice to be given to the Stockholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the persons entitled to call the meeting may give the notice. D. NOTICE OF MEETINGS 1. Except to the extent otherwise provided by applicable law or unless lapse of time shall be waived, written notice of any Stockholders' meeting shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each Stockholder entitled to vote thereat. Each notice shall state the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. The notice of any meeting may be accompanied by any additional documents, statement or information which may be selected by the persons calling the meeting or which may be prescribed by any applicable law or regulation. 3. 2. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the Stockholder at his or her address as it appears on the records of the corporation. An affidavit of the Secretary or an Assistant Secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. E. ADJOURNED MEETINGS AND NOTICE THEREOF Any meeting of Stockholders may be adjourned from time to time by a vote of a majority of the shares represented either in person or by proxy whether or not a quorum is present. When a Stockholders' meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at a meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. However, if the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Stockholder of record entitled to vote at the meeting. F. WAIVER OF NOTICE The transactions of any meeting of Stockholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. No Stockholder may object to any failure to comply with the provisions of this Section if either (i) at any time before or after the meeting he exercises a written waiver of notice or (ii) he attends one meeting in person or by proxy, except if he attends solely for the express purpose of objecting at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual or special meeting of Stockholders. All such waiver, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. G. QUORUM/MAJORITY VOTE Except as otherwise provided by the laws of the State of Delaware, a majority of shares entitled to vote, present in person, or represented by proxy, shall constitute a quorum for the transaction of business. If a quorum is present, the affirmative vote of the majority of the voting shares represented at the meeting and entitled to vote on any matters shall be the act of the Stockholders, unless the vote of a greater number, or voting by classes, is required by law or under the Certificate of Incorporation of the corporation. The Stockholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough Stockholders to leave less than a quorum, provided that any action taken (other than adjournment) must be approved by at least a majority of the shares required to constitute a quorum. H. CONDUCT OF MEETINGS Meetings of Stockholders shall be presided over by one of the following officers in the following order by seniority, if present and acting: Chairman of the Board, Vice Chairman of the Board, if any, the President or any Vice President selected in the order of chronological age. The Secretary of the corporation or, in his or her absence, any Assistant Secretary shall act as Secretary of the meeting. In lieu of the foregoing persons, the Board may designate a Chairman and/or Secretary at any meeting of the Stockholders. All meetings shall be conducted by reference to Roberts Rules of Order or other parliamentary system selected by the chairman of the meeting and not inconsistent with these Bylaws, the Certificate of Incorporation or any applicable law. I. NOMINATIONS FOR DIRECTORS Nominations for the election of directors may be made at any meeting at which directors are to be selected by the Board or its designees or by any Stockholder entitled to vote for directors generally at that 4. meeting. Nomination may be made by Stockholders only if written notice thereof is given to the Secretary of the corporation at least ten (10) days in advance of the meeting or two (2) days after service of the notice of the meeting (whichever shall occur last). Said notice should identify the person or persons whom the Stockholder wishes to nominate and give the residential address of the nominee and the nominee's business qualifications for such position. The chairman of the meeting may refuse to acknowledge any nominations not made in accordance with the foregoing procedure or in accordance with applicable law. Section 2.05 ACTION WITHOUT A MEETING Any action required or permitted to be taken at any annual or special meeting of Stockholders may be taken without a meeting, without prior notice, and without a vote, if the consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation by delivery (by hand or by certificate and registered mail, return receipt requested) to its registered office in the State of Delaware, its principal place of business, or to the Secretary of the corporation. Where the approval of Stockholders is given without a meeting by less than unanimous written consent, the Secretary shall give prompt notice of the approved corporate action to those Stockholders who have not consented in writing. Such notice shall be given in the same manner as notice of Stockholders' meetings. Any such written consents shall be filed with the minutes of proceedings of the Stockholders, and actions authorized or taken under such written consents shall have the same force and effect as those adopted by vote of the Stockholders at any annual or special meeting thereof. Section 2.06 VOTING OF SHARES A. IN GENERAL Except as may otherwise be prescribed by the provisions of the Certificate of Incorporation, each share of stock shall entitle the holder thereof to one vote. In the election of directors, a plurality of the votes cast shall elect. Any other action shall be authorized by a majority of the votes cast except where the applicable law in the State of Delaware prescribes a different percentage of votes and/or a different exercise of voting power, and except as may be otherwise prescribed by the provisions of the Certificate of Incorporation or these Bylaws. B. SECRET VOTING BY BALLOT Elections for directors and voting in other matters need not be by secret ballot until any Stockholder demands voting by secret ballot on the applicable issues at the meeting and before the voting begins. C. VOTING OF SHARES BY CERTAIN HOLDERS Shares of capital stock of the corporation standing in the name of another corporation, domestic or foreign, and entitled to vote may be voted by such officer, agent or proxy as the bylaws of such other corporation may prescribe or, in the absence of such provision, as the board of directors of such other corporation may determine. Shares of capital stock of the corporation standing in the name of a deceased person, a minor, an incompetent or a corporation declared bankrupt and entitled to vote may be voted by an administrator, executor, guardian, conservator or trustee, as the case may be, either in person or by proxy, without transfer of such shares into the name of the official so voting. A Stockholder whose shares of capital stock of the corporation are pledged shall be entitled to vote such shares unless on the transfer books of the corporation the pledgor has expressly empowered the pledgee to vote such shares, in which case only the pledgee, or such pledgee's proxy, may represent such shares and vote thereon. 5. Shares of capital stock of the corporation belonging to the corporation, or to another corporation if a majority of the shares entitled to vote in the election of directors of such other corporation shall be held by the corporation, shall not be voted at any meeting of Stockholders and shall not be counted in determining the total number of outstanding shares for the purpose of determining whether a quorum is present. Nothing in this Section 2.06C shall be construed to limit the right of the corporation to vote shares of capital stock of the corporation held by it in a fiduciary capacity. Section 2.07 PROXIES Every person entitled to vote for directors or any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the Secretary of the corporation. A proxy shall be deemed signed if the Stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, or otherwise) by the Stockholder or Stockholder's attorney in fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing signed by the person and delivered to the corporation stating that the proxy is revoked, or by a subsequent proxy executed by, or attendance at the meeting and voting in person by the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of the law applicable in the State of Delaware. Section 2.08 INSPECTORS OF ELECTION A. APPOINTMENT The Board shall, in advance of any meeting of Stockholders, appoint one or more inspectors (individually an "Inspector" and collectively, the "Inspectors") to act at such meeting and make a written report thereof. The Board may designate one or more persons as alternate Inspectors to replace any Inspector who shall fail to act. If no Inspector or alternate shall be able to act at such meeting, the person presiding at such meeting shall appoint one or more other persons to act as Inspectors thereat. Each Inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of an Inspector with strict impartiality and according to the best or his or her ability. B. DUTIES The Inspectors shall (i) ascertain the number of shares of capital stock of the corporation outstanding and the voting power of each, (ii) determine the shares of capital stock of the corporation represented at such meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the Inspectors and (v) certify their determination of the number of such shares represented at such meeting and their count of all votes and ballots. The Inspectors may appoint or retain other persons or entities to assist them in the performance of their duties. The date and time of the opening and closing of the polls for each matter upon which the Stockholders will vote at such meeting shall be announced at such meeting. No ballots, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the Inspectors after the closing of the polls unless the Court of Chancery of the State of Delaware upon application by any Stockholder shall determine otherwise. In determining the validity and counting of proxies and ballots, the Inspectors shall be limited to an examination of the proxies, ballots and the regular books and records of the corporation, except that the Inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by a Stockholder of record to cast or more votes than such Stockholder holds 6. of record. If the Inspectors consider other reliable information for the limited purpose permitted herein, the Inspectors, at any time they make their certification pursuant to this Section 2.08(B), shall specify the precise information considered by them, including the person or persons from whom they obtained such information, when the information was obtained, the means by which such information was obtained and the basis for the Inspectors' belief that such information is accurate and reliable. Section 2.09 RECORD DATE In order that the corporation may determine the Stockholders entitled to notice or of to vote at any meeting or entitled to express consent to any corporate action without a meeting or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days prior to the date of such meeting nor more than sixty (60) days prior to any such action. If no record date is fixed: A. The record date for determining Stockholders entitled to notice of or to vote at a meeting of Stockholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. B. The record date for determining Stockholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board has been taken, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered (by hand or by certified or registered mail, return receipt requested) to the corporation's registered agent in the State of Delaware, its principal place of business, or to the Secretary. C. The record date for determining Stockholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. A determination of Stockholders of record entitled to notice of or to vote at a meeting of Stockholders shall apply to any adjournment of the meeting unless the Board fixed a new record date for the adjourned meeting, but the Board shall fix a new record date if the meeting is adjourned for more than thirty (30) days from the date set for the original meeting. The stock ledger shall be the only evidence as to who are the Stockholders entitled to examine the stock ledger, the stock list or the books of the corporation, or to vote in person or by proxy at any meeting of Stockholders. ARTICLE III DIRECTORS Section 3.01 POWERS Subject to the provisions of the laws of the State of Delaware and the Certificate of Incorporation, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board. The Board may delegate the management of the day-to-day operations of the business of the corporation to a management company or other person provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board. Section 3.02 COMMITTEES OF THE BOARD The Board may, by resolution adopted by a majority of the who Board designate one (1) or more committees, each consisting of one (1) or more directors, to serve at the pleasure of the Board. The Board may designate one (1) or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a 7. committee, the member or members thereof present at any meeting and not disqualified from voting, whether a quorum or not, may unanimously appoint another member of the Board to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board and subject to the provisions of the applicable law in the State of Delaware, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the corporation, and may authorize the corporate seal to be affixed to all papers which may require it, but no such committee shall have the power or authority with respect to: A. Amending the Certificate of Incorporation (except that a committee may, to the extent provided in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board as provided in Section 151(a) of the Delaware General Corporation Law, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of shares for, shares of any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares in any series). B. Adopting an agreement of merger or consolidation under Sections 251 or 252 of the Delaware General Corporation Law. C. Recommending to the Stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets. D. Recommending to the Stockholders a dissolution of the Corporation or a revocation of a dissolution. E. Amending the Bylaws of the Corporation. F. Unless the resolutions, Bylaws, of Certificate of Incorporation expressly so provide, declaring a dividend, authorizing the issuance of stock or adopting a certificate of ownership and merger pursuant to Section 253 of the Delaware General Corporation Law. Section 3.03 ELECTION AND TERM OF OFFICE The directors shall be elected at each annual meeting of Stockholders, but, if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of Stockholders held for that purpose. All directors shall hold office until the expiration of the term for which elected and until their respective successors are elected and qualified. Section 3.04 VACANCIES A vacancy or vacancies in the Board shall be deemed to exist in case of death, resignation or removal of any director, or if the authorized number of directors be increased, or if the Stockholders fail, at any annual or special meeting of Stockholders, at which any director or directors are elected, to elect to fill the full authorized number of directorships. Except for a vacancy created by the removal of a director, vacancies on the Board may be filled by a majority of the directors then in office, whether or not less than a quorum, or by a sole remaining director, and each director so elected shall hold office until his successor is elected. A vacancy on the Board created by the removal of a director may only be filled by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present. The Stockholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Insofar as a director or directors are elected by a class or series of stock, vacancies or newly created directorships are to be filled only by the remaining director or directors elected by such class or series or by the vote of a majority of the shares of such class or series. 8. Section 3.05 REMOVAL Subject to the rights of any shares having a preference over the Common Stock of the corporation as to dividends or upon liquidation to elect directors under specified circumstances, any director may be removed from office, with or without cause, but only by the affirmative vote of the holders of a majority of the combined voting power of all then outstanding shares entitled to vote generally in the election of directors, voting together as a single class. Section 3.06 RESIGNATION Any director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary of the Board of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time the Board or the Stockholders shall have the power to elect a successor to take office when the resignation is to become effective. Section 3.07 MEETINGS OF THE BOARD A. REGULAR MEETINGS Regular meetings of the Board shall be held at such time and place within or without the State of Delaware as may be determined from time to time by resolution of the Board or by written consent of all members of the Board or in these Bylaws. Regular meetings shall be held upon oral or written notice given by any means in sufficient time for the convenient assembly of directors; forty-eight (48) hours' notice delivered by mail or twelve (12) hours' notice delivered personally or by telephone, telegraph or telecopier or other similar means shall be deemed sufficient for the foregoing purpose. Any notice shall state the date, place and hour of the meeting. Notice of a meeting need not be given to any director who signs a waiver of notice, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. B. ORGANIZATION MEETINGS Immediately following each annual meeting of Stockholders, the Board shall hold a regular meeting for the purpose of organization, election of officers and the transaction of other business. Notice of such meetings is hereby dispensed with. C. SPECIAL MEETINGS Special meetings of the Board for any purpose or purposes shall be called at any time or place by the Chairman of the Board or the President or by any Vice President or the Secretary or any two directors. Special meetings shall be held upon oral or written notice given by any means in sufficient time for the convenient assembly of directors; forty-eight (48) hours' notice delivered by mail or twelve (12) hour' notice delivered personally or by telephone or telegraph or other similar means shall be deemed sufficient for the foregoing purpose. Any notice shall state the date, place and hour of the meeting. Notice of a meeting need not be given to any director who signs a waiver of notice, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. D. NOTICE OF ADJOURNMENT A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than twenty-four (24) hours, notice of such adjournment to another time and place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of adjournment, in the same manner set forth above for special meetings in Section 3.07.C. 9. E. PLACE OF MEETING Meetings of the Board may be held at any place within or without the State of Delaware which has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, then such meeting shall be held at the principal executive office of the corporation, or such other place designated by resolution of the Board. F. PRESENCE BY CONFERENCE TELEPHONE CALL Members of the Board or any committee designated by the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear each other. Such participation constitutes presence in person at such meeting. G. QUORUM/VOTING A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business; provided, however, that in the absence of a quorum, a majority of the directors present at any directors' meeting, either regular or special, may adjourn any meeting to another time and place. If the meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of adjournment, in the same manner as set forth above for special meetings in Section 3.07.C. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present is the act of the Board, unless a greater number be required by law, by the Certificate of Incorporation or by the provisions of these Bylaws. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. H. WAIVER OF NOTICE Whenever notice is required to be given to any director pursuant to Delaware law, the corporation's Certificate of Incorporation or these Bylaws, a written waiver thereof, signed by such director, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting except when the director attends the meeting for the express and sole purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 3.08 ACTION WITHOUT MEETING Any action required or permitted to be taken at any meeting of the Board or any committee thereof may be taken without a meeting if all members of the Board or any committee, as the case may be, consent in writing to such action and the writing or writings are filed with the minutes or proceedings of the Board or committee, as the case may be. Section 3.09 FEES AND COMPENSATION Directors and members of the committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the Board. Section 3.10 INTERESTED DIRECTORS The presence of a director, who is directly or indirectly a party in a contract or transaction with the corporation, or between the corporation and any other corporation, partnership, association or other organization in which such director is a director or officer or has a financial interest, may be counted in determining whether a quorum is present at any meeting of the Board of Directors or a committee thereof at which such contract or 10. transaction is discussed or authorized, and such director may participate in such meeting to the extent permitted by applicable law, including Section 144 of the Delaware General Corporation Law. ARTICLE IV OFFICERS Section 4.01 OFFICERS The officers of the corporation shall consist of a Chairman of the Board or President, or both, a Secretary, a Chief Financial Officer, and such additional officers as may be elected or appointed in accordance with Section 4.03 of these Bylaws and as may be necessary to enable the corporation to sign instruments and share certificates. Any number of offices may be held by the same person. Section 4.02 ELECTIONS All officers of the corporation, except such officers as may be otherwise appointed in accordance with Section 4.03, shall be chosen by the Board, and each shall hold his office until he shall resign or be removed or is otherwise disqualified to serve, or until his successor is chosen and qualified. Section 4.03 OTHER OFFICERS The Board, at their discretion, may appoint, or empower the President to appoint, one or more Vice Presidents, one or more Assistant Secretaries, a Treasurer, one or more Assistant Treasurers, or such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as the Board or the President may from time to time determine. Section 4.04 REMOVAL Any officer may be removed, either with or without cause, by the Board, at any regular or special meeting thereof, or, except in case of an officer chosen by the Board, by any officer upon whom such power or removal may be conferred by the Board (subject, in each case, to the rights, if any, of an officer under contract of employment). Section 4.05 RESIGNATION Any officer may resign at any time by giving written notice to the Board or to the President, or to the Secretary of the corporation without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Any such resignation shall take effect at the time of the receipt of such notice or at any later time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 4.06 VACANCIES A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filed in the manner prescribed in these Bylaws for regular appointments to such office. Section 4.07 CHAIRMAN OF THE BOARD The Board may choose a Chairman of the Board from among its members. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board. If there is no President, the Chairman of the Board shall in addition be the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in Section 4.08 below. The Chairman of the Board shall hold office until the organization 11. meeting of the Board next succeeding his election and until his successor is elected and qualified or until his earlier resignation or removal. Section 4.08 PRESIDENT Subject to such supervisory powers, if any, as may be given by the Board to the Chairman of the Board, if there be such an officer, the President shall be the general manager and Chief Executive Officer of the corporation and shall, subject to the control of the Board, have general supervision, direction and control of the business and affairs of the corporation. He shall preside at all meetings of the Stockholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board. He shall be ex-officio a member of all the standing committees, including the Executive Committee, if any, and shall have the general powers and duties of management usually vested in the office of President of a corporation, and shall have such other powers and duties as may be prescribed by the Board or these Bylaws. Section 4.09 SECRETARY The Secretary shall keep or cause to be kept, at the principal executive office or such other place as the Board may order, a book of minutes of all meetings of Stockholders, the Board and committees of the Board, with the time and place of holding, whether regular or special, and if special, how authorized, the notice thereof given, the names of those present at the directors' or committee meetings, the number of shares present or represented at Stockholders' meetings, and the proceedings thereof. The Secretary shall keep or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent or registrar, a record of its Stockholders giving the names and addresses of all Stockholders and the number and class of shares held by each, the number and date of certificates issued for shares, and the number and date of cancellation of every certificate surrendered for cancellation. This information may be kept in written form or in any other form capable of being converted into written form. The Secretary shall give, or cause to be given, notice of all meetings of the Stockholders and of the Board required by the Bylaws or by law to be given, and shall have such other powers and perform such other duties as may be prescribed by the Board or by the Bylaws. Section 4.10 CHIEF FINANCIAL OFFICER The Chief Financial Officer shall have general supervision, direction and control of the financial affairs of the corporation and shall have such other powers and duties as may be prescribed by the Board or these Bylaws. In the absence of a named Treasurer, the Chief Financial Officer shall also have the powers and duties of the Treasurer as hereinafter set forth and shall be authorized and empowered to sign as Treasurer in any case where such officer's signature is required. Section 4.11 TREASURER The Treasurer shall keep or cause to be kept the books and records of account as provided for and in accordance with Section 6.01.B of these Bylaws. The books of account shall at all reasonable times be open to inspection by any director. The Treasurer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the Board. He shall disburse the funds of the corporation as may be ordered by the Board, shall render to the President and directors, whenever they request it, an account of all of his transactions as Treasurer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board or these Bylaws. Section 4.12 VICE PRESIDENT In the absence or disability of the President, the Vice Presidents, in order of their rank as fixed by the Board, or, if not ranked, the Vice President designated by the Board, shall perform all the duties of the President 12. and when so acting shall have all the powers of, and be subject to the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them. ARTICLE V INDEMNIFICATION AND INSURANCE The corporation shall, to the fullest extend permitted by Section 145 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented, indemnify any and all persons whom it shall have the power to indemnify under said section from and against any and all of the expenses, liabilities or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement, vote of Stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. Expenses incurred by any such person in connection with a proceeding shall be paid by the corporation in advance of the final disposition of such proceeding upon receipt of an undertaking by or on behalf of such person to repay such amounts, upon such terms and conditions as the Board of Directors deems appropriate, if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation. ARTICLE VI MISCELLANEOUS Section 6.01 BOOKS OF ACCOUNT AND PROCEEDINGS The corporation shall keep adequate and correct books and records of account and shall keep minutes of the proceedings of its Stockholders, Board and committees of the Board and shall keep at its principal executive office, or at the office of its transfer agent or registrar, a record of its Stockholders, giving the names and addresses of all Stockholders and the number and class of shares held by each. Such minutes shall be kept in written form. Such other books and records shall be kept either in written form or in any other form capable of being converted into written form. Section 6.02 RIGHTS OF INSPECTION A. BY STOCKHOLDERS 1. RECORD OF STOCKHOLDERS The Secretary shall prepare and make, at least ten (10) days before every meeting of Stockholders, a complete list of Stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each Stockholder and the number of shares registered in the name of each Stockholder. Such list shall be open to the examination of any Stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, at such place as specified in the notice of the meeting or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any Stockholder who is present. Further, any Stockholder in person or by attorney or other agent, upon written demand under oath stating the purposes thereof, has the right, during usual business hours, to inspect for any proper purpose the corporation's list of Stockholders. Such Stockholder has the right to make copies or extracts therefrom. A proper purpose for this Section 6.02.A shall mean a purpose reasonably related to such person's interest as a Stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the Stockholder. The demand under oath shall be 13. directed to the corporation at its principal place of business. The corporation shall either permit the right to inspection or reply to the written demand within five (5) business days of receiving the demand. 2. CORPORATE RECORDS Any Stockholder, in person or by attorney or other agent, shall upon written demand under oath stating the purpose thereof, have the right during business hours to inspect for any proper purpose the accounting books and records and minutes of proceedings of the Stockholders and the Board and committees of the Board. This right of inspection shall also extend to the records of any subsidiary of the corporation. B. BY DIRECTORS Every director shall have the right at any reasonable time to examine the Corporation's stock ledger, a list of its Stockholders and its other books and records for a purpose reasonably related to his position as a director. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. Section 6.03 CHECKS, DRAFTS, ETC. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board. Section 6.04 AUTHORITY TO EXECUTE CONTRACTS The Board may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and subject to the applicable laws of the State of Delaware. Such authority may be general or confined to specific instances and, unless so authorized by the Board, no officer, agent or employee shall have the power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose of to any amount. Section 6.05 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The Chairman of the Board, if any, President or any Vice President and the Secretary or any Assistant Secretary of this corporation are authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the corporation. The authority herein granted to said officers to vote or represent on behalf of this corporation any and all shares held by this corporation in any other corporation or corporations may be exercised either by such officers in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officers. Section 6.06 CONSTRUCTION AND DEFINITIONS Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the corporation laws of the State of Delaware shall govern the construction of these Bylaws. Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular number includes the plural and the plural number includes the singular, and the term "person" includes a corporation as well as a natural person. Section 6.07 REIMBURSEMENT OF DISALLOWED COMPENSATION Any payments made to an officer or director of the corporation including, but not limited, to payments of compensation, interest, rent or reimbursement for expenses, which payments are disallowed to the corporation in whole or in part by the Internal Revenue Service as a deductible business expense, shall, at the option of the corporation, be reimbursed by such officer or director to the corporation to the full extent of the amount so 14. disallowed. Any officer or director of the corporation who shall have received payment of any such amounts so disallowed shall promptly, on demand, reimburse the corporation for same. The corporation may withhold the amount of any such disallowance with respect to payment to any given officer or director from the future compensation or other payments which may be due or become due to such officer or director, if he does not reimburse the corporation on demand. ARTICLE VII AMENDMENTS Section 7.01 POWER OF STOCKHOLDERS New Bylaws may be adopted or these Bylaws may be amended or repealed by the vote of Stockholders entitled to exercise a majority of the voting power of the corporation or by the written consent of such Stockholders, except as otherwise provided by law or by the Certificate of Incorporation. Section 7.02 POWER OF DIRECTORS Subject to the right of Stockholders as provided in Section 7.01 to adopt, amend or repeal Bylaws, any Bylaw may be adopted, amended or repealed by the Board. ARTICLE VIII EMERGENCY PROVISIONS Section 8.01 GENERAL The provisions of this Article shall be operative only during any emergency resulting from an attack on the United States or on a locality in which the corporation conducts its business or customarily holds meetings of the Board or Stockholders, or during any nuclear or atomic disaster, or during the existence of any catastrophe or other similar emergency condition, as a result of which a quorum of the Board or a standing committee thereof cannot be convened. Said provisions in such event shall override all other Bylaws of the corporation in conflict with any provisions of this Article, and shall remain operative so long as it remains impossible or impracticable to continue the business of the corporation otherwise, but thereafter shall be inoperative; provided that all actions taken in good faith pursuant to such provisions shall thereafter remain in full force and effect unless and until revoked by action taken pursuant to the provisions of the Bylaws other than those contained in this Article. No officer, director or employee acting in accordance with any provision of this Article shall be liable except for willful misconduct. Section 8.02 UNAVAILABLE DIRECTORS All directors of the corporation who are not available to perform their duties as directors by reason of physical or mental incapacity or for any other reason or who are unwilling to perform their duties or whose whereabouts are unknown shall automatically cease to be directors, with like effect as if such persons had resigned as directors, so long as such unavailability continues. Section 8.03 AUTHORIZED NUMBER OF DIRECTORS The authorized number of directors shall be the number of directors remaining after eliminating those who have ceased to be directors pursuant to Section 8.02, or the minimum number required by law, whichever number is greater. 15. Section 8.04 QUORUM The number of directors necessary to constitute a quorum shall be one-third (1/3) of the authorized number of directors as specified in the foregoing Section, or such other minimum number as, pursuant to the law or lawful decree then in force, it is possible for the Bylaws of a corporation to specify. Section 8.05 CREATION OF EMERGENCY COMMITTEE In the event the number of directors remaining after eliminating those who have ceased to be directors pursuant to Section 8.02 is less than the minimum number of authorized directors required by law, then until the appointment of additional directors to make up such required minimum, all the powers and authorities which the Board could by law delegate, including all powers and authorities which the Board could delegate to a committee, shall be automatically vested in an emergency committee, and the emergency committee shall thereafter manage the affairs of the corporation pursuant to such powers and authorities and shall have all other powers and authorities as may by law or lawful decree be conferred on any person or body of persons during a period of emergency. Section 8.06 CONSTITUTION OF EMERGENCY COMMITTEE The emergency committee shall consist of all the directors remaining after eliminating those who have ceased to be directors pursuant to Section 8.02, provided that such remaining directors are not less than three (3) in number. In the event such remaining directors are less than three (3) in number, the emergency committee shall consist of three (3) persons, who shall be the remaining director or directors and either one (1) or two (2) officers or employees of the corporation, as the remaining director or directors may in writing designate. If there is no remaining director, the emergency committee shall consist of the three (3) most senior officers of the corporation who are available to serve, and if and to the extent that officers are not available, the most senior employees of the corporation. Seniority shall be determined in accordance with any designation of seniority in the minutes of the proceedings of the Board, and in the absence of such designation, shall be determined by rate of remuneration. In the event that there are no remaining directors and no officers or employees of the corporation available, the emergency committee shall consist of three (3) persons designated in writing by the Stockholder owning the largest number of shares of record as of the date of the last record date. Section 8.07 POWERS OF EMERGENCY COMMITTEE The emergency committee, once appointed, shall govern its own procedures and shall have power to increase the number of members thereof beyond the original number, and in the event of a vacancy or vacancies therein, arising at any time, the remaining member or members of the emergency committee shall have the power to fill such vacancy or vacancies. In the event at any time after its appointment all members of the emergency committee shall die or resign or become unavailable to act for any reason whatsoever, a new emergency committee shall be appointed in accordance with the foregoing provisions of this Article. Section 8.08 DIRECTORS BECOMING AVAILABLE Any person who has ceased to be a director pursuant to the provisions of Section 8.02 and who thereafter becomes available to serve as a director shall automatically become a member of the emergency committee. Section 8.09 ELECTION OF BOARD The emergency committee shall, as soon after its appointment as is practicable, take all requisite action to secure the election of a Board, and upon such election all the powers and authorities of the emergency committee shall cease. 16. Section 8.10 TERMINATION OF EMERGENCY COMMITTEE In the event, after the appointment of an emergency committee, a sufficient number of persons who ceased to be directors pursuant to Section 8.02 become available to serve as directors, so that if they had not ceased to be directors as aforesaid, there would be enough directors to constitute the minimum number of directors required by law, then all such persons shall automatically be deemed to be reappointed as directors and the powers and authorities of the emergency committee shall be at an end. EX-10.53 3 LTR AGMT DATED 7/3/96 - WALT DISNEY PIC & CPEI As of July 3, 1996 CINERGI PICTURES ENTERTAINMENT INC. (f/s/o Andrew G. Vajna) 2308 Broadway Santa Monica, CA 90404 Attn: Randy Paul, Esq. RE: "EATERS OF THE DEAD"/ANDREW G. VAJNA (EXECUTIVE PRODUCER) Gentlemen: The following letter confirms the principal terms of the agreement between Walt Disney Pictures ("WDPc") and Cinergi Pictures Entertainment Inc. ("Lender") for the executive producing services of Andrew G. Vajna ("Artist") in connection with a possible motion picture project currently entitled "Eaters of the Dead" (the "Picture"). A. CONDITIONS PRECEDENT. WDPc shall have no obligation hereunder unless and until: 1. WDPc receives a fully executed original of this letter of agreement (in form and substance acceptable to WDPc). 2. WDPc receives a fully executed original of the agreement (in form and substance acceptable to WDPc) for the underlying rights in and to the book written by Michael Crichton ("Crichton") entitled "Eaters of the Dead" (the "Book") and the producing services of Crichton in connection with the Picture. 3. WDPc receives a fully executed original of the agreement (in form and substance acceptable to WDPc) for the rights, directing and producing services of John McTiernan ("McTiernan") in connection with the Picture. 4. WDPc receives a fully executed original of the quitclaim agreement (the "Quitclaim Agreement") (in form and substance acceptable to WDPc) for all of the rights of Cinergi Film Productions Co. (and/or any affiliate or subsidiary thereof) ("Cinergi") in and to the Picture. 5. WDPc approves of the chain of title to the Book and the Picture, approves all agreements with respect thereto and receives all assignments, releases and other instruments and documents which it reasonably requires in connection therewith [including but not limited to an assignment of all rights from William Wisher ("Wisher") in and to the screenplay for the Picture written by Wisher]. -1- 6. WDPc approves and validates the "all-in" final budget (I.E., all above-the-line elements and all below-the-line elements excluding) for the Picture. The aforesaid Conditions Precedent shall be deemed satisfied only upon written confirmation thereof by a WDPc Business Affairs Executive. B. LOAN-OUT. The services of Artist are being furnished to WDPc by Lender and consequently all services and obligations to be performed hereunder by Artist shall be deemed to be performed by Artist at the direction of Lender and all compensation and other payments for the performance of such services and obligations shall be paid by WDPc to Lender. All warranties and representations made by either Lender or Artist shall be deemed made in addition by the other and a breach of this Agreement by either Lender or Artist shall be deemed a breach by both. C. EXECUTIVE PRODUCING SERVICES. If WDPc elects in it sole discretion to proceed with production of the Picture, then Lender shall cause Artist to personally render all services customarily rendered by an executive producer in the motion picture industry in connection with the development, preproduction, production, post production and delivery of the Picture, subject to the provisions of Paragraph I.2 below. Artist's services hereunder shall be on a non-exclusive basis to WDPc. D. FIXED COMPENSATION. If the Picture is produced as a theatrical motion picture and if Artist fully performs all services and material obligations, then Lender shall be entitled to receive the flat sum of $1,500,000, which sum shall be fully applicable against and recoupable by WDPc from the contingent compensation set forth in Paragraph E below and which sum shall accrue and become payable on WDPc's receipt of a fully executed original of this Agreement and the Quitclaim Agreement (both in form and substance acceptable to WDPc) and the earlier to occur of: (1) commencement of principal photography of the Picture; and (2) WDPc giving notice to Crichton and/or McTiernan that all the Conditions Precedent set forth in Paragraph A above are either satisfied or waived. Said compensation is an all-inclusive flat fee and no additional compensation shall be payable by reason of overtime, weekend work, holidays, etc. E. CONTINGENT COMPENSATION. If the Picture is produced and released as a theatrical motion picture and if Artist is not in default hereunder, then Artist shall be entitled to receive (it being understood and agreed that any sums payable to Artist under Paragraph D above shall be deemed an advance against and recoupable from any sums payable pursuant to this Paragraph E) an amount equal to 5% of 100% of the "Adjusted Gross Receipts" (as defined in Paragraph F.1 below), if any, of the Picture (less all sums paid to Artist pursuant to Paragraph D) until such time, if ever, that Artist has received therefrom the additional sum of $1,000,000 (at which time Artist's entitlement to said 5% of 100% of the Adjusted Gross Receipts, if any, shall terminate), thereafter Artist's participation shall escalate on a prospective basis to an amount equal -2- to 10% of 100% of the Adjusted Gross Receipts, if any, of the Picture at such time, if ever, that the Picture achieves "Cash Breakeven" (as defined in Paragraph F.2 below). F. DEFINITIONS. 1. "Adjusted Gross Receipts" as referenced herein shall be defined, computed and paid in accordance with WDPc's Exhibit "GRP" (and Rider thereto) as the Gross Receipts under Paragraph I.A. thereof (subject to the exclusions in Paragraph I.B. thereof) less the deductions in Paragraph I.C. thereof, but substitution theatrical reissue costs in place of Paragraph I.C.8. which relates to Theatre Level Advertising. 2. "Cash Breakeven" as referenced herein shall be defined as the end of the accounting period in which Gross Receipts (as defined in WDPc's Exhibit "NP" and Rider thereto) first equals the aggregate of the following: (a) an "off the top" Distribution Fee in the amount of 10% on all Gross Receipts; (b) all Distribution Costs as set forth in Paragraph IV. of Exhibit "NP"; (c) Accrued Interest as set forth in Paragraph V.C. of Exhibit "NP"; (d) Overhead as set forth in Paragraph V.B. of Exhibit "NP"; and (e) Cost of Production as set forth in Paragraph V.A. of Exhibit "NP". G. EXECUTIVE PRODUCER CREDIT. If the Picture is produced as a theatrical motion picture and if Artist is not in default hereunder, and further subject to WDPc's standard exclusions and exceptions (including artwork title exceptions), WDPc shall accord Artist an individual "Executive Producer" credit (which may be shared, with Artist in first position of such individual "Executive Producer" credits unless WDPc, in order to engage the services of one or more third parties, in good faith accords one or more third parties an individual "Executive Producer" credit in a position prior to that of Artist (and in such case, Artist's credit shall follow such other credits) as follows: 1. ON SCREEN: On a separate card (which may be shared with others), in the main titles if the director, cast, other producer credits etc. are in the main titles (otherwise in the end titles) in a size of type not less than the larger of (a) fifty percent (50%) of the size of the title; (b) one hundred percent (100%) of the size of the "Screenplay by" credit or (c) one hundred percent (100%) of the size of any other individual "Executive Producer" credit in connection with the Picture, with placement and all other characteristics of such credit at WDPc's discretion. 2. IN PAID ADS ISSUED OR CONTROLLED BY WDPc IN WHICH THE REGULAR BILLING BLOCK APPEARS: In a size of type not less than the larger of (a) thirty- five percent (35%) of the size of the regular title; (b) one hundred percent (100%) of the size of the "Screenplay by" credit in such billing block (c) or one hundred percent (100%) of the size of any other individual "Executive Producer" credit in connection with the Picture, with placement and all other characteristics of such credit at WDPc's discretion. -3- 3. EXCLUDED ADS. Notwithstanding the above, Artist's paid ad credit pursuant to Paragraph G.2 above shall appear in any so-called "excluded ads" in which any other individual "Screenplay by" or individual "Executive Producer" credit appears in connection with the Picture (except for congratulatory, nomination and/or award ads, special ads excepted under the DGA Basic Agreement, ads announcing a personal appearance, radio ads and the audio portion of teasers, trailers and television ads). 4. As used herein, "size" shall mean height, width and thickness. H. APPROVALS AND CONTROLS. WDPc shall retain all approvals and the right to initiate action at any time and in any respect in connection with the Picture. I. GENERAL 1. The results and proceeds of Artist's services hereunder in connection with the Picture shall be deemed a work-made-for-hire specially ordered or commissioned by WDPc. WDPc shall exclusively own all now known or hereafter existing rights of every kind throughout the universe, in perpetuity and in all languages, pertaining to such results and proceeds, the Picture, and all elements therein for all now known or hereafter existing uses, media, and forms. Lender acknowledges that Lender solely owns all of the results and proceeds of Artist's services in connection with the Picture prior to the date hereof. Lender and Artist hereby assign the results and proceeds of Artist's services in connection with the Picture rendered by Artist prior to the date of this Agreement. 2. WDPc is not obligated to develop, produce, distribute, and/or exploit the Picture, or to use the services of Artist hereunder or the results and proceeds thereof in whole or in part and WDPc may (at its sole discretion) abandon the Picture at any time without further obligation hereunder. 3. This letter agreement (including WDPc's Standard Terms and Conditions for a Producer/Loan-Out, Form I-9, WDPc's Exhibit "NP" and Exhibit "GRP" incorporated herein by this reference) contains the full and complete understanding between the parties and supersedes all prior agreements and understandings pertaining hereto. 4. Lender's and Artist's sole and exclusive remedy for WDPc's breach, termination, or cancellation of this letter agreement (including any provision relating to credit) shall be an action for damages and Lender and Artist irrevocably waive any right to seek and/or obtain equitable or injunctive relief. 5. Lender and Artist shall be covered as additional insureds on WDPc's errors and omissions insurance policy in connection with Artist's services for the Picture hereunder, during customary periods of pre-production, production and distribution of -4- the Picture, subject to the restrictions, limitations and terms of said policy. Artist shall, as and to the extent Artist is deemed an employee of WDPc, be covered as an additional insured on WDPc's general liability insurance policy in connection with Artist's services for the Picture, subject to the limitations, restrictions and terms of said policy. The provisions of this Paragraph I.5 shall not be construed so as to limit or otherwise affect any obligations, representation, warranty or agreement of Lender and/or Artist's hereunder. 6. Except with respect to claims to which Cinergi, Lender and/or Artist have indemnified WDPc and except with respect to any claims arising from any other breach by Cinergi, Lender and/or Artist and/or any tortious and/or criminal conduct of Cinergi, Lender and/or Artist, WDPc hereby defends, indemnifies and holds Lender and Artist, and their respective successors and assigns, harmless from and against any and all damages, loss, liability, cost, penalty, guild fee or award or other expense of any kind (including reasonable attorneys' fees) that may be obtained against, imposed upon or suffered by Lender or Artist arising from any claim, demand or action relating to the production or exploitation by WDPc of the Picture. WALT DISNEY PICTURES By: /s/ Phillip Mohl ------------------------ Its: Vice President ----------------------- PHILLIP MOHL ACCEPTED AND AGREED: CINERGI PICTURES ENTERTAINMENT INC. By: /s/ Randolph M. Paul ------------------------------ RANDOLPH M. PAUL Its: Senior Vice President ----------------------------- Federal I.D. No.: ---------------- By: /s/ Andrew G. Vajna ------------------------------ ANDREW G. VAJNA Social Security No.: ------------- -5- EX-10.54 4 LTR AGMT 4/1/95 - BUENA VISTA INTL & CPNV As of April 1, 1995 Cinergi Productions N.V. Inc. Polarisweg 35. St. 6 Willemstad, Curacao Netherlands, Antilles Gentlemen: The following sets forth the principal terms of the agreement between Buena Vista International, Inc. ("BVI") and Cinergi Productions N.V. Inc. ("Cinergi") with respect to the acquisition of exclusive distribution and other rights by BVI to the full length theatrical motion picture tentatively entitled "Nixon" (the "Picture"). 1. INTENTIONALLY OMITTED. 2. DISTRIBUTION: a. Cinergi does hereby irrevocably grant, assign and license to BVI the exclusive right, title and interest in and to the Picture and each of its elements and all exclusive rights to distribute, exhibit, market and exploit the Picture in any and all manner and in all media, now known or hereafter devised including, without limitation, theatrical, non-theatrical, all forms of home video cassettes/discs, cartridges, video on demand (i.e. the exploitation by per-exhibition charge of a motion picture which is delivered by means of a point to point telecommunication system from a digital storage device at a time chosen by the viewer ["Video On Demand"]), tapes or similar devices, near video on demand, formats or delivery systems now known or hereafter devised to be used in conjunction with a reproduction apparatus which causes the picture to be visible on the screen of a television receiver, television monitor or comparable device now known or hereafter devised in a private residence for viewing at the place of origin of such exhibition ("Home Video Devices") and all forms of television including, without limitation, standard, non-standard, subscription, pay television, cable and basic cable, satellite, etc. (including pay-per-view), fiber optic and digital delivery systems, etc. ("Television"); the right to advertise, publicize and promote the Picture including, without limitation, the right to excerpt and/or synopsize the Picture and/or screenplay for the Picture [provided, that any such excerpt and/or synopsis shall not exceed Two Thousand Five Hundred (2,500) words in length]; commercial tie-ins (subject to [x] the applicable terms of existing agreements between Cinergi and distributors in the BVI Territory and [y] the rights of principal talent under their respective agreements with Cinergi [all relevant portions of which Cinergi agrees to deliver pursuant to the delivery 1 provisions of subparagraph 3.a. below]); subject to the prior consent of Cinergi, the right to change the title of the Picture; the right to finance and/or produce (if none currently exists) and distribute a "making of" promotional film (subject to the rights and approvals of all persons who provide services to the Picture [of which Cinergi shall deliver a written account pursuant to the delivery provisions of subparagraph 3.a. below], and applicable guild and union requirements); the right to cut or edit the Picture for legal and censorship reasons, time parameters and standards and practices requirements of airlines, television stations and broadcasters (subject to the terms of Paragraph 4. below); the right to subtitle and dub the Picture into the foreign languages specified in this subparagraph 2.a. (as well as those of Japan and China); the right with respect to all persons appearing in the Picture or performing production services therein to issue and authorize publicity concerning such persons and the right to use, reproduce, transmit, broadcast, exploit, publicize and exhibit their names and likenesses (subject to third party agreements with Cinergi, of which Cinergi shall deliver a written account of pertinent points pursuant to the delivery provisions of subparagraph 3.a. below) in transcriptions, advertising, distribution and exploitation of the Picture in the following territories: (i) German-speaking Europe (including, without limitation, German language rights in all media in Switzerland); (ii) Switzerland (in the Italian, English and French languages, excluding Italian and French language Home Video Device rights and Italian and French language Television rights); (iii) Japan; (iv) China; and (v) all of the respective territories, protectorates and possessions of each of the aforementioned, including planes and ships flying the flag of any of the respective nations, wherever situated (altogether, the "BVI Territory"). For purposes of clarity, the parties agree that the rights granted to BVI by Cinergi herein shall not include "video" or computer games for platforms such as SEGA Genesis, Nintendo SNES, 3DO Multiplayer system or any similar or new platform formats in relation to which the user (x) is given interactive control over "virtual" actors and surroundings, and/or (y) engages in contests of dexterity]. BVI acknowledges that Cinergi has the right to distribute the Picture in all media, throughout the world, except for the BVI Territory, subject to the terms of the agreement between Cinergi and Buena Vista Pictures Distribution, Inc. ("BVD"), dated as of July 9, 1990, as amended ("BVD Agreement")("Cinergi Territory"). Each party shall be solely responsible for all distribution costs and expenses in connection with the Picture in its respective territory including, without limitation, advertising costs and costs associated with the manufacture of prints and Home Video Devices. For purposes of reference herein, the BVI Territory shall be comprised of the "BVI Territory "A"", "BVI Territory "B"", "BVI Territory "C"" and "BVI Territory "D"". As used herein, the term "BVI Territory "A"" shall refer to the following: (i) Germany; (ii) Austria; and (iii) all of the respective territories, protectorates and possessions of each of 2 the aforementioned, including planes and ships flying the flag of any of the respective nations, wherever situated. The parties agree that exploitation of broadcast television rights in Alto Aldige hereunder by BVI shall be restricted to such broadcasts as are simultaneous with BVI broadcasts of the Picture in Germany and/or Austria. As used herein, the term "BVI Territory "B"" shall refer to the following: (i) Switzerland (in the German, Italian, English and French languages); and (ii) all of the respective territories, protectorates and possessions of the aforementioned, including planes and ships flying the flag of such nation, wherever situated. The parties agree that the initial theatrical release of the Picture in the French language by BVI in Switzerland shall not occur prior to the initial theatrical release of the Picture in France. Furthermore, the parties agree that the initial theatrical release of the Picture in the Italian language by BVI in Switzerland shall not occur prior to the initial theatrical release of the Picture in Italy. As used herein, the term "BVI Territory "C"" shall refer to the following: (i) Japan; and (ii) all of the respective territories, protectorates and possessions of the aforementioned, including planes and ships flying the flag of such nation, wherever situated. As used herein, the term "BVI Territory "D"" shall refer to the following: (i) China; and (ii) all of the respective territories, protectorates and possessions of the aforementioned, including planes and ships flying the flag of such nation, wherever situated. b. The term of this Agreement (the "Term") shall commence as of the date hereof and terminate Nineteen (19) years from the initial theatrical release of the Picture in any country of the BVI Territory. In the event that BVI has not recouped its Advance (as defined below), together with all other recoupable sums hereunder (all of the foregoing, "Recoupable Sums") prior to the expiration of the Term, the Rights Granted in the BVI Territory shall automatically be extended on a year to year basis until the close of the accounting period in which the amount of revenues received by BVI from the exercise of the Rights Granted (as defined below) in the BVI Territory hereunder ("Recoupment Date") is equal to a sum which is One Hundred percent (100%) of the Recoupable Sums, net of payments made to you by BVI hereunder pursuant to the terms of subparagraph 3.b. below ("Extended Term"); provided, that the length of the Extended Term shall not exceed a period of three (3) years. Furthermore, Cinergi grants BVI a right of first negotiation to extend the Term in the BVI Territory pursuant to the provisions of Paragraph 12. below. c. BVI agrees to comply with the credit and billing requirements specified by Cinergi, subject to applicable guild requirements (it is understood and agreed that BVI will abide by any and all third party credit restrictions of which it receives written notice, which Cinergi agrees to provide pursuant to the delivery provisions of subparagraph 3.a. below). In the BVI 3 Territory, the Picture shall include the following presentation credit: either "Cinergi presents" or "Andrew G. Vajna presents" with a separate title card which includes a logo, as determined by BVI. In the BVI Territory, Cinergi agrees that the Picture may include, prior to the aforementioned presentation credit, a BVI distributor's credit in a form to be determined by BVI in its sole discretion on a separate title card which also includes a BVI logo (i.e. the credit and logo for BVI shall be on one [1] card). BVI may use the aforementioned distributor's credit both on-screen and in advertising and promotion for the Picture. Cinergi agrees that a subdistributor in the BVI Territory may include a distributor's credit on a separate title card which also includes a logo selected by such subdistributor. Cinergi may not use the BVI name, or the name of any parent, subsidiary or affiliate of BVI in connection with Cinergi's distribution and/or exploitation of the Picture in the Cinergi Territory. BVI may not use the Cinergi name, or the name of any parent, subsidiary or affiliate of Cinergi in connection with BVI's distribution and/or exploitation of the Picture in the BVI Territory (except as otherwise provided herein). No casual or inadvertent failure by BVI or any of its subdistributors or licensees to comply with the credit and billing requirements specified by Cinergi shall constitute a breach of this Agreement. d. Except as specifically set forth in Paragraph 2. above, all other rights in the Picture are retained by Cinergi including, without limitation: (i) literary publishing rights; (ii) soundtrack rights; (iii) music publishing rights; (iv) the right to exploit so-called merchandising rights; and (v) theme park attractions ("Reserved Rights"); provided, however, that BVI (and affiliates) shall have the right to purchase and/or create promotional aids, point of purchase materials, etc., to sell or give away in conjunction with the marketing and publicizing of the Picture as contemplated hereunder; provided, further, that BVI shall not have the right to sell such materials to the general public. e. BVI shall not authorize the exhibition of the Picture anywhere in the world including, without limitation, film festivals and public previews at any time prior to the initial general U.S. theatrical release of the Picture without the prior approval of Oliver Stone ("Stone"), not to be unreasonably withheld. f. The rights granted by Cinergi to BVI in this Paragraph 2. shall be referred to herein as the "Rights Granted". g. BVI acknowledges the Home Video Device and Television holdbacks specified in subparagraph 5.b. of the BVD Agreement. BVI shall be bound by such holdbacks, subject only to obtaining permission from BVD to exempt certain countries in the BVI Territory from the provisions of such holdbacks (in 4 which event BVI shall have the right to release the Picture in accordance with the terms of such permission from BVD). 3. COMPENSATION TO CINERGI: a. ADVANCE: Provided that Cinergi makes Complete Delivery (as defined below) of the Picture to BVI in accordance with Exhibit "DR" (free and clear of any claims, liens or encumbrances, except as otherwise agreed to by the parties hereto in advance and in writing) on or before the Delivery Date (as defined below), BVI agrees to pay Cinergi and Cinergi agrees to accept as full consideration for the rights granted to BVI by Cinergi herein an amount equal to Eight Million Eight Hundred Seventy Five Thousand Dollars ($8,875,000) ("Advance"). The Advance shall be allocated in accordance with the following: (i) Four Million Seven Hundred Seventy Five Thousand Dollars ($4,775,000) shall be allocated to BVI Territory "A" together with BVI Territory "B" ("BVI Territory "A/B" Advance"); (ii) Four Million One Hundred Thousand Dollars ($4,100,000) shall be allocated to BVI Territory "C" ("BVI Territory "C" Advance"); and (iii) Zero Dollars ($0.00) shall be allocated to BVI Territory "D". The Advance (together with interest thereon, which interest shall accrue at the rate specified in Exhibit "NP" and shall be computed as provided for in subparagraph V.C. of Exhibit "NP") shall be recouped by BVI pursuant to the terms of subparagraphs 3.b., 3.c. and 3.d. below and Exhibit "NP", which is attached hereto and incorporated herein by this reference (references to Exhibit "NP" shall be deemed to include Rider "NP", which is attached hereto and incorporated herein by this reference). The interest which accrues on the Advance shall be allocated in accordance with the following: (i) interest on the BVI Territory "A/B" Advance (""A/B" Interest"); and (ii) interest on the BVI Territory "C" Advance (""C" Interest"). The Advance shall be payable to Cinergi by BVI in accordance with the following: One Hundred percent (100%) on complete execution of this Agreement by both parties. b. CONTINGENT COMPENSATION FOR BVI TERRITORY "A", BVI TERRITORY "B" AND BVI TERRITORY "C": "A/B/C Gross Receipts" shall be defined pursuant to the applicable provisions of Exhibit "NP" throughout the BVI Territory "A", BVI Territory "B" and BVI Territory "C". A/B/C Gross Receipts, which shall include the Home Video Receipts, as set forth in subparagraphs 3.c. and 3.d. below, shall be subject to the exclusions and deductions set forth in Exhibit "NP" (provided, that for purposes of this Paragraph 3., Home Video Receipts shall not be deemed to include receipts by BVI from distribution of the Picture hereunder in the Video on Demand medium). BVI shall deduct and retain the following from A/B/C Gross Receipts in the following order of priority and on a continuing basis: 5 (i) BVI shall first deduct and retain for its own account the following distribution fees from the A/B/C Gross Receipts: (A) Theatrical/Non-Theatrical - FOR BVI TERRITORY "A" AND BVI TERRITORY "B" Theatrical distribution fees shall be calculated according to Film Rentals, as such term is defined in Exhibit "NP" with respect only to Theatrical/Non- theatrical exhibitions, and shall include third party distribution fees, if any. On Film Rentals received from the Theatrical/Non-theatrical exhibition of the Picture in the BVI Territory "A" and BVI Territory "B" less than or equal to Three Million Dollars ($3,000,000), BVI shall deduct and retain Twenty Five percent (25%); on Film Rentals greater than Three Million Dollars ($3,000,000) but less than or equal to Six Million Dollars ($6,000,000), BVI shall deduct and retain Twenty Seven and One half percent (27.5%); on Film Rentals greater than Six Million Dollars ($6,000,000), BVI shall deduct and retain a Thirty percent (30%) distribution fee. FOR BVI TERRITORY "C" Theatrical distribution fees shall be calculated according to Film Rentals, as such term is defined in Exhibit "NP" with respect only to Theatrical/Non- theatrical exhibitions, and shall include third party distribution fees, if any. On Film Rentals received from the Theatrical/Non-theatrical exhibition of the Picture in the BVI Territory "C" less than or equal to Three Hundred Million Yen (Y.300,000,000), BVI shall deduct and retain Twenty Five percent (25%); on Film Rentals greater than Three Hundred Million Yen (Y.300,000,000) but less than or equal to Five Hundred Million Yen (Y.500,000,000), BVI shall deduct and retain Twenty Seven and One half percent (27.5%); on Film Rentals greater than Five Hundred Million Yen (Y.500,000,000), BVI shall deduct and retain a Thirty percent (30%) distribution fee. The parties agree that all revenues received by BVI hereunder from the sale of theatrical souvenir programs for the Picture in BVI Territory "C" shall be contributed to Theatrical Gross Receipts and shall be deemed a part thereof. (B) All Television - Twenty-Five percent (25%). (C) Home Video Device - Zero percent (0%). (D) Video on Demand - Thirty percent (30%). 6 The respective distribution fees provided for in subparagraphs 3.b.(i)(A) and 3.b.(i)(B) above shall include all third party distributor fees, if any. By way of example only, for Theatrical/Non-Theatrical distribution of the Picture in BVI Territory "A", the maximum amount of distribution fees deducted and retained by BVI and subdistribution fees retained by a third party distributor when Film Rentals is greater than Six Million Dollars ($6,000,000) shall not exceed Thirty percent (30%) of the A/B/C Gross Receipts derived from such Theatrical/Non- Theatrical exploitation of the Picture in BVI Territory "A". Notwithstanding the foregoing, the distribution fee provided for in subparagraph 3.b.(i)(B) above as applied to BVI Territory "A" and to BVI Territory "B" shall be capped at Thirty Two and One Half percent (32.5%) in the event of third party subdistribution of Free Television product; provided, that BVI's fee shall in no event be less than Ten percent (10%)(net of any third party subdistributor)(provided, that such cap of Thirty Two and One Half percent [32.5%] is applied to the sum of the fees to BVI on the one hand and to a third party distributor on the other hand for Free Television product); provided, further, that the distribution fee provided for in subparagraph 3.b.(i)(B) above as applied to BVI Territory "C" shall be capped at Thirty Five percent (35%) in the event of third party subdistribution of Television product. Notwithstanding the foregoing, the distribution fee provided for in subparagraph 3.b.(i)(D) above as applied to BVI Territory "A" and to BVI Territory "B" shall be capped at Thirty Seven and One Half percent (37.5%) in the event of third party subdistribution of Video on Demand product; provided, that BVI's fee shall in no event be less than Ten percent (10%)(net of any third party subdistributor)(provided, that such cap of Thirty Seven and One Half percent [37.5%] is applied to the sum of the fees to BVI on the one hand and to a third party distributor on the other hand for Video on Demand product); provided, further, that the distribution fee provided for in subparagraph 3.b.(i)(D) above as applied to BVI Territory "C" shall be capped at Forty Five percent (45%) in the event of third party subdistribution of Video on Demand product. (ii) BVI shall next deduct and retain all Distribution Costs paid or incurred by BVI in commercially exploiting the Picture including, without limitation, residuals, so-called "off the tops", print and advertising costs, delivery costs paid or incurred by BVI, subtitling and dubbing costs, and all other customary Distribution Costs, as defined in Paragraph IV of Exhibit "NP"; (iii) BVI shall next deduct and retain amounts equal to the following: (x) the "A/B" Interest, as set forth in subparagraph 3.a. above; and (y) the "C" Interest, as set forth in subparagraph 3.a. above; and (iv) BVI shall next deduct and retain the Advance as set forth in subparagraph 3.a. above. 7 The A/B/C Gross Receipts remaining after continuing deduction of the amounts set forth in subparagraphs 3.b.(i) through 3.b.(iv) above, if any, after BVI has deducted its Distribution Fees, Distribution Costs, Interest and the Advance on a continuing basis in accordance with Exhibit "NP", shall be payable One Hundred percent (100%) to Cinergi. Cinergi shall be accorded audit and accounting rights as set forth in Exhibit "NP". Accordingly, Cinergi agrees that it shall not have the right to audit Home Video Device distribution costs under this Agreement (including, without limitation, home video disc distribution costs)(provided, that BVI shall upon request issue Cinergi an affidavit signed by a Financial Officer of BVI with respect to such manufacturing and distribution costs). c. HOME VIDEO RECEIPTS FOR BVI TERRITORY "A" AND BVI TERRITORY "B": (i) With respect to sums actually received by or credited to BVI or any subsidiary or affiliated company of BVI (less taxes actually paid [excluding income taxes], credits, returns and a reasonable reserve for returns, which shall be liquidated within Twelve (12) months in each instance) from the distribution in the rental market of Home Video Devices embodying the Picture in the BVI Territory "A" and BVI Territory "B", there shall be included in the A/B/C Gross Receipts a royalty rate calculated in accordance with the following: Units Royalty Rate ----- ------------ - 6,000 30% 6,001 - 10,000 32.5% 10,001 - 15,000 35% 15,001 - 20,000 37.5% 20,001 - 40% (ii) With respect to sums actually received by or credited to BVI or any subsidiary or affiliated company of BVI from the sales of Home Video Devices embodying the Picture in the BVI Territory "A" and BVI Territory "B" in the rental market by third party licensees, Fifty percent (50%) of revenues less actual costs incurred by BVI or its affiliates, if any (e.g. mastering, artwork, duplication, etc., but excluding all marketing, video duplication costs and third party distribution fees)(such actual costs to be deducted "off the top"), shall be included in the A/B/C Gross Receipts. Notwithstanding the foregoing, contributions to the A/B/C Gross Receipts of revenue received by BVI or its affiliates from such third party licensees shall in no event exceed the amount which would be contributed by application of the royalty rates specified in the immediately preceding subparagraph. 8 (iii) With respect to sums actually received by or credited to BVI or any subsidiary or affiliated company of BVI (less taxes actually paid [excluding income taxes], credits, returns and a reasonable reserve for returns, which shall be liquidated within Twelve (12) months in each instance) from the distribution in the sell-through or repriced rental market of Home Video Devices embodying the Picture in the BVI Territory "A" and BVI Territory "B", there shall be included in the A/B/C Gross Receipts (without any deduction of a distribution fee) a royalty rate equal Fifteen percent (15%). (iv) With respect to sales of Home Video Devices embodying the Picture in the BVI Territory "A" and BVI Territory "B" in the sell-through or repriced rental market by third party licensees, Fifty percent (50%) of revenues less actual costs incurred by BVI or its affiliates, if any (e.g. mastering, artwork, duplication, etc., but excluding all marketing, video duplication costs and third party distribution fees) (such actual costs to be deducted "off the top"), shall be included in the A/B/C Gross Receipts. Notwithstanding the foregoing, contributions to the A/B/C Gross Receipts of revenue received by BVI from such third party licensees shall in no event exceed the amount which would be contributed by application of the royalty rate specified in the immediately preceding subparagraph. d. HOME VIDEO RECEIPTS FOR BVI TERRITORY "C": (i) With respect to sums actually received by or credited to BVI or any subsidiary or affiliated company of BVI (less taxes actually paid [excluding income taxes] credits, returns and a reasonable reserve for returns, which shall be liquidated within Twelve (12) months in each instance) from the distribution in the rental market of Home Video Devices embodying the Picture in the BVI Territory "C", there shall be included in the A/B/C Gross Receipts a royalty rate calculated in accordance with the following: Units Royalty Rate ----- ------------ - 40,000 32.5% 40,001 - 65,000 35% 65,001 - 75,000 37.5% 75,001 40% (ii) With respect to sums actually received by or credited to BVI or any subsidiary or affiliated company of BVI from the sales of Home Video Devices (including, without limitation, home video discs) embodying the Picture in the BVI Territory "C" in the rental market by third party licensees, Fifty percent (50%) of revenues less actual costs incurred by BVI or its affiliates, if any (e.g. mastering, artwork, duplication, etc., but excluding all marketing, video 9 duplication costs and third party distribution fees) (such actual costs to be deducted "off the top"), shall be included in the A/B/C Gross Receipts. Notwithstanding the foregoing, contributions to the A/B/C Gross Receipts of revenue received by BVI from such third party licensees shall in no event exceed the amount which would be contributed by application of the royalty rates specified in the immediately preceding subparagraph. (iii) With respect to sums actually received by or credited to BVI or any subsidiary or affiliated company of BVI (less taxes actually paid [excluding income taxes], credits, returns and a reasonable reserve for returns, which shall be liquidated within Twelve (12) months in each instance) from the distribution in the sell-through or repriced rental market of Home Video Devices embodying the Picture in the BVI Territory "C", there shall be included in the A/B/C Gross Receipts (without any deduction of a distribution fee) a royalty rate equal Fifteen percent (15%). (iv) With respect to sums actually received by or credited to BVI or any subsidiary or affiliated company of BVI from the sales of Home Video Devices (including, without limitation, home video discs) embodying the Picture in the BVI Territory "C" in the sell-through or repriced rental market by third party licensees, Fifty percent (50%) of revenues less actual costs incurred by BVI or its affiliates, if any (e.g. mastering, artwork, duplication, etc., but excluding all marketing, video duplication costs and third party distribution fees)(such actual costs to be deducted "off the top"), shall be included in the A/B/C Gross Receipts. Notwithstanding the foregoing, contributions to the A/B/C Gross Receipts of revenue received by BVI from such third party licensees shall in no event exceed the amount which would be contributed by application of the royalty rate specified in the immediately preceding subparagraph. e. CONTINGENT COMPENSATION FOR BVI TERRITORY "D": (i) "D Gross Receipts" shall be defined pursuant to the applicable provisions of Exhibit "NP" throughout the BVI Territory "D". D Gross Receipts, which shall include the Home Video Receipts (but shall exclude receipts from the exploitation by BVI [or subsidiary or licensee of BVI] of home video discs embodying the Picture in BVI Territory "D"), as set forth in this subparagraph 3.e.(i), shall be subject to the exclusions and deductions set forth in Exhibit "NP". BVI shall deduct and retain the following from D Gross Receipts in the following order of priority and on a continuing basis: (x) BVI shall deduct and retain all Distribution Costs paid or incurred by BVI in commercially exploiting the Picture in BVI Territory "D" (excluding the D Disc Rights [as defined below]) including, without limitation, 10 residuals, so-called "off the tops", print and advertising costs, delivery costs paid or incurred by BVI, subtitling and dubbing costs, all Home Video Device (excluding home video discs) distribution costs (including, without limitation, all actual and direct costs incurred in relation to the duplication, sales, distribution, creative costs, marketing, advertising and publicity of home video devices embodying the Picture in the Territory [including third party distribution fees]), all costs, fees, commissions and taxes withheld at the source, and all other customary Distribution Costs, as defined in Paragraph IV of Exhibit "NP". The D Gross Receipts remaining after continuing deduction of the amounts set forth in subparagraph 3.e.(i)(x) above, if any, after BVI has deducted its Distribution Costs on a continuing basis in accordance with Exhibit "NP", shall be payable as follows: Sixty percent (60%) to Cinergi and Forty percent (40%) to BVI. Cinergi shall be accorded audit and accounting rights as set forth in Exhibit "NP". Accordingly, Cinergi agrees that it shall not have the right to audit Home Video Device distribution costs hereunder (including, without limitation, home video disc distribution costs)(provided, that BVI shall upon request issue Cinergi an affidavit signed by a Financial Officer of BVI with respect to such manufacturing and distribution costs). (ii) "D Gross Receipts" with respect to exploitation by BVI (or subsidiary or licensee of BVI) of the Rights Granted with respect to the sale and distribution of home video discs embodying the Picture in BVI Territory "D" (such rights, the "D Disc Rights"), shall be defined pursuant to the applicable provisions of Exhibit "NP" throughout the BVI Territory "D" ("D Gross Disc Receipts"). D Gross Disc Receipts, as set forth in this subparagraph 3.e.(ii), shall be subject to the exclusions and deductions set forth in Exhibit "NP". BVI shall deduct and retain the following from D Gross Disc Receipts in the following order of priority and on a continuing basis: (x) BVI shall next deduct and retain all Distribution Costs paid or incurred by BVI in exercising the D Disc Rights including, without limitation, residuals, so-called "off the tops", print and advertising costs, delivery costs paid or incurred by BVI, subtitling and dubbing costs, all distribution costs (including, without limitation, all actual and direct costs incurred in relation to the duplication, sales, distribution, creative costs, marketing, advertising and publicity of home video discs embodying the Picture in the Territory [including third party distribution fees]), all costs, fees, commissions and taxes withheld at the source, and all other customary Distribution Costs, as defined in Paragraph IV of Exhibit "NP" The D Gross Receipts remaining after continuing deduction of the amounts set forth in subparagraph 3.e.(ii)(x) above, if any, after BVI has deducted its Distribution Costs on a continuing 11 basis in accordance with Exhibit "NP", shall be payable as follows: Fifty percent (50%) to Cinergi and Fifty percent (50%) to BVI. Cinergi shall be accorded audit and accounting rights as set forth in Exhibit "NP". Accordingly, Cinergi agrees that it shall not have the right to audit Home Video Device distribution costs hereunder (including, without limitation, home video disc distribution costs)(provided, that BVI shall upon request issue Cinergi an affidavit signed by a Financial Officer of BVI with respect to such manufacturing and distribution costs). f. CROSS-COLLATERALIZATION: All sources of revenue from all countries in the BVI Territory "A" and BVI Territory "B" shall be fully cross- collateralized from and against the Distribution Fees and Distribution Costs from BVI Territory "A" and BVI Territory "B", the BVI Territory "A/B" Advance and the "A/B" Interest. All sources of revenue from the BVI Territory "C" shall be fully cross-collateralized from and against the Distribution Fees and Distribution Costs from BVI Territory "C", the BVI Territory "C" Advance and the "C" Interest; provided, up to Six Hundred Thousand Dollars ($600,000) from any and all sources of revenue from all countries in the BVI Territory "A" and BVI Territory "B" shall be fully cross-collateralized from and against the Distribution Costs in Territory "C", the BVI Territory "C" Advance and the "C" Interest. Cinergi agrees that all sources of revenue from BVI Territory "D" shall be fully cross-collateralized from and against the Distribution Costs incurred by BVI in BVI Territory "D" pursuant to the terms of subparagraphs 3.e.(i)(x) and 3.e.(ii)(x) above. The cross-collateralization allowed under this Agreement shall be that specified in this subparagraph 3.f. g. THIRD PARTY PARTICIPATIONS: Cinergi shall be solely responsible for the preparation of accounting statements and payments and other required documentation and the issuance of payments to third parties in connection with all executory obligations of the Picture, including, without limitation, the payment of all applicable profit participations, deferments, credit bonuses, corporate and income taxes and the like derived from the pre-production, production, and post-production (except as otherwise provided above) of the Picture. Cinergi agrees that no third parties shall have the right to audit and/or otherwise examine BVI's books and records for any purpose whatsoever. The parties agree that BVI shall be responsible for making all applicable guild, residuals and performing rights payments with respect to the BVI Territory during the period of BVI's exploitation of the Picture, and such payments shall be deemed Distribution Costs hereunder. h. DELIVERY: "Complete Delivery" shall include delivery by Cinergi and acceptance by BVI of all items in Exhibit "DR" and Exhibit "P" ("Complete Delivery"), which are attached hereto and incorporated herein by this reference. Cinergi agrees that it shall, at its own cost and expense, 12 deliver to BVI all materials required to make Complete Delivery. In accordance with Exhibit "NP", any delivery costs incurred by BVI in connection with the delivery of the Picture shall be deemed a Distribution Cost and shall be recouped in the manner set forth in subparagraphs 3.b. and 3.e. above. Cinergi agrees that as part of Complete Delivery it shall tender to BVI executed copies of Exhibit "A" and Exhibit "B", which are attached hereto and incorporated herein by this reference. Cinergi agrees (subject to the limits of pertinent rights under contract) to grant BVI access to any dubbed or subtitled versions of the Picture in any and all languages spoken in the BVI Territory as and when such foreign language dubbed or subtitled versions are available including, without limitation, the French and Italian languages; provided, that BVI shall to pay all of its own access and duplication costs incurred in accessing the materials. 4. BVI DISTRIBUTION CONTROL: BVI shall have, subject to the terms of this Agreement, complete, exclusive and unqualified discretion and control as to the time, manner and terms of distribution, exhibition and exploitation of the Picture, separately or in connection with other motion pictures, in accordance with such policies, terms and conditions and through such parties as BVI in its sole business judgment may determine proper or expedient and the decision of BVI in all such matters shall be binding and conclusive upon Cinergi. BVI acknowledges that it is BVI's general intent that the Picture shall be distributed by BVI in the BVI Territory (taking into account, among other things, such factors as the applicable budget, genre, release date, market conditions, quality, performance, etc. of the Picture), subject to BVI's customary and reasonable business practices with respect thereto. Subject to the foregoing, BVI grants Cinergi a right of prior and meaningful consultation with respect to BVI's general initial theatrical release plans for the Picture in the BVI Territory. BVI shall make no "flat sale" of the Picture in Germany until five (5) years after the initial general theatrical release of the Picture by BVI in the BVI Territory (unless BVI determines in the exercise of BVI's good faith business judgment to distribute substantially all of BVI's motion pictures in such manner). Except as expressly set forth herein, BVI makes no express or implied representation or warranty as to the manner or extent of any distribution or exploitation of the Picture nor as to any maximum or minimum amount of monies to be expended in connection therewith. BVI does not guarantee the performance by any subdistributor, licensee or exhibitor of any contract regarding the distribution and exploitation of the Picture. Cinergi shall on request use its best efforts to provide BVI such documents as may be necessary or desirable for BVI to secure licenses and permits for the importation, exportation and distribution of the Picture. During the theatrical exhibition of the Picture in the BVI Territory, Cinergi may request and receive copies of applicable box office and flash reports. BVI 13 agrees that with respect to Alto Adige, BVI shall use reasonable efforts to cause the broadcast television exhibition, if any, of the German language version of the Picture in Alto Adige to occur simultaneously with the broadcast television exhibition of the German language version of the Picture in Germany and/or Austria. 5. INTENTIONALLY OMITTED. 6. REPRESENTATIONS AND WARRANTIES: a. Cinergi hereby represents and warrants that: (i) it owns or controls all distribution rights in and to the Picture in the BVI Territory and all literary, dramatic and original musical material contained therein; (ii) neither the Picture nor any part thereof nor the exercise by an authorized party of any right granted to BVI hereunder will violate or infringe the copyright, trademark, trade name, patent or any literary, dramatic, musical, artistic, personal, private, civil or property right or right of privacy, right of publicity, or any other right of any person, firm or corporation or constitute unfair competition or defame any person, firm or corporation; (iii) Cinergi has not entered into and will not enter into any agreement which is inconsistent with any of the provisions of this Agreement and will not exercise any right or take any action or license or authorize any other person to exercise any right or take any action or license which conflicts with or knowingly prejudices the rights herein granted to BVI; (iv) the negative cost of the Picture is an "all in" figure of not less than Thirty Million Dollars ($30,000,000); (v) BVI shall not be obligated to make payments to any third party except with respect to music public performance fees calculated and due in the particular country and as specifically provided in subparagraph 3.e. above; (vi) the choice of the Director of the Picture shall be subject to prior written approval of BVI (Stone is hereby approved by BVI); (vii) Cinergi shall deliver all items specified in Exhibit "DR", at its cost; (viii) the Picture shall be shot in color and on 35 millimeter or 70 millimeter film stock, suitable for first class theatrical distribution; (ix) the Picture has an MPAA (or successor organization) rating no more restrictive than "R" rating ; (x) the Picture will be delivered by Cinergi to BVI by no later than December 31, 1995 (subject to force majeure)("Delivery Date"); (xi) the Picture will be no less than Ninety (90) minutes and not more than One Hundred Fifty (150) minutes including credits; (xii) in the BVI territory, BVI will be named jointly with Cinergi in any public relations, advertising, promotional and trade announcement covering the Picture; (xiii) Cinergi shall obtain all synchronization, performance and master use music licenses reasonably required by BVI on a buy-out basis for all media to exercise any and all of the rights granted in this Agreement including the right to advertise and promote the Picture without payment by BVI to any third party, excluding performing rights 14 payments (BVI shall pay such obligations to local performance societies as arise from BVI's exercise of the Rights Granted; provided, that all such amounts paid shall be deemed Distribution Costs pursuant to the terms of subparagraph 3.b.(ii) above); (xiv) subject to applicable guild restrictions and to the extent permitted by pertinent talent agreements (which Cinergi agrees to deliver pursuant to the terms of subparagraph 3.a. above), with respect to all persons appearing in the Picture, or performing production services therein, BVI has the right to issue and authorize publicity concerning such persons and the right to use, reproduce, transmit, broadcast, exploit, publicize and exhibit their names, likenesses, transcriptions, films and other reproductions thereof in connection with the distribution, exhibition, advertising and exploitation of the Picture including the right to exhibit trailers and excerpts from the Picture; (xv) the Picture is unpublished and capable of copyright protection in the BVI Territory, subject to the agreement by BVI not to copyright the Picture in its own name; and (xvi) the Picture as delivered to BVI shall be free and clear of any claims, liens or encumbrances except those expressly permitted hereunder (or as expressly approved in writing by BVI). b. Cinergi agrees to indemnify and hold BVI harmless from any and all claims, actions or proceedings of any kind and from any and all damages, liabilities, costs and expenses (including reasonable attorney's fees and costs) relating to or arising: (i) out of any breach of any of the warranties, representations and/or agreements made by Cinergi contained in this Agreement; (ii) out of any claim alleging facts which if true would constitute such a material breach of this Agreement by Cinergi, if and to the extent that such claim is of a type not ordinarily covered by so-called errors and omissions or producer's liability insurance policies; and/or (iii) in connection with the pre-production, production and/or post-production of the Picture, including, but not limited to, Cinergi's failure to supply BVI with a complete list of the Picture's credits. c. BVI agrees to indemnify and hold Cinergi harmless from any and all claims, actions, proceedings of any kind and from any and all damages, liabilities, costs and expenses (including reasonable attorney's fees and costs) relating to or arising: (i) out of any breach of any of the warranties, representations and/or agreements made by BVI contained in this Agreement; (ii) out of any claim alleging facts which if true would constitute such a material breach of this Agreement by BVI, if and to the extent that such claim is of a type not ordinarily covered by so-called errors and omissions or producer's liability insurance policies. 7. PUBLICITY RESPONSIBILITIES OF CINERGI: Cinergi agrees to use its reasonable efforts make Stone available for press and 15 interviews in the BVI Territory at a reasonable time prior to the initial theatrical release of the Picture in the BVI Territory. 8. COPYRIGHT: Cinergi represents and warrants that the copyright(s) in the Picture and in the literary, dramatic and musical material upon which it is based or which are contained therein will be valid and subsisting during the Term and during the maximum period of copyright in the United States and those countries party to the Universal Copyright Convention, and that Cinergi has not done or permitted any act or omission which would impair or diminish the validity or duration of such copyright. Cinergi further represents and warrants that no part of the Picture (other than clips and music of which BVI is given written notice at the time of delivery of the Picture) or any such literary or dramatic material or musical material provided by Cinergi in connection with the Picture is or will be in the public domain during the maximum period of applicable copyright as a result of any act or omission by BVI. The Picture when delivered to BVI shall contain a copyright notice in compliance with the Universal Copyright Convention in the BVI Territory and the Copyright Law of the United States. Cinergi agrees to secure or have secured and register such copyright in the Picture and related properties as BVI reasonably requests with respect to copyrights which are eligible for copyright registration prior to delivery of the Picture in the BVI Territory. BVI shall not be liable to Cinergi for any action or failure to act on behalf of Cinergi within the scope of authority conferred on BVI pursuant to this Paragraph 8. BVI agrees to give Cinergi timely notice of any legal challenges to Cinergi's copyright in the Picture in the BVI Territory in which BVI is duly served as a party. 9. PRESS ANNOUNCEMENTS AND PREVIEWS: Cinergi shall not (and Cinergi shall not authorize any person to) release information concerning the Picture to the press in the BVI Territory or preview the Picture in the BVI Territory either before or after delivery of the Picture to BVI without the express prior written consent of BVI; provided, however, that BVI and Cinergi shall issue a joint press release with respect to the Picture, the time and place of which shall be mutually determined by the parties. Cinergi and BVI agree that the initial press announcement regarding BVI's acquisition of the Picture shall be subject to the mutual prior approval of the parties hereunder. BVI acknowledges that certain press in the Cinergi Territory are effectively pan-European in scope. 10. ERRORS AND OMISSIONS INSURANCE: Cinergi agrees that BVI shall be an additional named insured on any and all Errors and Omissions insurance policies issued to Cinergi in connection with the Picture, subject to applicable policy conditions, terms and restrictions, for at least three (3) years following complete delivery of the Picture to BVI and liability limits of 16 One Million Dollars ($1,000,000) per claim and Three Million Dollars ($3,000,000) in the aggregate, with a Ten Thousand Dollar ($10,000) deductible. Nothing contained in this Paragraph 10 shall modify or otherwise affect any representation or warranty made by Cinergi hereunder. 11. SECURITY INTEREST/COPYRIGHT MORTGAGE/COMPLETION BOND: a. Cinergi shall grant and assign to BVI a continuing first priority lien and security interest in and to and copyright mortgage on the Picture and all underlying materials, elements, properties, contract rights, inventories, accounts and general intangibles associated with the Picture, all the foregoing only to the extent needed by BVI to exercise the distribution rights in the Picture granted herein by Cinergi to BVI ("Picture Items") in the BVI Territory, in a form to be mutually agreed to by the parties hereto and subject to the Interparty Agreement. b. Prior to complete delivery of the Picture by Cinergi to BVI pursuant to the terms of Paragraph 3. above, any such security interest of BVI shall be subordinate to any security interest granted by Cinergi to any bank or financial institutions or other persons providing financing for the Picture ("Financier[s]") and to any completion bond company; provided, that any such Financier(s) or completion bond company shall acknowledge that the respective lien(s) and/or security interest(s) in the Picture, shall at all times be subject to this Agreement and any and all of BVI's rights under this Agreement. BVI's acknowledgment of the foregoing security interest shall be conditioned upon the above-referenced lienholders agreeing that if any or all of them foreclose on their respective liens, that they and/or any purchaser of the Picture will be subject to terms of this Agreement and that BVI shall quietly and peacefully enjoy and possess, during the entire period of its exclusive rights hereunder, all of the distribution and other rights herein granted and agreed to be granted to BVI. c. Subsequent to payment by BVI to Cinergi of the sum specified in subparagraph 3.a. above, and pursuant to the terms of the Interparty Agreement (as defined below), the security interest of the Financier(s) in the Picture Items shall be subordinate to the security interest of BVI. d. It is the intention of BVI to enter into an agreement with the aforementioned Financier(s) in order to effect the terms of this Paragraph 11 ("Interparty Agreement"). e. Cinergi agrees to obtain a completion bond with respect to the Picture. 17 f. BVI shall enter into a distributor's assumption agreement with any of the applicable unions or guild, if required. 12. FIRST NEGOTIATION TO EXTEND TERM: Cinergi hereby grants to BVI a Right of First Negotiation to extend the Term in the BVI Territory in accordance with the following provisions: If, at the end of the Term, Cinergi desires to grant any of the Rights Granted to a third party other than BVI, then Cinergi shall, by written notice within three (3) months prior to the expiration of the Term, notice BVI of such desire and immediately thereafter negotiate with BVI with respect to such rights and if, after the expiration of three (3) months following such notice from Cinergi to BVI, no agreement shall have been reached, then Cinergi shall be free to negotiate elsewhere with respect to such of the aforementioned Rights Granted. 13. WAIVER OF INJUNCTIVE RELIEF: As between Cinergi and BVI, Cinergi hereby waives any right to injunctive relief or rescission of rights, and hereby agrees that Cinergi's sole and exclusive remedy in the event of any breach or alleged breach of this Agreement by BVI and/or its parent and/or subsidiaries of its parent shall be solely an action for damages; provided, however, that the terms of this Paragraph 13. are subject to the terms of the Interparty Agreement and/or Intercreditor Agreement. 14. NO THIRD PARTY BENEFICIARIES: This Agreement is not made and shall not inure to the benefit of any person not a party hereto and shall not be deemed to give any right or remedy to any third party (including any audit rights). 15. GOVERNING LAW: This Agreement shall be governed by the laws of the State of California applicable to agreements executed and to be wholly performed therein. Cinergi's consent to such jurisdiction is with respect to this Agreement only. 16. ASSIGNMENT: BVI shall have the right to assign this Agreement in whole or in part only to affiliates, subsidiaries and corporations owning all the stock of BVI. 17. CONFIDENTIALITY: BVI and Cinergi mutually agree that the terms of this Agreement are confidential and shall not, without the prior written consent of the applicable party, be disclosed to any unauthorized person(s), firm(s), corporation(s) or other entity, all of whom shall be informed of the confidential nature of this Agreement and shall agree to be bound by the terms and conditions of this Agreement including, without limitation, this Paragraph 17. 18 18. PAYMENTS: All payments to Cinergi hereunder shall be made care of the following address: Cinergi Production N.V. Inc. 2308 Broadway Santa Monica, CA 90404 Attention: Erick Feitshans 19. EXHIBIT "NP": In the event that the terms of this Agreement conflict with the terms of Exhibit "NP", the terms set forth in the Agreement will control. Please confirm your acceptance of the foregoing by signing in the space provided below. BUENA VISTA INTERNATIONAL, INC. By: /s/ Jeffery S. Graup --------------------------- Its: Sr. VP --------------------------- ACCEPTED AND AGREED TO: CINERGI PRODUCTIONS N.V. INC. By: /s/ Erick J. Feitshans ------------------------------ Erick J. Feitshans Its: Vice President ------------------------------ I.D.# ---------------------------- 19 EX-10.55 5 AGMT DATED 1/26/96 BET CPNV & BVI RE EVITA DEAL MEMORANDUM THIS AGREEMENT dated as of the 26 January 1996 between Cinergi Productions N.V. Inc. ("Cinergi") and Buena Vista Distribution International, Inc. ("BVI") is entered into between the parties relating to the distribution of the theatrical motion picture "Evita" ("the picture") in the Territory set forth below, as follows: 1. ADVANCE: Three Million US Dollars (US$3,000,000) payable on a cash flow basis. BVI's advance will be covered by the completion bond and Five Hundred Thousand US Dollars (US$500,000) of the advance shall be crossed against any overages payable to Cinergi in Latin America; 2. TERRITORY: Spain, Spanish speaking Andora, The Balaeric and Canary Islands; 3. TERM: Nineteen (19) years from delivery (plus right of first negotiation to extend the Term); 4. RIGHTS: All theatrical, non-theatrical, home video (including DVD, near VOD), ship, hotel/motel, pay TV, free TV, pay-per-view and video-on-demand rights. Airline and all other rights will be retained by Cinergi; 5. BACK END TERMS: a. THEATRICAL, NON-THEATRICAL: Twenty-five percent (25%) fee to Ptas. One Hundred Fifty Million film rental, Twenty-seven and one-half percent. (27.5%) fee from Ptas. One Hundred Fifty Million to Two Hundred Fifty Million rental and thirty percent (30%) fee over Ptas. Two Hundred Fifty Million for any and all film rentals actually received. b. The "out of pocket" sub-distribution fees which BVI actually pays to Laurenfilm for Catalonia, shall be treated as an additional fee hereunder. c. VIDEO: Rental: 0-4,000 units -- Thirty percent (30%) royalty; 4,000 - 6,000 units -Thirty-two and one-half percent (32.5%) royalty; 6,000 - 8,000 units -- Thirty -five percent (35%) royalty and 8,000 + units --Forty percent (40%) royalty. The above is on prospective basis. Sell-through --We can accept a Fifteen percent (15%) royalty if the picture is first released on rental. However, if BVI goes straight to sell-through, the royalty should be Seventeen and one-half percent (17.5%). d. VIDEO-ON DEMAND: Thirty percent (30%) fee. e. TELEVISION: Twenty-five percent (25%) fee. Please acknowledge your acceptance of the terms and conditions of this deal memorandum by signing in the space provided for below. CINERGI PRODUCTIONS, N.V. INC. BY:/s/ Warren Braverman ------------------------------ ITS:Executive Vice President ----------------------------- APPROVED AND ACCEPTED BY: BUENA VISTA DISTRIBUTION INTERNATIONAL INC. By:/s/ Jeffery S. Graup ------------------------------ Its:Senior Vice President ----------------------------- EX-21 6 SUBSIDIARIES SUBSIDIARIES OF CINERGI PICTURES ENTERTAINMENT INC. Cinergi Film Productions Co., a Delaware corporation Cinergi International N.V., a Netherlands Antilles corporation Cinergi Productions Inc., a Delaware corporation Cinergi Productions Inc. (California), a California corporation Cinergi Productions N.V. Inc., a Delaware Corporation Cinergi Service Inc., a Delaware corporation E.P. Distribution Inc., a California corporation Igrenic Music Publishing, a California corporation J.D. Distribution Inc., a California corporation SUBSIDIARIES OF CINERGI FILM PRODUCTIONS CO. Alan Smithee Productions Inc., a California corporation Bishop-MacGuire Productions Inc., a California corporation Casa Rosata Productions Inc., a California corporation Color of Night Productions Inc., a California corporation Hester Prynne's Production Company, a California corporation Renaissance Man Productions Inc., a California corporation Scarlet Letter Productions Inc., a Canadian corporation Simon Says Productions Inc., a California corporation Tombstone Productions Inc., a California corporation Track 2 Productions, Inc., a California corporation Wondervale Limited, a United Kingdom corporation 18 Hands Productions Inc., a California corporation Summit Entertainment Group Inc., a California corporation (33.3% interest only) SUBSIDIARIES OF CINERGI PRODUCTIONS N.V. INC. Cinergi Productions Kft., a Hungarian corporation Kala International Sales, Inc., a U.S. Virgin Islands corporation Summit Export Group (M.E.V.) N.V., a Netherlands Antilles corporation Summit Export (U.K.) Ltd., a United Kingdom corporation EXHIBIT 21 EX-23 7 EX 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-90660) pertaining to the 1994 Basic Stock Option and Stock Appreciation Rights Plan and the 1994 Special Stock Option and Stock Appreciation Rights Plan of Cinergi Pictures Entertainment Inc. of our report dated April 11, 1997, with respect to the consolidated financial statements of Cinergi Pictures Entertainment Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP Los Angeles, California April 11, 1997 EX-27 8 EX 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 27,364 0 11,649 0 103,792 143,256 7,703 2,884 156,548 66,559 0 131 0 0 36,476 156,548 133,000 133,907 139,612 149,364 0 0 448 (15,905) 0 (15,905) 0 0 0 (15,905) (1.12) (1.12)
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