-----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, HfslJ1/0iUs0IilWp5KHLDWVqoi9kc93QYfo6xkOEKyK+q8I7IsSfx7Yx6ewDD9B 2OWY+wnK0rgMdcZosdaVHA== 0000912057-96-027038.txt : 19961121 0000912057-96-027038.hdr.sgml : 19961121 ACCESSION NUMBER: 0000912057-96-027038 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961119 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CINERGI PICTURES ENTERTAINMENT INC CENTRAL INDEX KEY: 0000922519 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 954247952 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23958 FILM NUMBER: 96669293 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-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 0-23958 CINERGI PICTURES ENTERTAINMENT INC. (Exact name of registrant as specified in its charter) DELAWARE 95-4247952 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 2308 BROADWAY SANTA MONICA, CALIFORNIA 90404 (Address of principal executive offices) (Zip Code) (310) 315-6000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------- As of November 19, 1996, there were 14,191,556 shares of the registrant's Common Stock outstanding. CINERGI PICTURES ENTERTAINMENT INC. INDEX PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements Condensed Consolidated Balance Sheets -- December 31, 1995 and September 30, 1996 (unaudited)..............3 Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 1995 and September 30, 1996................................................5 Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 1995 and September 30, 1996................................................6 Notes to Condensed Consolidated Financial Statements (unaudited)..................................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................12 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................18 Item 2. Changes in Securities............................................18 Item 3. Defaults Upon Senior Securities..................................18 Item 4. Submission of Matters to a Vote of Security Holders..............18 Item 5. Other Information................................................19 Item 6. Exhibits and Reports on Form 8-K.................................20 Signature........................................................21 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CINERGI PICTURES ENTERTAINMENT INC. CONDENSED CONSOLIDATED BALANCE SHEETS December 31, September 30, 1995 1996 ------------ ------------ (unaudited) ASSETS Cash and cash equivalents $ 29,832,000 $ 11,032,000 Accounts receivable 7,494,000 11,280,000 Accounts receivable, related parties 682,000 1,039,000 Film costs, less accumulated amortization 160,756,000 144,684,000 Property and equipment, at cost, less accumulated depreciation 4,381,000 5,173,000 Other assets 3,112,000 3,170,000 ------------ ------------ TOTAL ASSETS $206,257,000 $176,378,000 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Accounts payable $ 235,000 $ 844,000 Accrued expenses 1,550,000 626,000 Accrued interest 2,613,000 4,126,000 Accrued residuals & participations 8,781,000 9,993,000 Deferred revenue 68,791,000 47,038,000 Capital lease obligation -- 475,000 Loans payable 65,360,000 55,161,000 Notes and amounts payable to related parties 5,310,000 5,207,000 ------------ ------------ TOTAL LIABILITIES $152,640,000 $123,470,000 3 CINERGI PICTURES ENTERTAINMENT INC. CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) December 31, September 30, 1995 1996 ------------ ------------ (unaudited) Common Stock with certain redemption features, $.01 par value, 1,117,000 shares issued and outstanding less notes receivable from related parties amounting to $1,350,000 $1,900,000 $2,838,000 Commitments & Contingencies (Note 4) -- -- STOCKHOLDERS' EQUITY Preferred Stock, $.01 par value, 5,000,000 shares authorized, no shares issued and outstanding -- -- Common Stock, $.01 par value, 20,000,000 shares authorized, 13,075,000 shares issued and outstanding 131,000 131,000 Additional Paid-in Capital 64,753,000 64,753,000 Retained Deficit (13,167,000) (14,814,000) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 51,717,000 50,070,000 ------------ ------------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $206,257,000 $176,378,000 ------------ ------------ ------------ ------------ NOTE: The balance sheet at December 31, 1995 has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principals for complete financial statements. See notes to condensed consolidated financial statements. 4 CINERGI PICTURES ENTERTAINMENT INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, 1995 1996 1995 1996 ----------- ----------- ------------ ----------- Revenues Feature films $51,442,000 $30,160,000 $114,920,000 $89,712,000 Fee income 86,000 29,000 274,000 60,000 ----------- ----------- ------------ ----------- 51,528,000 30,189,000 115,194,000 89,772,000 Cost and expenses: Amortization of film costs, residuals & participations 59,690,000 28,543,000 131,387,000 86,954,000 Selling, general & ad- ministrative expenses 1,055,000 2,111,000 2,444,000 4,990,000 ----------- ----------- ------------ ----------- Operating loss (9,217,000) (465,000) (18,637,000) (2,172,000) Interest expense (142,000) -- (142,000) (176,000) Interest income 300,000 171,000 518,000 701,000 ----------- ----------- ------------ ----------- Net loss before provision for income taxes (9,059,000) (294,000) (18,261,000) (1,647,000) Provision for income taxes -- -- -- -- ----------- ----------- ------------ ----------- Net loss $(9,059,000) $ (294,000) $(18,261,000) $(1,647,000) ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- Net loss per share $(0.64) $(0.02) $(1.45) $(0.12) ------ ------ ------ ------ ------ ------ ------ ------ Weighted average number of shares outstanding 14,192,000 14,192,000 12,632,000 14,192,000 ----------- ----------- ------------ ----------- ----------- ----------- ------------ -----------
See notes to condensed consolidated financial statements. 5 CINERGI PICTURES ENTERTAINMENT INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) Nine Months Ended September 30, 1995 1996 ----------- ----------- OPERATING ACTIVITIES Net loss $(18,261,000) $ (1,647,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 423,000 901,000 Amortization of unearned compensation 337,000 938,000 Film cost amortization 126,299,000 81,317,000 Changes in operating assets and liabilities: Accounts receivable 1,928,000 (3,786,000) Accounts receivable, related parties 414,000 (357,000) Film cost additions (125,216,000) (65,245,000) Other assets 539,000 (58,000) Accounts payable, accrued expenses and interest (1,024,000) 1,198,000 Accrued residuals and participations payable 1,499,000 1,212,000 Deferred revenue 32,106,000 (21,753,000) ---------- ----------- Net cash provided by (used in) operating activities 19,044,000 (7,280,000) INVESTING ACTIVITIES Purchase of property and equipment (1,166,000) (112,000) ---------- ---------- Net cash used in investing activities $(1,166,000) $(112,000) See notes to condensed consolidated financial statements. 6 CINERGI PICTURES ENTERTAINMENT INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED) (UNAUDITED) Nine Months Ended September 30, 1995 1996 ----------- ----------- FINANCING ACTIVITIES Increase in loans payable $71,425,000 $32,196,000 Payments on loans payable (99,375,000) (42,396,000) Increase in notes and amounts payable to related parties 17,627,000 615,000 Payments on notes and amounts payable to related parties (9,407,000) (718,000) Payments on capital lease obligation -- (1,105,000) Issuance of common stock, net of expenses 23,317,000 -- ---------- ---------- Net cash provided by (used in) financing activities 3,587,000 (11,408,000) ---------- ---------- Increase (decrease) in cash 21,465,000 (18,800,000) Cash and cash equivalents at beginning of year 2,665,000 29,832,000 ----------- ------------ Cash and cash equivalents at end of period $24,130,000 $11,032,000 ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Income taxes $ 193,000 $ 23,000 NINE MONTHS ENDING SEPTEMBER 30, 1996 Visual effects equipment amounting to $1,580,000 was purchased under a capital lease agreement. Accrued interest of $575,000 relating to production loans owed to a third party was offset against monies owed to the Company by such third party. NINE MONTHS ENDING SEPTEMBER 30, 1995 Film assets amounting to $1,221,000 were transferred from film inventory to fixed assets. See notes to condensed consolidated financial statements. 7 CINERGI PICTURES ENTERTAINMENT INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 30, 1996 NOTE 1 -- PREPARATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited condensed consolidated financial statements of Cinergi Pictures Entertainment Inc. (the "Company" or "CPEI") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ended December 31, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in CPEI's Annual Report on Form 10-K ("Annual Report") filed with the Securities and Exchange Commission. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES NET LOSS PER COMMON SHARE. The per share data for the three and nine month periods ended September 30, 1995 and 1996 are based on the weighted average number of common and common share equivalents outstanding during the period. Common Stock with certain redemption features are considered common share equivalents. Stock options and warrants are considered common share equivalents if dilutive. RECLASSIFICATION. Certain reclassifications were made to the 1995 balances to conform to the September 30, 1996 presentation primarily to not reflect Buena Vista Pictures Distribution, Inc. as a related party. NOTE 3 -- FILM COSTS Film costs consist of the following: DECEMBER 31, SEPTEMBER 30, 1995 1996 ------------ ------------- Released, less amortization. . . . . . $101,238,000 $ 35,029,000 In production. . . . . . . . . . . . . 53,545,000 101,290,000 Development. . . . . . . . . . . . . . 5,973,000 8,365,000 ------------ ------------ $160,756,000 $144,684,000 ------------ ------------ ------------ ------------ 8 CINERGI PICTURES ENTERTAINMENT INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) September 30, 1996 NOTE 4 -- COMMITMENTS AND CONTINGENCIES In December 1995, the U.S. Attorney for the Central District of California served subpoenas ("Subpoenas") on the Company related to a grand jury investigation of federal tax aspects of various transactions involving Andrew G. Vajna, President, Chief Executive Officer and Chairman of the Board of Directors of the Company, and certain other persons and entities (the "Investigation"). The Company believes the Investigation is focusing primarily on (i) the 1988 and 1989 personal tax returns of Mr. Vajna and the tax returns of certain other persons and entities, and (ii) the ongoing audits of Mr. Vajna's tax returns since 1990 by the Internal Revenue Service. The Company has not been identified by the U.S. Attorney as being a target of the Investigation; however, there can be no assurance that the Company's status will not change in the future. The Board of Directors of the Company has formed a committee of the three outside directors of the Company (the "Special Committee") to monitor the Company's response to the Subpoenas, to consider the Company's indemnification obligations with respect to its employees, officers and directors and to otherwise evaluate and act upon matters related to the Investigation. The Company has engaged counsel to represent it in connection with the Investigation and is in the process of responding to the Subpoenas. Given the uncertainty of the Investigation, there is currently no basis upon which to estimate the impact, if any, the Investigation may have on the Company. Pursuant to Article Tenth of the Company's Restated Certificate of Incorporation, Article V of the Company's Restated Bylaws, indemnity agreements entered into between the Company and certain of its officers and directors, and the provisions of Section 145 of the Delaware General Corporation Law ("Indemnification Provisions"), the Company is advancing the expenses of certain of its current and former employees, officers and directors other than Mr. Vajna (the "Indemnitees") which they may incur in connection with the Investigation. As of November 19, 1996, the Company had advanced an aggregate of $134,000 on behalf of the Indemnitees. The Indemnitees have undertaken to reimburse the Company for their expenses if it is ultimately determined by the Special Committee that they are not entitled to be indemnified. In addition, Mr. Vajna has undertaken to reimburse the Company under certain circumstances with respect to the expenses of the Indemnitees. Given the current uncertainty regarding the scope and duration of the Investigation and the amount of expenses which may be incurred by the Indemnitees in connection with the Investigation, there is no basis upon which to estimate the financial impact which the foregoing may have on the Company. On May 13, 1996, two purported class action lawsuits were filed in the Superior Court of California for the County of Los Angeles by alleged stockholders of the Company, against the Company and certain of its current and former executive officers and directors. On July 26, 9 1996, the court consolidated the two cases and plaintiffs filed an amended consolidated complaint alleging, among other things, that the defendants negligently misrepresented (or omitted) material facts about the business, financial condition, future growth and profitability of the Company in connection with the Company's 1995 public offering of Common Stock, and in alleged statements by certain of the individual defendants. The complaint alleged violations of Sections 11 and 15 of the Securities Act of 1933, as amended, and common law negligent misrepresentations. The amended complaint sought, among other things, an award of unspecified monetary damages in favor of the plaintiffs and the other members of the purported class for all losses and injuries allegedly suffered as a result of the defendants' alleged conduct. On September 19, 1996, the court sustained defendants' demurrer to the amended complaint, granting leave to amend certain allegations. Limited discovery is underway. Management of the Company does not believe that these lawsuits have merit and intends to defend them vigorously. Pursuant to the Indemnification Provisions, the Company is advancing the expenses of the current and former officers and directors named as defendants in the litigation (the "Litigation Indemnitees") which they may incur in the defense of the litigation. The Litigation Indemnities are being jointly represented with the Company. As of November 19, 1996, total fees incurred on behalf of the Company and the Litigation Indemnitees in connection with this litigation were approximately $200,000. The Litigation Indemnitees have undertaken to reimburse the Company for their portion of the expenses if it is ultimately determined that they are not entitled to be indemnified. Given the current uncertainty regarding the scope and duration of this litigation and the amount of expenses which may be incurred by the Litigation Indemnitees in connection with this litigation, there is no basis upon which to estimate the financial impact which the foregoing may have on the Company. The Company and Hollywood Pictures Company ("HPC") have agreed to enter into a Financing and Distribution Agreement whereby the Company, in exchange for (i) a 50% equity participation in the motion picture tentatively entitled DEEP RISING (a high seas action-adventure, thriller starring Treat Williams which is currently in production and anticipated to be released in mid-1997) and (ii) a sales fee for international distribution of such motion picture, is financially obligated to pay to HPC the lesser of 50% of the cost of the picture or $22,500,000. NOTE 5 -- SUBSEQUENT EVENTS 10 In September 1995, the Company sold its interest in JUDGE DREDD to the British corporation Lloyds Commercial Leasing Ltd. ("Lloyds") and concurrently leased the film back pursuant to a 12 year lease. A portion of the sale proceeds was placed on deposit with ABN AMRO Bank (the "Bank") to be used as security for a guaranty of the lease payments issued by the Bank. Under the original terms of such transaction, depending on the level of the UK corporate tax rate over various time periods, the Company could have been liable for additional lease payments or entitled to a return of a portion of the amount on account at the Bank. In October 1996, the parties to such transaction agreed to amend the terms of such transaction to eliminate the adjustments for changes in the UK corporate tax rate. As a result, in October 1996, $1,388,000 (net of related fees) of the funds on account at the Bank was returned to the Company. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as "may," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. The reader is cautioned that all forward-looking statements are necessarily speculative and there are certain risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. These risks and uncertainties include, among other things, the highly speculative and inherently risky and competitive nature of the motion picture industry. There can be no assurance of the economic success of any motion picture since the revenues derived from the production and distribution of a motion picture (which do not necessarily bear a direct correlation to the production or distribution costs incurred which can be substantial with respect to the Company's films) depend primarily upon its acceptance by the public, which cannot be predicted. The results for the nine months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the entire year. Due to the uncertainties of the release schedules of the relatively limited number of motion pictures produced by the Company and the audience responses thereto, the Company's revenues and earnings fluctuate significantly from quarter to quarter and from year to year. In addition, management of the Company is conducting an ongoing strategic review of the Company's business strategies and goals and has retained the financial advisory firm of Jefferson Capital Group, Ltd. (of which R. Timothy O'Donnell, a director of the Company, is President), to assist it in such review. The strategic review includes discussions with third parties regarding the sale of a partial interest in the Company or the entire Company. As the Company has not concluded its strategic review nor have any agreements been reached with respect thereto, it is not possible to predict at this time what changes, if any, may be made in the Company's business strategies and what effect any changes may have on the Company's business, future results of operations and financial condition. As indicated below under "Liquidity and Capital Resources," the Company, which is continuing to consider motion picture projects on a case-by-case basis, recently began production on one motion picture and is preparing another project for production. The average direct negative cost of such motion pictures is currently estimated to be, subject to changes in existing budgets, approximately $18,450,000 which is substantially below the average direct negative costs of the Company's slate of motion picture productions in 1995 (DIE HARD WITH A VENGEANCE, JUDGE DREDD, THE SCARLET LETTER and NIXON) and 1996 (EVITA, AMANDA and THE SHADOW CONSPIRACY), which averaged $64,297,000 and $35,822,000, respectively. As the strategic review has not yet been concluded, there can be no assurances that the direct negative costs of these motion pictures is necessarily indicative of the direct negative costs of the Company's future releases. In addition, it has not yet been determined whether there will be additional motion pictures produced by the Company for release in 1997. 12 The risks highlighted above should not be assumed to be the only things that could affect future performance of the Company. The Company does not have a policy of updating or revising forward-looking statements and thus it should not be assumed that silence by management of the Company over time means that actual events are bearing out as estimated in such forward-looking statements. RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 30, 1996 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1995 Feature film revenues decreased from $51,442,000 for the quarter ended September 30, 1995 to $30,160,000 for the quarter ended September 30, 1996. Feature film revenues for the quarter ended September 30, 1995 consisted mainly of international revenues from the release of DIE HARD WITH A VENGEANCE and JUDGE DREDD as well as domestic syndication revenue from MEDICINE MAN. Feature film revenues for the quarter ended September 30, 1996 consisted mainly of the domestic home video availability of NIXON, domestic and international availability of AMANDA and continuing domestic and foreign revenues from TOMBSTONE and DIE HARD WITH A VENGEANCE. Amortization of film costs, residuals and participations decreased from $59,690,000 for the quarter ended September 30, 1995 to $28,543,000 for the quarter ended September 30, 1996 primarily due to the decrease in feature film revenue recognized in the quarter ended September 30, 1996 as compared to the quarter ended September 30, 1995 and the write down to net realizable value in the quarter ended September 30, 1995 of THE SCARLET LETTER, which was released on October 13, 1995 to less than expected box office results. The Company estimates the total projected revenues to be received from the exploitation of a motion picture in all territories and media. As revenues from a motion picture are recognized, the percentage of revenues recognized to total projected revenues is applied to film costs for such motion picture to record amortization. Where applicable, unamortized film costs for a picture are written down to net realizable value for such picture based upon the Company's appraisal of current market conditions. Selling, general and administrative ("SG&A") expenses (excluding production overhead costs capitalized to film costs) increased from $1,055,000 for the quarter ended September 30, 1995 to $2,111,000 for the quarter ended September 30, 1996. The difference is primarily due to a larger number of personnel at the special effects facility in the third quarter of 1996 compared to the third quarter of 1995 (additional personnel were retained to pursue potential third party special effects projects), as well as depreciation expense associated with the special effects equipment leased by the Company in 1996. The increase in overhead during the quarter ended September 30, 1996 was also due to legal expenses in connection with the Investigation and lawsuits described in Note 4 of the Financial Statements. The Company capitalizes production overhead incurred in connection with the production of a motion picture by adding such costs to the capitalized film costs of the motion picture. Production overhead being 13 capitalized to film costs decreased from $1,667,000 in the third quarter of 1995 as compared to $1,179,000 in the third quarter of 1996, and the total of SG&A expenses and production overhead costs capitalized to film costs increased from $2,722,000 for the quarter ended September 30, 1995 to $3,290,000 for the quarter ended September 30, 1996. Interest expense decreased from $142,000 for the quarter ended September 30, 1995 to none for the quarter ended September 30, 1996 because all interest expense for the quarter ended September 30, 1996 was capitalized to film costs. The Company capitalizes applicable interest expense incurred in connection with the production of each motion picture. The Company determines the amount of interest expense to be capitalized to each motion picture in production by multiplying the average cumulative film cost of each motion picture in a given period by the overall effective interest rate paid by the Company on the aggregate amount of debt outstanding for such period. Interest expense, including interest capitalized to film costs, decreased from $2,507,000 for the quarter ended September 30, 1995 to $1,678,000 for the quarter ended September 30, 1996. This decrease was due to the lower average outstanding balance of the Company's production loans in the quarter ended September 30, 1996 as compared to the quarter ended September 30, 1995. Two films were in various stages of production during the third quarter of 1996 as compared to three films during the third quarter of 1995. Fee income decreased from $86,000 for the quarter ended September 30, 1995 to $29,000 for the quarter ended September 30, 1996. Fee income represents fees earned in connection with an arrangement to collect accounts receivable on behalf of and to distribute motion pictures produced by an unrelated third party. Interest income decreased from $300,000 for the quarter ended September 30, 1995 to $171,000 for the quarter ended September 30, 1996 due to lower cash balances during the third quarter of 1996 compared to the third quarter of 1995. As a result of the above, the Company incurred a net loss for the quarter ended September 30, 1996 of $294,000 as compared to a net loss of $9,059,000 for the quarter ended September 30, 1995. NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1995 Feature film revenues decreased from $114,920,000 for the nine months ended September 30, 1995 to $89,712,000 for the nine months ended September 30, 1996. Feature film revenues for the nine months ended September 30, 1995 consisted of domestic home video and pay television revenues for TOMBSTONE, domestic home video revenues for COLOR OF NIGHT, international revenues from the release of DIE HARD WITH A VENGEANCE and JUDGE DREDD and domestic syndication revenue from MEDICINE MAN. Feature film revenues for the nine months ended September 30, 1996 consisted mainly of the domestic home video availability of THE SCARLET LETTER and NIXON, international availability of NIXON, domestic and international 14 availability of AMANDA and continuing domestic and international revenues from TOMBSTONE and DIE HARD WITH A VENGEANCE. Amortization of film costs, residuals and participations decreased from $131,387,000 for the nine months ended September 30, 1995 to $86,954,000 for the nine months ended September 30, 1996 primarily due to the decrease in feature film revenue recognized for the nine months ended September 30, 1996 as compared to the nine months ended September 30, 1995 and the write down to net realizable value of JUDGE DREDD and THE SCARLET LETTER during the nine months ended September 30, 1995 both of which were released to less than expected box office results. SG&A expenses (excluding production overhead costs capitalized to film costs) increased from $2,444,000 for the nine months ended September 30, 1995 to $4,990,000 for the nine months ended September 30, 1996. The difference is primarily because indirect costs attributable to the special effects facility were included in overhead in the nine months ended September 30, 1996. For the nine months ended September 30, 1995, substantially all of the indirect costs attributable to the special effects facility were included in film costs, as the special effects for JUDGE DREDD, which was in production during such period, were primarily created at the facility. The increase in overhead during the nine months ended September 30, 1996 was also due to legal expenses in connection with the Investigation and lawsuits described in Note 4 of the Financial Statements. Total of SG&A expenses (including production overhead costs capitalized to film costs) increased from $7,133,000 for the nine months ended September 30, 1995 to $9,261,000 for the nine months ended September 30, 1996. Such increase was primarily due to legal expenses in connection with the Investigation and lawsuits and the expenses related to a larger number of personnel at the special effects facility during most of the nine months ended September 30, 1996, as compared to the comparable period in 1995. Interest expense increased from $142,000 for the nine months ended September 30, 1995 to $176,000 for the nine months ended September 30, 1996. Interest expense, including interest capitalized to film costs, decreased from $8,726,000 for the nine months ended September 30, 1995 to $5,015,000 for the nine months ended September 30, 1996 due to the lower average outstanding balance of the Company's production loans in the nine months ended September 30, 1996 as compared to the nine months ended September 30, 1995. The Company had a lower average outstanding balance of production loans for the nine months ended September 30, 1996 because three films were in production in such period as compared to six films in production in the corresponding period in 1995. Fee income decreased from $274,000 for the nine months ended September 30, 1995 to $60,000 for the nine months ended September 30, 1996. Fee income represents fees earned in connection with an arrangement to collect accounts receivable on behalf of and to distribute motion pictures produced by an unrelated third party. Interest income increased from $518,000 for the nine months ended September 30, 1995 to $701,000 for the nine months ended September 30, 1996 due primarily to higher cash balances during the nine months ended September 30, 1996. 15 As a result of the above, the Company incurred a net loss for the nine months ended September 30, 1996 of $1,647,000 as compared to a net loss of $18,261,000 for the nine months ended September 30, 1995. LIQUIDITY AND CAPITAL RESOURCES The Company has a Credit, Security, Pledge and Guaranty Agreement dated as of August 16, 1994 with The Chase Manhattan Bank ("Chase") and a syndicate of lenders (collectively, the "Lenders") which provides the Company with a revolving credit facility of $150,000,000 (the "Credit Facility"). The Credit Facility is secured by substantially all of the assets of the Company, including $5,000,000 in "key man" life insurance on Mr. Vajna. As of September 30, 1996, approximately $23,739,000 in borrowings was outstanding under the Credit Facility. As of September 30, 1996, the interest rate on the amounts outstanding under the Credit Facility was approximately 7% per annum. The commitment fee on the average daily unused portion of the commitment is 3/8 of one percent per annum. Under the Credit Facility, the Lenders have committed to make loans available until August 31, 1997, although the Lenders will continue to make loans to finance any motion picture in which principal photography has commenced or that has otherwise satisfied certain conditions prior to such date. The Company and the Lenders are currently discussing an extension of the commitment to lend under the Credit Facility, although there can be no assurance that such an extension will be obtained or be obtained on terms equivalent to those currently contained in the Credit Facility. The Credit Facility matures on February 28, 1999. The Company previously entered into term loan agreements with Buena Vista Pictures Distribution, Inc. ("BVPD") to finance a portion of the costs of COLOR OF NIGHT, THE SCARLET LETTER, NIXON, THE SHADOW CONSPIRACY and EVITA. Each loan must be repaid with accrued interest on or before the earlier of (i) four years after the loan proceeds are first made available to the Company or (ii) three years after the initial domestic theatrical release of the applicable picture. The first of these loans will become due in May 1997 for COLOR OF NIGHT (for which approximately $6,312,000 was outstanding as of September 30, 1996). Each of these loans are secured by rights to distribute the respective motion picture in the Americas and, except for the term loan with respect to COLOR OF NIGHT which is personally guaranteed by Mr. Vajna, certain other distribution rights related to other motion pictures financed by BVPD. At September 30, 1996, the aggregate loan balances were approximately $35,483,000. In September 1995, the Company sold its interest in JUDGE DREDD to the British corporation Lloyds Commercial Leasing Ltd. ("Lloyds") and concurrently leased the film back pursuant to a 12 year lease. A portion of the sale proceeds was placed on deposit with ABN AMRO Bank (the "Bank") to be used as security for a guaranty of the lease payments issued by the Bank. Under the original terms of such transaction, depending on the level of the UK corporate tax rate over various time periods, the Company could have been liable for additional lease payments or entitled to a return of a portion of the amount on account at the Bank. In 16 October 1996, the parties to such transaction agreed to amend the terms of such transaction to eliminate the adjustments for changes in the UK corporate tax rate. As a result, in October 1996, $1,388,000 (net of related fees) of the funds on account at the Bank were returned to the Company. The Company has a one year capital lease for certain visual effects equipment. The total capital lease obligation at September 30, 1996 was $475,000. Subsequent to the quarter ended September 30, 1996, the Company completed delivery of THE SHADOW CONSPIRACY, currently scheduled for release in late January 1997, to BVPD for domestic distribution and delivered the picture to Summit Entertainment L.P., an international sales company ("Summit"), for international distribution. The theatrical release of THE SHADOW CONSPIRACY was delayed due to an extremely competitive box office environment. See Part II, Item 1 ("Legal Proceedings") in this Report. The Company currently is in post-production of EVITA. Through September 30, 1996, the Company incurred approximately $88,736,000 in direct negative costs in connection with the motion pictures THE SHADOW CONSPIRACY and EVITA. The Company currently expects, subject to changes in existing budgets, that an additional approximately $5,031,000 in direct negative costs will be incurred in connection with such motion pictures. In addition, the Company has recently commenced production on one motion picture (AN ALAN SMITHEE FILM) which has an anticipated release date in mid-1997, and has another project (BROADWAY BRAWLER, which will star Bruce Willis) in pre-production and preparation with an anticipated release date in late 1997. The aggregate direct costs of these two motion pictures is currently expected to be, subject to changes in existing budgets, approximately $36,900,000. In addition, the Company and Hollywood Pictures Company ("HPC") have agreed to enter into a Financing and Distribution Agreement whereby the Company, in exchange for (i) a 50% equity participation in the motion picture tentatively entitled DEEP RISING (a high seas action-adventure, thriller starring Treat Williams which is currently in production and anticipated to be released in mid-1997) and (ii) a sales fee for international distribution of such motion picture, is financially obligated to pay to HPC the lesser of 50% of the cost of the picture or $22,500,000. There can be no assurance that any of these motion pictures will necessarily involve all the creative elements listed above, will be completed or that completion will occur in accordance with the anticipated schedule or budget, as the production, completion and distribution of motion pictures is subject to numerous uncertainties, including financing requirements, personnel availability and the release schedule of competitive films. In July 1996, AMANDA was delivered for domestic distribution to Family Channel Pictures, Inc. ("FCP"), which controls all U.S. and Canadian distribution rights to AMANDA. AMANDA has also been delivered to Summit which is assisting the Company in exploitation of the Company's international distribution rights to AMANDA. FCP has not yet obtained domestic theatrical distribution of AMANDA, which, if not obtained, could adversely affect certain foreign revenues ultimately realized by the Company from the exploitation of the international distribution rights to AMANDA. 17 The Company believes that its existing capital, funds from operations, borrowings under the Credit Facility, advances and production loans from BVPD and other available sources of capital (including single picture production loans), will be sufficient to enable the Company to fund its planned development, production and overhead expenditures for the next 12 months. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company has an output agreement in France with Le Film Office ("LFO") (which expires after the delivery of EVITA). Pursuant to the output agreement with LFO, a $3,071,000 advance is payable to the Company upon delivery of THE SHADOW CONSPIRACY to LFO. On August 27, 1996, LFO filed for and obtained a temporary restraining order in California Superior Court, in Los Angeles, California (the "Court") restraining the Company, Summit (the international sales company handling the international distribution of THE SHADOW CONSPIRACY) and Chase (one of the lenders under the Company's Credit Facility), from drawing down the letter of credit securing LFO's advance on the basis of LFO's allegations that the Company failed to give proper notice to LFO for extending the delivery date of THE SHADOW CONSPIRACY. On September 20, 1996, the Court issued a preliminary injunction against the Company, Summit and Chase. The parties have agreed to stay the Court proceedings and submit the dispute to binding arbitration by the American Film Marketing Association, as required by the output agreement. The Company believes that LFO's allegations are without merit and intends to defend them vigorously. In the event the Company does not prevail in the arbitration, it believes that it can obtain alternative distribution of THE SHADOW CONSPIRACY in France. However, there can be no assurance that the Company will obtain an alternative distribution arrangement or that any such arrangement will provide for an advance on delivery or otherwise be on terms equivalent to those under the Company's output agreement with LFO. See also Note 4 to Condensed Consolidated Financial Statements set forth herein. ITEM 2. CHANGES IN SECURITIES. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 18 ITEM 5. OTHER INFORMATION. Not applicable. 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) Exhibits. 10.1 Engagement letter dated May 8, 1996 between Jefferson Capital Group, Ltd. and the Company. 27. Financial Data Schedule b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended September 30, 1996. 20 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CINERGI PICTURES ENTERTAINMENT INC. November 19, 1996 By: /s/ Warren Braverman ----------------------------------------- Warren Braverman, Executive Vice President, Chief Financial Officer and Treasurer, signing both in his capacity as Executive Vice President on behalf of Registrant and as Chief Financial Officer of Registrant 21 EXHIBIT INDEX Sequentially Exhibit Number Description Numbered Page - -------------- ----------- ------------- 10.1 Engagement Letter dated May 8, 1996 between Jefferson Capital Group, Ltd. and the Company. 27 Financial Data Schedule 22 EX-10.1 2 EXHIBIT 10.1 ENGAGEMENT LETTER JEFFERSON CAPITAL GROUP, LTD. One James Center, Suite 1414 Richmond Virginia 23219 (804) 643-0100 Fax (804) 643-8140 May 8, 1996 Cinergi Pictures Entertainment Inc. 2808 Broadway Santa Monica, CA 90404 Attention: Warren Braverman, Chief Operating Officer Dear Warren: We are pleased to set forth the terms of the retention of Jefferson Capital Group, Ltd. (JCG or the "Financial Advisor") by Cinergi Pictures Entertainment Inc. (collectively with its affiliates, the "Company" or "Cinergi"). As your Financial Advisor, we will assist the Company in connection with the activities enumerated in paragraph 1 below (collectively, the "Transaction"). 1. In connection with our activities hereunder, JCG will, among other things, (a) review and familiarize ourselves with the business, operations, properties, financial condition and prospects of the Company and its subsidiaries; (b) review the Company's capital structure; (c) assist in structuring and placing an appropriate working capital facility at the Company; (d) make specific recommendations with respect to a transaction or series of transactions necessary to restructure the Company's capital structure to more appropriately reflect the Company's financial condition and future prospects; (e) assist in an analysis of the value of the Company and its subsidiaries under differing financing scenarios; (f) assist in the structuring and placing of debt and equity securities of the Company; (g) assist the Company in analyzing its strategic alternatives including, but not limited, to the sale of all or portion of the Company's outstanding common stock or a potential combination of the Company in one or a series of transactions by (i) merger, consolidation, reorganization or other transaction pursuant to which the Company may combine with a third party or (ii) an acquisition involving all or a substantial amount of the business, stock, or assets of a third party. 2. In connection with JCG's activities on the Company's behalf, the Company will cooperate with JCG and will furnish information and data concerning the Company and the Transaction (the "Information") which JCG deems appropriate and will provide JCG and any prospective financing sources with access to the Company's officers, directors, employees, independent accountants and legal counsel. JCG agrees to use such information only in connection with their agreement herein, unless otherwise agreed by the Company in writing. The Company represents and warrants that to the best of its knowledge all information (a) made available to JCG by the Company, or (b) contained in any memorandum or offering document prepared by the Company with respect to the Transaction (the "Memorandum") will, at all times during the period of the engagement of JCG hereunder, be complete and correct in all material respects and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances under which they are made. The Company further represents and warrants that any projections provided by it to JCG will have been prepared in good faith and will be based upon assumptions which, in light of the circumstances under which they are made, are reasonable. The Company acknowledges and agrees that in rendering its services hereunder, JCG will be using and relying on the information (and information available from public sources and other sources deemed reliable by JCG) without independent verification thereof by JCG or independent appraisal by JCG of any of the Company's assets. JCG does not assume responsibility for the accuracy or completeness of the information or any other information regarding the Company, or any Transaction. Any advice rendered by JCG pursuant to this Agreement may not be disclosed publicly without JCG's prior written consent unless required by law, rule or regulation. 3. In consideration of its services pursuant to this Agreement, JCG shall be entitled to receive, and the Company agrees to pay, JCG the following compensation, without duplication: a) The Company shall pay to JCG a retainer in the amount of $75,000. $37,500 of the retainer will be offset against any fees payable pursuant to paragraphs 3(b) - (f). b) 2% of the aggregate amount of any senior debt arranged by JCG having a term of three years or more. c) 3% of the aggregate amount of any subordinated debt arranged by JCG. d) 4% of the aggregate amount of any convertible subordinated debt or preferred equity financing arranged by JCG. e) 5% of the aggregate amount of any equity financing arranged by JCG. f) 1% of the total enterprise value of the Company in the event of a transaction described in paragraph 1(g). Enterprise value shall be defined as the sum of the total equity consideration paid in a Transaction plus the amount of any outstanding debt assumed by the acquirer. 4. In addition to the fees described in paragraph 3 above, the Company agrees to promptly reimburse JCG, upon request from time to time, for all reasonable out-of-pocket expenses incurred by JCG (including reasonable fees and disbursements of counsel, and of other consultants and advisors retained by the Financial Advisors, provided the retention of such other consultants and advisors has been approved in advance by the Company) in connection with the matters contemplated by this Agreement. 5. The Company agrees to indemnify JCG in accordance with the indemnification provisions (the "Indemnification Provisions") attached to this Agreement, which Indemnification Provisions are incorporated herein and made a part hereof. 6. This Agreement will continue for as long as the Company is actively pursuing the Transaction, but either party hereto may terminate this Agreement at any time upon written notice, without liability or continuing obligation except as set forth in the following sentence. Neither termination of this Agreement nor completion of the assignment contemplated hereby shall affect: (i) any compensation earned by JCG up to the date of termination, (ii) any compensation earned by JCG after termination pursuant to paragraph 3 hereof for transactions in which JCG has had substantial and substantive involvement before termination, (iii) the reimbursement of expenses incurred by JCG up to the date of termination or completion, (iv) the attached Indemnification Provisions which are incorporated herein, all of which shall remain operative and in full force and effect. 7. The validity and interpretation of this Agreement shall be governed by the laws of the State of Virginia applicable to agreements made and to be fully performed therein. 8. The benefits of this Agreement shall inure to the respective successors and assigns of the Company, and the obligations and liabilities assumed in this Agreement by the parties hereto shall be binding upon their respective successors and assigns. 9. For the convenience of the parties, any number of counterparts of this Agreement may be executed by the parties hereto. Each such counterpart shall be, and shall be deemed to be, an original instrument, but all such counterparts taken together shall constitute one and the same Agreement. This Agreement may not be modified except in writing signed by the parties hereto. If the foregoing correctly sets forth our Agreement, please sign the enclosed copy of this letter in the space provided and return it to us. Very truly yours, JEFFERSON CAPITAL GROUP, LTD. By: /s/ R. Timothy O'Donnell ------------------------------ President JEFFERSON CAPITAL GROUP, LTD. Confirmed and Agreed to this 29th day of May, 1996 Cinergi Pictures Entertainment Inc. By: /s/ Warren Braverman --------------------------- INDEMNIFICATION PROVISIONS The Company (as such term is defined in the Agreement (as such term is defined below)) agrees to indemnify and hold harmless JCG against any and all losses, claims, damages, liabilities, obligations, penalties, judgments, awards, costs, expenses and disbursements and any and all legal and other costs, expenses or disbursements in giving testimony or furnishing documents in response to a subpoena or otherwise, including, without limitation, the costs, expenses and disbursements, as and when incurred, of investigating, preparing or defending any such action, suit, proceeding or investigation asserted or initiated by a third party (whether or not in connection with litigation in which JCG is a party), directly or indirectly, caused by, relating to, based upon, arising out of or in connection with (a) any act or omission by JCG in connection with its acceptance of or the performance or nonperformance of its obligations under the agreement dated May 8, 1996 between JCG and the Company as it may be amended from time to time (the "Agreement"), or (b) any untrue statement or alleged untrue statement of a material fact contained in, or omissions or alleged omissions from, any memorandum or offering document prepared by the Company with respect to the Transaction (as such term is defined in the Agreement) or similar statements or omissions in or from any other information furnished by the Company to JCG or any financing source; PROVIDED, HOWEVER, such indemnity agreement shall not apply to any portion of any such loss, claim, damage, obligation, penalty, judgment, award, liability, cost, expense or disbursement to the extent it is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) to have resulted primarily and directly from the gross negligence, bad faith or willful misconduct of JCG or from any information provided by JCG. The Company also agrees that JCG shall not have any liability (whether direct or indirect, in contract or tort or otherwise) to the Company or to any person (including, without limitation, Company shareholders) claiming through the Company for or in connection with the engagement of JCG, except to the extent that any such liability that is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) to have resulted primarily and directly from JCG's gross negligence, willful misconduct or bad faith. If any action, suit, proceeding or investigation is commenced, as to which JCG proposes to demand indemnification, JCG shall notify the Company with reasonable promptness; PROVIDED, HOWEVER, that any failure by JCG to notify the Company shall not relieve the Company from its obligations hereunder unless the Company shall have been prejudiced by the failure of JCG to notify the Company and then only to the extent of such prejudice. JCG shall have the right to retain counsel of its own choice to represent JCG, and the Company shall pay the reasonable fees, expenses and disbursements of such counsel, and such counsel shall, to the extent consistent with its professional responsibilities, cooperate with the Company and any counsel designated by the Company. The Company shall be liable for any settlement of any claim against JCG made with the Company's written consent, which consent shall not be unreasonably withheld. The Company shall not, without the prior written consent of JCG, settle or compromise any claim, or permit a default or consent to the entry of any judgment in respect thereof, unless such settlement, compromise or consent includes, as an unconditional term thereof, the giving by the claimant to JCG of any unconditional release from all liability in respect of such claim. In order to provide for just and equitable contribution, if a claim for indemnification pursuant to these Indemnification Provisions is made but is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) that such indemnification may not be enforced in such case, even though the express provisions hereof provide for indemnification in such case, then the Company, on the one hand, and JCG on the other hand, shall contribute to the losses, claims, damages, obligations, penalties, judgments, awards, liabilities, costs, expenses and disbursements to which the indemnified persons may be subject in accordance with the relative benefits received by the Company, on the one hand, and JCG, on the other hand, and also the relative fault of the Company on the one hand, and JCG, on the other hand, in connection with the statements, acts or omissions which resulted in such losses, claims, damages, obligations, penalties, judgments, awards, liabilities, costs expenses and disbursements and the relevant equitable considerations shall also be considered. No person found liable for a fraudulent misrepresentation shall be entitled to contribution from any person who is not also found liable for such fraudulent misrepresentation. Notwithstanding the foregoing, JCG shall not be obligated to contribute any amount hereunder that exceeds the amount of fees previously received by JCG pursuant to the Agreement. Neither termination nor completion of the engagement of JCG referred to above shall affect these Indemnification Provisions which shall then remain operative and in full force and effect. EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON PAGES 3 THROUGH 5 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1995 SEP-30-1996 11,032 0 12,319 0 144,684 160,024 7,706 2,533 176,378 78,819 0 0 0 131 49,939 176,378 89,772 90,473 86,954 91,944 0 0 176 (1,647) 0 (1,647) 0 0 0 (1,647) (.12) (.12)
-----END PRIVACY-ENHANCED MESSAGE-----