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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-25308
OVERSEAS FILMGROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3751702
(State or other (I.R.S. Employer
jurisdiction of incorporation or organization) Identification No.)
8800 SUNSET BLVD., THIRD FLOOR, LOS ANGELES, CA 90069
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (310) 855-1199
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 $.001 per share
(title of class)
Warrants to Purchase Common Stock
(title of class)
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 disclosures 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 by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
(Cover page of Form 10-K continued on next page)
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 and directors are "affiliates" of the Registrant) as of April
21, 1998, (based on the closing sale price on such date as reported on the OTC
Bulletin Board) was $3,762,500.
The number of shares of Common Stock outstanding as of April 21, 1998 was
5,732,778.
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," "INTEND" 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) DEPEND PRIMARILY UPON ITS ACCEPTANCE BY THE PUBLIC, WHICH CANNOT
BE PREDICTED. THE COMMERCIAL SUCCESS OF A MOTION PICTURE ALSO DEPENDS UPON THE
QUALITY AND ACCEPTANCE OF OTHER COMPETING FILMS RELEASED INTO THE MARKETPLACE AT
OR NEAR THE SAME TIME, THE AVAILABILITY OF ALTERNATIVE FORMS OF ENTERTAINMENT
AND LEISURE TIME ACTIVITIES, GENERAL ECONOMIC CONDITIONS AND OTHER TANGIBLE AND
INTANGIBLE FACTORS, ALL OF WHICH CAN CHANGE AND CANNOT BE PREDICTED WITH
CERTAINTY. THEREFORE, THERE IS A SUBSTANTIAL RISK THAT SOME OR ALL OF THE
MOTION PICTURES RELEASED, DISTRIBUTED, FINANCED OR PRODUCED BY THE REGISTRANT
WILL NOT BE COMMERCIALLY SUCCESSFUL, RESULTING IN COSTS NOT BEING RECOUPED OR
ANTICIPATED PROFITS NOT BEING REALIZED. THE REGISTRANT'S RESULTS OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1997 ARE NOT NECESSARILY INDICATIVE OF THE
RESULTS THAT MAY BE EXPECTED IN FUTURE PERIODS. DUE TO QUARTERLY FLUCTUATIONS
IN THE NUMBER OF MOTION PICTURES IN WHICH THE REGISTRANT CONTROLS THE
DISTRIBUTION RIGHTS AND WHICH BECOME AVAILABLE FOR DISTRIBUTION (AND THUS, FOR
WHICH REVENUE CAN FIRST BE RECOGNIZED) AND THE NUMBER OF MOTION PICTURES
DISTRIBUTED BY THE REGISTRANT, AS WELL AS THE UNPREDICTABLE NATURE OF AUDIENCE
AND SUBDISTRIBUTOR RESPONSE TO MOTION PICTURES DISTRIBUTED BY THE REGISTRANT,
THE REGISTRANT'S REVENUES, EXPENSES AND EARNINGS FLUCTUATE SIGNIFICANTLY FROM
QUARTER TO QUARTER AND FROM YEAR TO YEAR. IN ADDITION, FOR SEVERAL REASONS,
INCLUDING (I) THE LIKELIHOOD OF CONTINUED INDUSTRY-WIDE INCREASES IN
ACQUISITION, PRODUCTION AND MARKETING COSTS AND (II) THE REGISTRANT'S INTENT,
BASED UPON ITS ONGOING STRATEGY, TO ACQUIRE RIGHTS TO OR PRODUCE FILMS WHICH
HAVE GREATER PRODUCTION VALUES (OFTEN AS A RESULT OF LARGER BUDGETS), THE
REGISTRANT'S COSTS AND EXPENSES, AND THUS THE CAPITAL REQUIRED BY THE REGISTRANT
IN ITS OPERATIONS AND THE ASSOCIATED RISKS FACED BY THE REGISTRANT MAY INCREASE
IN THE FUTURE. ADDITIONAL RISKS AND UNCERTAINTIES ARE DISCUSSED ELSEWHERE IN
APPROPRIATE SECTIONS OF THIS REPORT AND IN OTHER FILINGS MADE BY THE REGISTRANT
WITH THE SECURITIES AND EXCHANGE COMMISSION. 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.
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ITEM 1. BUSINESS
Overseas Filmgroup, Inc., a Delaware corporation, (the "Company") is an
independent film company which specializes in the acquisition and worldwide
license, sale or distribution of distribution rights to independently produced
feature films in a wide variety of genres (including action, "art-house,"
comedy, drama, foreign language, science fiction and thrillers). The Company's
executive offices are located at 8800 Sunset Boulevard, Third Floor, Los
Angeles, California 90069, and its telephone number is (310) 855-1199.
The Company was incorporated in December 1993 under the name
"Entertainment/Media Acquisition Corporation" as a Specified Purpose Acquisition
Company-Registered Trademark-* in order to acquire an operating business in the
entertainment and media industry by merger or other similar type of transaction.
From inception until the October 1996 merger hereafter described, its operations
were limited to organizational activities, completion of an initial public
offering in February 1995, and the evaluation and negotiation of possible
business combinations. On October 31, 1996, pursuant to an Agreement of Merger
dated as of July 2, 1996, as amended as of September 20, 1996, among the
Company, Overseas Filmgroup, Inc. - a privately-held Delaware corporation
("Pre-Merger Overseas"), and Ellen Dinerman Little and Robert B. Little (as
amended, the "Merger Agreement"), the Company merged with Pre-Merger Overseas
(the "Merger"), with the Company as the surviving corporation in the Merger.
Upon consummation of the Merger, the Company changed its name to "Overseas
Filmgroup, Inc.", and succeeded to the business and operations of Pre-Merger
Overseas which had been established in 1980. Unless otherwise specifically
indicated or the context otherwise requires, the term "Company," refers to the
Registrant, Overseas Filmgroup, Inc., and its wholly owned subsidiaries and
references to the operations of the Company are to the operations of Pre-Merger
Overseas through the date of the Merger and to the combined company following
the Merger. In addition, the term "EMAC" is sometimes used herein to refer to
the Registrant during the period from its inception as "Entertainment/Media
Acquisition Corporation" until the Merger.
RECENT DEVELOPMENTS
In mid-1997, in order to address an anticipated need for additional
liquidity occasioned by the disappointing worldwide performance of recent
films acquired by the Company and the maturity of various film facilities
under the Company's credit facility, the Company began discussions with the
lenders providing the Company's credit facility to make additional amounts
available under the operating facility portion of the credit facility and to
extend the commitment to lend under the credit facility. On April 14, 1998,
the Company and such lenders entered into an agreement pursuant to which they
amended the credit facility to extend the commitment to lend until April 9,
1999, subject to continued compliance by the Company with the terms of the
credit facility and establishment of the guarantee described below. The
Company and the lenders also agreed to make up to an additional $1,325,660
available under the operating portion of the Company's credit facility above
the $5,908,340 then outstanding and agreed to extend the maturity dates of
certain film facilities established under the film facilities portion of the
credit facility. However, the Company and the lenders also agreed that the
film facilities portion of the credit facility (a significant primary source
of funds for acquisition of distribution rights by the Company) will no
longer be a revolving credit line and that sums repaid by the Company cannot
be reborrowed. The Company also agreed to additional covenants and operating
restrictions, including obtaining written approval of the lenders prior to
entering into any new rights acquisitions or commitments or committing to
spend amounts in connection with distribution expenses or costs for prints
and advertising. In connection with the extension of the commitment to lend
and these changes to the credit facility, the Company's principal
stockholders and executive officers, Ellen Dinerman Little and Robert B.
Little, agreed to personally guarantee for the benefit of the lenders under
the credit facility amounts in excess of $6,000,000 outstanding under the
operating portion of the credit facility (up to a maximum guarantee amount of
$618,000) and to defer payments under the promissory note that they received
in connection with the Merger. See "Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" for additional information regarding this agreement
between the Company and the lenders which provide its credit facility.
STRATEGIC OBJECTIVES
The Company has accumulated a library of distribution rights (including
sales agency rights) in various media and markets to approximately 220
feature films. See "The Company's Film Library of Distribution Rights" below.
Most of such motion pictures have had direct negative costs between
$1,000,000 and $6,000,000. This is substantially below the average direct
negative cost of films produced by the major studios, which was approximately
$53,400,000 million in 1997. The Company's primary focus has been the
licensing of distribution rights (such as theatrical, video, pay television,
free television, satellite and other rights) to foreign sub-distributors in
the major international territories or regions. These activities accounted
for approximately 77% of the Company's total revenues in 1997. In recent
years, the Company has been increasingly active in acquiring domestic
distribution rights. The Company has engaged directly in domestic theatrical
distribution (booking motion pictures with theatrical exhibitors, arranging
for the manufacture of release prints from the film negative, and promoting
such motion pictures with advertising and publicity campaigns) through the
Company's domestic theatrical releasing division, First Look Pictures. First
Look Pictures has released such films as MRS. DALLOWAY (starring Vanessa
Redgrave, Rupert Graves, and Natascha McElhone), ANTONIA'S LINE (winner of
the 1996 Academy Award for Best Foreign Language Film), THE DESIGNATED
MOURNER (starring Mike Nichols, Miranda Richardson and Daivd De Keyser),
INFINITY
- -------------------------
* "Specified Purpose Acquisition Company" is a registered servicemark of GKN
Securities Corp.
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(directed by Matthew Broderick, starring Matthew Broderick and Patricia
Arquette), THE SECRET OF ROAN INISH (the critically acclaimed film by the
noted director, John Sayles), THE SCENT OF GREEN PAPAYA (which was nominated
for the 1994 Academy Award for Best Foreign Language Film) and PARTY GIRL
(which the Company believes was the first theatrical motion picture broadcast
over the Internet).
The Company began its operations by acting primarily as a foreign sales
agent, licensing distribution rights in markets outside the United States to
independently produced films which were fully financed and continued to be owned
by others, in exchange for a sales agency fee. In addition, the Company now
acquires from independent producers the distribution rights in a film for a
specified term in one or more territories and media and receives a distribution
fee in connection with its licensing activities. Often the Company commits to
pay an independent producer a minimum guaranteed payment (a "minimum guarantee")
at or after delivery of the completed film to the Company, ranging from
approximately $100,000 to $5,000,000 or more and representing varying portions,
including at times all or substantially all of a film's production costs. These
minimum guarantees may enable the independent producer to obtain financing for
its project and often results in the Company controlling more of the
distribution rights in the film and receiving more favorable distribution terms.
The Company has also selectively produced certain of the motion pictures
distributed by it, generally acquiring fully developed projects ready for
pre-production and contracting out pre-production and production activities.
The films distributed by the Company in 1997 generally performed
disappointingly, in part due to (i) changes in the marketplace for
independent films including the reduced demand by retail video stores and
video subdistributors for films which have not had significant (or any)
theatrical release (none of the six films released theatrically in the United
States by the Company through First Look Pictures generated more than
$211,000 in United States box office receipts and seven films first available
for distribution by the Company in 1997 had no or are expected to have no
theatrical release) (ii) the failure of films released theatrically by the
Company in the U.S. to achieve significant audience and subdistributor
acceptance, and (iii) the weakened demand for film rights in Asia due to the
region's recent financial crisis. In order to seek to improve the Company's
cash flow and address the factors which led to the disappointing performance
of the Company's films in 1997, as well as in response to the operating
limitations imposed by the recent agreement between the Company and its
commercial lenders with respect to the Company's credit facility, the Company
has been implementing changes in its operational strategies. Currently, the
Company's primary strategies are to:
- -- SEEK TO LIMIT RISK BY CONTINUING TO BALANCE THE METHODS IT USES FOR
ACQUIRING DISTRIBUTION RIGHTS. The Company is altering the frequency in
which it engages in various acquisition, distribution and financing
arrangements. The Company presently intends to:
- Reduce the number of films for which the Company provides minimum
guarantees which represent the majority of the final production
costs of a film or for which the Company otherwise finances
all or substantially all of the film's production costs.
- Act as sales agent or engage in "straight distribution" (i.e.,
licensing distribution rights to a film from the rights owner for
exploitation by the Company for a given term in a given territory or
territories and media without a minimum guarantee commitment) more
frequently than in recent years (including under "gap financing"
arrangements where a lender lends a portion of the
acquisition or production funds based upon the Company's estimated
value of unsold distribution rights).
- Limit the instances in which the Company itself produces motion
picture projects. The Company does not presently have plans to
produce any motion picture projects itself in 1998.
- Reduce the number of films First Look Pictures releases annually.
From January 1, 1997 through April 15, 1998, First Look Pictures
released seven motion pictures. First Look Pictures may release up
to approximately three additional films in 1998 assuming the
availability of funding for print and advertising costs associated
therewith. The Company currently anticipates that, in most
circumstances, it will not proceed with a First Look Pictures release
unless outside sources of funds for print and advertising costs are
available to the Company in connection with such release.
- Increasingly participate in co-financing arrangements whereby the
Company, in combination with other equity providers (including
producers, distributors in various territories, various international
governmental programs designed to incentivize film production and
other equity providers), commits to fund a portion of a particular
film's production costs. For example, ALEGRIA and ILLUMINATA, two
films the Company currently anticipates that it will distribute in
1998, are co-production arrangements with The Cirque Du Soleil,
Mainstream S.A. and Egmond Film & Television BV; and with Victor
Company of Japan (JVC) and Sogepaq S.A. and Compagnia Distribuzione
Internazionale SRL respectively.
-- MAINTAIN A COST CONSCIOUSNESS IN ITS ACQUISITION, FINANCING AND
DISTRIBUTION ACTIVITIES. The Company currently intends to:
- Consider possible additional reductions in overhead. In the last
fiscal year, the Company reduced the number of its employees by 20%.
- Further develop relationships with major studios and expand the
Company's executive producing role in connection with motion
pictures produced and distributed by other companies. For example,
in May 1997, the Company concluded an executive producing arrangement
with The Walt Disney Company with respect to a project optioned by
the Company entitled "EMILY."
- Emphasize films with more recognizable cast, directors and
producers and greater production values (often through offering
greater creative opportunity to talent than major studios offer or
as a result of larger budgets) and which may accordingly have
broader appeal in the competitive theatrical market while
attempting to limit the Company's exposure with respect to
production and/or acquisition costs through "gap financing" and
co-production arrangements.
- Seek to develop relationships with emerging and established talent
and to maintain relationships with independent producers with
reputations for producing high quality films while also controlling
costs.
- EXPLORE OBTAINING ADDITIONAL SOURCES OF CAPITAL. The Company is
currently exploring obtaining additional sources of capital
(including equity and debt financing). There can be no assurance,
however, that such additional capital will be available or available on
terms advantageous to the Company.
For additional information on these operational strategies, See "Motion
Picture Distribution by the Company," and "Acquisition of Rights by the
Company, Production and Financing" below and "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of
Operations." No assurances can be given that any or all of such strategies
will be fully or partially realized, as their successful implementation
depends upon, among other things, the ability of management of the
Company to implement such strategies and the availability of
sufficient capital.
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THE MOTION PICTURE INDUSTRY
The motion picture industry consists of two principal activities which
are described in greater detail below: production, which involves the
development, financing and production of motion pictures; and distribution,
which involves the promotion and exploitation of feature-length motion
pictures in a variety of media, including theatrical exhibition, home video,
television and other ancillary markets, both domestically and
internationally. The United States motion picture industry is dominated by
the "major studios," including The Walt Disney Company, Paramount Pictures
Corporation, Warner Brothers Inc., Universal Pictures, Twentieth Century Fox,
Columbia Pictures, and MGM/UA. The major studios, which have historically
produced and distributed the vast majority of high grossing theatrical motion
pictures released annually in the United States, are typically large
diversified corporations that have strong relationships with creative talent,
television broadcasters and channels, theatrical exhibitors and others
involved in the entertainment industry. The major studios also typically have
extensive national or worldwide distribution organizations and own extensive
motion picture libraries. Motion picture libraries, consisting of motion
picture copyrights and distribution rights owned or controlled by a film
company, can be valuable assets capable of generating revenues from worldwide
commercial exploitation in existing media and markets, and potentially in
future media and markets resulting from new technologies and applications.
The major studios also may own or are affiliated with companies that own
other entertainment related assets such as music and merchandising operations
and theme parks. The major studios' motion picture libraries and other
entertainment assets may provide a stable source of earnings which can offset
the variations in the financial performance of their new motion picture
releases and other aspects of their motion picture operations.
During the past 15 years, "independent" production and distribution
companies (many with financial and other ties to the major studios) have
played an important role in the production and distribution of motion
pictures for the worldwide feature film market, including Miramax Films
Corporation (GOOD WILL HUNTING, SCREAM, SLING BLADE, THE ENGLISH PATIENT,
PULP FICTION, IL POSTINO (the Postman) and LIKE WATER FOR CHOCOLATE), now
affiliated with The Walt Disney Company; New Line Cinema Corporation/Fine
Line Features (LOST IN SPACE, SHINE, THE MASK, TEENAGE MUTANT NINJA TURTLES
and the NIGHTMARE ON ELM STREET series), now affiliated with Time Warner
Entertainment Company, L.P.; October Films (SECRETS & LIES, BREAKING THE
WAVES) now affiliated with Universal Pictures; and Orion Pictures (THE
SILENCE OF THE LAMBS), now affiliated with MGM/UA. As a result of
consolidation in the domestic motion picture industry, a number of previously
independent producers and distributors have been acquired or are otherwise
affiliated with major studios. However, there are also a large number of
other production and distribution companies that produce or distribute motion
pictures which have not been acquired or become affiliated with the major
studios. In contrast to the major studios, the independent production and
distribution companies generally produce or distribute fewer motion pictures
and do not own production studios, national or worldwide distribution
organizations, or associated businesses or extensive film libraries which can
generate gross revenues sufficient to offset overhead, service debt or
generate significant cash flow.
The motion picture industry is a world-wide industry. In addition to the
production and distribution of motion pictures in the United States, motion
picture distributors generate substantial revenues from the exploitation of
motion pictures internationally. In recent years, there has been a substantial
increase in the amount of filmed entertainment revenue generated by U.S. motion
picture distributors from foreign sources. From 1989 to 1996, international
revenues of motion picture distributors from filmed entertainment grew from
approximately $4.7 billion in 1989 to approximately $8.7 billion in 1996. This
growth has been due to a number of factors, including, among other things, the
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general worldwide acceptance of and demand for motion pictures produced in the
United States, the privatization of many foreign television industries, growth
in the number of foreign households with videocassette players, and growth in
the number of foreign theater screens.
Many countries and territories, such as Australia, Canada, China,
France, Germany, Hong Kong, India, Italy, Russia, Japan, Spain, and the
United Kingdom have substantial indigenous film industries. In a number of
these countries, as in the United States, the film (and in some cases the
entertainment) industry is dominated by a small number of companies, often
large, diversified companies with production and distribution operations.
However, like in the United States, in most of such countries there are also
smaller, independent, motion picture production and distribution companies.
Foreign distribution companies not only distribute motion pictures produced
in their countries or regions but also films licensed or sub-licensed from
United States production companies and distributors. In addition, film
companies in many foreign countries produce films not only for local
distribution, but also for export to other countries, including the United
States. While some foreign language films, such as LIKE WATER FOR CHOCOLATE,
IL POSTINO (the Postman) and ANTONIA'S LINE, and foreign English-language
films, such as WINGS OF THE DOVE, THE ENGLISH PATIENT, SHINE, FOUR WEDDINGS
AND A FUNERAL, THE CRYING GAME and CROCODILE DUNDEE appeal to a wide U.S.
audience, most foreign language films distributed in the United States are
released on a limited basis as such films draw a specialized audience for
which the appeal of such films has decreased recently.
MOTION PICTURE PRODUCTION
The production of a motion picture begins with the screenplay adaptation of
a popular novel or other literary work acquired by the producer or the
development of an original screenplay having its genesis in a story line or
scenario conceived by a writer and acquired by the producer. In the development
phase, the producer typically seeks production financing and tentative
commitments from a director, the principal cast members and other creative
personnel. A proposed production schedule and budget are also prepared during
this phase. Upon completing the screenplay and arranging financing commitments,
pre-production of the motion picture begins. In this phase, the producer engages
creative personnel to the extent not previously committed; finalizes the filming
schedule and production budget; obtains insurance and secures completion
guaranties, if necessary; establishes filming locations and secures any
necessary studio facilities and stages; and prepares for the start of actual
filming. Principal photography (the actual filming of the screenplay) generally
extends from eight to sixteen weeks for a film produced by a major studio and
often for a significantly shorter period (sometimes as little as four to eight
weeks) for low budget films and films produced by independent production
companies, depending in each case upon such factors as budget, location, weather
and complications inherent in the screenplay. Following completion of principal
photography (the post-production phase), the motion picture is edited, opticals,
dialogue, music and any special effects are added, and voice, effects and music
sound tracks and pictures are synchronized. This results in the production of a
negative from which release prints of the motion picture are made.
Production costs consist primarily of acquiring or developing the
screenplay, compensation of creative and other production personnel, film studio
and location rentals, equipment rentals, film stock and other costs incurred in
principal photography, and post-production costs, including the creation of
special effects and music. Distribution expenses, which consist primarily of the
costs of advertising and preparing release prints, are not included in direct
production costs. The major studios generally fund production costs from cash
flow generated by motion pictures and related activities or, in some cases, from
unrelated businesses or through off-balance sheet methods. Substantial overhead
costs, consisting largely of salaries and related costs of the production staff
and physical facilities maintained by the major studios, also must
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be funded. Independent production companies generally avoid incurring
overhead costs as substantial as those incurred by the major studios by
hiring creative and other production personnel and retaining the other
elements required for pre-production, principal photography and
post-production activities on a picture-by-picture basis. As a result, these
companies do not own sound stages and related production facilities, and,
accordingly, do not have the fixed payroll, general administrative and other
expenses resulting from ownership and operation of a studio. Independent
production companies also may finance their production activities on a
picture-by-picture basis. Sources of funds for independent production
companies include bank loans, "pre-licensing" of distribution rights, foreign
government subsidies, equity offerings and joint ventures. Independent
production companies generally attempt to obtain all or a substantial portion
of their financing of a motion picture prior to commencement of principal
photography, at which point substantial production costs begin to be incurred
and require payment.
As part of obtaining financing for its films, the independent production
company is often required by its lenders and distributors who advance production
funds to obtain a completion bond or production completion insurance from an
acceptable completion guarantor which names the lenders and applicable
distributors as beneficiaries. The guarantor assures the completion of the
particular motion picture on a certain date, and if the motion picture cannot be
completed for the agreed upon budgeted cost, the completion guarantor is
obligated to pay the additional costs necessary to complete the picture by the
agreed upon delivery date. If the completion guarantor fails to timely complete
and deliver such motion picture on or before the agreed upon delivery date, the
completion guarantor is required to pay the lenders and distributor, if
applicable, an amount equal to the aggregate amount the lenders and distributor
have loaned or advanced to the independent producer.
In connection with the production and distribution of a motion picture,
major studios and independent production companies generally grant contractual
rights to actors, directors, screenwriters, owners of rights and other creative
and financial contributors to share in net revenues from a particular motion
picture. Except for the most sought-after talent, these third-party
participations are generally payable after all distribution fees, marketing
expenses, direct production costs and financing costs are recouped in full.
Major studios and independent film companies in the United States typically
incur obligations to pay residuals to various guilds and unions including the
Screen Actors Guild, the Directors Guild of America and the Writers Guild of
America. Residuals are payments required to be made by the motion picture
producer to the various guilds and unions (on a picture-by-picture basis)
arising from the exploitation of a motion picture in markets other than the
primary intended market for such picture. Residuals are calculated as a
percentage of the gross revenues derived from the exploitation of the picture in
these ancillary markets. The guilds and unions typically obtain a security
interest in all rights of the producer in the motion picture being exploited to
ensure satisfaction of the residuals obligation. This security interest is
usually subordinate to the security interest of the lenders financing the
production cost of the motion picture and the completion bond company
guaranteeing completion of the motion picture. Under a producer's agreement with
the guilds and unions, the producer of a motion picture may transfer the
obligation to pay the residuals to a distributor if the distributor assumes the
obligation to make the residual payment. If the distributor does not assume
those obligations, the producer is obligated to pay those residuals.
MOTION PICTURE DISTRIBUTION
GENERAL. Distribution of a motion picture involves domestic and
international licensing of the picture for (a) theatrical exhibition, (b)
videocassettes, laser discs and digital video discs, (c) presentation
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on television, including pay-per-view, basic and premium cable, network,
syndication, or satellite, (d) marketing of the other rights in the picture and
underlying literary property, which may include books, CD-ROM, merchandising and
soundtracks, and (e) non-theatrical exhibition, which includes airlines, hotels
and armed forces facilities. Although releases by the major studios typically
are licensed and fully exploited in all of the foregoing media, often films
produced or distributed by independent film companies are not exploited in all
such media. For example, certain films may not receive theatrical exhibition in
the United States or various other territories and may instead go straight to
home video release or instead first "premiere" or otherwise be exploited on a
pay television service (in certain limited circumstances followed by a
theatrical release).
Production companies with distribution divisions, such as the major
studios, typically distribute their motion pictures themselves. Production
companies without distribution divisions may retain the services of sales agents
or distributors to exploit the motion pictures produced by them in various media
and territories, or in all media and territories. Distribution companies may
directly exploit distribution rights licensed to, or otherwise acquired by them,
for example, by booking motion pictures with theatrical exhibitors or selling
videocassettes to video retailers. Alternatively, they may grant sub-licenses to
domestic or foreign sub-distributors to exploit completed motion pictures.
ACQUISITION OF DISTRIBUTION RIGHTS. A sales agent does not generally
acquire distribution rights from the producer or other owner of rights in the
motion picture, but instead acts as an agent on behalf of the producer or
rights owner to license distribution rights to such motion picture to
distributors on behalf of the producer or rights owner in exchange for a
sales agency fee, typically computed as a percentage of gross revenues from
licenses obtained by the sales agent. A distributor generally licenses and
takes a grant of distribution rights from the producer or other rights owner
of the motion picture for a specified term in a particular territory or
territories and media, generally in exchange for a distribution fee
calculated as a percentage of gross revenues generated by exploitation of the
motion picture by the distributor. The distributor often agrees to pay the
producer of the motion picture a certain advance or minimum guarantee upon
the delivery of the completed motion picture, which amount is to be recouped
by the distributor out of revenues generated from the exploitation of the
motion picture in particular media or territories. In general, after
receiving its ongoing distribution fee and recouping the advance or minimum
guarantee plus its distribution costs, the distributor pays the remainder of
revenues in excess of an ongoing distribution fee to the producer of such
motion picture. Obtaining license agreements with a distributor or
distributors prior to completion of a motion picture and which provide for
payment of a minimum guarantee (often referred to as the "pre-licensing" or
"pre-selling" of film rights), may enable the producer to obtain financing
for its project by using the contractual commitment of the distributor to pay
the advance or minimum guarantee as collateral to borrow production funding.
Although pre-sales had provided a means for financing film production in the
past, no assurance can be given that certain territories and/or regions will
continue to acquire films on such basis. The producer may also at times be
able to acquire additional production funds through "gap financing", whereby
a lender loans a portion of the production funds based on a distributor's
estimate of the value of world distribution rights. Although "gap financing"
is currently being made available by multiple lenders, there can be no
assurance such lenders will continue to make funds available on this basis.
Recently the Company has had indications that certain gap financiers may be
altering the frequency and manner of providing such funds. In some
circumstances, the distributor is entitled to recoup any unrecouped costs and
advances from a film licensed to such distributor from the revenues from
another film or films also licensed to the distributor, commonly known as
"cross collateralizing."
In addition to obtaining distribution rights in a motion picture for a
limited duration, a distributor may also acquire all or a portion of the
copyright in such motion picture or license certain distribution rights in
perpetuity. Both major studios and independent film companies often acquire
motion pictures for distribution through a customary industry arrangement known
as a "negative pickup," under which the studio or independent film company
agrees to pay a specified minimum guaranteed amount to an independent production
company in exchange for all rights to the film upon completion of production and
delivery of the film. The independent production company normally finances
production of the motion picture pursuant to financing arrangements with banks
and other lenders in which the lender receives an assignment of the production
company's right to payment of the minimum guarantee and is granted a
7
security interest in the film and in the production company's rights under its
arrangement with the studio or independent film company. When the major studio
or independent film company "picks up" the completed motion picture, it pays the
minimum guarantee or assumes the production financing indebtedness incurred by
the production company in connection with the film. In addition, the independent
production company is paid a production fee and generally is granted a
participation in net revenues from distribution of the motion picture.
THE DISTRIBUTION CYCLE. Concurrently with their release in the United
States, motion pictures generally are released in Canada and may also be
released in one or more other international markets. As a general matter, a
motion picture which is released theatrically is typically available for
distribution in other media during its initial distribution cycle as follows:
MARKETPLACE (MEDIA) NUMBER OF MONTHS FOLLOWING INITIAL DOMESTIC
THEATRICAL RELEASE
Domestic theatrical --
International theatrical --
Domestic home video (initial release) 4-6 months
Domestic pay-per-view 6-9 months
International video (initial release) 6-12 months
Domestic pay television 9-10 months
International television (pay or free) 18-24 months
Domestic free television* 30-33 months
- ------------------------------------------
* Includes network, barter syndication, syndication and basic cable.
Films often remain in distribution for varying periods of time. For
example, motion pictures which are released theatrically can play in theaters
for several weeks following their initial release (for major studios) or, at
times, including for instance in the case of certain successful "art-house"
films which are released on a limited basis, for several months. Unsuccessful
films, on the other hand, may play in theaters for only a short period of time.
Once released on videocassette, a motion picture may remain available on
videocassette for many years. Similarly a motion picture can be licensed to
various forms of television for many years after its first release. The release
periods set forth above represent standard "holdback periods". A holdback
period with respect to a certain media in which the motion picture is being
released represents a stipulated period of time during which release of the
motion picture in other media is prevented to allow the motion picture to
maximize its value in the media in which it is currently being released.
Holdback periods are often specifically negotiated with various distributors on
a media-by-media basis; however the periods set forth above represent the
Company's estimate of typical current holdback periods in the motion picture
industry.
In general, if a film is not released theatrically in the United States and
instead is released straight to domestic home video, television exploitation
generally does not commence until four to eight months after such video release.
Thereafter, the same general release patterns indicated in the table above
typically apply. If a film "premieres" on United States pay television (which
generally means that no other
8
distribution of the film in the United States has occurred), the pay
television service typically is licensed a four to six week exclusive airing
period. The license will generally provide for limited airings (defined as
five to eight "exhibition days" with multiple airings permitted on each
"exhibition day"). The provisions of such license also usually provide for
the pay television service to receive subsequent airing periods following a
period in which the film can be released on video (or sometimes even
theatrically) and a period when the film may be broadcast on free television.
A substantial portion of a film's ultimate revenues are generated in a
film's initial distribution cycle (generally the first five years after the
film's initial domestic release), which typically includes theatrical, video,
and pay and free television. Commercially successful motion pictures,
however, may continue to generate revenues after the film's initial
distribution cycle from the relicensing of distribution rights in certain
media, including television and home video, and from the licensing of
distribution rights with respect to new media and technologies and in
emerging markets. Although there has been a substantial increase over the
past fifteen years in the revenues generated from the licensing of rights in
ancillary (other than domestic theatrical) media, such as home video, cable
and pay-per-view, the theatrical success of a motion picture remains a
significant factor in generating revenues in foreign markets and in other
media such as television and videocassettes. For example, retail video stores
have been increasingly purchasing fewer copies of videocassettes of motion
pictures which have not been theatrically released, and purchasing more
copies of major studio theatrical hits. Industry-wide purchases of
homevideos in 1997 decreased by 10% over 1996 while homevideo rentals in 1997
decreased by 3% as compared to 1996.
THEATRICAL. The theatrical distribution of a motion picture, whether in the
United States or internationally, involves the licensing and booking of the
motion picture to theatrical exhibitors (movie theatres), the promotion of the
picture through advertising and publicity campaigns and the manufacture of
release prints from the film negative. Expenditures on these activities,
particularly on promotion and advertising, are often substantial and may have a
significant impact on the ultimate success of the film's theatrical release. In
addition, such expenditures can vary significantly, depending upon the markets
and regions where the film is distributed, the media used to promote the film
(newspaper, television and radio), the number of screens on which the motion
picture is to be exhibited and the ability to exhibit motion pictures during
peak exhibition seasons. With a release by a major studio, the vast majority of
these costs (primarily advertising costs) are incurred prior to the first
weekend of the film's domestic theatrical release, so there is not necessarily a
correlation between these costs and the film's ultimate box office performance.
In addition, the ability to distribute a picture during peak exhibition seasons,
including the summer months and the Christmas holidays, and in the most popular
theaters may affect the theatrical success of a picture. Films distributed
theatrically by an independent film company are sometimes released on a more
limited basis which in some circumstances allows the distributor to defer
certain marketing costs until it is able to assess the initial public acceptance
of the film.
While arrangements for the exhibition of a film vary greatly, there are
certain economic relationships generally applicable to theatrical distribution.
Theater owners (the "exhibitors") retain a portion of the admissions paid at the
box office ("gross box office receipts"). The share of the gross box office
receipts retained by an exhibitor generally includes a fixed amount per week (in
part to cover overhead), plus a percentage of receipts that generally escalates
over time. Although these percentages vary widely, in the Company's general
experience, an exhibitor's share of a particular film's revenues will generally
be approximately 60% to 65% of gross box office receipts. The balance ("gross
film rentals") is remitted to the distributor. The distributor then retains a
distribution fee (typically 30-35%) from the gross film rentals and recoups the
costs incurred in distributing the film, which consist primarily of the cost of
marketing and advertising and the cost of release prints for exhibition. The
balance of gross film rentals, after deducting distribution fees and
distribution costs recouped by the distributors ("net film
9
rentals"), is then applied against the recoupment of any advance paid for the
distribution rights (with interest thereon) and the balance is remitted to the
producer or other rights owner of the film.
HOME VIDEO. A motion picture released theatrically typically becomes
available for videocassette distribution within four to six months after its
initial domestic theatrical release. As indicated above, certain films are
not initially released theatrically but may instead be initially released to
home video. Given the increasing preference of retail video stores for
successful theatrical releases, it has become increasingly difficult to
secure the initial release of a film directly to home video, and the economic
opportunity for such films where such a release is obtained has greatly
diminished.
Home video distribution consists of the promotion and sale of
videocassettes to local, regional and national video retailers which rent or
sell videocassettes to consumers primarily for home viewing. Most films are
initially made available in videocassette form at a wholesale price of
approximately $50 to $75 per videocassette and are sold at that price
primarily to wholesalers who then sell to video rental stores at a price of
approximately $75 to $105 per videocassette, which rent the cassettes to
consumers. Following the initial marketing period, selected films may be
remarketed at a wholesale price of $10 to $15 or less for sale to consumers.
These "sell-through" arrangements are used most often with films that will
appeal to a broad marketplace or to children. A few major releases with broad
appeal may be initially offered by a film company at a price designed for
sell-through rather than rental when it is believed that the ownership demand
by consumers will result in a sufficient level of sales to justify the
reduced margin on each cassette sold. Typically, owners of films do not share
in rental income; however, video distributors are beginning to enter into
revenue sharing arrangements with certain retail stores in some
circumstances. Under such arrangements, videocassettes are sold at a reduced
price to video rental stores (usually $8 to $10 per videocassette) and a
percentage of the rental revenue is then shared with the owners (or
licensors) of the films. Home video arrangements in international territories
are similar to those in domestic territories except that the wholesale prices
may differ.
TELEVISION. Television rights for films initially released theatrically
are, if such films have broad appeal, generally licensed first to pay-per-view
for an exhibition period within six to nine months following initial domestic
theatrical release, then to pay television approximately 12 to 15 months after
initial domestic theatrical release, thereafter in certain cases to network
television for an exhibition period, and then to pay television again. These
films are then syndicated to either independent stations or basic cable outlets.
Pay-per-view allows subscribers to pay for individual programs. Pay television
allows cable television subscribers to view such services as HBO/Cinemax,
Showtime/The Movie Channel, Encore Media Services or others offered by their
cable system operators for a monthly subscription fee. Pay-per-view and pay
television is now delivered not only by cable, but also by satellite
transmission, and films are generally licensed in both such media. Certain films
which are not initially released in the domestic theatrical market may
"premiere" instead on pay television followed in some limited circumstances by
theatrical release. Groups of motion pictures are often packaged and licensed as
a group for exhibition on television over a period of time and, therefore,
revenues from these television licensing "packages" may be received over a
period that extends beyond five years from the initial domestic theatrical
release of a particular film. Motion pictures are also licensed and "packaged"
by producers and distributors for television broadcast in international markets
by government owned or privately owned television studios and networks. Pay
television is less developed outside the United States, but is experiencing
significant international growth. The prominent foreign pay television services
include Canal+, Premiere, STAR TV, British Sky Broadcasting and the
international operations of several U.S. cable services including HBO, the
Disney Channel and Turner Broadcasting.
NON-THEATRICAL AND OTHER RIGHTS. Films may be licensed for use by airlines,
schools, public libraries, community groups, the military, correctional
facilities, ships at sea and others. Music contained in a film may be licensed
for sound recording, public performance and sheet music publication. Rights in
10
motion pictures may be licensed to merchandisers for the manufacture of products
such as toys, T-shirts, posters and other merchandise. Rights may also be
licensed to create novels from a screenplay and to generate other related book
publications, as well as interactive games on such platforms as CD-ROM, CD-I or
other proprietary platforms.
MOTION PICTURE DISTRIBUTION BY THE COMPANY
INTERNATIONAL DISTRIBUTION. Management of the Company has considerable
expertise in international distribution. Ellen Dinerman Little and Robert B.
Little, the senior executive officers of the Company and founders of its
operations, have substantial experience in the business of licensing motion
pictures for distribution outside the United States and have been active in
international motion picture sales since 1975. Over the past 23 years, they have
developed, through their foreign sales activities, relationships with
distributors in most significant territories. In addition, the Company is a
founding member of the American Film Marketing Association which sponsors the
American Film Market, one of the three major annual international film markets
attended by significant international and regional distributors. The Company
generally participates annually with a sales office at all three major film
markets (the American Film Market, the Cannes Film Festival and MIFED), as well
as the major television (NATPE, MIP, MIPCOM) and video (VSDA) markets. The
Company, may also, from time to time, engage independent representatives to
assist the Company in acquiring and/or licensing motion picture rights.
With respect to international territories, the Company licenses
distribution rights in various media (such as theatrical, video, pay
television, free television, satellite and other rights) to foreign
sub-distributors on either an individual rights basis or grouped in various
combinations of rights (which sometimes includes rights in all media). These
rights are licensed by the Company to numerous sub-distributors in
international territories or regions either on a picture-by-picture basis or,
in certain circumstances, with respect to a number of motion pictures
pursuant to output arrangements. Currently, the most important international
territories for the Company are Australia, the Benelux countries, Brazil,
Canada, France, Germany, Italy, Japan, Scandinavia, Spain and the United
Kingdom. South Korea has also been an important territory to the Company in
the past; however, the economic crisis in Asia has resulted in significantly
decreased demand in Korea (as well as other Southeast Asian territories)
resulting in fewer sales and licensing transactions with respect to those
territories than in recent years and, significantly less advantageous terms
to the Company when deals are concluded, compared to recent years. As a
result the Company is generally unable to depend on such Southeast Asian
territories (especially South Korea) for any significant pre-sales (or other
collateral value) for use in arranging financing for production of motion
pictures. In addition certain contracts the Company had with subdistributors
for these territories have been re-negotiated or cancelled. See Note 11 of
Notes to the Company's Consolidated Financial Statements for certain
geographic information regarding the Company's foreign distribution
activities.
The terms of the Company's license agreements with foreign sub-distributors
vary depending upon the territory and media involved and whether the agreement
relates to a single motion picture or multiple motion pictures. Most of the
Company's license agreements provide that the Company will receive a minimum
guarantee from the foreign sub-distributor with all or a majority of such
minimum guarantee paid prior to, or upon delivery of, the film to the
sub-distributor for release in the particular territory. The remainder of any
unpaid minimum guarantee is generally payable at specified intervals after
delivery of the film to the sub-distributor. The minimum guarantee is recouped
by the sub-distributor out of the revenues generated from exploitation of the
picture in such territory. The foreign sub-distributor retains a negotiated
distribution fee (generally measured as a percentage of the gross revenues
generated from its distribution of the motion picture), recoups its distribution
expenses and the minimum guarantee and ultimately (after recoupment by the
sub-distributor of the minimum guarantee and recovery of its
11
distribution expenses) remits to the Company the remainder of any receipts in
excess of the distributor's ongoing distribution fee. The Company must rely on
the foreign sub-distributor's ability to successfully exploit the film in order
to receive any proceeds in excess of the minimum guarantee.
In certain situations, the Company does not receive a minimum guarantee
from the foreign sub-distributor and instead negotiates terms which usually
result, in effect, in an allocation of gross revenues between the
sub-distributor and the Company. Typically the terms of such an arrangement
provide for the sub-distributor to retain an ongoing distribution fee
(calculated as a percentage of gross receipts of the sub-distributor in the
territory), recoup its expenses and pay remaining receipts in excess of the
ongoing distribution fee to the Company. Alternatively, such as often with
respect to video rights, the terms may provide for a royalty to be paid to the
Company calculated as a percentage of the gross receipts of the sub-distributor
from exploitation of the video rights (without deduction for the
sub-distributor's distribution expenses).
At times, the Company enters into output arrangements with local foreign
distributors whereby the foreign sub-distributor receives the right,
typically for a specified period and/or specified number of motion pictures,
to distribute in a particular territory, in designated media, motion pictures
released by the Company. In some circumstances, a minimum guarantee is paid
by the foreign sub-distributor to the Company; generally on a
picture-by-picture basis with each minimum guarantee having been either
pre-negotiated or computed as a stipulated percentage of the production cost
or acquisition cost of each picture. The Company is currently a party to an
output arrangement with Polygram Pictures Limited. Under such arrangement,
Polygram Pictures Limited receives the right to distribute the Company's
motion pictures in all media in Australia and New Zealand for a twelve year
term and, in certain circumstances, is obligated to pay a minimum guarantee
for a particular picture. The Company's previous output arrangements with
respect to the United Kingdom and Ireland, South Africa and certain adjoining
territories, Canada, and Belgium, the Netherlands, Luxembourg and certain
ex-colonies of Belgium and the Netherlands, have expired. The Company is
currently exploring obtaining output arrangements with respect to certain of
these territories, although there can be no assurance that the Company will
obtain such arrangements or that such arrangements will be on terms as
advantageous as the prior arrangements. If output arrangements are not
obtained for such territories, the Company intends to seek agreements with
respect to such territories on a film-by-film basis. The Company enters into
output arrangements with foreign sub-distributors which the Company believes
have the ability to make the recurring payments. Nevertheless, in certain
instances foreign sub-distributors encounter financial difficulties that may
preclude timely payment, and as a result the Company may be forced to
terminate or renegotiate output agreements. See also "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Exchange Rate Considerations" for certain additional considerations regarding
the Company's international distribution activities.
DOMESTIC DISTRIBUTION. In addition to obtaining foreign distribution
rights, the Company has in recent years been increasingly active in acquiring
domestic distribution rights. During 1997, various distribution rights to
approximately sixteen films, including various domestic distribution rights
in thirteen films, became available for the first time to the Company for
licensing or distribution. The Company exploits its domestic distribution
rights in a variety of ways. In 1993, the Company's domestic theatrical
releasing operation, First Look Pictures, was established. Not all of the
films distributed by the Company, however, receive domestic theatrical
release by First Look Pictures or otherwise. Some films are licensed by the
Company to domestic sub-distributors for release initially on video or, in
certain circumstances, the Company licenses initially to the pay television
services for "premiere" on pay television (cable and/or satellite). Of the
thirteen films which first became available to the Company in 1997 for
licensing or distribution and in which the Company controls various domestic
distribution rights, eight were (or are currently intended to be) released
theatrically by First Look Pictures and five were (or are intended to be)
released directly to video.
12
The Company's previous domestic video output arrangement with BMG Video
has expired, however, three films the Company has released (including MRS.
DALLOWAY) or currently anticipates releasing will be distributed on video in
the United States and certain related territories by BMG Video under the
prior arrangement with BMG Video. In addition, BMG Video's domestic video
distribution rights to films released by it under such arrangement
(approximately ten films through April 15, 1998) continue for a five year
period following initial video release. The Company is currently licensing
domestic video rights to films not covered by the BMG Video output
arrangement on a film-by-film basis or in small groupings of films to various
subdistributors, including BMG Video, Fox-Lorber Associates and Unapix
Entertainment, Inc. Although the Company has explored (and may explore in the
future) the possibility of obtaining a new domestic video output arrangement,
given the recent changes in the market for domestic video distribution rights
(including the decreased demand for films which have not achieved significant
theatrical success), the Company believes it unlikely that it can obtain a
multi-picture output arrangement with a domestic video subdistributor which
would provide for significant minimum guarantees to be paid to the Company.
As part of the strategic changes in its operations, the Company is
seeking to expand its sales and licensing of television distribution rights
and, in connection therewith, has recently hired an additional sales person
to focus on exploiting the Company's library of motion picture distribution
rights in television, as well as newly acquired distribution rights. The
Company licenses distribution rights directly to pay television services
including HBO, Showtime and Encore, as well as smaller services, including
pay-per-view services. Although the Company has not engaged in significant
licensing or syndication of domestic free television rights except as part of
a license of rights in multiple media, it controls these rights to a
significant portion of the films in its library.
In some cases, the Company will license the right to distribute a film
domestically in multiple media to a major studio, a division of a major studio,
or an independent distributor. Although the terms of such licenses vary,
typically the Company will be paid a minimum guarantee. The sub-distributor then
retains a distribution fee (measured as a percentage of the gross receipts
received by the sub-distributor from exploitation of the film), recoups its
distribution costs and the advance paid to the Company, and ultimately remits to
the Company the remainder of any receipts in excess of an ongoing distribution
fee.
The Company does not always receive a minimum guarantee from the
licensing of distribution rights to foreign and domestic sub-distributors,
thus increasing the Company's reliance on the actual financial performance of
the film being distributed. In some circumstances, whether the Company
receives a minimum guarantee depends upon the media. For example, the
Company is increasingly (particularly with respect to motion pictures which
have not been theatrically released) entering into video distribution
arrangements with sub-distributors where no minimum guarantee is paid to the
Company or where the minimum guarantee paid to the Company is significantly
smaller than those paid to the Company for similar films in the recent past.
In addition, even if the Company does obtain minimum guarantees from its
sub-distributors, such minimum guarantees do not assure the profitability of
the Company's motion pictures or the Company's operations. Additional
revenues may be necessary from distribution of a motion picture in order to
enable the Company to recoup any investment in such motion picture in excess
of the aggregate minimum guarantees obtained from such sub-distributors, pay
for distribution costs, pay for ongoing acquisition and development of other
motion pictures by the Company and cover general overhead. While the
pre-licensing of distribution rights to sub-distributors in exchange for
minimum guarantees may reduce some of the risk to the Company from
unsuccessful films, it may also result in the Company receiving lower
revenues with respect to highly successful films than if such licensing of
distribution rights were made upon different terms that, for example, might
have provided lower minimum guarantees to the Company but also provided a
lower distribution fee (i.e., a lower percentage of gross revenues) to the
sub-distributor.
13
FIRST LOOK PICTURES. The Company, from its Los Angeles offices, has
directly distributed some of the motion pictures for which it controls
domestic rights to theaters throughout the United States under the name First
Look Pictures. Through April 15, 1998, eighteen films have been released
through First Look Pictures (including six in 1997). Although some of First
Look Pictures' future releases may appeal to a wide audience, many of the
eighteen First Look Pictures releases to date have been specialized motion
pictures generally characterized by underlying literary and artistic elements
intended to appeal primarily to sophisticated audiences including foreign
language films and so called "art-house" films.
Management of the Company believes that the Company can benefit in
several ways by theatrically distributing films in the United States directly
through First Look Pictures. The domestic theatrical success of a motion
picture can be a significant factor in generating revenues from distribution
of the motion picture in ancillary media and foreign markets. For example,
retail video stores have been increasingly purchasing significantly fewer
copies of videocassettes of motion pictures that have not been theatrically
released. In addition, the Company believes it is generally able to obtain
more favorable distribution terms in its agreements with foreign
sub-distributors and domestic sub-distributors in other media (for example,
pay television) with respect to motion pictures that have been theatrically
released in the United States. Management of the Company also believes that,
in some cases, its First Look Pictures operations enable the Company to
achieve domestic theatrical release for films that might not otherwise be
released in U.S. theaters. In addition, management of the Company believes
that its ability to release a film theatrically in the U.S. enables the
Company to attract more recognizable talent, higher profile producers and
more promising motion picture projects to the Company generally (for both
domestic and foreign distribution) and that by theatrically releasing films
itself in the United States, the Company can retain a significantly greater
share of the revenue from domestic media in the event of a highly successful
theatrical release.
Despite the significant potential advantages to distributing motion
pictures directly in the domestic theatrical market, given the disappointing
results of the six 1997 First Look Pictures releases (none of which generated
more than $211,000 in domestic box office receipts), the increased
industry-wide cost of prints and advertising, the restrictions imposed by the
recent changes to the Company's credit facility (which do not permit
borrowing under the credit facility for prints and advertising costs and
which require the consent of the Company's lenders before print and
advertising commitments can be made), and the desire of the Company to
improve cash flows, the Company currently intends to reduce the number of
First Look Pictures films released annually as part of the changes in its
operational strategies. The Company currently anticipates that, in most
circumstances, it will not proceed with a First Look Pictures release unless
outside sources of funds for print and advertising costs are available to the
Company in connection with such release. Assuming such funds become available
to the Company, the Company presently anticipates a total of three 1998 First
Look Picture releases compared to the six in 1997. As described in "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," the funds for the print and
advertising costs of First Look Pictures' one 1998 release to date (through
April 15, 1998), "MRS. DALLOWAY", were provided by pre-selling United States
video rights and a loan from the Company's principal stockholders, Ellen
Dinerman Little and Robert B. Little. See Item 13, "Certain Relationships and
Related Transactions" below. The Company is currently in discussions with
various third parties to obtain other possible sources of funds for print and
advertising expenses, however, there can be no assurance that any such
sources will be available to the Company.
14
Films distributed theatrically in the United States by First Look Pictures
have been typically released on a limited basis (initially less than 100
screens) and in selected cities, expanding to new cities or regions based upon
the performance of the film. In some circumstances, films are released in new
cities as prints become available from cities where the engagement has closed,
reducing the number of prints needed and the aggregate cost of such prints. In
select circumstances, the Company may release appropriate films with more mass
market appeal on a wide release basis either through First Look Pictures or,
more likely, by licensing such film to a domestic distributor with more
significant financial and distribution resources.
The cost to First Look Pictures to distribute a specialized motion
picture or "art-house" film on a limited-release basis has in the past
typically ranged from approximately $100,000 to $2,000,000, although in the
future these costs may exceed such range. Expenditures for prints, marketing
and advertising represent a substantial portion of the costs of releasing a
film. Costs for prints, marketing and advertising for the six films initially
released by First Look Pictures during 1997 ranged from approximately
$382,000 to approximately $780,000. In connection with the acquisition of
domestic theatrical rights to a film, the Company sometimes commits to spend
no less than a specified minimum amount for prints and advertising costs.
These costs are in addition to the direct production or acquisition costs and
other distribution expenses of such films. Generally, in addition to
receiving a distribution fee, the Company is entitled to recoup its prints
and advertising expenditures. Although First Look Pictures may at times
utilize standard broadcast television advertising, First Look Pictures
typically supports its limited releases with local newspaper and, in certain
instances, some cable television advertising. First Look Pictures also relies
on local and national publicity, such as reviews or articles in local and
national publications and appearances of the film's principal artists on
radio and television talk shows. In contrast, distributors of national, wide
release films must rely primarily on national advertising campaigns,
including substantial television advertising, to attract theatergoers.
The success of a domestic theatrical release by First Look Pictures can
be affected by a number of factors outside of its control, including audience
and critical acceptance, availability of motion picture screens and the
success of competing films in release (see "Competition" below), awards won
by First Look Pictures' releases or that of its competition, inclement
weather, and competing televised events (such as sporting and news events).
As a result of the foregoing, and depending upon audience acceptance of the
films distributed through First Look Pictures, the Company expects that, in
many cases, it will not recoup all of its distribution expenses or derive any
profit solely from domestic theatrical distribution of First Look Pictures'
releases. In addition, there can be no assurance that total revenues from any
First Look Pictures' release, including revenues derived from such film in
ancillary media and international markets, will be sufficient to allow the
Company to recoup all of its costs or to realize a profit on such film. For
example, of the six motion pictures released by the Company in 1997 four
(JERUSALEM, THE DESIGNATED MOURNER, JOHNS and ALIVE & KICKING) resulted in
write downs to net realizable values (after taking into account total
anticipated revenue including revenue from ancillary media).
15
From January 1, 1997 through April 15, 1998, First Look Pictures
released the seven motion pictures listed in the following chart. First Look
Pictures may release up to approximately three additional films in 1998
(consisting of those listed below under "Anticipated Releases") assuming the
availability of funding for the print and advertising costs associated
therewith.
RELEASED
TITLE MAJOR CREATIVE ELEMENTS STORYLINE RELEASE DATE AND
- ----- ----------------------- --------- DOMESTIC BOX OFFICE
RECEIPTS
--------
JOHNS Writer/Director: Scott Silver A dark comic drama about two hustlers Released in January 1997
Cast: Lukas Haas (MARS ATTACKS!, EVERYONE SAYS working the dirty, sun-scorched with domestic box office
I LOVE YOU, WITNESS) and David Arquette (SCREAM, pavement of Hollywood's Santa Monica receipts of $202,596.
BEAUTIFUL GIRLS, WILD BILL, BUFFY THE VAMPIRE Boulevard.
SLAYER)
JERUSALEM Director: Bille August When a charismatic and messianic Released in March 1997,
Cast: Maria Bonnevie, Ulf Friberg, Olympia preacher arrives in a small Swedish with domestic box office
Dukakis (MIGHTY APHRODITE, STEEL MAGNOLIAS) and village, the lives of two young lovers receipts of $92,089.
Max von Sydow (PELLE THE CONQUEROR) are torn apart. Based on the novel by
Nobel Prize winner, Selma Lagerlof.
A BROTHER'S Writer/Director: Seth Zvi Rosenfeld Headstrong and hot-tempered, a man Released in April 1997 with
KISS Cast: Nick Chinlund (ERASER), Michael Raynor down on his luck falls in with the domestic box office
(FEDERAL HILL), Michael Rapaport (METRO, wrong people. His brother, an NYPD receipts of $65,674.
BEAUTIFUL GIRLS) John Leguizamo (EXECUTIVE officer, is torn between loyalty to
DECISION, TO WONG FOO-THANKS FOR EVERYTHING- his uniform and the person who
JULIE NEWMAR), Cathy Moriarty (CASPER, RAGING protected him as a kid on the tough
BULL), Rosie Perez (WHITE MEN CAN'T JUMP), streets of NY.
Marisa Tomei (UNHOOK THE STARS, MY COUSIN VINNY)
THE DESIGNATED Writer: Wallace Shawn (VANYA ON 42ND STREET, Straight from the National Theatre in Released in May 1997 with
MOURNER MY DINNER WITH ANDRE) London and told completely in direct domestic box office
Director: David Hare (STRAPLESS, PARIS BY NIGHT) address to the camera, the film receipts of $210,082.
Cast: Mike Nichols (acclaimed director of THE captures a three way conversation in
GRADUATE, THE BIRDCAGE and POSTCARDS FROM THE which the characters (a snobbish
EDGE), Miranda Richardson (ENCHANTED APRIL, THE father, pretentious daughter and her
CRYING GAME, DAMAGE). middlebrow husband) debate the
emotional and intellectual bankruptcy
of high culture in the modern world.
ALIVE AND Director: Nancy Meckler (SISTER MY SISTER) A tender, funny and passionate love Released in August 1997
KICKING (a/k/a Cast: Jason Flemyng (STEALING BEAUTY, ROB ROY), story of a talented young dancer with domestic box office
INDIAN SUMMER) Antony Sher (Broadway's "Stanley") living positively with AIDS. receipts of $199,220.
DIFFERENT FOR Director: Richard Spence (YOU, ME AND MARLEY); A romantic gender-bender about two Released in September 1997
GIRLS Cast: Rupert Graves (THE MADNESS OF KING GEORGE, young school boys, Karl and Paul, who with domestic box office
DAMAGE, A ROOM WITH A VIEW) and Steven meet again, accidentally, twenty years receipts of $154,753.
Mackintosh (GENTLEMEN DON'T EAT POETS, MEMPHIS later. Paul does not recognize Karl
BELLE). who is now an attractive transsexual
named Kim.
MRS. DALLOWAY Director: Marleen Gorris (ANTONIA'S LINE) On one summer's day in London, in Released on February 20,
Cast: Vanessa Redgrave (MISSION IMPOSSIBLE, 1923, Clarissa Dalloway remembers that 1998 with domestic box
SMILLA'S SENSE OF SNOW), Rupert Graves (THE summer in the country, in 1890, when office receipts of
MADNESS OF KING GEORGE, A ROOM WITH A VIEW), she was young and beautiful and very approximately $1,578,981
Natascha McElhone (THE DEVIL'S OWN, SURVIVING much courted. through April 14, 1998.
PICASSO)
16
ANTICIPATED RELEASES
TITLE MAJOR CREATIVE ELEMENTS STORYLINE ESTIMATED DOMESTIC
- ----- ----------------------- ---------
THEATRICAL RELEASE DATE
THE MERRY WAR Director: Bob Bierman (VAMPIRE'S KISS) In this touching romantic comedy, the Spring 1998
F/K/A KEEP THE beautiful and charming Rosemary tries
ASPIDISTRA Cast: Helena Bonham Carter (WINGS OF THE desperately to maintain appearances
FLYING DOVE), Richard E. Grant (TWELFTH NIGHT, and avoid scandal, but she is
MIGHTY APHRODITE, PORTRAIT OF A LADY, constantly frustrated by her
THE AGE OF INNOCENSE) eccentric and rebellious boyfriend,
Gordon, who flaunts his outrageous
behavior in the face of stuffy
British middle-class hypocrisy.
THE OTHER SIDE Director: Berit Nesheim (BEYOND THE SKY, A story of a young woman coming of Spring 1998
OF SUNDAY FRIDA-STRAIGHT FROM THE HEART) age in the parochial oppression of a
small Norwegian town where almost
Cast: Marie Theisen (BLESSED ARE THOSE WHO everything is forbidden- especially
THIRST), Bjorn Sundquist (BLESSED ARE THOSE the lure of sex, boys and
WHO THIRST, BLIND GODDESS), Hildegun Riise rock'n'roll.
(FOR THE DAYS ARE EVIL)
MARCELLO Director: Anna Maria Tato A documentary about Marcello Summer 1998
MASTROIANNI: Mastroianni's memories, joy of
I REMEMBER living, and love of cinema recorded
by his companion during the shooting
of his last movie VOYAGE AU DEBUT DU
MONDE.
There can be no assurance that any of the pictures scheduled for release by
First Look Pictures in 1998 or thereafter will actually be released or
released in accordance with the anticipated schedule set forth above. The
motion picture business is subject to numerous uncertainties, including
financing requirements, personnel availability and the release schedule of
competing films. As indicated above, the Company currently anticipates
releasing films through First Look Pictures, in most situations, only if
outside sources of funds are available for print and advertising expenses.
ACQUISITION OF RIGHTS BY THE COMPANY, PRODUCTION AND FINANCING
The Company acquires distribution rights from a large variety of
independent production companies and producers. The Company generally acquires
distribution rights to single films, as compared to acquiring films pursuant to
multi-picture acquisition agreements with independent film companies or
producers. The Company commits to acquire rights to motion pictures at various
stages in the completion of a film, from films completed and ready for release
to developed (or undeveloped) film projects for which the Company may arrange
financing and/or production services to complete. In acquiring rights, the
Company generally seeks to obtain rights to commercially appealing motion
pictures with substantially lower direct negative costs than motion pictures
released by the major studios.
In order to fund the acquisition costs of the films for which it
acquires rights, the Company, in the past, has relied primarily on: (i) the
film facilities provided under the Company's credit facility with Coutts &
Co. and Berliner Bank A.G.; (ii) other lenders willing to finance the
contractual minimum guarantee obligations of the Company to the films'
producers or rights owners; (iii) working capital; (iv) pre-sales (minimum
guarantees obtained from subdistributors who have licensed rights to the film
from the Company); and (v) "gap financing" (where a lender is willing to
finance the production and/or acquisition costs of the motion picture based
on the Company's estimate of the value of unsold distribution rights to the
motion picture). The lenders under the credit facility have the right to
approve each acquisition by the Company. In addition, the Company and the
lenders have agreed that the film facilities portion of the credit facility
(a significant primary source of funds for acquisition of distribution rights
by the Company in the past) will no longer be a revolving credit line and
that sums repaid by the Company cannot be re-borrowed (provided, however,
that one pending film facility with respect to the motion picture ILLUMINATA
will still be funded by the lenders). These provisions could substantially
limit the Company's acquisition activities, unless the Company is able to
exploit its other sources of rights acquisition funding to a greater extent
including "gap financing", pre-sales and/or obtain additional sources of
capital. As described below, the Company also intends, as part of the changes
in its operational strategy, to alter the frequency in which it engages in
various acquisition and distribution arrangements. The Company is also
exploring obtaining additional sources of capital, although there can be no
assurance that such additional capital will be available or available on
terms advantageous to the Company.
The films distributed by the Company have generally had direct negative
costs ranging from $1,000,000 to $6,000,000. However, from time to time, the
Company may acquire rights to, finance or produce, motion pictures with
direct negative costs (as well as marketing costs) below or substantially in
excess of the average direct negative costs (as well as marketing costs) of
the films historically distributed by the Company. For instance, an upcoming
film expected to be distributed by the Company is anticipated to have a
direct negative cost of between $10,000,000 and $15,000,000 (the production
funds for which are currently expected to be provided by third party equity
providers and pre-sales). In addition, as part of the Company's overall
business strategy it intends to emphasize films with more recognizable cast,
directors and producers and greater production values and which may
accordingly have broader appeal in the competitive theatrical market while
attempting to limit the Company's exposure with respect to production and
acquisition costs through gap financing and co-production arrangements as
described below.
In certain circumstances, the Company acquires limited distribution or
sales rights and, in other circumstances, acquires worldwide rights (sometimes
including the copyright) to such films. Generally, this depends upon whether the
Company agrees to pay the producer or other owner of rights in the film (the
"rights owner") a substantial minimum guarantee. As part of its acquisition of
theatrical, video and/or television distribution rights, the Company may obtain
rights to exploit ancillary rights, such as music or sound track rights,
merchandising rights, or rights to produce CD-ROMs or other interactive media
17
products. Although the Company may license such rights to sub-distributors,
historically the Company has not derived any significant revenues from these
ancillary rights.
The Company is sometimes appointed as the sales agent for a particular
motion picture to license, on behalf of the rights owner, distribution rights
in the film to various distributors for exploitation on a
territory-by-territory basis. This often occurs in many gap financing
arrangements, where a lender lends a portion of the production and/or
acquisition funds based upon the Company's estimated value of unsold
distribution rights. When the Company acts as a sales agent, in exchange for
its services as sales agent, the Company is generally entitled to a sales
agency fee which typically ranges from approximately 10% to 20% of the gross
revenues from resulting licenses or sales. In such circumstances, the Company
generally advances limited funds toward the marketing and distribution of the
film (generally ranging from approximately $50,000 to $150,000). In gap
financing arrangements a portion, or sometimes all, of the sales agency fee
(and some or all of the distribution expenses) may be deferred as part of the
sales agency arrangement until a specified level of revenues from sale and/or
licensing of the particular distribution rights is achieved.
In some circumstances, the Company acts in much the same manner as a
sales agent but, rather than licensing or selling the distribution rights of
a particular film to a third party on behalf of the rights owner, the Company
itself licenses the distribution rights in the film from the rights owner for
exploitation by the Company for a given term in a given territory (or
territories) and media. The remainder of this arrangement (the fee structure
and funds provided for marketing and distribution) remains similar to that of
a sales agency. As part of the changes in its operational strategy, the
Company currently intends to act in this manner, or as a sales agent, more
frequently than in recent years.
In both a sales agency arrangement and the distribution arrangement
described above, the amounts payable by the Company to the rights owner
depend upon the success of the Company in distributing the film and the
financial performance of the film itself. In acquiring distribution rights to
a completed or incomplete film, however, the Company will sometimes agree to
pay the rights owner a minimum guarantee that is independent of the financial
performance of the film. Historically, these minimum guarantees paid by the
Company have ranged from approximately $100,000 to $5,000,000, although in
some circumstances they may exceed such amounts. A minimum guarantee may be
payable in full at the time of delivery of the completed film to the Company,
as in a typical negative pickup arrangement, or in installments following
complete delivery of the film to the Company, depending upon the particular
arrangement. The rights owner may also receive additional payments as a
result of the Company's exploitation of the distribution rights to the film.
After receiving a distribution fee (generally a percentage of gross receipts
from exploitation of the distribution rights) and recovering its distribution
expenses and minimum guarantee, the Company pays the remainder of revenues in
excess of an ongoing distribution fee to the rights owner. The Company
typically receives a larger share of gross receipts from the distribution of
motion pictures for which it has provided a minimum guarantee than when it
does not. In addition, at times the minimum guarantee paid by the Company may
represent, in amount, all or a substantial portion of the film's production
costs. In those circumstances, such as a typical negative pickup entered into
by the Company, the Company generally receives worldwide distribution rights
in all media and generally will also obtain ownership of the copyright to the
film, with the production company from which the Company acquired the rights
receiving a production fee and generally a participation in net revenues from
distribution of the motion picture. As part of the changes in its operational
strategy, the Company presently intends to reduce the number of films for
which the Company provides minimum guarantees which represent the majority of
the final production costs of a film or for which the Company otherwise
finances all or substantially all of the films' production costs.
The Company's commitment to pay a minimum guarantee with respect to
films that have not begun production often enables the production company or
producer to obtain financing for its project, if needed. In some cases, the
Company's contractual commitment to pay a minimum guarantee upon delivery of
a film serves as sufficient collateral for a bank to lend production funds.
The bank will typically insure delivery of the film to the Company by
requiring the producer to purchase a completion guaranty. In order to enable
the production company or producer to borrow production funding, or to borrow
at preferential bank fees and interest rates, it may also be necessary for
the Company to secure its purchase or acquisition commitment, which, in the
past, it has generally done by obtaining the issuance of a letter of credit
from the Company's primary lenders, Coutts & Co., a subsidiary of National
Westminster Bank plc., and Berliner
18
Bank A.G. However, as part of the recent change to the Company's credit
facility, such lenders will no longer make such letters of credit available,
which may limit this practice unless the Company can locate other lenders
willing to provide such letters of credit. See "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources." In certain situations, the production
company or producer of a film may initially obtain certain funds from other
distribution companies which obtain distribution rights in certain media or
territories (for example, the domestic distribution rights or distribution
rights in Japan), from accessing foreign governmental film industry incentive
programs (such as programs offered in the past by England, Canada, Australia
and New Zealand) or by using its own resources or other resources available
to it, and then subsequently approach the Company to supply the remaining
funds necessary to complete or co-finance the film in exchange for the
Company's obtaining the remaining distribution rights to the motion picture.
As part of the changes in the Company's operational strategy, the Company
presently intends to seek to increasingly participate in co-financing
arrangements whereby the Company, in combination with other equity providers
(including producers, distributors in various territories, various
international governmental programs designed to incentivize film production
and other equity providers) commit to fund a portion of a particular film's
production costs. For example, ALEGRIA and ILLUMINATA, two films currently
slated for distribution by the Company in 1998, were co-production
arrangements of The Cirque de Soleil, Mainstream S.A. and Egmond Film &
Television BV; and of Victor Company of Japan (JVC), sogePaq S.A., and
Compagnia Distribuzione Internazionale SRL respectively. In addition, the
Company also intends to seek to further develop relationships with major
studios and expand the Company's executive producing role in connection with
motion pictures produced and distributed by other companies. For example in
May 1997, the Company concluded an executive producing arrangement with The
Walt Disney Company with respect to a project optioned by the Company
entitled "EMILY," whereby the Company will provide the services of Ellen
Little, its Co-Chairman, Co-Chief Executive Officer and President, in
exchange for an executive producer fee.
Of the 16 completed films which first became available to the Company
for distribution in 1997, only one film, MRS. DALLOWAY, was produced by the
Company (through a production company controlled by the Company). The Company
does not presently have plans to produce motion pictures itself in 1998. In
those circumstances where the Company produces a film, the Company's
production subsidiaries typically obtain production financing by obtaining
production loans using the Company's minimum guarantee commitment as
collateral, at times secured by a letter of credit issued under the Company's
credit facility. However, with respect to MRS. DALLOWAY, the Company provided
an unsecured minimum guarantee ($500,000 for domestic distribution rights to
both MRS. DALLOWAY and DIFFERENT FOR GIRLS) and substantially all of the
remaining production funds were provided by pre-sales and gap financing
provided by an unaffiliated motion picture financier. The Company attempts
to minimize the risks associated with any development and production
activities that it conducts, in a variety of ways. The Company does not
maintain a substantial staff of creative or technical personnel. The Company
also does not own or operate sound stage and related production facilities
generally referred to as a "studio" and does not have the fixed payroll,
general and administrative and other expenses resulting from ownership of a
studio. In addition, in those circumstances where the Company produces a
film, the Company generally attempts to acquire fully developed projects
ready for pre-production with, when feasible, completed scripts and directors
and/or cast members who are committed to or are interested in the project.
Many projects also have a producer involved or committed. However, if at the
time of acquisition by the Company of rights in a project, a producer is not
formally or informally committed to a project, the Company also may engage a
production services company or a producer to supervise and arrange all
pre-production, production and post-production activities in exchange for a
production fee and a participation in net revenues from the film.
19
The following chart provides certain information regarding completed motion
pictures first made available to the Company for distribution during 1997. For
purposes of the chart, "Sales Agency" refers to those situations where the
Company licenses distribution rights to third parties on behalf of the rights
owner; "Straight Distribution" refers to those situations where the Company
itself licenses distribution rights to a film from the rights owner for
exploitation by the Company for a given term in a given territory (or
territories) and media; "Minimum Guarantee" refers to those situations where the
Company acquires rights to a film in exchange for an agreement by the Company to
pay a minimum guaranteed amount upon (or after) delivery of the film to the
Company for exploitation; "Negative Pickup" refers to those situations where,
upon payment of the minimum guarantee, the Company acquires worldwide rights in
all media, including copyright ownership; "Gap Financed" refers to those
situations where a lender has lent a portion of the production funds based upon
the Company's estimated value of unsold distribution rights; and "Minimum P&A
Commitment" refers to those situations where, as part of its acquisition of
rights, the Company commits to spend a minimum amount on prints and advertising
in connection with domestic theatrical release of the film. The chart includes
acquisitions of rights from unaffiliated production companies or other rights
owners, as well as from production companies owned or controlled by the Company.
MOTION PICTURE GENRE TYPE OF ACQUISITION TERRITORIES ACQUIRED SELECTED CAST
TITLE ----- ------------------- -------------------- -------------
- -----
ALIVE AND KICKING Drama Minimum Guarantee The United States Jason Flemyng (STEALING BEAUTY, ROB ROY),
A/K/A INDIAN Antony Sher
SUMMER
THE DESIGNATED Drama Minimum Guarantee The United States Mike Nichols (director of THE GRADUATE, THE
MOURNER BIRDCAGE and POSTCARDS FROM THE EDGE),
Miranda Richardson
20
(ENCHANTED APRIL, THE
CRYING GAME, DAMAGE)
DIFFERENT FOR Romantic Minimum Guarantee The United States Rupert Graves (THE MADNESS OF KING GEORGE,
GIRLS Comedy DAMAGE, A ROOM WITH A VIEW), Steven
Mackintosh (GENTLEMEN DON'T EAT POETS,
MEMPHIS BELLE)
EAT YOUR HEART Comedy Straight Distribution/Gap Universe, excluding all Linda Hunt (YEAR OF LIVING DANGEROUSLY),
OUT Financed rights in the following Christian Oliver, Laura San Giacomo (PRETTY
German-speaking countries: WOMAN), Pamela Segall
Austria, Germany,
Liechtenstein, Luxembourg
and Switzerland and the
television rights to the
German dubbed version for
Europe, including the
former Soviet Union
GODS AND MONSTERS Drama Sales Agency/Gap Financed World, excluding the Ian McKellen (BENT, RICHARD III, SIX DEGREES
(A.K.A FATHER OF United States and Canada OF SEPARATION), Brendan Fraser (GEORGE OF THE
FRANKENSTEIN) JUNGLE, MRS. WINTERBOURNE, AIRHEADS), Lolita
Davidovich (JUNGLE TO JUNGLE, NOW AND THEN,
INTERSECTION, COBB, RAISING CAIN, BLAZE,
ADVENTURES IN BABYSITTING), Lynn Redgrave
(SHINE, MIDNIGHT)
FIRST TO GO Comedy Minimum Guarantee World, excluding the Mark Harmon (THE LAST SUPPER, WYATT EARP),
United States and English- Zach Galligan (CUPID, ICE), Laurel Hollomon,
speaking Canada Corin Nemec (THE WAR AT HOME)
GODMONEY Drama Minimum Guarantee World Christi Allen (QUIZ SHOW, CLOCKERS, BOXED
MOONLIGHT), Rick Rodney, Bobby Field
JERUSALEM Drama Straight Distribution United States and Canada Marie Bonnerie, Vif Friberg, Lena Endre,
Pernilla August, Olympia Dukakis (MIGHTY
APHRODITE, MR. HOLLAND'S OPUS, STEEL
MAGNOLIAS, MOONSTRUCK), Max Von Sydow (A
KISS BEFORE DYING, AWAKENING, HANNAH AND HER
SISTERS)
LIFEBREATH Drama Minimum Guarantee World Luke Perry (BUFFY THE VAMPIRE SLAYER, THE
FIFTH ELEMENT), Francie Swift (THE SCARLET
LETTER), Gia Carides (PRIMARY COLORS)
MARCELLO
MASTROIANNI: I Documentary Straight Distribution The United States Documentary on Marcello Mastroianni
REMEMBER
A MERRY WAR A/K/A Romantic Minimum Guarantee World excluding the UK Helena Bonham Carter (WINGS OF THE DOVE),
KEEP THE Comedy Richard E. Grant (TWELFTH NIGHT, MIGHTY
ASPIDISTRA FLYING APHRODITE, PORTRAIT OF A LADY, AGE OF
INNOCENCE)
MRS. DALLOWAY Drama Minimum Guarantee/Gap World excluding The Vanessa Redgrave (MISSION IMPOSSIBLE,
Financed Netherlands and certain SMILLA'S SENSE OF SNOW), Rupert Graves (THE
rights in the UK MADNESS OF KING GEORGE, A ROOM WITH A VIEW),
Natascha McElhone (THE DEVIL'S OWN, SURVIVING
PICASSO)
QUIET DAYS IN Drama Straight Distribution World, excluding German- Peter Dobson (THE FRIGHTENERS, BIG SQUEEZE,
HOLLYWOOD speaking Europe FORREST GUMP), Chad Lowe (FLOATING, DO ME A
FAVOR), Daryl Mitchell (WHITE LIES, SGT.
BILKO), Meta Golding (KISS THE GIRLS),
Natasha Gregson Wagner (TWO GIRLS AND A GUY,
LOST HIGHWAY), Bill Cusack (CON AIR, ED WOOD,
THE FUGITIVE), Stephen Mailer (A LEAUGE OF
THEIR OWN, REVERSAL OF FORTUNE)
SIX-STRING Action Sales Agency/Gap Financed World, excluding United Justin McGuire, Jeffrey Falcon
SAMURAI States and English-
speaking Canada
STAND-INS Drama Negative Pick-Up World Daphne Zuniga (CITY SCRAPES, NAKED IN THE
COLD SUN, MAD AT THE MOON), Costas Mandylor
(JUST WRITE, VIRTUOSITY, THE DOORS, TRIUMPH
OF THE SPIRIT), Jordan Ladd (NETNAPPED,
NOWHERE, EMBRACE OF THE VAMPIRE), Sammi Davis
(FOUR ROOMS, HOPE AND GLORY, A PRAYER FOR THE
DYING, MONA LISA), Missy Crider (BUGBUST),
Katherine Heigl (WISH UPON A STAR, UNDER
SEIGE 2, KING OF THE HILL), Charlotte Chatton
(TITANIC, HELLRAISER -BLOODLINE, DAKOTA
ROAD).
21
THE TIC CODE Drama Straight Distribution/Gap World Gregory Hines (THE PREACHER'S WIFE, WAITING
Financed TO EXHALE, RENAISSANCE MAN, THE COTTON CLUB),
Polly Draper (HUDSON RIVER BLUES, THE PICK-UP
ARTIST, MAKING MR.RIGHT) Christopher George
Marquette (ALWAYS SAY GOODBYE)
THE COMPANY'S FILM LIBRARY OF DISTRIBUTION RIGHTS
The Company's film library consists of rights to a broad range of films,
most of which were produced since 1980. As of April 15, 1998, the Company
had various distribution rights to approximately 220 motion pictures
(including approximately 77 motion pictures in which the Company owns an
interest in the copyright and approximately 58 motion pictures for which the
Company acts as sales agent on behalf of the producer or other owner of
rights in the film). The Company's distribution rights generally range from
12 to 25 years or more from the date of acquisition, and typically extend to
many, if not all, media of exhibition worldwide or in specified territories.
In addition to exploitation of distribution rights to motion pictures in
its library in the major media (theatrical, video and television), in certain
situations the Company is able to exploit various ancillary rights in such
films. For example, in September 1997 the Company sold the rights to produce
a second sequel and a television series of The Prophecy for $750,000. The
Company has also arranged for the music in several motion pictures it has
distributed to be released as soundtrack recordings (including KEEP THE
ASPIDISTRA FLYING, MRS. DALLOWAY, THE SECRET OF ROAN INISH, PARTY GIRL, THE
BIG SQUEEZE, and INFINITY). Although exploitation of these soundtrack and
other ancillary rights has not generated significant revenues for the Company
to date, the Company's ownership or control of ancillary rights to motion
pictures in its library (including interactive rights, remake rights and
merchandising rights, among others) may provide future sources of additional
revenues.
MAJOR CUSTOMERS
Since January 1, 1995, only three customers have accounted for more than
10% of the Company's revenues (including for this purpose revenues of Pre-Merger
Overseas) in any full fiscal year: none in 1997, three in 1996 (BMG Video with
$3,068,000 or 10.7%, Helkon Media Filmvertrieb gmbH with $3,490,000 or 12.2% and
Columbia TriStar and its affiliates with $2,940,000 or 10.3%); and one in 1995
(Columbia TriStar and its affiliates with $4,366,000 or 20.1%).
EMPLOYEES
At April 15, 1998, the Company employed a total of 28 full-time
employees. Certain subsidiaries of the Company are, for certain films,
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. In certain circumstances, the Company
assumes a production company's obligation to pay residuals to these various
entertainment guilds and unions. A new industry-wide collective bargaining
agreement with the Screen Actors Guild is scheduled for a ratification vote
by the board of the Guild and, assuming board passage, by the members of the
Guild. A strike, job action or labor disturbance by the members of any of
these entertainment guilds and unions (including potentially by the members
of the Screen Actors Guild in the event the proposed agreement is not
ratified) could have a material adverse effect on the production of a motion
picture within the United States, and, consequently, on the business,
operations and results of operations of the Company. These organizations have
all engaged in strikes and similar activities. The Company believes that its
current relationship with its employees is satisfactory.
COMPETITION
22
Motion picture distribution, finance and production are highly
competitive businesses. The competition comes both from companies within the
same business and from companies in other entertainment media which create
alternative forms of leisure entertainment. The Company competes with major
film studios (including The Walt Disney Company, Paramount Pictures
Corporation, Universal Pictures, Columbia Pictures, Twentieth Century Fox,
Warner Brothers Inc. and MGM/UA) and their affiliates (including such
previously independent companies as Miramax, October, and New Line Cinema)
which are dominant in the motion picture industry. The Company also competes
with numerous independent motion picture production and distribution
companies, as well as numerous foreign motion picture production and
distribution companies. Many of the organizations with which the Company
competes have significantly greater financial and other resources than does
the Company. The Company's ability to compete successfully depends upon the
continued availability of independently produced, domestic and foreign motion
pictures and the Company's ability to identify and acquire distribution
rights and to distribute motion pictures successfully. A number of formerly
independent motion picture companies have been acquired in recent years by
major entertainment companies. These transactions have significantly
increased competition for the acquisition of distribution rights to
independently produced motion pictures by eliminating some available sources
of independently produced films and providing greater financial resources to
other previously independent companies engaged in the business of acquiring
distribution rights to independently produced films and distributing such
films.
Films distributed or financed by the Company also compete for audience
acceptance and exhibition outlets with motion pictures distributed and
produced by other companies. As a result, the success of any of the films
distributed or financed by the Company 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. With respect to the Company's domestic theatrical releasing
operations, a substantial majority of the motion picture screens in the
United States are typically committed at any one time to films distributed
nationally by the major film studios, which generally buy large amounts of
advertising on television and radio and in newspapers and can command greater
access to available screens. Although some exhibitors specialize in the
exhibition of independent, specialized motion pictures and "art-house" films,
there is intense competition for screen availability for these films as well.
Given the substantial number of motion pictures released theatrically in the
United States each year, competition for exhibition outlets and audiences is
intense. In addition, there have also been rapid technological changes over
the past fifteen years. Although technological developments have resulted in
the creation of additional revenue sources from the licensing of rights with
respect to such new media, such developments have also resulted in the
popularity and availability of alternative and competing forms of leisure
time entertainment, including pay/cable programming, and home entertainment
equipment such as videocassettes, interactive games and computers.
REGULATION
In 1994, the United States was unable to reach agreement with its major
international trading partners to include audio-visual works, such as television
programs and motion pictures, under the terms of the General Agreement on Trade
and Tariffs Treaty ("GATT"). The failure to include audiovisual works under GATT
allows many countries (including members of the European Union, which consists
of Belgium, Denmark, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg,
The Netherlands, Portugal and the United Kingdom) to continue enforcing quotas
that restrict the amount of United States produced television programming which
may be aired on television in such countries. The Council of Europe has adopted
a directive requiring all member states of the European Union to enact laws
specifying that broadcasters must reserve a majority of their transmission time
(exclusive of news, sports,
23
game shows and advertising) for European works. The directive does not itself
constitute law, but must be implemented by appropriate legislation in each
member country. In addition, France requires that original French programming
constitute a required portion of all programming aired on French television.
These quotas generally apply only to television programming and not to
theatrical exhibition of motion pictures, but quotas on the theatrical
exhibition of motion pictures could also be enacted in the future. There can be
no assurance that additional or more restrictive theatrical or television quotas
will not be enacted or that countries with existing quotas will not more
strictly enforce such quotas. Additional or more restrictive quotas or more
stringent enforcement of existing quotas could materially and adversely affect
the business of the Company by limiting the ability of the Company to exploit
fully its rights in motion pictures internationally and, consequently, to assist
or participate in the financing of such motion pictures.
Distribution rights