-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, aDfpq4JT++8Zn1Jh0mFsadu7jVQYPJpvRaIu7aGsDuSj25C3OSvff+hvwX+fM27o yh+/Kj/v1Pld02TwP+InRg== 0000801441-95-000005.txt : 19950516 0000801441-95-000005.hdr.sgml : 19950516 ACCESSION NUMBER: 0000801441-95-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAROLCO PICTURES INC CENTRAL INDEX KEY: 0000801441 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 954046437 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09264 FILM NUMBER: 95539284 BUSINESS ADDRESS: STREET 1: 8800 SUNSET BLVD CITY: LOS ANGELES STATE: CA ZIP: 90069 BUSINESS PHONE: 3108598800 MAIL ADDRESS: STREET 1: 8800 SUNSET BLVD CITY: LOS ANGELES STATE: CA ZIP: 90069 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1995 Commission File No. 1-9264 CAROLCO PICTURES INC. (Exact name of registrant as specified in its charter) Delaware 95-4046437 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8800 Sunset Blvd., Los Angeles, CA 90069 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 859-8800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of registrant's Common Stock, $.01 par value, at May 15, 1995 was 140,015,109 shares, including 2,373,756 shares of treasury stock. CAROLCO PICTURES INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - December 31, 1994 and March 31, 1995 (unaudited) Condensed Consolidated Statements of Operations - Three months ended March 31, 1994 and 1995 (unaudited) Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 1994 and 1995 (unaudited) Notes to Unaudited Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 3. Defaults upon Senior Securities Item 6. Exhibits and Reports on Form 8-K CAROLCO PICTURES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS A S S E T S December 31, March 31, 1994 1995 (Unaudited) (In Thousands) Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $27,336 $ 32,358 Restricted cash. . . . . . . . . . . . . . . . . . . . . . . . -- 1,803 Accounts receivable, net . . . . . . . . . . . . . . . . . . . 13,835 9,079 Accounts receivable, related parties . . . . . . . . . . . . . 340 275 Film costs, less accumulated amortization (Notes B and C) . . 89,145 118,020 Property and equipment, at cost, less accumulated depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . 17,413 5,531 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 8,788 6,677 ------- -------- TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . $156,857 $173,743 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIENCY LIABILITIES: Accounts payable and accrued liabilities . . . . . . . . . . $ 21,194 $ 16,683 Accrued residuals and participations . . . . . . . . . . . . 34,315 32,314 Income taxes, current and deferred . . . . . . . . . . . . . 15,000 15,233 Debt (Notes B and E) . . . . . . . . . . . . . . . . . . . . 93,855 119,776 Advance collections on contracts . . . . . . . . . . . . . . 15,047 15,894 Notes and amounts payable, related parties (Note D). . . . . 41,967 43,933 -------- -------- TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . 221,378 243,833 COMMITMENTS AND CONTINGENCIES - (Note F) STOCKHOLDERS' DEFICIENCY - (Notes F and G) Preferred stock - $1.00 par value, 10,000,000 shares authorized: Series A Convertible Preferred Stock, 120,000 shares authorized, 82,500 shares issued and outstanding ($86,482,000 aggregate liquidation preference in 1994 and $87,563,000 aggregate liquidation preference in 1995). . . . . . . . . . . . . 88 89 Common stock - $.01 par value, 650,000,000 shares authorized, 140,015,109 shares issued and outstanding, including 2,373,756 shares in treasury. . . . . . . . . . . . . . 1,400 1,400 Additional paid-in capital . . . . . . . . . . . . . . . . . . 302,175 303,269 Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . (5,920) (5,920) Accumulated deficit. . . . . . . . . . . . . . . . . . . . . .(362,264) (368,928) --------- --------- TOTAL STOCKHOLDERS' DEFICIENCY. . . . . . . . . . . . . (64,521) (70,090) --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY . . . . $156,857 $173,743 ========= =========
See notes to condensed consolidated financial statements. CAROLCO PICTURES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months ended March 31, 1994 1995 (Unaudited) (In Thousands, Except per Share Data) Revenues: Feature films . . . . . . . . . . . . . . . . . . $ 20,279 $ 5,778 Other income (Note H). . . . . . . . . . . . . . . 2,724 744 --------- -------- TOTAL REVENUES. . . . . . . . . . . . . . . . . 23,003 6,522 Costs and expenses: Amortization of film costs, residuals and participations 16,046 5,442 Selling, general and administrative. . . . . . . . . . 5,260 5,254 Interest . . . . . . . . . . . . . . . . . . . . . . . 3,981 3,206 ---------- --------- TOTAL COSTS AND EXPENSES. . . . . . . . . . . . . 25,287 13,902 ---------- --------- LOSS BEFORE BENEFIT FROM (PROVISION FOR) INCOME TAXES . . . . . . . . . . . . . . . . (2,284) (7,380) Benefit from (provision for) income taxes. . . . . . . 253 (326) --------- --------- LOSS BEFORE EXTRAORDINARY ITEM . . . . . . . . . (2,031) (7,706) Extraordinary gain on extinguishment of debt (Note D). --- 2,137 --------- --------- NET LOSS . . . . . . . . . . . . . . . . . . . . $(2,031) $(5,569) ========= ========= Per Common Share: Loss before extraordinary item. . . . . . . . . . . $(0.02) $(0.06) Income from extraordinary item. . . . . . . . . . . --- .02 ---------- --------- Net Loss. . . . . . . . . . . . . . . . . . . . . . $(0.02) $(0.04) ========== ========= Weighted average shares outstanding. . . . . . . . . 137,687,728 137,641,353
See notes to condensed consolidated financial statements. CAROLCO PICTURES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 1994 1995 (Unaudited) (In Thousands) Net cash flow from operating activities: NET CASH PROVIDED BY (USED IN) OPERATIONS . . . . $(25,964) $(32,530) Cash flow from investing activities: Purchase of property and equipment . . . . . . . . . (226) (96) Proceeds from sale of aircraft, net of costs . . . . 1,775 --- --------- ---------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,549 (96) Cash flow from financing activities: Payments on debt . . . . . . . . . . . . . . . . . . (1,176) (2,470) Proceeds of Production Loan . . . . . . . . . . . . --- 39,893 Increase in notes payable to related parties. . . . 1,653 1,966 Decrease in receivables from related parties . . . . 100 65 (Increase) decrease in restricted cash . . . . . . . 1,255 (1,803) Repurchase of Vista shares and Vista Partnership Units (744) --- Other. . . . . . . . . . . . . . . . . . . . . . . . (2) (3) -------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . 1,086 37,648 -------- --------- INCREASE (DECREASE) IN CASH . . . . . . . . . . (23,329) 5,022 Cash and cash equivalents at beginning of period 56,697 27,336 -------- --------- Cash and cash equivalents at end of period. . . . $33,368 $32,358 ======== ========= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest (net of amounts capitalized in 1994 and 1995) $572 $497 ======== ========= Income taxes . . . . . . . . . . . . . . . . . . . $73 $93 ======== =========
See notes to condensed consolidated financial statements. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Prior to March 29, 1995, Carolco owned the building housing its corporate headquarters in Los Angeles, California. In March 1988, Carolco entered into a $12,000,000 mortgage loan on its headquarters building with Equitable Life Assurance Society of the United States ("Equitable"). The mortgage provided for a balloon payment of the outstanding principal amount (approximately $11,500,000) on March 1, 1995. The mortgage loan, which was non-recourse to Carolco, was sold by Equitable to Dolphinshire, L.P. ("Dolphinshire"), an entity unaffiliated with Carolco, on March 29, 1995. Immediately thereafter, Carolco transferred the building to Dolphinshire in full satisfaction of the mortgage loan outstanding. At December 31, 1994, the net book value of the building and certain leasehold improvements was reduced to approximate the amount of the outstanding mortgage loan. In March 1995, upon the close of the transactions described above, the balance of the mortgage loan was offset against the carrying value of the assets. Note A - Basis of Presentation and Significant Account Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements include the accounts of Carolco Pictures Inc. and its wholly-owned subsidiaries including Carolco International Inc. ("CII"), Carolco Television Inc. and The Vista Organization, Ltd. ("Vista"); The Vista Organization Partnership, L.P.; and Carolco Studios Inc. (Delaware) (collectively, the "Company" or "Carolco"), after elimination of material intercompany accounts and transactions. The Company is engaged in a single business segment, the entertainment industry, and its principal activities include the production and distribution of feature films. The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company's management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the Company's financial position as of March 31, 1995 and the results of its operations for the three months ended March 31, 1994 and 1995. The Company's independent auditors have included an explanatory paragraph in their report on the Company's consolidated financial statements for the year ended December 31, 1994 stating that such financial statements have been prepared assuming the Company will continue as a going concern and that the Company's financial condition raises substantial doubt about its ability to continue as a going concern. See Note B. The results of operations for the period ended March 31, 1995 are not necessarily indicative of the results to be expected for the year ending December 31, 1995. Certain reclassifications have been made in the amounts for 1994 to conform to 1995 presentation. For further information, refer to the Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1994. At March 31, 1995, LDC Films, Inc., an affiliate of Pioneer Electronic Corporation (" Pioneer"), Cinepole Productions B.V. ("Cinepole"), and RCS International Communications N.V. ("RCS Communications"), owned approximately 33.7%, 19.0% and 11.6%, respectively, of the issued and outstanding Common Stock of the Company. At March 31, 1995, New Carolco Investments B.V. ("New CIBV"), a corporation incorporated in The Netherlands, owned approximately 5.8% of the issued and outstanding Common Stock of the Company. Mario F. Kassar, Chairman of the Board of Directors and Chief Executive Officer of the Company, may be deemed to own beneficially the shares of the Company's Common Stock owned by New CIBV. In addition, Pioneer, Cinepole and MGM Holdings Corporation ("MGM Holdings") own 40,000, 12,500 and 30,000 shares, respectively of Series A Convertible Preferred Stock, not including accrued "in-kind" dividends. MGM Holdings also owns $31,901,000 in aggregate principal amount of 5% Payment-In-Kind Convertible Subordinated Notes due 2002 (the "5% Notes"), not including accrued "in-kind" interest. Significant Accounting Policies Net Loss Per Common Share: Net loss per share is based on the weighted average number of common shares outstanding during the period, after appropriate inclusion in net loss of payment-in-kind dividends of $1,045,000 in 1994 and $1,095,000 in 1995. Common equivalent shares, consisting of outstanding stock options, warrants and the Series A Convertible Preferred Stock, were excluded because the effect of their inclusion would be antidilutive. Other potentially dilutive securities, including the 5% Notes, were excluded because the effect of their inclusion would be antidilutive. Income Taxes: Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 109 "Accounting for Income Taxes". Previously, the Company used SFAS No. 96 "Accounting for Income Taxes". The adoption of SFAS No. 109 had no material effect on the Company's financial position or results of operations for the year ended December 31, 1993. Current and deferred federal income taxes are provided based on the Company and its U.S. subsidiaries owned 80% or more, filing a consolidated tax return. Deferred taxes, relating to differences in accounting for film rights and the related amortization for financial statement and tax return purposes, as well as from financial statement reserves not currently deductible for tax purposes, have historically been determined by applying the current tax rate to the cumulative temporary differences between the recorded carrying amounts and corresponding tax basis of assets and liabilities at the respective dates. Due to the reversal of prior book and tax differences, as of March 31, 1995, Carolco's deferred tax liability has been virtually eliminated. However, due to the potential liability arising form the ongoing examination of Carolco's 1988 through 1993 federal income tax returns by the Internal Revenue Service ("IRS") and the 1988 and 1989 state income tax returns by the California Franchise Tax Board ("FTB"), Carolco has not reduced the amount of its current and deferred income tax liability. See Note F for a discussion of these examinations. On October 18, 1993, the Company's wholly-owned subsidiary, Carolco International N.V. ("CINV") was domesticated as a Delaware corporation and its name was changed to CII. Due to the domestication of CINV, in future periods, foreign source income of the Company will be subject to United States income taxation which could result in a significant increase in the Company's effective tax rate. Note B - Liquidity and Going Concern Issues Carolco currently has one motion picture in production: Cutthroat Island starring Geena Davis and Matthew Modine and directed by Renny Harlin. Cutthroat Island completed principal photography in March 1995 and is scheduled to be completed and available for release in the fourth quarter of 1995. However, there can be no assurance that the film will be completed or released on schedule or that it will be completed and released. The direct negative cost of Cutthroat Island is expected to be in excess of $80,000,000. Carolco has completed certain financing arrangements in connection with Cutthroat Island. On February 6, 1995, the limited partnership formed by Carolco to produce and distribute Cutthroat Island ("Cutthroat Productions L.P.") satisfied the conditions necessary for it to draw funds under a production loan (the "Production Loan") provided by a group of banks led by Berliner Bank AG (London Branch) and Credit Lyonnais Bank Nederland N.V. ("CLBN"). The Production Loan provides for financing of up to $60,238,000 in direct negative costs, including completion bond fees, certain contingencies and other financing related expenses. In February and March 1995, Carolco received approximately $25,031,000 in proceeds from the Production Loan, representing reimbursement of a portion of the approximately $80,007,000, including capitalized interest and overhead, Carolco had spent in 1994 and 1995 to develop and begin production of Cutthroat Island. In addition, through March 1995, $13,126,000 in proceeds from the Production Loan were provided directly to Cutthroat Productions L.P. The Production Loan is collateralized by certain pre-sales of foreign and domestic licensing rights of Cutthroat Island. Initial proceeds from the distribution of Cutthroat Island will be used exclusively to repay the Production Loan. In addition, in 1994 the Company received $7,500,000 in co-production investments from Tele-Communications, Inc. ("TCI"), LSC+ Investments Inc., a wholly owned subsidiary of Le Studio Canal+ (U.S.), and RCS Video International Services B.V. ("RCS"). These funds, together with the proceeds of the Production Loan, reduced Carolco's contribution to the negative cost of the film to approximately $47,500,000. CII, with Carolco as principal guarantor, has $14,000,000 in principal amount outstanding under a credit facility with CLBN acting as agent and lender (the "Existing Carolco Credit Facility") as of the date hereof. The maturity date of the loan under the Existing Carolco Credit Facility, which is secured by substantially all of Carolco's assets, is September 30, 1995, provided certain events of default do not occur. CLBN has agreed to remit to CII all collections from accounts receivable pledged to CLBN, so long as certain defaults do not occur. No amounts are available for borrowing under the Existing Carolco Credit Facility. Repayment of the Existing Carolco Credit Facility, without a replacement facility, would have a severe adverse effect on the operations and financial viability of Carolco. In August 1992, Carolco entered into an agreement with the Screen Actors Guild, the Director's Guild of America, the Writers' Guild of America and the Motion Picture Industry Pension and Health Plan (collectively, the "Guilds") with respect to amounts owed to the Guilds under certain collective bargaining agreements. As of March 31, 1995, the balance due the Guilds pursuant to a promissory note made in favor of the Guilds (the "Guild Note") was $7,485,000, including accrued interest at 3-month LIBOR plus 1% per annum. The balance of the Guild Note is due in two remaining installments of $3,000,000 each, plus interest, on October 1, 1995 and October 1, 1996, with an additional $600,000 due on October 1, 1996. The Guild Note is secured by a lien on substantially all of the Company's assets, which lien is subordinated to the Existing Carolco Credit Facility. In addition to the Guild Note, the Company has on-going obligations to the Guilds, the American Federation of Musicians ("AFM") and the International Alliance of Theatrical Stage Employees ("IATSE") for amounts owed under similar collective bargaining agreements. In February 1995, the Company paid approximately $3,000,000 to the Guilds, AFM and IATSE representing residual obligations arising from cash received by the Company in the fourth quarter of 1994. The Company estimates that its residual obligations for the first quarter of 1995 will be $1,500,000. The amount of residual obligations to be paid for future periods will be determined by the amount of cash receipts received by the Company in each quarter of 1995. As long as the Guild Note is outstanding, the on-going obligations of Carolco under the collective bargaining agreements with the Guilds are secured by the same lien as the Guild Note. In connection with the production of its motion pictures, the Company entered into certain contingent compensation agreements with motion picture talent (actors, directors, producers, writers) and co-production investors (collectively, the "Participants") whereby the Company is obligated to pay to the Participants a share of the Company's receipts from the distribution of its released motion pictures. At March 31, 1995, the Company had recorded a liability for present and future obligations of approximately $24,599,000 in connection with various Participants' contingent compensation arrangements. In April 1995, the Company reached settlements with certain Participants, whereby each such Participant agreed to accept a portion of the amount due at March 31, 1995 in exchange for the release of all claims against the Company for current and future participation obligations, subject to certain adjustments under certain circumstances. As a result of these settlement agreements, in April and May 1995 the Company paid approximately $4,800,000 to certain Participants and reduced its liability for current and future contingent compensation obligations. This will result in an extraordinary gain of $3,663,000 in the second quarter of 1995. Additional contingent compensation obligations will be recorded in 1995 based on the film revenues recognized by the Company in 1995. Semi-annual interest of approximately $3,261,000 on the 11.5%/10% Reducing Rate Senior Notes due 2000 (the "New Senior Notes") and the 13%/12% Reducing Rate Senior Subordinated Notes due 1999 (the "New Senior Subordinated Notes") is due on April 15 and October 15 of each year. Semi-annual interest of approximately $224,000 on the 13% Senior Subordinated Notes due 1996 is due on June 1 and December 1 of each year. On May 2, 1995, the Company paid approximately $3,279,000 representing semi-annual interest due on the New Senior Notes and New Senior Subordinated Notes. Such interest payments were made prior to the end of the 30-day grace period provided in the indentures governing such issues of indebtedness. Going Concern Issues As a result of its reduced production schedule, Carolco did not generate revenues from new production in 1994 and anticipates that it will continue to experience losses through 1995. During the next 12 months, the Company will not have sufficient cash resources and existing financing sources to meet its operating expenses and scheduled debt service obligations, and to continue to fund its principal business activity -- the development, production and exploitation of motion pictures. Therefore, the Company is currently considering a plan which will allow it to continue to operate as a going concern. The plan being considered by the Company includes a combination of the following: the sale of certain assets; identifying and securing new equity investments and/or sources of financing; negotiating more advantageous distribution arrangements which would finance at least 100% of the development, production and distribution of new films; and restructuring the Company's outstanding obligations either outside of a Chapter 11 Bankruptcy filing, or within a Chapter 11 Bankruptcy filing (including a possible prenegotiated plan). If the Company is unable to successfully accomplish the aforementioned plan, or implement other similar strategies, the Company will be unable to continue as a going concern. The consolidated financial statements as of and for the three months ended March 31, 1995 do not include any adjustments to reflect the possible future effects on the recoverability of assets or amounts of liabilities that may result from the inability of the Company to continue as a going concern. Note C - Film Costs December 31, March 31, 1994 1995 (Unaudited) (In Thousands) Film costs are comprised of the following: Released, less amortization. . . . . . . . . . . $ 20,925 $ 19,031 In process and development . . . . . . . . . . . 68,220 98,989 -------- -------- Total film costs . . . . . . . . . . . . . . . . $ 89,145 $118,020
Interest and production overhead capitalized to film costs during the three months ended March 31, 1995 totaled $297,000 and $912,000, respectively. Interest and production overhead capitalized to film costs during the three months ended March 31, 1994 totaled $156,000 and $833,000 respectively. Note D - Related Party Transactions MGM: In 1993, MGM Holdings purchased from the Company $30,000,000 in aggregate principal amount of 5% Notes in exchange for $30,000,000. The $30,000,000 in principal amount of 5% Notes will mature in October 2002 and bears interest at 5% per annum, payable quarterly. Consistent with the treatment of MGM Holdings as a "principal shareholder," the Company recorded the 5% Notes in Notes and Amounts Payable, Related Parties, at its present value of $21,361,000 to yield a fair market interest rate of 10%. The discount of $8,639,000 was recorded as an increase to equity. The Company will recognize additional interest expense of approximately $960,000 per year related to the amortization of this discount. Interest accruing on or prior to the fifth anniversary of the date of issuance may be paid in cash or by payment in-kind of additional 5% Notes with a principal amount equal to the amount of such interest, or a combination thereof, at the election of the Company. Thereafter, interest shall be paid in cash. Through March 31, 1995, interest of approximately $1,901,000 has been paid in additional 5% Notes and interest of approximately $332,000 has been accrued. The 5% Notes, and any accrued and unpaid interest thereon, will automatically be converted into Common Stock of the Company on the 20th business day following the date on which Metro-Goldwyn-Mayer Inc. ("MGM") shall have received an aggregate of $100,000,000 in distribution fees under MGM's distribution agreement with the Company (the "MGM Distribution Agreement"). This conversion rate will be equal to 1,667 shares of Common Stock for each $1,000 principal amount of 5% Notes and each $1,000 of accrued and unpaid interest, subject to certain adjustments. Alternatively, the 5% Notes may be converted into Common Stock of the Company at the aforementioned conversion rate (subject to certain adjustments,) effective on the maturity date (October 2002) or upon certain defaults under the indenture governing the 5% Notes; or in the event that the Company (i) declares a dividend on its Common Stock in excess of $.05 per share, (ii) offers to redeem or repurchase Common Stock, (iii) merges or consolidates, unless the Company is the surviving corporation, or (iv) undertakes to sell all or substantially all its assets. As of March 31, 1995, approximately 53,178,000 shares of Common Stock of the Company would be issued upon conversion of the 5% Notes. In connection with the production of Cutthroat Island, CLBN, an affiliate of MGM, was one of the lead lenders providing the Production Loan. In addition, MGM has agreed to distribute Cutthroat Island domestically and internationally ursuant to the MGM Distribution Agreement. RCS: In March 1992, CINV sold 50% ownership in one of its principal development projects to RCS in return for RCS's commitment to pay, subject to certain conditions, 50% of the costs of development and production of the project. Through March 31, 1995, RCS had advanced approximately $7,000,000, representing certain development and production commitments due pursuant to this agreement. In June 1990, the Company, through a nominee of CINV, and Le Studio Canal+ S.A. ("Le Studio"), formed a partnership (the "Carolco/Le Studio Partnership"). In January 1992, the Carolco/Le Studio Partnership entered into a co-financing arrangement with Le Studio and RCS pursuant to which CINV, Le Studio and RCS each made co-financing payments equal to one-third of the total production cost of the motion picture, Chaplin. In exchange for their co-financing payments, Le Studio and RCS are each entitled to one-third of the net receipts from Chaplin, reduced to one-sixth of the net receipts after they have each recouped their initial co-financing payments, plus interest. RCS asserted a claim of approximately $5,000,000 against Carolco alleging that Carolco guaranteed certain levels of performance and agreed to reimburse a portion of RCS's unrecouped investment in the motion picture Chaplin. Pursuant to an agreement between Carolco and RCS, in April 1995 Carolco paid RCS $4,000,000 and RCS quitclaimed to Carolco all of its ownership and other interest in the motion picture development project discussed above and also waived all claims relating to Chaplin. As a result, in the second quarter of 1995, the Company will record an extraordinary gain of $1,071,000 relating to the Chaplin claims. Le Studio: Le Studio has asserted a claim against Carolco alleging that Carolco guaranteed certain levels of performance and agreed to reimburse a portion of Le Studio's unrecouped investment in the motion picture Chaplin. Le Studio has not specified the amount of its claim. Le Studio has also claimed that Caorlco is obligated to pay $500,000 as reimbursement for expenses incurred by Le Studio in connection with certain restructuring transactions consummated in 1992. Carolco believes that Le Studio relinquished its claim for reimbursement as part of the October 1993 restructuring. Although Carolco and Le Studio are discussing these claims, Carolco is unable to predict the outcome of these disputes. Other: Pursuant to a series of agreements (collectively, the "Domestic Video Output Agreement"), the Company granted to LIVE Home Video Inc. ("LHV"), a subsidiary of LIVE Entertainment Inc. ("LIVE") and a former subsidiary/affiliate of the Company, domestic home video rights to the Company's feature films (except Cliffhanger and Iron Eagle III) on which principal photography commenced prior to July 31, 1995 or for which LHV has paid an advance to the Company prior to such date. Canadian home video rights were not granted to LHV in the case of several films produced by the Company. In consideration for the rights granted by the Company, LHV agreed to pay the Company certain advances for each picture. CINV entered into an agreement with an affiliate of LIVE pursuant to which LIVE's affiliates acquire home video rights in the German-speaking European markets for most of the Company's films for which principal photography has commenced or for which LHV paid an advance prior to July 31, 1995 (the "German Output Agreement"). In consideration for the rights granted by the Company, the LIVE affiliate agreed to pay CINV certain advances for each picture. In January 1995, in order to settle disputes between them with respect to the United States and Canadian video distribution rights to the film Cutthroat Island, LIVE and the Company agreed that Cutthroat Island would not be subject to the Domestic Video Output Agreement or the German Output Agreement. Pursuant to a separate agreement, LIVE obtained the video distribution rights to Cutthroat Island in the United States and Canada for a video advance to be paid by LIVE. In addition, LIVE agreed to certain amendments to the Domestic Video Output Agreement, whereby LIVE would no longer have certain rights of offset between prior films distributed pursuant to such agreement. In exchange for the aforementioned arrangements and resolution, the Company paid $3,500,000 to LIVE against accrued liabilities of approximately $5,600,000 and recognized an extraordinary gain of approximately $2,100,000. On January 1, 1995, the Company retained Daniels & Associates ("Daniels") and Jefferson Capital Group ("Jefferson") to act as the Company's non-exclusive financial advisors and agents of the Company to assist the Company in locating capital sources, to market for sale substantially all of the Company's film library rights, to make recommendations with respect to any transactions which may result and to consider a possible restructuring of the Company's capital structure. Michael E. Garstin, a principal in Daniels, is a member of Carolco's Board of Directors. In consideration of the services to be provided by Daniels and Jefferson, Carolco agreed to pay $1,800,000 payable over twelve months at the rate of $150,000 per month. Carolco is required to make a minimum of six monthly payments under the agreement, with 60% of all fees paid to Daniels and 40% paid to Jefferson. In addition, Carolco agreed to pay all reasonable out-of-pocket expenses incurred by Daniels and Jefferson up to $100,000. During the three months ended March 31, 1995, the Company paid $280,000 to Daniels and $180,000 to Jefferson. Note E - Debt Prior to March 29, 1995, Carolco owned the building housing its corporate headquarters in Los Angeles, California. In March 1988, Carolco entered into a $12,000,000 mortgage loan on its headquarters building with Equitable. The mortgage provided for a balloon payment of the outstanding principal amount (approximately $11,500,000) on March 1, 1995. The mortgage loan, which was non-recourse to Carolco, was sold by Equitable to Dolphinshire on March 29, 1995. Immediately thereafter, Carolco transferred the building to Dolphinshire in full satisfaction of the mortgage loan outstanding. At December 31, 1994, the net book value of the building and certain leasehold improvements was reduced to approximate the amount of the outstanding mortgage loan. In March 1995, upon the close of the transactions described above, the balance of the mortgage loan was offset against the carrying value of the assets. In connection with the motion picture Cutthroat Island, through March 31, 1995, the Production Loan provided motion picture financing of approximately $39,893,000, including approximately $1,736,000 in loan costs and fees. The Production Loan provides for financing of up to $60,238,000 in direct negative costs, including completion bond fees, certain contingencies and other financing related expenses. The Production Loan bears interest at LIBOR, plus 2 % per annum and is payable on the earlier of (i) March 1, 1997 or (ii) fifteen months following the initial United States theatrical release of Cutthroat Island. Initial proceeds from the distribution of Cutthroat Island will be used exclusively to repay the Production Loan. Note F - Commitments and Contingencies As of March 31, 1995, the Company has received approximately $937,000 in deposits on cancelled licensing agreements and on certain films which the Company may not produce. Traditionally, the Company has been able to allocate advances of this nature to other pictures being produced by the Company which contain elements similar to the original film. However as a result of reduced production commitments, the Company may be required to return these deposits. In June 1993, the Company entered into a non-exclusive consulting agreement with Anthony J. Scotti, Chairman of the Company's former subsidiary/affiliate, LIVE, and Chairman and Chief Executive Officer of All American Communications, an unaffiliated company, for the period commencing immediately after the Company's October 1993 restructuring and ending twelve months thereafter. This agreement was extended under the same terms and conditions as the original consulting agreement and currently terminates on June 30, 1995. Pursuant to the agreement, Mr. Scotti consults with management of the Company with respect to the operation of the Company's business and such other matters as may be agreed upon between the Company and Mr. Scotti. In consideration for the services provided by Mr. Scotti, the Company pays Mr. Scotti $40,000 per month plus reimbursement of all expenses incurred by Mr. Scotti in connection with the services provided by him under the agreement. Mr. Scotti is entitled to participate in any and all of the Company's employee stock option plans during the term of the agreement, and is granted options to purchase shares of the Company's Common Stock (the terms and number of options to be negotiated in the future) at an exercise price per share equal to 1.25 times the market value of the Common Stock at the date of commencement of the consulting period. In addition, Mr. Scotti is indemnified from certain liabilities in connection with the performance of his duties under the agreement. During the three months ended March 31, 1995, the Company paid $120,000 to Mr. Scotti for his services under this agreement. Spiderman Litigation: On April 20, 1993, 21st-Century Film Corporation ("21st") and Menahem Golan ("Golan") filed an action against Carolco, CINV and Spiderman Productions Ltd. ("SPL") in Los Angeles County Superior Court alleging claims for breach of contract, anticipatory breach of contract and fraud relating to the motion picture project Spiderman. Plaintiffs allege that on or about May 19, 1990, 21st entered into an agreement with Carolco (the "Carolco/21st Agreement") whereby 21st transferred to Carolco rights relating to the comic book character Spiderman, and Carolco agreed, among other things, to accord credit to Golan as a producer of the motion picture to be produced by defendants. Plaintiffs further allege that on or about June 19, 1992, the parties entered into a second agreement settling certain other litigation and wherein it was agreed that Carolco and CII could assign the Carolco/21st Agreement to RCS Video Service Antilles N.V. ("RCS NV") and provided that Carolco and CII remain jointly and severally liable with RCS NV under the Carolco/21st Agreement. Plaintiffs alleged that Carolco and the other defendants breached the foregoing agreements by denying any obligation to accord producer credit to Golan, by assigning the Carolco/21st Agreement to a party other than RCS NV, and by failing to provide plaintiffs with a written document showing that Carolco and the other defendants have assumed the obligations of the Carolco/21st Agreement. Finally, plaintiffs alleged that Carolco and the other defendants entered into the foregoing agreements fraudulently in that they did not intend to perform their alleged promises at the time they entered into the agreements. Based on the foregoing allegations, plaintiffs sought compensatory damages in excess of $5,000,000, unspecified punitive damages, attorneys' fees, rescission of the Carolco/21st Agreement, a declaration as to the plaintiffs' alleged rights and a preliminary and permanent injunction preventing Carolco and the other defendants from distributing Spiderman upon completion without according producer screen credit to Golan and from issuing press releases or other information to the media without according producer credit to Golan. On October 22, 1993, the plaintiffs, following several successful demurrers by the defendants to the plaintiffs' previous complaints, filed a Third Amended Complaint against Carolco, CII, SPL and RCS NV. On November 19, 1993, all four defendants filed an answer to the Third Amended Complaint in which they agreed that the Carolco/21st Agreement had been rescinded, thereby accepting the demand and offer of rescission contained in the Third Amended Complaint. The defendants also filed a cross-complaint seeking restitution of the more than $5,000,000 that plaintiffs were paid under the rescinded agreement. The plaintiffs contend that assuming they make such restitution to Carolco and its co-defendants and co-cross-complainants, the plaintiffs would be entitled to recover the rights, or the monetary value of the rights, that were transferred under the Carolco/21st Agreement. On December 14, 1993, 21st became a debtor under Chapter 7 of the United States Bankruptcy Code as a result of petitions for involuntary bankruptcy that were filed by various creditors of 21st (other than the parties to the above-described litigation). On December 15, 1993, such bankruptcy proceedings were converted to voluntary reorganization proceedings under Chapter 11 of the Bankruptcy Code. These bankruptcy filings resulted in an automatic stay of the Los Angeles Superior Court litigation. On July 21, 1994, the Chapter 11 Trustee for 21st and the defendants in this action stipulated to relief from the automatic stay as a result of which the litigation resumed. On February 3, 1994, Carolco, CII, SPL and RCS NV filed declaratory relief actions against Viacom International Inc., its division, Viacom Enterprises, and various Doe defendants (collectively "Viacom"), and against CPT Holdings, Inc. and Columbia Pictures Home Video, Inc. jointly doing business as Columbia Tri-Star Home Video, and various Doe defendants (collectively "Columbia Tri-Star"), seeking declarations that such defendants do not have certain motion picture distribution rights in Spiderman. Both Viacom and Columbia Tri-Star contend that they acquired certain distribution rights from 21st prior to Carolco's and 21st's entering into the Carolco/21st Agreement, and allegedly continue to hold such rights. Viacom and Columbia Tri-Star each have answered Carolco's complaints against them, denying the material allegations of the complaints. In addition, on April 8, 1994, Columbia Tri-Star served a cross-complaint on Carolco and its co-plaintiffs for anticipatory repudiation of contract, specific performance, breach of the implied covenant of good faith and fair dealing, and declaratory relief. Columbia Tri-Star is seeking a judicial declaration that Carolco and its co-plaintiffs are contractually obligated to accord to Columbia Tri-Star the home video distribution rights in Spiderman that Columbia Tri-Star alleges it has, an order commanding the performance of those alleged obligations, and, alternatively, damages "in a sum not less than $5,000,000" if those alleged obligations are not performed. On May 18, 1994, Viacom filed an action in the Superior Court of the State of California for the County of Los Angeles against Carolco, CII, SPL and RCS NV alleging, among other things, that Viacom is contractually entitled to all rights to produce and exploit the motion picture Spiderman. Based on this claim, Viacom is seeking damages for breach of contract, specific performance, declaratory relief, interference with contractual relations and interference with prospective economic advantage. The Court has ordered this action consolidated with the action brought by 21st and Golan and with the actions brought by Carolco, CII, SPL and RCS NV against Viacom and Columbia Tri-Star. Carolco is unable to place a monetary value on the rights claimed by Viacom. Viacom asserts that the distribution rights in Spiderman could potentially generate distribution fees to Viacom in excess of $2,000,000. Discovery has commenced in all related cases. On March 6, 1995, the court granted the motion of Carolco, CII, SPL and RCS NV for summary adjudication on 21st's and Golan's cause of action for an injunction, thereby dismissing those parties' claims for an injunction. 21st and Golan's time to seek review of that order by the Court of Appeal has not yet expired. MGM, an indirect subsidiary of MGM Holdings, has filed a declaratory relief action seeking declarations that certain named defendants do not have rights in Spiderman. The named defendants do not include Carolco. On May 25, 1995, a hearing will be held in the U.S. Bankruptcy Court, Central District of California upon a motion of the Chapter 11 Trustee for 21st to sell all of the rights and interest of 21st in the Spiderman motion picture project to a designee of CLBN for $2,000,000 plus 10% of all proceeds realized by CLBN or its designee from the sale of such rights in excess of $2,000,000. According to the Notice of Hearing filed with the Bankruptcy Court by the Chapter 11 Trustee for 21st, CLBN has a secured claim in the 21st bankruptcy estate estimated to be $18,000,000. Class Action Litigation: On January 9, 1992, a purported class action lawsuit was filed in the U.S. District Court, Central District of California, by alleged stockholders of LIVE against Carolco, LIVE and certain of Carolco's and LIVE's past and present executive officers and directors. The complaint alleges, among other things, that the defendants violated Section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder (i) by concealing the true value of certain of Carolco's and LIVE's assets, and overstating goodwill, stockholders' equity, operating profits and net income in Carolco's and LIVE's Forms 10-K for the year ended December 31, 1990, in their 1990 Annual Reports and in their Forms 10-Q for the quarters ended March 31, 1991 and June 30, 1991, and (ii) by materially understating the true extent of the write-off of goodwill in connection with the sale of Lieberman Enterprises Incorporated to Handleman Company in July 1991. In addition, the complaint alleges that certain of the defendants are liable as controlling persons under Section 20 of the Exchange Act and alleges that certain other defendants are liable for aiding and abetting the primary violations. Subsequently, two additional lawsuits were filed in the U.S. District Court, Central District of California, by alleged stockholders of LIVE against the same persons and entities who were defendants in the original action, making substantially the same allegations as were made in the first lawsuit. On March 30, 1992, these lawsuits were consolidated. Further in April 1992, an amended complaint was filed in the consolidated action, (the "Amended Complaint"). The Amended Complaint contains substantially the same allegations as the three original complaints. In addition, the Amended Complaint lengthened the alleged class period and added as defendants certain substantial shareholders (New CIBV, Pioneer and Le Studio), directors and former directors of Carolco (Messrs. Frans Afman, Rene Bonnell, Satoshi Matsumoto, and Ryuichi Noda) and a lender to Carolco. In addition to the claims asserted in the individual actions, a claim for respondeat superior liability was added. On June 17, 1992, the U.S. District Court, Central District of California, entered an order conditionally certifying the class, subject to possible decertification after discovery is completed. On or about January 27, 1993, a second amended complaint was filed in the consolidated action expanding the allegations against certain directors, a lender to Carolco and Pioneer. On April 19, 1993, the Court granted Pioneer's Motion to Dismiss the second amended complaint as against Pioneer. In February 1992, a purported class action lawsuit was filed in the U.S. District Court, District of Delaware, by an alleged holder of Carolco's public debt, against Carolco, LIVE and certain executive officers and directors of Carolco and LIVE. The Delaware complaint alleges, among other things, that the defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by concealing the true value of certain of LIVE's assets, and overstating goodwill, stockholders' equity, operating profits and net income in LIVE's Form 10-K for the year ended December 31, 1990 and in its Forms 10-Q for the quarters ended March 31, 1991 and June 30, 1991. In April 1992, this lawsuit was transferred to the U.S. District Court, Central District of California. The proceedings are being coordinated with the consolidated action described in the preceding paragraph. On June 17, 1992, the U.S. District Court, Central District of California, entered an order conditionally certifying the class, subject to possible decertification after discovery is completed. The purported class action complaints do not contain a damage claim of any specific dollar amount. Discovery has commenced, including the taking of depositions. Cliffhanger Litigation: On October 27, 1993, Gene P. Hines and James R. Zatolokin filed an action in Los Angeles Superior Court against Michael Anthony France, Jr. ("France"), one of the writers for the motion picture Cliffhanger. The plaintiffs alleged various causes of action against France based on the theory that the plaintiffs have legal rights in some of the literary material contributed by France to the Cliffhanger screenplay. On September 9, 1994, the plaintiffs filed a first amended complaint whereby they added claims against, among other defendants, Carolco, CII (erroneously sued as its predecessor, CINV), and Cliffhanger B.V. (collectively, the "Carolco Entities"). The claims against the Carolco Entities are based upon the theory that the Carolco Entities breached certain alleged obligations to the plaintiffs under an agreement whereby the Carolco Entities settled claims by the plaintiffs arising out of the plaintiffs' contention that the Cliffhanger screenplay contained material in which the plaintiffs had legal rights. The plaintiffs alleged that under that settlement agreement, the Carolco Entities were obligated and failed to pay the plaintiffs certain contingent compensation from the proceeds of Cliffhanger, to cooperate with the plaintiffs in attempting to obtain for plaintiff Hines a screen credit on the picture, to provide the plaintiffs with certain sequel rights, to cause various assignees of the Carolco Entities to assume the obligations of the Carolco Entities, to act in the plaintiffs' best interests, not to enter into agreements with individuals having interest adverse to the plaintiffs, and to disclose to the plaintiffs the fact that the Carolco Entities entered into agreements with individuals having interests adverse to the plaintiffs. The plaintiffs do not allege any specific monetary amount by which they allegedly were damaged, except that they alleged in their cause of action against France for breach of oral contract that France should have known that his actions would damage the plaintiffs' reputation, career and future earning capacity in a sum not less that $1,000,000. The plaintiffs have not alleged any specific amount of damage against the Carolco Entities. However, the Carolco Entities have agreed to indemnify France in connection with any judgement that might be entered against him in the action. On December 9, 1994, the trial court sustained without leave to amend the demurrers of France and the Carolco Entities to all of the plaintiffs' causes of action. On January 19, 1995, the court denied plaintiffs' motion for reconsideration of that order. The plaintiffs have not appealed from these rulings but their time to do so has not yet expired. On December 29, 1994, the plaintiffs filed an action in the United States District Court for the Central District of California that is virtually identical to their state court action. The named defendants are identical, as are the claims alleged, with the exception that the federal action includes a federal copyright infringement claim and an accompanying accounting claim, and does not include a purported common law copyright infringement claim. The complaint in that case was served on Carolco and France on April 22, 1995. Management and counsel to the Company are unable to predict the ultimate outcome of these actions at this time. However, the Company and the other defendants believe that these lawsuits are without merit and are defending them vigorously. Accordingly, no provision for any liability which may result has been made in the Company's consolidated financial statements. In the opinion of management, these actions, when finally concluded and determined, will not have a material adverse effect upon the Company's financial position or results of operations. Tax Matters: The Company's tax position for prior taxable years may be adversely affected by an audit presently being conducted by the Internal Revenue Service ("IRS") for the Company's 1988 through 1993 federal income tax returns. In addition, the California Franchise Tax Board ("FTB") is conducting an examination of the Company's 1988 and 1989 State income tax returns. The Company has received notices from the IRS regarding proposed adjustments ("Proposed Adjustments") to the Company's income tax returns for the 1988, 1989 and 1990 taxable years. As of March 31, 1995, the Company has responded or is in the process of preparing responses to all of the Proposed Adjustments by supplying the IRS with additional facts and technical analyses which will be considered by the IRS before it makes a decision whether to propose to assess deficiencies attributable to the Proposed Adjustments. It is anticipated that the IRS will issue additional proposed adjustments. Several of the Proposed Adjustments would disallow deductions or increase income for certain of the Company's taxable years. Many of these Proposed Adjustments affect the timing of income and deductions, i.e., the Company would be required to include income in an earlier taxable year than originally reported or take deductions in a later taxable year than originally reported. Other Proposed Adjustments would reallocate various items of income and deductions between Carolco and CINV (which the Company believes is not subject to federal income taxation), and would include in Carolco's income certain deemed dividends from CINV (the "Carolco/CINV Adjustments"). One of the Proposed Adjustments would subject CINV's income to United States federal income taxation on the basis that Carolco and CINV were engaged in a partnership for income tax purposes and CINV's share of the "partnership" income was foreign source income that was effectively connected with a trade or business conducted in the United States and therefore subject to United States federal income taxation. If the IRS were successful in asserting this theory, most of the Proposed Adjustments relating to the Carolco/CINV Adjustments would be duplicative, and therefore could not be asserted. The Company believes that a number of the Proposed Adjustments are without merit. Because the examination is at an early stage, and because many of the issues dealt with in the Proposed Adjustments are highly complex and unresolved under the current state of the law, the Company cannot predict with any reasonable degree of accuracy the actual tax liabilities that may result from the IRS and FTB examinations. The Company believes its current and non-current deferred income tax liability as of March 31, 1995 is adequate to cover any potential tax liability from such examinations. However, the ultimate tax liability may be substantially higher or lower. Note G - Stockholders' Deficiency In October 1993, Pioneer, Cinepole and MGM Holdings purchased from the Company 40,000, 12,500 and 30,000 shares, respectively, of Series A Convertible Preferred Stock ("New Preferred"), in exchange for cash payments of $40,000,000, $12,500,000 and $30,000,000, respectively. The New Preferred bears an annual dividend rate of 5%. Cumulative dividends are payable when and if declared by the Company's Board of Directors, either (a) out of any funds legally available therefore, or (b) for the first five years after issuance, to the extent legally available therefore, in additional shares of New Preferred equal to 1.25% multiplied by the liquidation preference of the New Preferred on the first day of the next succeeding quarterly dividend period. Through March 31, 1995, approximately $5,063,000 in dividends had been accrued, thereby increasing the aggregate liquidation preference of the New Preferred to $87,563,000. In addition, dividends of $1,095,000 payable on April 1, 1995 were accrued. However, since the Company did not have sufficient "surplus" as defined in the provisions of the General Corporation Law of the State of Delaware, the Company was unable to pay such dividends. Each share of New Preferred, when issued, is convertible at the option of the holder into Common Stock of the Company at $.60 per share. As of March 31, 1995, 145,938,000 shares of Common Stock of the Company would be issuable upon conversion of the New Preferred. Holders of the New Preferred will be entitled to the same voting rights as such holders would be entitled to if they had converted their New Preferred to Common Stock. The holders of the New Preferred will also be entitled to vote as a class on certain matters. Note H - Other Income Other income in 1994 includes revenues from the operations of the Company's film studio in North Carolina ("Carolco Studios"), interest income, rental income and a gain of $1,275,000 recognized upon the sale of the Company's aircraft. Other income in the first quarter of 1994 also includes producers fees of approximately $500,000 related to the motion picture Stargate, paid to the Company pursuant to an agreement entered into with Hexagon Films (U.S.), an indirect, wholly-owned subsidiary of Le Studio. Other income in the first quarter of 1995 includes interest income, rental income and producers fees related to the motion picture Last of the Dogmen, paid to the Company pursuant to an agreement entered into with Last of the Dogmen, Inc. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Carolco is an entertainment company which finances, produces and leases motion pictures for exhibition in domestic and foreign theatrical markets and for later worldwide release in other media including home video and pay and free television. In 1993, the Company released one film, Cliffhanger, which was produced through a joint venture with Pioneer, Cinepole and RCS. In 1994, Carolco had no theatrical releases. Feature film revenues are derived primarily from the distribution of feature films in both domestic and foreign markets. The Company recognizes minimum guaranteed amounts from theatrical exhibition and revenues from home video and pay television license agreements when the license period begins for each motion picture and such motion pictures are available pursuant to the terms of the license agreement. Revenues from theatrical exhibition in excess of minimum guaranteed amounts ("overages") are recognized as they are reported by the distributor. Results of Operation Three Months Ended March 31, 1995 as Compared to Three Months Ended March 31, 1994 Feature film revenues decreased from $20,279,000 for the three months ended March 31, 1994 to $5,778,000 for the three months ended March 31, 1995. This represents a decrease of $14,501,000, or approximately 71.5%. The Company had no theatrical releases during the first quarter of 1995 or the first quarter of 1994. Therefore, revenues for both periods principally represent license fees from exploitation in secondary markets (i.e. pay television, video, free television, etc.) of films released theatrically in prior years. Feature film revenues for the three months ended March 31, 1995 include approximately $1,091,000 in foreign theatrical and video overages related to the 1992 theatrical release of Basic Instinct; approximately $651,000 in foreign theatrical and video overages related to the 1991 theatrical release of Terminator 2:Judgment Day; and approximately $2,050,000 in foreign theatrical and video overages related to the 1992 theatrical release of Universal Soldier. Feature film revenues for the three months ended March 31, 1994 include approximately $8,250,000 from the domestic network television availability of Terminator 2: Judgment Day; $2,984,000 from the domestic syndication television availability of Rambo III, released theatrically in 1988; and $1,417,000 in foreign theatrical overages related to Basic Instinct. Amortization of film costs, residuals and participations decreased by $10,604,000, or 66.1%, from $16,046,000 for the three months ended March 31, 1994 to $5,442,000 for the comparable period in 1995. Amortization of film costs, as a percentage of the Company's feature film revenues, increased to 94.2% for the three months ended March 31, 1995 from 79.1% for the three months ended March 31, 1994. This increase is due to the fact that in 1995 the Company recorded additional amortization of film costs of $1,295,000 as a result of the abandonment of certain development projects. Selling general and administrative ("SG&A") expenses (which caption also includes production overhead costs), before capitalization of production overhead to film costs, decreased by $73,000 during the first quarter of 1995 as compared to the first quarter of 1994. In 1995, the Company capitalized approximately $912,000 of production overhead to film costs and in 1994, the Company capitalized $833,000 of production overhead to film costs. The amounts for 1995 include a reduction in SG&A expenses of $887,000 as a result of reductions in the Company's work force and the downsizing of the operations of the Company. This reduction is offset in 1995 by $1,265,000 in costs relating to the Company's possible plan of reorganization (see Note B). Amounts in 1994 included $305,000 of costs related to the Company's October 1993 restructuring. Interest expense decreased by $775,000, or 19.5%, from $3,981,000 during the first quarter of 1994 to $3,206,000 during the first quarter of 1995. This decrease is the result of lower debt levels in 1995, combined with the capitalization of $297,000 of interest expense to film costs in the first quarter of 1995, as compared to $156,000 in the first quarter of 1994. On February 3, 1994, the Company sold its aircraft for $1,925,000 and the remaining loan balance of $900,000, including accrued interest, was paid in full. The Company recognized a gain of $1,275,000 in 1994 as a result of the sale of the aircraft. The Company incurred a consolidated net loss for the three months ended March 31, 1994 of $2,031,000. The Company incurred a consolidated net loss for the three months ended March 31, 1995 of $5,569,000. At March 31, 1995, the Company had a deficiency in assets of $70,090,000. Liquidity and Capital Resources Carolco currently has one motion picture in production: Cutthroat Island starring Geena Davis and Matthew Modine and directed by Renny Harlin. Cutthroat Island completed principal photography in March 1995 and is scheduled to be completed and available for release in the fourth quarter of 1995. However, there can be no assurance that the film will be completed or released on schedule or that it will be completed and released. The direct negative cost of Cutthroat Island is expected to be in excess of $80,000,000. Carolco has completed certain financing arrangements in connection with Cutthroat Island. On February 6, 1995, Cutthroat Productions L.P. satisfied the conditions necessary for it to draw funds under the Production Loan. The Production Loan provides for financing of up to $60,238,000 in direct negative costs, including completion bond fees, certain contingencies and other financing related expenses. In February and March 1995, Carolco received approximately $25,031,000 in proceeds from the Production Loan, representing reimbursement of a portion of the approximately $80,007,000, including capitalized interest and overhead, Carolco had spent in 1994 and 1995 to develop and begin production of Cutthroat Island. In addition, through March 1995, $13,126,000 in proceeds from the Production Loan were provided directly to Cutthroat Productions L.P. The Production Loan is collateralized by certain pre-sales of foreign and domestic licensing rights of Cutthroat Island. Initial proceeds from the distribution of Cutthroat Island will be used exclusively to repay the Production Loan. In addition, in 1994 the Company received $7,500,000 in co-production investments from TCI, LSC+ Investments Inc., a wholly owned subsidiary of Le Studio Canal+ (U.S.), and RCS. These funds, together with the proceeds of the Production Loan, reduced Carolco's contribution to the negative cost of the film to approximately $47,500,000. CII, with Carolco as principal guarantor, has $14,000,000 in principal amount outstanding under the Existing Carolco Credit Facility as of the date hereof. The maturity date of the loan under the Existing Carolco Credit Facility, which is secured by substantially all of Carolco's assets, is September 30, 1995, provided certain events of default do not occur. CLBN has agreed to remit to CII all collections from accounts receivable pledged to CLBN, so long as certain defaults do not occur. No amounts are available for borrowing under the Existing Carolco Credit Facility. Repayment of the Existing Carolco Credit Facility, without a replacement facility, would have a severe adverse effect on the operations and financial viability of Carolco. In August 1992, Carolco entered into an agreement with the Guilds with respect to amounts owed to the Guilds under certain collective bargaining agreements. As of March 31, 1995, the balance due the Guilds pursuant to the Guild Note was $7,485,000, including accrued interest at 3-month LIBOR plus 1% per annum. The balance of the Guild Note is due in two remaining installments of $3,000,000 each, plus interest, on October 1, 1995 and October 1, 1996, with an additional $600,000 due on October 1, 1996. The Guild Note is secured by a lien on substantially all of the Company's assets, which lien is subordinated to the Existing Carolco Credit Facility. In addition to the Guild Note, the Company has on-going obligations to the Guilds, the AFM and IATSE for amounts owed under similar collective bargaining agreements. In February 1995, the Company paid approximately $3,000,000 to the Guilds, AFM and IATSE representing residual obligations arising from cash received by the Company in the fourth quarter of 1994. The Company estimates that its residual obligations for the first quarter of 1995 will be $1,500,000. The amount of residual obligations to be paid for future period will be determined by the amount of cash receipts received by the Company in each quarter of 1995. As long as the Guild Note is outstanding, the on-going obligations of Carolco under collective bargaining agreements with the Guilds are secured by the same lien as the Guild Note. In connection with the production of its motion pictures, the Company entered into certain contingent compensation agreements with Participants whereby the Company is obligated to pay to the Participants a share of the Company's receipts from the distribution of its released motion pictures. At March 31, 1995, the Company had recorded a liability for present and future obligations of approximately $24,599,000 in connection with various Participants' contingent compensation arrangements. In April 1995, the Company reached settlements with certain Participants, whereby each such Participant agreed to accept a portion of the amount due at March 31, 1995 in exchange for the release of all claims against the Company for current and future participation obligations, subject to certain adjustments under certain circumstances. As a result of these settlement agreements, in April and May 1995 the Company paid approximately $4,800,000 to certain Participants and reduced its liability for current and future contingent compensation obligations. This will result in an extraordinary gain of $3,663,000 in the second quarter of 1995. Additional contingent compensation obligations will be recorded in 1995 based on the film revenues recognized by the Company in 1995. Semi-annual interest of approximately $3,261,000 on the New Senior Notes and the New Senior Subordinated Notes is due on April 15 and October 15 of each year. Semi-annual interest of approximately $224,000 on the 13% Notes is due on June 1 and December 1 of each year. On May 2, 1995, the Company paid approximately $3,279,000 representing the semi-annual interest due on the New Senior Notes and New Senior Subordinated Notes. Such interest payments were made prior to the end of the 30-day grace period provided in the indentures governing such issues of indebtedness. Pursuant to certain distribution agreements with Tri-Star Pictures Inc., ("Tri-Star"), certain payments were due to the Company or its affiliates from Tri-Star at December 31, 1994. In February and March of 1995, Tri-Star paid approximately $14,147,000 pursuant to these distribution agreements. Of this amount, $9,176,000 related to the distribution of Cliffhanger, which was produced through a less -than- 50%-owned joint venture with Pioneer, Cinepole and RCS, and is, therefore, not included in the financial statements of the Company. Pursuant to the Domestic Video Output Agreement, the Company granted to LHV, domestic home video rights to the Company's feature films (except Cliffhanger and Iron Eagle III) on which principal photography commenced prior to July 31, 1995 or for which LHV has paid an advance to the Company prior to such date. Canadian home video rights were not granted to LHV in the case of several films produced by the Company. In consideration for the rights granted by the Company, LHV agreed to pay the Company certain advances for each picture. CINV entered into the German Output Agreement pursuant to which LIVE's affiliates acquire home video rights in the German-speaking European markets for most of the Company's films for which principal photography has commenced or for which LHV paid an advance prior to July 31, 1995. In consideration for the rights granted by the Company, the LIVE affiliate agreed to pay CINV certain advances for each picture. In January 1995, in order to settle disputes between them with respect to the United States and Canadian video distribution rights to the film Cutthroat Island, LIVE and the Company agreed that Cutthroat Island would not be subject to the Domestic Video Output Agreement or the German Output Agreement. Pursuant to a separate agreement, LIVE obtained the video distribution rights to Cutthroat Island in the United States and Canada for a video advance to be paid by LIVE. In addition, LIVE agreed to certain amendments to the Domestic Video Output Agreement, whereby LIVE would no longer have certain rights of offset between prior films distributed pursuant to such agreement. In exchange for the aforementioned arrangements and resolution, the Company paid $3,500,000 to LIVE against accrued liabilities of approximately $5,600,000 and recognized an extraordinary gain of approximately $2,100,000. Going Concern Issues As a result of its reduced production schedule, Carolco did not generate revenues from new production in 1994 and anticipates that it will continue to experience losses through 1995. During the next 12 months, the Company will not have sufficient cash resources and existing financing sources to meet its operating expenses and scheduled debt service obligations, and to continue to fund its principal business activity -- the development, production and exploitation of motion pictures. Therefore, the Company is currently considering a plan which will allow it to continue to operate as a going concern. The plan being considered by the Company includes a combination of the following: the sale of certain assets; identifying and securing new equity investments and/or sources of financing; negotiating more advantageous distribution arrangements which would finance at least 100% of the development, production and distribution of new films; and restructuring the Company's outstanding obligations either outside of a Chapter 11 Bankruptcy filing, or within a Chapter 11 Bankruptcy filing (including a possible prenegotiated plan). If the Company is unable to successfully accomplish the aforementioned plan, or implement other similar strategies, the Company will be unable to continue as a going concern. The consolidated financial statements as of and for the three months ended March 31, 1995 do not include any adjustments to reflect the possible future effects on the recoverability of assets or amounts of liabilities that may result from the inability of the Company to continue as a going concern. CAROLCO PICTURES INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. Legal Proceedings Reference is made to PART I - FINANCIAL INFORMATION, Item 1. Financial Statements, Note F - Commitments and Contingencies which is incorporated herein by reference. Item 3. Defaults Upon Senior Securities Because the Company did not have sufficient "surplus" as defined in and computed in accordance with the provisions of the General Corporation Law of the State of Delaware, the Company was unable to pay dividends in the amount of $818,000, $1,042,000, $1,061,000, $1,061,000 and $1,081,000, due January 1, 1994, April 1, 1994, July 1, 1994, October 1, 1994 and January 1, 1995, respectively, on its Series A Convertible Preferred Stock. As a result, as of March 31, 1995, approximately $5,063,000 in unpaid dividends had been added to the liquidation preference of the Series A Convertible Preferred Stock. In addition, at March 31, 1995, $1,095,000 in accrued dividends payable had been recorded. On April 1, 1995, these upaid dividends were also added to the liquidation preference of the Series A Convertible Preferred Stock. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The Exhibits listed below are filed as part of this Report. Sequentially Exhibit No. Description of Exhibit Numbered Page 10.1 Release and Quitclaim Agreement 26 dated as of March 28, 1995 by and among Carolco Pictures Inc., Carolco International Inc., Spiderman Productions Ltd., RCS Video Services Antilles N.V. and RCS Video International Services B.V. Filed herewith. 11.1 Computation of Loss per 37 Common Share 27 Financial Data Schedule 38 (b) No Reports on Form 8-K were filed during the quarter ended March 31, 1995. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAROLCO PICTURES INC. Registrant Date: May 15, 1994 /s/ Karen A. Taylor Karen A. Taylor, Senior Vice President and Acting Chief Financial Officer EX-11.1 2 [DESCRIPTION] EXHIBIT EXHIBIT 11.1 CAROLCO PICTURES INC. COMPUTATION OF EARNINGS PER COMMON SHARE Three Months Ended 1994 1995 -------------------- Weighted average shares outstanding 140,015,109 140,015,109 Less Treasury shares (2,327,381) (2,373,756) ------------ ------------ Total 137,687,728 137,641,353 ============ ============ Loss before extraordinary item ($2,031,000) ($7,706,000) Preferred Dividends (1,045,000) (1,095,000) ------------ ------------ Loss before extraordinary item attributable to common shares ($3,076,000) ($8,801,000) ============= ============ Loss before extraordinary item per common share $(0.02) ($0.06) ============= ============ Income from Extraordinary Item $0 $2,137,000 ============= ============ Income from Extraordinary Item per common share $0.00 $0.02 ============= ============ Net loss ($2,031,000) ($5,569,000) Preferred Dividends (1,045,000) (1,095,000) ------------- ------------ Net loss attributable to common shares ($3,076,000) ($6,664,000) ============= ============ Net loss per common share ($0.02) ($0.04) ============= ============ Page 26
EX-27 3
5 1000 3-MOS JAN-01-1995 MAR-31-1995 DEC-31-1995 34,161 0 10,469 (1,390) 117,268 0 14,824 (9,293) 172,991 0 119,776 1,400 0 89 (71,580) 172,991 5,778 6,522 5,442 5,442 5,254 0 3,206 (7,380) 326 (7,706) 0 2,137 0 (5,569) (.04) (.04)
EX-10.1 4 RELEASE AND QUITCLAIM AGREEMENT This RELEASE AND QUITCLAIM AGREEMENT dated as of March 28, 1995 (this "Agreement") is entered into by and among Carolco Pictures Inc., a Delaware corporation ("Carolco"), Carolco International Inc., a Delaware corporation (formerly Carolco International N.V.) ("Carolco International"), Spiderman Productions Ltd., an international business company formed under the laws of the British Virgin Islands ("Spiderman"), RCS Video Services Antilles N.V., a Netherlands Antilles corporation ("RCS NV"), and RCS Video International Services B.V., a Netherlands corporation ("RCS BV"), with reference to the following facts: R E C I T A L S WHEREAS, in exchange for the consideration set forth herein, the parties hereto desire to settle certain disputes among them with respect to the motion picture "Chaplin" formerly known as "Charlie" ("Chaplin"); and WHEREAS, in exchange for the consideration set forth herein, RCS NV and RCS BV and all of their related and affiliated persons and entities (including, but not limited to, any of their successor entities) (collectively, the "RCS Parties") desire to transfer to Carolco and Carolco International all of their rights in and to the motion picture project currently entitled "Spiderman" ("Spiderman") including, without limitation, any and all characters and any and all materials (including all versions of the screenplay), and all of their ownership interests in Spiderman. (Carolco, Carolco International and Spiderman and all of their related and affiliated persons and entities (including, but not limited to, any of their successor entities) are collectively referred to herein as the "Carolco Parties"). NOW, THEREFORE, the parties hereto agree as follows: 1. Waivers and Releases Regarding "Chaplin." Effective on the Closing (as defined in Paragraph 5 below) and in consideration for the covenants and agreements contained herein, the parties hereto agree as follows: 1.1. Release of Claims by the RCS Interests. The RCS Parties and all of their past and present predecessors, successors, parents, partners, subsidiaries, principals, officers, directors, employees, agents, attorneys and other related or affiliated entities and persons (collectively, the "RCS Interests") hereby fully and irrevocably release and discharge the Carolco Parties and all of their past and present predecessors, successors, parents, partners, subsidiaries, principals, officers, directors, employees, agents, attorneys and other related or affiliated entities and persons (collectively, the "Carolco Interests") of and from any and all claims, actions, causes of action and obligations, known or unknown, which the RCS Interests have had, may have had or now have or hereafter can, shall or may have against the Carolco Interests for or by reason of any matter, cause or thing whatsoever relating to Chaplin, including, but not limited to, (i) any claims, obligations or demands, described, referred to, or set forth in that letter dated March 30, 1994 from Paul Downs to Carolco on behalf of the RCS Parties and that letter dated July 28, 1994 from Kenneth Sidle to Mr. Downs on behalf of the Carolco Parties (the "July 28 Letter") including, but not limited to, the Minimum Receipts Guarantee and Loss Protection Payment as defined in the July 28 Letter and (ii) any amounts or sums which may be due to the RCS Interests now or in the future related to Chaplin pursuant to the Participation and Assumption Agreement dated as of October 14, 1991 between RCS NV and Carolco International, the purported letter agreement dated as of October 14, 1991 between RCS NV and Carolco International, the Co-Production Agreement dated as of May 8, 1991 between RCS NV and Carolco, the Chaplin Commitment Letter as defined in the July 28 Letter, the Commitment Agreement as defined in the July 28 Letter (the "Commitment Agreement") and the Chaplin Co-Production Agreement as defined in the July 28 Letter, and all other agreements, arrangements, documents, and understandings, oral or written, relating to Chaplin in any manner whatsoever. This release shall not include any and all claims, actions or causes of action based on, arising from or related to the exploitation of distribution rights referred to in Paragraph 3 herein after the Closing (as defined herein) and shall not include any obligations created by this Agreement. 1.2. Release of Claims by the Carolco Interests. The Carolco Interests hereby fully and irrevocably release and discharge the RCS Interests of and from any and all claims, actions, causes of action and obligations, known or unknown, that the Carolco Interests have had, may have had or now have or hereafter can, shall or may have against the RCS Interests for or by reason of any matter, cause or thing whatsoever relating to Chaplin. This release shall not include any and all claims, actions or causes of action based on, arising from or related to the exploitation of distribution rights referred to in Paragraph 3 herein after the Closing and shall not include any obligations created by this Agreement. 1.3. No Admission. The parties hereby acknowledge and agree that this Agreement is a compromise settlement which is not in any respect nor for any purpose to be deemed or construed to be or in any way used as evidence of an admission or concession of any liability whatsoever on the part of any of them or any other person, firm or corporation whatsoever. 2. Quitclaim and Releases Regarding "Spiderman." Effective on the Closing and in exchange for the consideration set forth in Paragraph 5.1, RCS NV and RCS BV, individually and on behalf of the other RCS Interests, agree that all of their right, title and interest in and to Spiderman and all of their ownership interests in Spiderman shall be transferred to Carolco. In furtherance of the foregoing, the parties hereto agree as follows: 2.1. Sale and Purchase of Shares. On the Closing, RCS NV shall sell and transfer to Carolco all of its ownership interest in Spiderman represented by share certificate number 3 for 10,000 Class A shares of Spiderman (the "Shares"), free and clear of all encumbrances. 2.2. Quitclaim of All Rights. Effective on the Closing and except as provided below, RCS NV and RCS BV, individually and on behalf of the other RCS Interests, hereby quitclaim to Carolco all of the RCS Interests' right, title and interest in and to that motion picture project and screenplay currently entitled "Spiderman" (the "Property"), including, but not limited to, the RCS Interests' right, title and interest in: 2.2.1. All literary and/or dramatic material including, but not limited to: all rights in and to all drafts and versions of the screenplay(s) for Spiderman written by James Cameron, Ted Newsom & John Brancato, Menahem Golan, Jon Michael Paul, Ethan Wiley, Leslie Stevens, Frank Laloggia, Neil Ruttenberg, Barney Cohen, Shepard Goldman and any and all other writers who performed writing services in connection with Spiderman (which literary and/or dramatic material is hereinafter collectively referred to as "the Literary Property"); 2.2.2. All of "the Documents." As used herein, the term "the Documents" shall be deemed to mean and refer to all contracts, assignments and other instruments related to the Property and shall encompass all rights set forth in said Documents including, but not limited to: the Commitment Agreement dated as of March 17, 1992 among RCS NV, Carolco and Carolco International (the "Spiderman Commitment Agreement"), all agreements previously assigned to Spiderman Productions, Ltd. pursuant to that certain Exchange Agreement dated as of November 17, 1992 among Carolco, Carolco International, RCS NV and Spiderman (the "Exchange Agreement") and any and all subsequent agreements to which any of the RCS Interests is a party relating to the rights in and to the Property, the development of the Property and/or the engagement of above-the-line personnel in connection with the development or production of the Property and excluding only the distribution rights specified in Section 3 herein; 2.2.3. All other instruments, if any, pursuant to which any of the RCS Interests acquired any right, title or interest in or in connection with the Property, but only insofar as such contracts, assignments and other instruments relate to the Property. 2.3. Assignment of Security Interests. Effective on the Closing, RCS NV hereby assigns and transfers to Carolco all of its right, title and interest in and to the Spiderman Commitment Agreement, that certain Security Agreement dated as of March 17, 1992 among Carolco, Carolco International and RCS NV, the Exchange Agreement and any and all security interests granted to RCS BV by Spiderman and/or by Carolco and Carolco International with respect to the Property, the Literary Property and/or the Documents. 2.4. Consent to Sale of Shares. Pursuant to Section 13 of the Memorandum of Association of Spiderman, Carolco International and RCS NV as members of Spiderman hereby consent to the sale of Shares contemplated by Section 2.1 of this Agreement. 2.5. Release of Claims. The Carolco Interests, on the one hand, and the RCS Interests, on the other hand, hereby fully and irrevocably release and discharge each other of and from any and all claims, actions or causes of action, known or unknown, that they or any of them had, have or in the future may have against each other based on, arising from or related to Spiderman, Spiderman, the Property, the Literary Property or the Documents. This release shall not include any and all claims, actions or causes of action based on, arising from or related to the distribution rights referred to in Paragraph 3 herein and shall not include any obligations created by this Agreement. 3. Distribution Rights. Reference is hereby made to that certain Output Agreement dated as of May 8, 1991 by and between RCS NV and Carolco International (hereinafter, the "Output Agreement"). The Output Agreement shall continue to remain in full force and effect. Solely with regard to Chaplin, the Output Agreement was modified by the Commitment Agreement and by its terms RCS NV shall have perpetual distribution rights in the Territory (as defined in the Commitment Agreement) and such modification shall also remain in effect. Further, the parties hereby acknowledge that the Output Agreement (subject only to the modification described in the preceding sentence) is the sole agreement between the parties with regard to Chaplin and Spiderman that shall remain a valid agreement in full force and effect following the execution of this Release and Quitclaim Agreement (it being understood that the Output Agreement shall not apply to Spiderman unless Spiderman is made in such a manner as to be subject to the Output Agreement); and that the parties' rights pursuant to the Output Agreement shall be as specified therein and as specified in this Paragraph 3 and shall be neither enhanced nor diminished as a result of this Release and Quitclaim Agreement. 4. Representations and Warranties. 4.1. RCS BV and RCS NV represent and warrant as of the date hereof, and again as of the Closing, that: 4.1.1. Authorization and Enforceability. The execution, delivery and performance of this Agreement (and all other documents, instruments and agreements executed in connection herewith) by them has been duly authorized by all necessary corporate action on their part. This Agreement and all other documents, instruments and agreements executed by RCS BV and RCS NV in connection herewith constitute their valid and legally binding agreements, enforceable against them in accordance with their respective terms, except to the extent that enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforceability of creditors' rights generally, or by general equitable principles. 4.1.2. No Material Defaults or Encumbrances. The execution, delivery and other performance by RCS BV and RCS NV of this Agreement and all other documents, instruments and agreements executed in connection herewith, and the consummation by RCS BV and RCS NV of the transactions contemplated hereby, do not and will not (i) constitute a material violation of or default under (either immediately, upon notice or upon lapse of time) their Certificates of Incorporation, Bylaws, other constituent documents, any provision of any material contract to which RCS BV or RCS NV is a party or by which it may be bound, or (ii) result in the creation or imposition of any encumbrance upon, or give to any third person any interest in or right to, any of the Shares, the Property, the Literary Property or any other property transferred hereby. 4.1.3. Ownership of Shares. RCS NV is the record and beneficial owner of all of the Shares and has the full and unqualified legal right, power and authority to sell, transfer, assign and convey to Carolco complete and absolute legal and equitable title to all of the Shares, free and clear of any encumbrances, subject to any rights or remedies asserted by any of the parties (other than any of the RCS Interests) in the litigation referred to in Paragraph 4.1.5 below. On the Closing, upon consummation of the transactions contemplated hereby, Carolco will acquire complete and absolute legal, equitable, good, valid and marketable title to all of the Shares, free and clear of all encumbrances, subject to any rights or remedies asserted by any of the parties (other than any of the RCS Interests) in the litigation referred to in Paragraph 4.1.5 below. 4.1.4. Ownership of Claims. None of the RCS Interests have assigned or in any way conveyed, transferred or encumbered all or any portion of the claims, obligations or rights released or transferred by this Agreement. 4.1.5. Ownership of the Property. None of the RCS Interests have heretofore granted, assigned, hypothecated, pledged, encumbered or otherwise disposed of, in any manner whatsoever any right, title or interest heretofore acquired by it in or to said Literary Property or in, to or under said Documents. There has been paid to the party or parties entitled thereto all sums which have heretofore become payable under said documents. To the best of the RCS Interests' knowledge, there is not now outstanding any litigation or threat of litigation or claim or threats of claims which affect or are concerned with or any way touch upon any of the rights, licenses, privileges and property quitclaimed to Carolco pursuant to this Agreement other than the following cases: Metro-Goldwyn-Mayer Inc. v. Menahem Golan, et. al. (Case No. BC 113157); 21st Century Film Corporation, et. al., v. Carolco Pictures Inc., et. al. (Case No. 079359 and Consolidated Case Nos. SC 028496, SC 028497 and BC 105018); 21st Century Film Corporation, et. al., v. Carolco Pictures Inc., et. al. (Case No. BC 079 359); Carolco Pictures Inc., et. al., v. CPT Holdings, Inc., et. al. (Consolidated Case No. SC028496); Carolco Pictures Inc., et. al. v. Viacom International Inc., et. al. (Consolidated Case No. SC028497); Viacom International Inc. v. Carolco Pictures Inc., et. al. (Consolidated Case No. BC105018); and In re 21st Century Film Corporation, In re 21st Century Productions N.V. and In re 21st Century Releasing Corporation (Case Nos. LA 93-53846-KL, LA 94-16008-KL and LA 94-16012-KL) (collectively, the "Spiderman Litigation"). The RCS Parties specifically make no representations or warranties with respect to the outcome of the Spiderman Litigation or any claims by Marvel Entertainment Group, Inc. or any of its affiliates respecting Spiderman and/or Spiderman and Carolco hereby assumes all risk of an adverse result arising from these claims or lawsuits. 4.2. Carolco, Carolco International and Spiderman represent and warrant as of the date hereof, and again as of the Closing, that: 4.2.1. Authorization and Enforceability. The execution, delivery and performance of this Agreement (and all other documents, instruments and agreements executed in connection herewith) by them has been duly authorized by all necessary corporate action on their part. This Agreement and all other documents, instruments and agreements executed by Carolco, Carolco International and Spiderman in connection herewith constitute their valid and legally binding agreements, enforceable against them in accordance with their respective terms, except to the extent that enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforceability of creditors' rights generally, or by general equitable principles. 4.2.2. No Material Defaults. The execution, delivery and other performance by Carolco, Carolco International and Spiderman of this Agreement and all other documents, instruments and agreements executed in connection herewith, and the consummation by Carolco, Carolco International and Spiderman of the transactions contemplated hereby, do not and will not constitute a material violation of or default under (either immediately, upon notice or upon lapse of time) their Certificates of Incorporation, Bylaws, other constituent documents, any provision of any material contract to which Carolco, Carolco International and Spiderman is a party or by which it may be bound. 4.2.3. Ownership of Claims. None of the Carolco Parties has assigned or in any way conveyed, transferred or encumbered all or any portion of the claims, obligations or rights released by them pursuant to this Agreement; provided however, Carolco has previously granted a security interest in the assets of Spiderman relating to Spiderman to Le Studio Canal+ S.A. and Pioneer LDCA, Inc. pursuant to a certain Security Agreement dated as of November, 1992. 4.2.4. Bankruptcy Proceedings. No petition has been filed by or against Carolco, Carolco International or Spiderman for relief under any applicable bankruptcy, insolvency or similar law. No decree or order for relief has been entered in respect of Carolco, Carolco International or Spiderman, voluntarily or involuntarily, under any such law. No receiver, liquidator, sequestrator, trustee, custodian or other officer has been appointed with respect to Carolco, Carolco International or Spiderman or their respective assets and liabilities pursuant to any such law. None of Carolco, Carolco International or Spiderman has made any general assignment for the benefit of creditors. 5. Closing. The closing under this Agreement shall occur on the later of April 25, 1995, or such other date as the parties hereto may agree in writing (the "Closing"). 5.1. Conditions to the RCS Parties' Obligations. It shall be a condition to the RCS Parties' obligations under this Agreement that Carolco shall have paid, and Carolco agrees on the Closing to pay, RCS NV $4,000,000 by wire transfer to RCS NV's account in accordance with the following instructions: Istituto Bancario San Paolo Di Torino 245 Park Avenue, Suite 3500 New York, New York 10022, USA Swift Code: IBSPUS33 Attention: Ms. Maria Ruberto Account No. 1001010001 Amount in Favor of RCS Video Services Antilles, N.V. - Curacao 5.2. Conditions to Carolco's Obligations. It shall be a condition to Carolco's obligations under this Agreement that the following documents shall have been duly authorized, executed and delivered to it and the RCS Parties agree to authorize, execute and deliver to Carolco the following documents on the Closing: 5.2.1. The stock certificate representing the Shares, together with a stock power endorsed in blank and the share transfer instrument required pursuant to the laws of the British Virgin Islands in the form attached hereto as Exhibit "A." 5.2.2. UCC Financing Statement Assignments, and such other documents (including an amendment of the Register of Mortgages and Charges of Spiderman) as may be necessary to evidence the assignment of security interests pursuant to Section 2 hereof, all in form and substance satisfactory to Carolco. A copy of such UCC Financing Statement Assignments is attached hereto as Exhibit "B." 5.2.3. A letter from Luigi Predieri resigning as a director of Spiderman. 5.2.4. The Memorandum of Association of Spiderman shall have been amended to provide that the Shares may not be further transferred or assigned. 5.2.5. An original of each of the Documents, or any of them, in the possession of the RCS Parties; 5.2.6. A copy of each manuscript of the Literary Property then in the possession of the RCS Parties; and 5.2.7. Such further instruments as the Carolco Parties may reasonably require in order to evidence and/or record with the United States Copyright Office or otherwise the Carolco Parties' acquisition of rights hereunder, all in form and substance satisfactory to Carolco, including, but not limited to, the Short Form Assignments attached hereto as Exhibits "C" and "D." 6. Other Matters. 6.1. Section 1542. Without in any way expanding the scope of the releases set forth herein, it is expressly understood that Section 1542 of the Civil Code of California provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release which, if known by him, must have materially affected his settlement with the debtor." RCS BV and RCS NV, individually and on behalf of the other RCS Interests, and Carolco, Carolco International and Spiderman, individually and on behalf of the other Carolco Interests, hereby specifically WAIVE any respective rights they may have under Section 1542 of the Civil Code of California as well as the provisions of all comparable, equivalent or similar statutes and principles of common law of California or of any other jurisdiction and acknowledge and agree that this waiver is an essential and material term of this Agreement without which the consideration given by the parties would not have been given. 6.2. Further Assurances. The parties hereto agree to execute and deliver, or cause to be executed and delivered, all such documents, and do all such things as may be reasonably necessary and proper to carry out and effectuate the intents and purposes of this agreement. Particularly and without limiting the generality of the foregoing, RCS BV and/or RCS NV will execute and deliver, or cause to be executed and delivered, to the Carolco Parties such instruments as may be necessary and proper to effectuate the purposes and interest of this Agreement and to vest in the Carolco Parties the rights herein assigned to the Carolco Parties as a matter of record in the United States Copyright Office, all without any further payment by or cost or expense to the Carolco Parties other than customary recording charges. 6.3. Confidentiality. Each of the parties hereto agrees that it will make no public statement regarding the amount of consideration paid in connection with transactions contemplated hereby and will not disclose to any person, firm, corporation, or other entity the consideration paid pursuant to this Agreement except as required by binding and applicable laws, regulations or orders of any governmental authority. Notwithstanding the foregoing, each of the parties hereto may, in documents required to be filed by it with the Securities and Exchange Commission or other regulatory bodies, make such public statements and disclosure with respect to the transactions contemplated hereby as each may be advised by counsel is legally necessary. 6.4. Spiderman Indemnification. The Carolco Parties shall indemnify and hold harmless the RCS Parties, and each of them, from and against all losses, liabilities, damages, claims, actions, judgments, costs and expenses (collectively, "Claims"), asserted against, resulting to or incurred by the RCS Parties based on, arising from or related to any right, title or interest of the RCS Parties in Spiderman, Spiderman, the Property, the Literary Property or the Documents(including the Claims against the RCS Parties in the Spiderman Litigation), but excluding (i) any Claims arising from any misrepresentation, breach or failure of any warranty or representation made by the RCS Parties in this Agreement or pursuant hereto or from any breach of any term or condition of this Agreement by the RCS Parties, and (ii) any Claims arising exclusively out of RCS's rights pursuant to the Output Agreement. 6.5. Rights and Remedies. Upon the Closing, the rights and remedies of the RCS Parties in the event of a breach of any term or provision of this Agreement by the Carolco Parties shall be limited to the RCS Parties' rights, if any, to an action at law for money damages and the RCS Parties, individually and collectively, shall not have and hereby waive any right to rescind or terminate this Agreement or any part thereof or to enjoin or restrain the exercise of any of the Carolco Parties' rights hereunder; provided however, the foregoing waivers concerning the rights of the RCS Parties shall not apply in the event of the Carolco Parties' breach or failure to comply with their indemnification obligations as set forth in Paragraph 6.4 hereinabove. 7. Miscellaneous. 7.1. Assignment. The respective rights and obligations of the parties under this Agreement shall not be assignable without the prior written consent of the other parties. This Agreement shall inure solely to the benefit of, and be binding upon, the parties hereto. 7.2. Entire Agreement. This Agreement and the other agreements and documents referred to herein set forth the entire understanding of the parties relating to the subject matter hereof and supersede all prior agreements and understandings, whether oral or written. 7.3. Governing Law. This Agreement is made in the State of California and shall be construed in accordance with, and governed by, the laws of that State applicable to contracts made and performed entirely therein, regardless of the law of choice of law of that or any other jurisdiction. 7.4. Jurisdiction. Any judicial proceeding brought against any of the parties to this Agreement on any dispute arising out of this Agreement or any matter related hereto may be brought in the courts in the State of California, or in the United States District Court for the Central District of California, and, by execution and delivery of this Agreement, each of the parties to this Agreement accepts the exclusive jurisdiction of such courts, and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. The foregoing consents to jurisdiction shall not constitute general consents to service of process in the State of California for any purpose except as provided above and shall not be deemed to confer rights on any person other than the respective parties to this Agreement. 7.5. Payment of Expenses for Legal Proceedings. The parties hereto agree that the prevailing party in any action, suit, arbitration or other proceedings between any of the parties arising out of or with respect to this Agreement shall be entitled to reimbursement of all costs of litigation, including reasonable attorney's fees, from the non-prevailing party. 7.6. Amendment; Waiver. No attempted amendment, modification, termination, discharge or change of this Agreement shall be valid and effective, unless the parties shall unanimously agree in writing to such amendment. No waiver of any provision of this Agreement shall be effective unless it is in writing and signed by the party against whom it is asserted, and any such written waiver shall only be applicable to the specific instance to which it relates and shall not be deemed to be a continuing or future waiver. 7.7. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, (i) the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 7.8. Description Headings. The descriptive headings of the several sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 7.9. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of such counterparts together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. CAROLCO PICTURES INC. By: /s/ Robert W. Goldsmith Title: Senior Vice President CAROLCO INTERNATIONAL INC. By: /s/ Robert W. Goldsmith Title: Senior Vice President SPIDERMAN PRODUCTIONS LTD. By: /s/ Lynwood Spinks Title: Managing Director By: /s/ Luigui Predieri Title: Managing Director RCS VIDEO SERVICES ANTILLES, N.V. By: /s/ P. Casalini Title: Managing Director RCS VIDEO INTERNATIONAL SERVICES B.V. By: P. Casalini Title: Managing Director -----END PRIVACY-ENHANCED MESSAGE-----