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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 31, 1996.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
For the transition period from to .
------------ ------------
Commission file number 0-14023
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PRISM ENTERTAINMENT CORPORATION
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(Exact name of Registrant as specified in its charter)
Delaware 95-3897052
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1888 Century Park East, Suite 350, Los Angeles, California 90067
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(Address of principal executive offices) (zip code)
Registrant's telephone number including Area Code: (213)277-3270
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value Per Share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of May 1, 1996, 2,213,000 shares of common stock were outstanding.
It is not meaningful to present the aggregate market value of the outstanding
stock of the registrant held by non-affiliates in view of the limited trading
market in the Company's stock.
Certain exhibits are incorporated by reference to the registrant's
Form S-18 Registration Statement effective on August 14, 1985, the registrant's
Quarterly Report on Form 10-Q for the quarter ended October 31, 1986, the
registrant's Annual Report on Form 10-K for the fiscal year ended January 31,
1987, the registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1988, the registrant's Annual Report on Form 10-K for the fiscal
year ended January 31, 1989, the registrant's Annual Report on Form 10-K for the
fiscal year ended January 31, 1990, the registrant's Annual Report on Form 10-K
for the fiscal year ended January 31, 1991, the registrant's Annual Report on
Form 10-K for the fiscal year ended January 31, 1994, the registrant's Annual
Report on Form 10-K for the fiscal year ended January 31, 1995, the registrant's
Form S-2 Registration Statement effective on March 27, 1990 and the registrant's
Form S-3 Registration Statement effective on February 16, 1993.
The total number of pages in this report is 55. The exhibit index is
located on pages 28 through 34.
2
PART I
------
Item 1. DESCRIPTION OF BUSINESS
-----------------------
General
-------
Prism Entertainment Corporation ("Prism" or the "Company"), a Delaware
corporation, was incorporated on January 27, 1984. The Company has been engaged
in the in-house production of theatrical and television films and other
programming for distribution to the home video, pay and basic cable, network
television and syndication, and theatrical markets worldwide. The Company also
has acquired from third parties rights to such programming, primarily for
distribution to the home video market. The Company has concentrated on
developing and obtaining rights to programming which have not received as wide a
theatrical distribution, if any, as first-run theatrical products.
Through its Prism Pictures Corporation subsidiary ("Prism Pictures"),
the Company has entered into development arrangements with film producers and
others. Through its Prism Pictures International, Ltd. subsidiary ("Prism
International"), the Company has licensed certain of the films produced by Prism
Pictures into the foreign marketplace. Prism International also has acquired
foreign rights to films from independent producers supplementing Prism Pictures'
productions.
Beginning in approximately the fiscal year commencing February 1,
1994, the Company experienced a substantial decline in sales of video cassettes
to the domestic rental market. Management believes that this decline was a
result of a trend in the retail video store market to purchase multiple copies
of studio hits and fewer products of the type sold by the Company (i.e. "B"
movies). This trend continued into the Company's fiscal year commencing
February 1, 1995 causing a material reduction in available cash and receivables
from sale of product. The reduction in receivables, in turn, decreased the
borrowing base under its credit line with Imperial Bank which prevented the
Company from producing new product. The result of the foregoing was that the
Company lacked the necessary cash to operate its business and pay its creditors.
On December 1, 1995, the Company and its subsidiaries filed a
voluntary Chapter 11 petition and commenced a case (the "Bankruptcy
Proceedings") under Chapter 11 of the United States Bankruptcy Code, which is
still pending. Throughout the course of the Bankruptcy Proceedings, the Company
has been operating as a debtor in
3
possession. No trustee has been appointed and no motion has been filed for the
appointment of a trustee. The Company has not yet filed a plan of
reorganization. However, at the present time, the Company is in negotiations
with Imperial Bank, its principal secured creditor, and the Official Committee
of Unsecured Creditors ("Committee") concerning the formation of a consensual
plan.
During the course of the Bankruptcy Proceedings the Company has
entered into a series of stipulations with Imperial Bank concerning the
Company's use of the Bank's collateral, including "cash collateral," for its
operations. These stipulations have all been approved by order of the
Bankruptcy Court.
In view of the Company's cash position, the Company is presently
engaged in only limited business activities consisting of the sale of its
existing film products and the attempt to presell certain ancillary rights for
film properties owned by the Company which the Company would then use to obtain
production financing.
As a result of the contraction in the Company's business activity, the
Company has terminated the employment of a number of its employees and
management personnel, including its Senior Vice President of Sales & Marketing
and the President of Prism Pictures.
Management of the Company is presently focused on seeking
merger/acquisition candidates. While the Company is actively engaged in
discussions with one such candidate, no agreement has been entered into as of
the date of this Report, and no assurance can be given that a transaction will
be consummated with this or any other firm.
Products - Development
----------------------
During the period prior to the filing of the Bankruptcy Proceedings,
the Company had focused on the in-house production of films through its Prism
Pictures subsidiary. Prism Pictures functioned as a mini-studio coordinating
producers, screenwriters and directors to develop scripts and evaluate
production budgets, typically in the $1 million to $1.5 million range. As of
March 31, 1996, Prism Pictures had developed, produced and financed
approximately 52 motion pictures. Prism Pictures films have been distributed
primarily to the home video, television/cable and foreign markets.
Prism Pictures productions have been generally cast with at least two
recognizable anchor "names". Examples of such actors include Martin Sheen (When
the Bough
4
Breaks), Kelly Le Brock (Betrayal of the Dove) and Patsy Kensit (Bitter
Harvest). In evaluating each film project separately, the Company attempted to
produce films across all genres-drama, thriller, comedy, science fiction, family
and action adventure. Prism Pictures films have been shot on location in the
United States, Canada and abroad.
In a typical production, Prism invested approximately 50% of the
overall film budget for domestic rights to be payable upon delivery of the film
with the remainder of the budget to be furnished by the producer or from the
sale of foreign rights. In some cases, the Company has retained foreign rights
to a number of films by financing all of the film budget.
The Company is not presently engaged in any production activity.
Products - Acquisition of Rights
--------------------------------
While prior to the filing of the Bankruptcy Proceedings the Company
had focused on the development of its own product, the Company still acquired
from third parties home video and television rights to films and other
programming. In this regard, Prism obtained exclusive, fixed term licenses for
home video rights from independent theatrical film producers, distribution
companies, and others. The term of most of the licenses ranged from five to
seven years although the term has been as long as twenty years where all rights
were acquired. While the present consumer video cassette format consists
primarily of VHS, Prism generally acquired rights sufficiently broad to
encompass new formats of video cassettes (such as 8mm), video discs,
videocartridges, videotape or similar audio-visual devices. The licenses
typically required payment of non-refundable fixed royalty advances or
guarantees recoupable out of royalties payable to the licensors. Such royalties
were generally fixed percentages, customarily in the range of 10% to 30%, of
Prism's gross receipts from video cassettes sold and not returned. The amount
of royalty advances paid by Prism for home video rights to feature films
generally ranged between $100,000 and $250,000 per title, and higher where
additional rights were acquired.
The Company is not presently engaged in any acquisition activity.
Home Video Marketing and Sales
------------------------------
The home video distribution business involves the promotion and sale
of videocassettes and videodiscs to local, regional and national video retailers
(e.g., video
5
specialty stores, convenience stores, record stores and other outlets), which
then rent or sell the videocassettes and videodiscs to consumers primarily for
private viewing.
Major feature films are usually scheduled for release in the home
video market within four to six months after theatrical release to capitalize on
the theatrical advertising and publicity for the film. Promotion of new
releases is generally undertaken during the nine to twelve weeks before the
release date. Videocassettes of feature films are generally sold to domestic
wholesalers at approximately $50 to $60 per unit and generally are rented by
consumers for fees ranging from $1 to $5 per day. Selected titles, including
certain made-for-video programs, can be priced significantly lower to encourage
direct purchase by consumers.
As set forth above (See, "DESCRIPTION OF BUSINESS - General") the
Company believes that home video retailers have been increasing their purchases
of video cassettes of hit movies produced by the major studios, thus leaving
little or no budget dollars for the purchase of the type of product produced by
Prism.
Pursuant to an Agreement dated November 8, 1994 (the "THE Agreement")
between the Company and Turner Home Entertainment, Inc. ("THE"), the Company
granted to THE the exclusive right to distribute the Company's new programming
as well as the Company's existing library in the United States home video
market. The term of ("THE") the THE Agreement is three years, and the Company
was required to deliver no fewer than 9 pictures each year during such term
which are in-house productions. THE is also granted the right of first
negotiation to extend the term of the arrangement. Under the THE Agreement, THE
is required to sell the Company's product, to bill and collect the revenues
generated from sales, and to remit to the Company such collections less a
distribution fee and distribution expenses incurred by THE on behalf of the
Company. THE is obligated to make certain scheduled minimum payments to the
Company recoupable from proceeds otherwise payable to the Company. As part of
its obligations under the THE Agreement, THE is responsible for arranging for
the manufacturing and distribution of the Company's video cassettes as well as
billing and collection therefor. The Company is responsible for arranging for
the packaging and artwork for the video boxes, and all marketing programs in
support of the sales efforts.
6
Because of the curtailment of the Company's production activities
discussed above, THE's activities are currently limited to sales of existing
products from Prism's library.
Foreign Sales
-------------
In 1993, the Company formed Prism International to license Prism
Pictures produced product into the foreign marketplace. Prism International has
also acquired foreign rights to films from independent sources for license
outside the United States. The Company is still engaged in the sale of foreign
rights to its existing film library and films owned by third parties.
Ancillary Rights
----------------
The Company has formed a separate division within Prism Pictures to
sell rights for Prism Pictures product to the domestic ancillary market,
including pay-per-view, pay and basic cable, free television and laser discs.
Several of the Company's films have been selected as premiere movies on pay
cable channels such as HBO, Encore, Showtime and USA Network. The Company
continues to license rights to its existing product for the ancillary market.
Competition
-----------
The Company has faced substantial competition in producing
programming, acquiring home video rights and in marketing home video cassettes.
The Company's competitors include major studios and their affiliates, such as
Universal, Walt Disney, Paramount, Warner Bros., CBS/Fox Video, Turner
Broadcasting Systems/New Line Home Video and independent companies, such as
Trimark Entertainment. In addition, Prism faces competition from a number of
privately held production companies which target the home video market,
including Full Moon Productions, Cinetel Films, Arrow Films Int'l., Vision
Entertainment and Saban Productions. Many of these private companies have video
distribution arrangements with major studios. As indicated above, many of the
Company's competitors have available for distribution "A" quality films which
have increasingly attracted the "buy" decisions of video retailers thus limiting
the market available to the Company.
In the international distribution market, the Company has competed
with a wide range of companies from small independent production companies to
sales agents acting as producers' representatives. Competitors in this market
include Atlas Int'l. and Betafilm (Germany), Capitol Films (Britain), DB Media
(Italy) and UGC Int'l. (France).
7
Employees
---------
As of January 31, 1996, the Company had 14 full-time employees working
in executive, administrative, marketing and support capacities. No employee is
represented by any union or guild. The Company believes that relations between
the Company and its employees are satisfactory.
Item 2. PROPERTIES
- -------------------
The Company leases office space in Century City, Los Angeles,
California, at an annual rent of approximately $195,000. The space is used for
the Company's executive and business offices. The Company believes that the
space is suitable and adequate for its current business needs.
Item 3. LEGAL PROCEEDINGS
-----------------
Tom Coleman v. Prism Entertainment Corporation; Los Angeles Superior
Court Case No. WEC 129295 (consolidated with C748210); Case No. 2
Civil B09586 in the Second Appellate District, California Court of
Appeals
Tom Coleman, the former principal shareholder and executive officer of
Atlantic Entertainment Corporation ("Atlantic"), has sued the Company, its
President Barry Collier, and its former director, Paul Levinson, in Los Angeles
Superior Court alleging that he is a third party beneficiary of a purported 1988
agreement providing for the merger of Atlantic and the Company. In that alleged
capacity, Coleman sued for breach of the alleged merger and for various alleged
acts in the performance or making of the alleged merger agreement. On April 26,
1995, the Los Angeles Superior Court ruled in favor of defendants on their
motion for summary judgment and ordered Coleman's case dismissed in its
entirety, ruling that Coleman was not a third party beneficiary of the alleged
merger agreement. On May 3, 1995, the Los Angeles Superior Court entered
judgment in favor of all defendants. Coleman filed a motion for reconsideration
of the Superior Court's ruling dismissing his case. The Court denied that motion
on July 21, 1995. On August 4, 1995, Coleman appealed. That appeal is currently
pending but has been stayed as against the Company because of its bankruptcy.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
(Not Applicable)
8
PART II
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Item 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------
Until November 30, 1996, the Company's common stock was traded on the
American Stock Exchange under the symbol "PRZ". In response to the anticipated
filing of the Bankruptcy Petition, the American Stock Exchange suspended trading
for the Company's common stock pending review of the Company's Plan of
Reorganization and its then eligibility for continued trading. Thereafter, the
Common Stock has traded on a very limited basis on the NASD Electronic Bulletin
Board. Listed below are the high and low sale prices for the Company's common
stock for each full fiscal quarter ended from April 30, 1993 to November 30,
1995, as reported on the American Stock Exchange.
High Low
---- ---
1993
First Quarter.......................... 5-1/4 3-3/8
Second Quarter......................... 3-5/8 2-1/2
Third Quarter.......................... 3-5/8 2-5/8
Fourth Quarter......................... 3-1/2 2-13/16
1994
First Quarter.......................... 3-1/4 2-5/8
Second Quarter......................... 3-3/8 1-7/8
Third Quarter.......................... 3-1/4 1-5/8
Fourth Quarter......................... 2-5/16 1-5/8
1995
First Quarter.......................... 1-7/8 15/16
Second Quarter......................... 3-1/2 2-5/16
Third Quarter.......................... 3 1-7/8
Fourth Quarter......................... 1-7/8 1-1/2
The Company had approximately 750 beneficial holders of its common
stock as of March 31, 1996.
The Company has never paid a dividend and does not anticipate paying
any dividends in the fiscal year ending January 31, 1997.
9
Item 6. SELECTED FINANCIAL DATA
-----------------------
The financial information included in this table has been derived from
the financial statements for the periods indicated. The financial statements
for the years ended January 31, 1996, January 31, 1995 and January 31, 1994 have
been audited by BDO Seidman LLP, independent certified public accountants, whose
report is included elsewhere in this document. The financial statements for the
years ended January 31, 1993 and January 31, 1992 were audited by other
independent certified public accountants. The Selected Financial Data should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the financial statements and related
notes thereto appearing elsewhere in this document.
10
STATEMENT OF OPERATIONS DATA
YEAR ENDED JANUARY 31
(in thousands except per share amounts)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net Sales $15,798 $17,915 $20,018 $17,941 $ 10,598
Cost of Sales 17,044 10,858 10,560 9,400 6,055
------- ------- ------- ------- --------
Gross Profit (Deficit) (1,246) 7,057 9,458 8,541 4,543
------- ------- ------- ------- --------
Expenses
Selling, general
and administrative 7,326 7,642 8,333 8,605 7,531
Other 148 -- (158) (104) 14
------- ------- ------- ------- --------
(Loss) Income before
provision (benefits)
for income taxes and
cumulative effect of
accounting change (8,720) (585) 1,283 40 (3,002)
Provision (benefit)
for income taxes (914) (187) 52 17 (819)
------- ------- ------- ------- --------
(Loss) Income before
cumulative effect of change
in accounting method (7,806) (398) 1,231 23 (2,183)
Cumulative effect on
prior years of changing method
of accounting for income taxes -- -- 285 -- --
------- ------- ------- ------- --------
Net (loss) income $(7,806) $ (398) $ 1,516 $ 23 $ (2,183)
======= ======= ======= ======= ========
PRIMARY EARNINGS PER SHARE
(Loss) Income before
cumulative effect of
accounting change $ (3.53) $ (.18) $ .56 $ .01 $ (1.04)
Cumulative effect
of accounting change -- -- .13 -- --
------- ------- ------- ------- --------
Net (loss) income per share $ (3.53) $ (.18) $ .69 $ .01 $ (1.04)
======= ======= ======= ======= ========
11
1996 1995 1994 1993 1992
FULLY DILUTED EARNINGS PER SHARE
(Loss) Income before
cumulative effect
of accounting
change $ (3.76) $ (.18) $ (.57) $ .01 $ (1.04)
Cumulative effect
of accounting
change -- -- .09 -- --
------- ------- ------- ------- --------
Net (loss) income
per share $ (3.76) $ (.18) $ .66 $ .01 $ (1.04)
======= ======= ======= ========
Weighted average
number of
common shares
outstanding
PRIMARY 2,213 2,213 2,195 2,098 2,097
======= ======= ======= ======= ========
DILUTED 2,213 2,213 3,203 2,098 2,097
======= ======= ======= ======= ========
Total Assets $15,444 $29,403 $27,040 $21,778 $20,166
======= ======= ======= ======= ========
Cash Dividends -- -- -- -- --
12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------
Results of Operations
- ---------------------
The following table breaks down the Company's sales by percentages
into the markets serviced.
Year Ended January 31
------------------------
1996 1995 1994
----- ---- ----
Net Sales
Video Sales - Domestic
Rental Market 50.7% 49.4% 67.8%
"Sell-Through Market" U.S. 7.0 1.8 2.7
Ancillary Sales - Television
Rights - Domestic 25.5 22.0 11.5
Foreign Rights 16.8 24.3 18.0
Theatrical -- 2.5 --
----- ----- -----
100.0% 100.0% 100.0%
Years ended January 31, 1996 and January 31, 1995
- -------------------------------------------------
Net sales decreased $2,117,000 or 11.8% from $17,915,000 last year to
$15,798,000. the decrease was primarily a result of a 38.8% decrease in sales
of rights in the foreign marketplace since the Company was financially unable to
produce any new films for sale at the last two major markets, i.e. the Cannes
Film Festival in May, 1995 and MIFED in Milan, Italy in November 1995.
Sales of video cassettes to the home video rental market decreased 10%
as a result of a greater number of films released by the studios which have been
released theatrically and had large box office receipts. Films with box office
receipts are selected for purchase by the home video retailer prior to selecting
direct to video films. There were no domestic theatrical releases in the
current year.
The decreases were offset by an increase of $785,000 in cassette sales
to the home video "sell-through" market. However, the profit margin of "sell-
through" videos is very small compared to the video rental market. "Sell-
through" product retail price is $9.95 compared to $79.95, $89.95 and $92.95 for
rental product.
In November 1994, the Company entered into a three year exclusive
domestic distribution agreement with Turner Home Entertainment, Inc. The
agreement provides that Turner assume
13
all domestic sales responsibility for the Company's product in the domestic home
video market, both rental and "sell-through."
Ancillary sales, sales of domestic television rights were
approximately the same for both years.
Cost of sales increased $6,186,000, from $10,858,000 for the year
ended January 31, 1995 to $17,044,000 for the year ended January 31, 1996. The
majority of the increase is due to an increase of $5,352,000 in amortization
expense based on a revision of the Company's estimated ultimate revenues. Also,
distribution expenses increased $765,000 as a result of the fees earned by
Turner for the domestic home video sales into the rental and "sell-through"
markets. The remaining difference is primarily a write down of the Company's
video finished goods inventory to realizable cash value, offset by reductions in
production of artwork and trailers as part of the Company's cost reduction
program.
Selling, general and administrative expenses decreased $504,000. This
is due primarily to a decrease in advertising and selling expenses since these
activities are now the responsibility of Turner pursuant to the distribution
agreement.
Interest expense and loan costs increased $175,000 due to increased
borrowings under the Imperial Loan Agreement and payment schedules negotiated
with several creditors requiring interest payments.
Interest income decreased $13,000 as the Company's shortage of cash
did not allow for any short term investments compared to last year.
The Company recorded an income tax benefit of $914,000 in the year
ended January 31, 1996 relating to the reversal of temporary differences against
the deferred tax liability.
Years ended January 31, 1995 and January 31, 1994
- -------------------------------------------------
Net sales decreased 10.6% from $20,018,000 to $17,914,000. The
decrease was the result of a 35% decrease in home video sales to the rental
market. Direct to video sales to the home video rental market were negatively
affected by a greater number of films released by the studios which have been
released theatrically and had large box office receipts. Films with box office
receipts are selected for purchase by the home video retailer prior to selecting
direct to video films. In addition, introduction of computer games to video
rental stores caused a redirection of amounts otherwise available to purchase
"B" titles.
14
Sales of films into the foreign marketplace and sales of ancillary
rights for domestic viewing increased by 40% from last year with the
introduction of films produced in 1992 by the Company's Prism Pictures
subsidiary. These sales partially offset the home video market decline.
The Company also had domestic theatrical sales of $450,000 from its
first theatrical release of a Prism Pictures film, "A Million to Juan".
In September, 1993, the Company repriced 20 films from its catalog for
the home video "sell-through" market. This was the Company's first "sell-
through" promotion in approximately two years, resulting in more than $300,000
in sales during fiscal 1995 and more than $500,000 during fiscal 1994.
Cost of sales increased $296,000 primarily from an increase in film
costs and increase in distribution, production, artwork and trailers needed to
support the entry into the foreign and theatrical markets and the increase in
ancillary sales to the domestic television marketplaces.
Selling, general and administrative expenses decreased $861,000 from
$7,353,000 to $6,492,000. This is primarily due to a decrease in advertising of
$691,000 and the remaining decrease in selling expenses. In the July 31, 1994
quarterly report, the Company announced it had instituted cost reductions in the
areas of distribution, sales and marketing. This decrease is the first result
of this program.
Interest expense increased $71,000, from $939,000 to $1,010,000
primarily from an increase in the prime rate on the Company's bank debt during
the year. Interest income decreased by $57,000 from $101,000 to $44,000 since
the Company utilized the majority of its cash to produce films and did not have
the level of short term investments compared to last year.
Loan costs included the amortization of the costs related to the
Convertible Subordinated Debentures over a 10-year period, the life of the
Debentures, and the Bank of America NT & SA commitment fee for the Company's
renewal of its line of credit.
The benefit for income taxes of $187,000 for the year ended January
31, 1995 is the result of deferred tax liability reversing in the current year.
Net income before taxes decreased $2,164,000 as compared to last year
due to lower sales of $2,104,000, partially offset by lower selling and general
administrative expenses.
15
Liquidity and Capital Resources
- -------------------------------
The Company finances its activities from cash flow and borrowing from
banks and other financial institutions and from the public debt market.
On March 13, 1995, the Company and Imperial Bank of Los Angeles,
California entered into an agreement for the bank to supply the Company with a
$6,000,000 revolving line of credit secured by the assets of the Company,
reducing to $5,000,000 on December 31, 1995 with an expiration date of June 16,
1996. This replaced the Company's previous $5,000,000 line of credit with Bank
of America NC & SA.
The Company had fully utilized its available line of credit at July
31, 1995 and had to rely on its current cash flow to meet its future
obligations. The Company had incurred a substantial loss in the fiscal years
ended January 31, 1995 and 1996 creating a significant working capital shortfall
and was unable to meet its current obligations to its creditors. Therefore, on
December 1, 1995 the Company filed for reorganization under Chapter 11 of the
Bankruptcy Code. Since that date, the Company has been operating as a debtor in
possession. The Company has entered into a series of stipulations with Imperial
Bank concerning the Company's use of the Bank's collateral, including "cash
collateral," for its operations.
Cash flow from operating activities for the year ended January 31,
1996 was $1,288,000, which is a $2,375,000 decrease in cash flow from operating
activities from $3,663,000 from the year ended January 31, 1995. The decrease
was a result of the following: a reduction in the balance of accounts
receivable between years of $2,635,000 and an increase in film cost amortization
of $5,352,000, offset by a reduction in minimum guarantees of $6,215,000. The
increase in amortization was a result of the Company revising their estimates of
ultimate revenues. The reduction in minimum guarantees was a result of the
Company producing fewer films in the current year.
Cash flow from operating activities for the year ended January 31,
1995 was $3,663,000, or an increase of $56,000 over the year ended January 31,
1994. The increase was principally due to a decrease in net income of
$1,914,000 offset by an increased gross accounts receivable of $348,000 compared
to an increase in gross accounts receivable of $1,901,000 in the previous year.
Cash used in investing activities for the year ended January 31, 1996
was $1,994,000, which is a $1,632,000 decrease in usage from the year ended
January 31, 1995. This decrease was
16
primarily the result of a decrease in the purchase of licensing rights of
$1,538,000 between years.
Cash used in investing activities for the year ended January 31, 1995,
was $3,626,000 or a decrease of $3,329,000 over the year ended January 31, 1994.
The decrease was primarily attributable to a decrease of $3,368,000 for the
purchase of licensing rights.
Cash provided by financing activities was $935,000 during the year
ended January 31, 1996, compared to cash used in financing activities of
$379,000 for the year ended January 31, 1995, which is a net change of
$1,214,000. The change was primarily the result of the Company drawing down its
line of credit to finance operations.
Cash Flows from financing activities for the year ended January 31,
1995 was ($379,000) or a decrease of $2,149,000 over the year ended January 31,
1994. This decrease was primarily attributable to a decrease of $2,036,000 in
net borrowing on the line of credit.
The Company incurred a loss of ($8,315,000) for the year ended January
31, 1996 and has an accumulated deficit in retained earnings of ($4,950,000) at
January 31, 1996. Further, the Company is in default under the terms of its
line of credit agreement. Because of these and other factors, the Company is in
reorganization under the federal bankruptcy laws in the United States Bankruptcy
Court. These matters raise substantial doubt about the ability of the Company
to continue as a going concern.
Management's plans in this regard are to present a Plan of
Reorganization for approval by the Bankruptcy Court and will include a
significant reduction of the Company's pre-petition obligations and may include
plans to merge with or acquire certain companies which the Company feels would
complement its business activities. There can be no assurance that the Company
will successfully reorganize under the federal bankruptcy laws.
New Accounting Pronouncements
- -----------------------------
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after December 15,
1995. SFAS No. 121 establishes new guidelines regarding when impairment losses
on long-lived assets, which include plant and equipment, and certain
identifiable intangible assets, should be recognized and how impairment losses
should be measured. The Company does not expect adoption of SFAS No. 121 to
have a
17
material affect on its financial position or results of operations.
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) issued by the Financial Accounting
Standards Board (FASB) is effective for specific transactions entered into after
December 15, 1995, while the disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning no later than
December 15, 1995. The new standard establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which an
entity acquired goods or services from nonemployees in exchange for equity
instruments. The Company has determined it will not change its accounting policy
for stock based compensation and will provide the required supplemental
financial statement disclosures.
Seasonality
- -----------
Industry statistics and the Company's operating history indicate there
is a summer sales decline in the home video rental market.
Inflation
- ---------
Management believes that inflation is not a material factor in the
operation of its business at this time.
Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
------------------------
The Financial Statements of the Company filed with and as part of this
Report are hereby incorporated by reference. (See Item 14 of this Report.)
Item 9. CHANGES IN AND DISAGREEMENTS WITH
----------------------------------
ACCOUNTANTS ON ACCOUNTING AND
------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
18
PART III
--------
The following information (Items 10, 11, 12 and 13) is provided as a
part of this Report as the Company does not anticipate filing its definitive
Proxy Statement for its annual meeting of stockholders within 120 days following
the end of its 1996 fiscal year.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
- ------- --------------------------------
Directors
---------
The following table identifies the directors of the Company, their
respective ages, the year in which each was first elected or appointed a
director and, where applicable, any other office of the Company held by each
director. Each director is expected to hold office until the next annual meeting
of stockholders and until their successors have been elected and qualified.
Director of
the Company Other Positions
Name Age Since with Company
- ---- ---- ----------- ---------------
Barry Collier 53 1984 President; Chief
Executive Officer;
Chief Operating
Officer
Peter M. Graham 40 1994 None
Mr. Graham resigned as a director of the Company May 15, 1996.
The business background of each of the Company's directors is
described below.
Executive Officers
------------------
The following table identifies the executive officers of the Company,
their respective ages and the year in which each was first appointed an
executive officer. Each executive officer serves at the discretion of the Board
of Directors, subject to the terms of any employment contract.
Officer
Name Age Office Since
- ---- ---- ----------- -------
Barry Collier 53 Chairman of the Board and 1984
President; Chief Executive
Officer; Chief Operating
Officer
Earl Rosenstein 63 Senior Vice President; 1985
Secretary; Chief Financial
Officer
19
Business Experience
-------------------
The following section summarizes the present occupation and prior
business experience during the past five years for each director and executive
officer of the Company:
Barry Collier has been a director, President and Chief Operating
Officer of the Company from its inception and served as its Secretary from its
inception until June 12, 1985, when he became Chief Executive Officer. Mr.
Collier served as Chairman of the Board from 1990 to 1994. Mr. Collier served
as a director, President and Chief Operating Officer of the Company pursuant to
an Employment Agreement between the Company and Mr. Collier. That Agreement was
terminated on August 1, 1985, but Mr. Collier now serves as President, Chief
Executive Officer and Chief Operating Officer pursuant to a new Employment
Agreement, effective August 1, 1985, as amended March 2, 1988 and on August 12,
1993.
Earl Rosenstein has been Chief Financial Officer, Vice President and
Secretary of the Company since June 12, 1985 and served as a director of the
Company from 1985 to 1994. Since February 1987, he has been Senior Vice
President of the Company.
Since 1990, 1989 and 1982, respectively, Mr. Graham has been Chairman
of the Executive Committee, Director of Corporate Finance and a Director of
Ladenburg, Thalmann & Co. Inc., a company engaged in investment banking. Mr.
Graham is a director of Regency Equities Corp., a company engaged in real estate
investment business. Mr. Graham is also a Director of Rudy's Restaurant Group,
a company engaged in the restaurant business, Suspension & Parts Industries,
Ltd., a company which designs, develops and markets suspension system
components, and Seventh Generation, a company which distributes via catalog
environmental products.
Item 11. EXECUTIVE COMPENSATION
- ------- ----------------------
The following table sets forth information concerning compensation
paid (or earned by the named individuals) by the Company and Prism Pictures for
the fiscal years ended January 31, 1996, 1995 and 1994 to individuals who were
at January 31, 1996 the chief executive officer and the other executive officer
employed by the Company as of January 31, 1996 who earned more than $100,000 for
the last fiscal year:
20
SUMMARY COMPENSATION TABLE
--------------------------
Other Stock
Annual Options
Name and Principal Salary Bonus Compensa- # of
Position Year ($) ($)(1) tion Shares
- ------------------ ---- -------- --------- --------- -------
Barry Collier 1996 436,645 -- -- --
President; Chief 1995 447,319 -- -- --
Executive Officer; 1994 421,985 64,000 -- --
Chief Operating
Officer
Earl Rosenstein 1996 138,497 -- -- --
Senior Vice President; 1995 147,930 -- -- --
Chief Financial Officer; 1994 150,000 20,000 -- --
Secretary
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
---------------------------------------------------
AND FY-END OPTION/SAR VALUES
----------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs at
at FY-End(#) FY-End($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise(#) Value Realized($) Unexercisable Unexercisable
- --------------- --------------- ----------------- ------------- ---------------
Barry Collier NA NA NA NA
Earl Rosenstein -0- -0- 30,000/0 0/NA
Stock Option Plan
-----------------
The Company maintains a Stock Option Plan (the "Plan"), effective as
of June 12, 1985 and amended as of January 1, 1987 and as amended and readopted
on August 12, 1993, which provides for the grant of options to purchase up to
200,000 shares of the Company's common stock. Pursuant to the Plan, persons
classified by the Board of Directors (or a committee thereof) as key employees
of the Company and its subsidiaries, directors of the Company and its
subsidiaries and certain independent contractors of the Company and its
subsidiaries, by reason of their contribution to the success of the Company and
its subsidiaries, may be granted stock options intended to qualify as incentive
stock options ("ISOs") within the meaning of Section 422A of the Internal
Revenue Code of 1986, as amended (the "Code"), or nonqualified stock options, at
the discretion of the Board.
21
Independent contractors and nonemployee directors are only eligible for
nonqualified stock options.
The exercise price of the option shares cannot be less than the fair
market value of the Company's common stock on the date of grant, except that
options granted to any individual who at the time the option is granted owns
more than 10% of the stock of the Company cannot be less than 110% of the fair
market value on the date of grant. Upon the grant of an option, the optionee is
required to enter into an agreement setting forth the terms of the option. No
option under the Plan may be exercised after ten years following the date of
grant and any option granted to any person then owning 10% or more of the voting
power of the Company must expire within five years of grant. Cash must be paid
for the purchase of the stock upon exercise of the option. No ISO granted
before January 1, 1987 may be exercised if a previous ISO is outstanding (within
the meaning of Section 422A of the Code). The Plan will expire on June 12,
1995.
Options granted under the Plan are exercisable only while the optionee
is employed by or providing services to the Company or to its subsidiaries,
except that if the optionee's termination results from disability of the
optionee, the option may be exercised within one year from the date of
disability of the optionee, and if such termination results from the death of
the optionee, the option may be exercised (unless it provides to the contrary)
by the optionee's legal representatives to the extent it was exercisable on the
date of the optionee's death. The other terms and conditions of the options,
including the period and manner in which an option may be exercised, are to be
established by the Board. The Board may amend or discontinue the Plan at any
time.
At a Board of Directors meeting held November 9, 1988, all stock
options then existing, subject to the written agreement of each person then
holding an option, were cancelled effective that date and new options were
issued effective that date in substitution of the cancelled options at an
exercise price of $3.125 per share, the closing price of the Company's common
stock on the American Stock Exchange on that date. All of the persons holding
options at November 9, 1988, have agreed in writing to the cancellation of their
outstanding options and the issuance of new options. The effect of this action
was to lower the exercise price of the outstanding options, but the Company's
Board of Directors believes that such action is consistent with the purpose and
intent underlying the Plan.
As of April 15, 1996, options for the purchase of 50,000 shares were
outstanding and held by six employees, two of whom are executive officers. The
exercise prices for the options range from $2.50 to $3-1/8 per share. No
options were exercised in the past fiscal year.
22
Employee Bonus Fund
-------------------
The Company has a policy of reserving up to 6% of its pretax profits
as an employee bonus fund out of which bonuses may be paid to key employees
(other than Mr. Collier, who is not eligible) as and when determined by the
Board of Directors in its sole discretion. The Board has the right to amend or
to terminate this policy at any time. For the year ended January 31, 1996, no
bonuses were accrued under this policy.
Compensation to Directors
-------------------------
During the fiscal year ended January 31, 1996, directors of the
Company who are also officers did not receive any compensation for their
services as directors. Each director of the Company, other than those who are
officers of the Company or its affiliates, is entitled to receive $5,000 per
year, plus reimbursement of expenses incurred as a director.
Provisions upon Termination of Employment
-----------------------------------------
Pursuant to a March 2, 1988 Amendment to Mr. Collier's Employment
Agreement, in the event that Mr. Collier's employment is terminated prior to the
expiration of the term for any reason other than "justifiable cause" (as defined
in the Agreement), the Company will pay Mr. Collier $440,000 for each year
remaining in the term plus an additional sum of $440,000. Pursuant to an
Amendment as of August 12, 1993, the term of Mr. Collier's employment agreement
was extended to July 31, 1998.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- ------- ---------------------------------------------------
MANAGEMENT
----------
Security Ownership of Certain Beneficial Owners
-----------------------------------------------
The following table identifies the persons and entities known by the
Company to be the beneficial owners of 5% or more of the Company's outstanding
voting securities as of March 31, 1996:
Name and Address of Amount and Nature of Percent of
Beneficial Owner (1)(2) Beneficial Ownership Class
- ------------------------------- -------------------- ----------
Barry Collier(3)(4) 650,000 29.4
Investors (5) 756,000 34.3
KuwAm Corporation (5)(6)(7) 679,000 30.6
Mishal Y. Al Sabah (5) 32,000 1.4
23
Special Situation Investment
Holdings, Ltd. (5)(6) 632,000 28.6
Special Situation Investment
Holdings, L.P. II(5)(6) 25,000 1.1
Wirt D. Walker III(5)(6)(8) 758,000 34.3
_______________
(1) The address of Mr. Collier is 1888 Century Park East, Suite 350, Los
Angeles, California 90067. The address of each of the Investors is 2600
Virginia Avenue N.W., Suite 900, Washington, D.C. 20037.
(2) The information was furnished by the named persons, or is contained in
filings made by certain named persons with the Securities and Exchange
Commission.
(3) Including 305,750 shares owned of record by Mr. Collier which were pledged
to Palan Settlement Trust ("Palan"), the predecessor in interest to Batur
Lake, Inc. and Betula Holdings, Inc., to secure a debt. On June 29, 1985,
Mr. Collier purchased 305,750 shares of the Company's common stock from
Palan, which shares are pledged to Palan to secure the deferred purchase
price owed to Palan. Under the terms of the pledge, Mr. Collier retains
voting rights and the right to receive cash dividends. Shares will be
released from the pledge on a pro rata basis as and when portions of the
deferred purchase price are paid to Palan. The deferred purchase price is
payable from proceeds to Mr. Collier of the sale of any of his common stock
or the shares of common stock held in trust for his children after such
time as aggregate proceeds of such sales exceed $500,000. Mr. Collier has
the obligation to pay the deferred purchase price only and to the extent
that he can lawfully sell any of such common stock. The Company is not a
party to the pledge and has not undertaken any obligation regarding the
sale to Mr. Collier. However, if Mr. Collier defaults in payments, Batur
Lake, Inc. and Betula Holdings, Inc., as successors to Palan's rights with
respect to the pledge, have the right to retain or to sell the pledged
shares to satisfy the unpaid balance of the purchase price.
(4) Including 137,000 shares held of record by trusts for Mr. Collier's
children for which Mr. Collier's brother is trustee. The trustee has sole
voting and investment power with respect to the shares held by such trusts.
Mr. Collier has sole voting and investment power over the remaining 513,000
shares.
24
(5) The "Investors" are KuwAm Corporation (the general partner of Special
Situation Investment Holdings, Ltd. and Special Situation Investment
Holdings, L.P. II); Special Situation Investment Holdings, Ltd.; Special
Situation Investment Holdings, L.P. II; Mishal Y. Al Sabah; and Wirt D.
Walker III. The Investors have filed statements on Schedule 13D with the
Securities and Exchange Commission with respect to their ownership of
shares of common stock. The shares of the Investors are held of record as
follows: KuwAm Corporation -- 22,000 shares, Special Situation Investment
Holdings, Ltd. -- 632,000 shares, Special Situation Investment Holdings,
L.P. II -- 25,000 shares, Mishal Y. Al Sabah -- 32,000 shares, and Wirt D.
Walker III and Sally Walker -- 25,000 shares.
(6) Mr. Walker is a director and Managing Director of KuwAm Corporation. By
reason of the foregoing and other relationships with members of the
Investors, Mr. Walker may be deemed to share voting and investment power
with respect to the shares owned by KuwAm Corporation, Special Situation
Investment Holdings, Ltd., Special Situation Investment Holdings, L.P. II
and Mr. Al Sabah.
(7) Includes 632,000 and 25,000 shares held of record by Special Situation
Investment Holdings, Ltd. and Special Situation Investment Holdings, L.P.
II, respectively.
(8) Includes 632,000 shares, 22,000 shares, 32,000 shares and 25,000 held of
record by Special Situation Investment Holdings, Ltd., KuwAm Corporation,
Mr. Al Sabah, and Special Situation Investment Holdings L.P. II,
respectively, 2,000 shares held by Mr. Walker, as custodian for W.
Alexander Walker, and 20,000 shares purchasable by Mr. Walker upon exercise
of Nonqualified Stock Options granted pursuant to the Company's Stock
Option Plan.
Security Ownership of Management
--------------------------------
The following table sets forth the beneficial ownership of the
Company's common stock by (i) each director, individually, and (ii) all
directors and officers of the Company, as a group, as of March 31, 1996:
Name and Address of Amount and Nature of Percent of
Beneficial Owner(1) Beneficial Ownership Class
- ------------------------------ -------------------- ----------
Barry Collier(2) 650,000 29.4
1888 Century Park East
Suite 350
Los Angeles, CA 90067
25
Peter Graham(3) 44,500 2.0
540 Madison Avenue
New York, New York 10022
All Directors and Officers
as a Group (3 persons)(4) 724,500 32.3
_______________
(1) The information was furnished by the named persons.
(2) See notes 3 and 4 under "Security Ownership of Certain Beneficial Owners,"
above.
(3) Includes 10,000 shares held of record by a trust for Mr. Graham's mother
for which Mr. Graham is a co-trustee. As co-trustee, Mr. Graham shares
voting and investment power over such shares.
(4) Includes 30,000 shares purchasable by Mr. Rosenstein upon exercise of
Incentive Stock Options granted pursuant to the Company's Stock Option
Plan.
Change in Control
-----------------
See note 3 under "Security Ownership of Certain Beneficial Owners,"
above.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
Ron Berger
----------
Mr. Berger, a director of the Company until his resignation in
November, 1995 is Chairman of the Board, President and Chief Executive Officer
of Rentrak Corporation ("Rentrak"). During the year ended January 31, 1996, the
Company had sales of $694,517 to Rentrak. In December 1992, Prism and Rentrak
entered into an agreement (the "PPT Agreement") pursuant to which Prism
appointed Rentrak as a distributor for Prism's home video products through
Rentrak's pay-per-transaction system ("PPT System"). The PPT Agreement was
amended on February 28, 1994. The PPT System requires a participating home
video retailer to pay to the distributor a per transaction fee for each rental
or sale of a video product to a consumer.
26
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND
REPORTS ON FORM 8-K
-------------------------------------------
(a) The following financial statements, schedule and exhibits are
filed with and as a part of this Report:
Page No(s).
-----------
(1) Financial Statements
--------------------
Index to Financial Statements 36
Independent Certified Public F-1
Accountants' Reports
Consolidated Balance Sheets as F-2
of January 31, 1996 and 1995
Consolidated Statements of Operations F-4
for years ended January 31, 1996,
1995 and 1994
Consolidated Statements of F-5
Stockholders' Equity (Deficit)
for years ended January 31, 1996,
1995 and 1994
Consolidated Statements of Cash F-6
Flows for years ended
January 31, 1996, 1995 and 1994
Summary of Accounting Policies F-8
Notes to Consolidated Financial F-10
Statements
(2) Financial Statement Schedules
-----------------------------
Schedule II - Valuation and S-1
Qualifying Accounts
All other schedules are omitted because they are not required, are
inapplicable, or the information is included in the Financial Statements or
Notes thereto.
27
(3) Exhibits
--------
Exhibit
No. Title Page No(s).
------- ----- -----------
3.1 By-laws of Registrant, as amended
to date. 5/
-
3.2 Certificate of Incorporation of
Registrant, as amended to date. 5/
-
4.1 Form of Indenture by and between the
Company and National City Bank of
Minneapolis regarding 13% Convertible
Senior Subordinated Debentures due
1999. 7/
-
10.1 Amended Stock Option Plan of the Company,
dated January 1, 1987. 4/
-
10.2 Employment Agreement, dated June 26,
1985, between Barry Collier and the
Company. 1/
-
10.3 Amendment to Employment Agreement,
dated March 2, 1988, between Barry
Collier and the Company. 5/
-
10.4 Employment Agreement, dated as of
February 1, 1986, between Earl
Rosenstein and the Company. 5/
-
10.5 PPT Vendor Agreement, dated March 23,
1988, between National Video, Inc.
and the Company. 6/
-
10.6 Deal Memorandum, dated August 31, 1987,
between Gaga Communications, Inc. and
the Company. 5/
-
10.7 Duplication Agreement, effective
January 1, 1989, between West Coast
Video Duplicating, Inc. and the
Company. 6/
-
10.8 Videogram Rights Agreement, dated
June 26, 1985, between Palan
Entertainment Corporation, Mr. Levinson
and the Company. 1/
-
28
Exhibit
No. Title Page No(s).
------- ----- -----------
10.9 License Agreement, dated February 5,
1985, between Palan Entertainment
Corporation Limited (U.K.) and the
Company pertaining to the motion
picture entitled "Sakharov." 1/
-
10.10 License Agreement, dated as of
March 12, 1985, between Palan
Entertainment Corporation Limited
(U.K.) and the Company pertaining to
the following motion pictures:
"Bad Man's River," "The Big Combo,"
"Captain Apache," "Crucible of
Terror," "Cry of Battle," "Day of
the Triffids," "Fifth Day of Peace,"
"God's Little Acre," "Have a Good
Funeral, My Friend," "Horror Express,"
"House of Seven Corpses," "The Mad
Bomber," "Men in War," "Pancho Villa,"
"Psychomania," "A Town Called Hell,"
and "Unknown World." 1/
-
10.11 Memorandum of Agreement, dated
July 2, 1984, between Donald Rankin
and the Company. 1/
-
10.12 License Agreement, dated March 15,
1985, between American National
Enterprises, Inc. and the Company
pertaining to the following motion
pictures: "Ironmaster," "Hooch,"
"Johnny Firecloud," "South Seas
Massacre," "Smoke In the Wind,"
"Little Moon and Jud McGraw," "The
Last Reunion," "Medusa," "Pushing
Up Daisies," "Pursuit," "The
Invincible Barbarian," "Evidence
of Power," "Day of the Assassin,"
"Beasts," "Bimini Code," "Escape
From Angola," "This Time Forever,"
"My Old Man," "Didn't You Hear,"
"Four Against the Desert," "Once
Upon A Scoundrel," "Lost," "Goldenrod,"
"Spittin' Image," "Ninja Wars," "2
Catch 2," "The Devil and LeRoy Bassett,"
"Vultures," "Scuba," and "Renegade
Ninjas," plus six titles to be agreed
upon by the parties at a later date. 1/
-
10.13 License Agreement, dated July 23, 1985,
between the Company and Palan
29
Exhibit
No. Title Page No(s).
------- ----- -----------
Entertainment Corporation Limited
(U.K.) pertaining to the following
motion pictures: "Derby," "Dr. Death,"
"Georgia, Georgia," "Hammersmith is Out,"
"Mind Snatchers," "Today We Kill
Tomorrow We Die," "Ben," "Willard,"
"Goodbye Gemini," "House That Dripped
Blood," "I Want What I Want," "Statue,"
"Dan Candy's Law," "Changes," "Digby,"
"Follow Me," "Fools," "Girly," "Hot Rod
Action," "How to Seduce a Woman," "If He
Hollers Let Him Go," "My Old Man's Place,"
"Puppet on a Chain," "Say Hello to
Yesterday," "Seizure," "The Pyx," and
"Girl in Blue." 1/
-
10.14 License Agreement, dated July 9, 1985,
between Palan Entertainment Corporation
Limited (U.K.) and the Company pertaining
to the motion picture entitled "Enola
Gay." 1/
-
10.15 Agreement for Reciprocal First
Negotiation and First Refusal Rights,
dated August 7, 1985, between
Prestwich Holdings PLC and the
Company. 1/
-
10.16 License Agreement, dated October 1,
1985, between Palan Entertainment
Corporation Limited (U.K.) and the
Company regarding the film known as
"Three Sovereigns for Sarah." 2/
-
10.17 License Agreement, dated October 1,
1985, between Palan Entertainment
Corporation Limited (U.K.) and the
Company regarding the film known as
"Killing 'Em Softly." 2/
-
10.18 License Agreement, dated April 1,
1986, between the Company and Palan
Entertainment Corporation Limited
(U.K.) regarding the film known as
"Night Train to Terror." 3/
-
30
Exhibit
No. Title Page No(s).
------- ----- -----------
10.19 License Agreement, dated July 3,
1986, between the Company and Palan
Entertainment Corporation Limited
(U.K.) regarding the film known as
"Hush Little Baby." 4/
-
10.20 License Agreement, dated December 4,
1986, between the Company and Palan
Entertainment Corporation Limited
(U.K.) regarding the film known as
"Junior." 4/
-
10.21 License Agreement, dated December 16,
1986, between the Company and Palan
Entertainment Corporation Limited
(U.K.) regarding the films known
as "Bloody Wednesday" and "Savage
Journey." 4/
-
10.22 Subdistribution Agreement, dated
January 14, 1987, between the Company
and Palan Entertainment Corporation
Limited (U.K.) regarding nine titles. 4/
-
10.23 First Amendment to Employment
Agreement, dated as of February 1,
1989, between Earl Rosenstein and
the Company. 6/
-
10.24 Employment Agreement, dated as of
February 1, 1989, between Joseph
Petrone and the Company. 6/
-
10.25 Home Video License Agreement, dated
as of January 10, 1989, between
Starmaker Entertainment, Inc.
("Starmaker") and the Company,
with respect to fifty titles, as
amended on April 25, 1989. 6/
-
10.26 Letter Agreement, dated January 10,
1989, between Starmaker and the
Company, amending the Videogram
Rights Agreement. 6/
-
10.27 Home Video License Agreement,
dated April 26, 1989, between
the Company and Starmaker, with
respect to fifty titles. 6/
-
31
Exhibit
No. Title Page No(s).
------- ----- -----------
10.28 Home Video License Agreement,
dated April 26, 1989, between
the Company and Starmaker, with
respect to thirty-seven titles. 6/
-
10.29 Distribution Agreement dated as of
November 30, 1989 between the Company
and Paramount Pictures Corporation. 7/
-
10.30 Warrant held by Paramount Pictures
Corporation for the purchase of up to
500,000 shares of Common Stock of
the Company. 7/
-
10.31 Agreement dated July 5, 1989 between
the Company and I. Friedman Equity,
Inc. regarding the provision of
financial consulting services. 7/
-
10.32 Stock Purchase Agreement, dated as of
March 10, 1990, by and among the
Company, GFL Communications Inc., a
New York corporation, David M. Fox
and Richard Lorber. 7/
-
10.33 Output License Agreement, dated as of
January 1, 1990, by and between Image
Entertainment, Inc. and the Company. 8/
-
10.34 Office Lease, dated as of June 28, 1990
between JMB/1888 Partners and the Company. 9/
-
10.35 Termination Agreement, dated December 21,
1990, between Paramount Pictures Corporation
and the Company. 9/
-
10.36 Amended and Restated Loan Agreement, dated as
of March 15, 1991 among the Company and The
Lewis Horwitz Organization and World Trade
Bank. 9/
-
10.37 Amended and Restated Loan Agreement dated
as of June 27, 1991 between the Company and
World Trade Bank.10/
--
10.38 First Amendment to Amended and Restated
Loan Agreement dated as of October 15,
1991 between the Company and World Trade
Bank.10/
--
32
Exhibit
No. Title Page No(s).
------- ----- -----------
10.39 Agreement dated February 4, 1992
between the Company and ABC
Distribution Company.10/
--
10.40 PPT Producer Agreement dated December 11,
1992 between Rentrak Corporation and
Prism Entertainment Corporation.11/
--
10.41 Business Loan Agreement dated
December 20, 1992 between Bank of
America National Trust and Savings
Association and Prism Entertainment
Corporation.11/
--
10.42 Amendment to PPT Producer Agreement
dated February 28, 1994.12/
--
10.43 Letter Agreement dated January 14,
1994, between the Company and
C/FP Distribution.12/
--
10.44 License Agreement dated as of
November 8, 1994 between Prism
Entertainment Corporation and Turner
Home Entertainment, Inc.13/
--
10.45 Revolving Credit Loan and Security
Agreement dated as of February 24,
1995 among Prism Entertainment
Corporation, Prism Pictures Corporation,
Prism Pictures International, Ltd.
and Imperial Bank.13/
--
22. Prism Pictures Corporation, a Delaware
corporation, and Prism Pictures
International, Ltd., a California
corporation, are the subsidiaries
of the Company.
(1) Exhibits 10.2 and 10.8 through 10.15 were filed as Exhibits to Registrant's
Registration Statement on Form S-18 (Registration No. 2-98855-A), effective
on August 14, 1985, and each is incorporated herein by this reference.
(2) Exhibits 10.16 and 10.17 were filed as Exhibits to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 31, 1985, and
each is incorporated herein by this reference.
(3) Exhibit 10.18 was filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 31, 1986 and is incorporated
herein by this reference.
33
(4) Exhibits 10.1 and 10.19 through 10.21 were filed as Exhibits to the
Registrant's Annual Report on Form 10-K for the fiscal year ended January
31, 1987, and each is incorporated herein by this reference.
(5) Exhibits 3.1, 3.2, 10.3, 10.4 and 10.6 were filed as Exhibits to the
Registrant's Annual Report on Form 10-K for the fiscal year ended January
31, 1988, and each is incorporated herein by this reference.
(6) Exhibits 10.5, 10.7, and 10.23 through 10.28 were filed as Exhibits to the
Registrant's Annual Report on Form 10-K for the fiscal year ended January
31, 1989, and each is incorporated herein by this reference.
(7) Exhibits 4.1 and 10.29 through 10.32 were filed as Exhibits to the
Registrant's Registration Statement on Form S-2 (Registration No. 33-
32628), effective on March 27, 1990, and each is incorporated herein by
this reference.
(8) Exhibit 10.33 was filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 31, 1990, and is incorporated
herein by this reference.
(9) Exhibits 10.34, 10.35 and 10.36 were filed as Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 31, 1991, and
each is incorporated herein by this reference.
(10) Exhibits 10.37 through 10.39 were filed as Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 31, 1992, and
each is incorporated herein by reference.
(11) Exhibits 10.40 and 10.41 were filed as Exhibits to the Registrant's
Registration Statement on Form S-3 (Registration No. 33-54156), effective
on February 16, 1993, and each is incorporated herein by reference.
(12) Exhibits 10.43 and 10.44 were filed as Exhibits to the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 31, 1994, and each is
incorporated herein by this reference.
(13) Exhibits 10.44 and 10.45 were filed as Exhibits to the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 31, 1995, and each is
incorporated herein by this reference.
(b) Reports on Form 8-K. None.
-------------------
34
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: May 15, 1996 PRISM ENTERTAINMENT CORPORATION
(Registrant)
By /s/ Barry Collier
-----------------------------
Barry Collier,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the date set forth above.
Signature Title
--------- -----
May 15, 1996 /s/ Barry Collier Chief Executive Officer;
---------------------
Barry Collier Chief Operating Officer;
President; and Director
May 15, 1996 /s/ Earl Rosenstein Senior Vice President of
---------------------
Earl Rosenstein Administration
and Finance; Chief
Financial Officer
and Secretary
35
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders
Prism Entertainment Corporation
Los Angeles, California
We have audited the accompanying consolidated balance sheets of Prism
Entertainment Corporation and subsidiaries (the "Company") (Debtor-in-
Possession, as of December 1, 1995) as of January 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended January 31, 1996.
Our audits also included the financial statement schedule listed in the
accompanying index. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall presentation of
the financial statements and schedule. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of January 31, 1996
and 1995, and the results of its operations and its cash flows for each of the
three years in the period ended January 31, 1996 in conformity with generally
accepted accounting principles.
Also in our opinion, the financial statement schedule for the years ended
January 31, 1996, 1995 and 1994 presents fairly, in all material respects, the
information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company incurred a loss of
($8,315,000) for the year ended January 31, 1996 and has an accumulated deficit
of ($4,950,000) at January 31, 1996. Further, the Company is in default under
the terms of its line of credit agreement. The Company filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court on December 1, 1995. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regards to this matter are also described in Note 1. The
consolidated financial statments do not include any adjustments that might
result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
Los Angeles, California
April 24, 1996
F-1
PRISM ENTERTAINMENT CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1996 AND 1995
================================================================================
ASSETS (Note 5) 1996 1995
- ---------------------------------------- ----------- -----------
Cash and cash equivalents $ 589,000 $ 360,000
Restricted cash (Note 5) 887,000 -
Trade receivables, net of allowance
for doubtful accounts of $547,000
and $49,000 4,440,000 7,573,000
Due from affiliate (Note 2) 257,000 351,000
Inventories 363,000 1,243,000
Film costs 7,820,000 17,920,000
Prepaid expenses 82,000 585,000
Furniture and equipment, net (Note 3) 257,000 541,000
Debenture issue costs, net (Note 10) 390,000 520,000
Other assets 359,000 310,000
----------- -----------
TOTAL ASSETS $15,444,000 $29,403,000
=========== ===========
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-2
PRISM ENTERTAINMENT CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1996 AND 1995
(CONCLUDED)
================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) 1996 1995
- -------------------------------------------------------- ------------- -----------
LIABILITIES NOT SUBJECT TO COMPROMISE:
Line of credit (Note 5) $ 3,989,000 $ 2,964,000
Accounts payable 429,000 1,416,000
Accrued expenses (Note 4) 876,000 1,135,000
Minimum guarantees - 8,576,000
Obligations under capital leases - 262,000
Deferred income taxes (Note 8) - 914,000
Deferred income - related party (Note 6) - 682,000
Deferred income 41,000 821,000
Convertible senior subordinated debentures (Note 10) - 4,964,000
----------- -----------
Total liabilities not subject to compromise 5,335,000 21,734,000
----------- -----------
LIABILITIES SUBJECT TO COMPROMISE (Note 11) 10,246,000 -
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY (DEFICIT): (Notes 2, 7 and 10)
Common stock, $.01 par value; 20,000,000 shares
authorized, 2,213,000 issued and outstanding 22,000 22,000
Additional paid-in capital 4,282,000 4,282,000
Retained earnings (accumulated deficit) (4,441,000) 3,365,000
----------- -----------
Total stockholders' equity (deficit) (137,000) 7,669,000
----------- -----------
TOTAL $15,444,000 $29,403,000
=========== ===========
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-3
PRISM ENTERTAINMENT CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
================================================================================
1996 1995 1994
----------- ----------- -----------
NET SALES (Notes 6 and 13) $15,798,000 $17,915,000 $20,018,000
COST OF SALES (Note 14) 17,044,000 10,858,000 10,560,000
----------- ----------- -----------
Gross profit (deficit) (1,246,000) 7,057,000 9,458,000
----------- ----------- -----------
OTHER EXPENSES (INCOME):
Selling, general and administrative
expenses (Note 12) 5,988,000 6,492,000 7,353,000
Interest expense 1,167,000 1,010,000 939,000
Interest income (31,000) (44,000) (101,000)
Amortization of loan costs 202,000 184,000 142,000
Other income - - (158,000)
----------- ----------- -----------
Total other expenses 7,326,000 7,642,000 8,175,000
----------- ----------- -----------
Income (loss) from operations before
reorganization item, income taxes
and cumulative effect of accounting
change (8,572,000) (585,000) 1,283,000
REORGANIZATION ITEM
Professional fees 148,000 - -
----------- ----------- -----------
Income (loss) from operations before
income taxes and cumulative
effect of accounting change (8,720,000) (585,000) 1,283,000
PROVISION (BENEFIT) FOR INCOME TAXES
(Note 8) (914,000) (187,000) 52,000
----------- ----------- -----------
Net income (loss) before cumulative
effect of accounting change (7,806,000) (398,000) 1,231,000
CUMULATIVE EFFECT ON PRIOR YEARS OF
CHANGING METHOD OF ACCOUNTING
FOR INCOME TAXES (Note 8) - - 285,000
----------- ----------- -----------
NET INCOME (LOSS) $(7,806,000) $ (398,000) $ 1,516,000
=========== =========== ===========
F-4
PRISM ENTERTAINMENT CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
================================================================================
1996 1995 1994
-------- ------- -----
PRIMARY EARNINGS PER SHARE:
Income (loss) before cumulative
effect of accounting change $(3.53) $(.18) $ .56
Cumulative effect of change in
accounting method - - .13
------ ----- -----
Net income (loss) $(3.53) $(.18) $ .69
====== ===== =====
FULLY DILUTED EARNINGS PER SHARE:
Income (loss) before cumulative
effect of accounting change $(3.53) $(.18) $ .57
Cumulative effect of change in
accounting method - - .09
------ ----- -----
Net income (loss) $(3.53) $(.18) $ .66
====== ===== =====
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-5
PRISM ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
================================================================================
Retained
Additional Earnings
Common Stock Treasury Stock Paid-In (Accumulated
-------------------- ----------------------
Shares Amount Shares Amount Capital Deficit) Total
--------- -------- --------- ---------- ----------- ------------- ------------
BALANCE, February 1, 1993 2,101,000 $21,000 111,000 $(374,000) $4,657,000 $ 2,247,000 $ 6,551,000
Issuance of treasury and
sale of other stock
(Note 5(a)) 112,000 1,000 (111,000) 374,000 (375,000) - -
Net income - - - - - 1,516,000 1,516,000
--------- ------- -------- --------- ---------- ----------- -----------
BALANCE, January 31, 1994 2,213,000 22,000 - - 4,282,000 3,763,000 8,067,000
Net loss - - - - - (398,000) (398,000)
--------- ------- -------- --------- ---------- ----------- -----------
BALANCE, January 31, 1995 2,213,000 22,000 - - 4,282,000 3,365,000 7,669,000
Net loss - - - - - (7,806,000) (7,806,000)
--------- ------- -------- --------- ---------- ----------- -----------
BALANCE, January 31, 1996 2,213,000 $22,000 - $ - $4,282,000 $(4,441,000) $ (137,000)
========= ======= ======== ========= ========== =========== ===========
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-6
PRISM ENTERTAINMENT CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
================================================================================
INCREASE (DECREASE) IN CASH
1996 1995 1994
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(7,806,000) $ (398,000) $ 1,516,000
----------- ----------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Film cost amortization 12,375,000 7,023,000 6,419,000
Depreciation and amortization 276,000 247,000 138,000
Provision for losses on trade receivables 498,000 189,000 135,000
Interest on capital lease obligations 38,000 72,000 -
Loss on disposal of assets - 32,000 -
Changes in operating assets and liabilities:
Restricted cash (887,000) - -
Trade receivables 2,635,000 (348,000) (1,901,000)
Inventories 880,000 103,000 (193,000)
Prepaid expenses and other assets 446,000 276,000 (206,000)
Pre-petition accounts payable 109,000 (324,000) 809,000
Pre-petition accrued expenses (886,000) (232,000) 574,000
Post-petition accounts payable 429,000 - -
Post-petition accrued expenses 876,000 - -
Minimum guarantees (6,215,000) (2,943,000) (3,118,000)
Income taxes payable - (73,000) 73,000
Deferred income taxes (914,000) (187,000) (305,000)
Deferred income - related party 213,000 (178,000) (751,000)
Deferred income (780,000) 404,000 417,000
----------- ----------- -----------
Total adjustments 9,603,000 4,061,000 2,091,000
----------- ----------- -----------
Net cash provided by
operating activities 1,288,000 3,663,000 3,607,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of film rights (2,088,000) (3,526,000) (6,894,000)
Capital expenditures - (140,000) (74,000)
Proceeds from sale of assets - 22,000 -
Proceeds from affiliate note
receivable 94,000 18,000 13,000
----------- ----------- -----------
Net cash used in
investing activities (1,994,000) (3,626,000) (6,955,000)
-----------
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-7
PRISM ENTERTAINMENT CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(CONCLUDED)
================================================================================
INCREASE (DECREASE) IN CASH
1996 1995 1994
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under
Line of credit $1,025,000 (186,000) 1,850,000
Repayments of capital lease obligations (84,000) (150,000) -
Payments on debentures (6,000) (43,000) (80,000)
---------- ---------- -----------
Net cash provided by (used
in) financing activities 935,000 (379,000) 1,770,000
---------- ---------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS 229,000 (342,000) (1,578,000)
CASH AND CASH EQUIVALENTS,
beginning of year 360,000 702,000 2,280,000
---------- ---------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 589,000 $ 360,000 $ 702,000
========== ========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $1,189,000 $ 899,000 $ 915,000
Taxes paid 44,000 61,000 -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Acquisition of licensing agreements
under contract $ 187,000 $6,261,000 $ 4,277,000
Capital lease obligations of $146,000 were eliminated during the year ended
January 31, 1996 when the Company returned computer equipment it was not
utilizing to the lessor.
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-8
PRISM ENTERTAINMENT CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
SUMMARY OF ACCOUNTING POLICIES
================================================================================
BUSINESS ACTIVITIES
Prism Entertainment Corporation and subsidiaries (the "Company") acquires rights
to theatrical and television films and other programming and co-produces certain
films for distribution to the home video, pay and basic cable, network
television and syndication, theatrical markets primarily in the United States
and Canada. The Company's video cassettes are distributed by Turner Home Video
pursuant to a three year exclusive domestic distribution agreement entered into
in November 1994. On December 1, 1995, the Company filed for protection under
Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court
(See Note 1).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Prism
Entertainment Corporation and its wholly owned subsidiaries, Prism Pictures
Corporation and Prism Pictures International, Ltd. All significant intercompany
balances and transactions have been eliminated. The Company uses a non-
classified balance sheet which the Company believes is more representative of
their business.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of video cassettes when units are
shipped by Turner Home Video. Sales also include revenue from license
agreements which are recognized in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 53, "Financial Reporting by Producers and
Distributors of Motion Picture Films." Revenues from licensing agreements,
which provide for the receipt by the Company of nonrefundable guaranteed
amounts, are recognized when the programming becomes available for exhibition
and all other conditions of the sale have been met. Deposits and cash advances
received under such licensing contracts are deferred until all conditions of
sale have been met, and are reflected in the accompanying financial statements
as deferred income. Revenues are recorded net of applicable rebates, returns
and advertising allowances.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all short
term investments purchased with an initial maturity of three months or less to
be cash equivalents.
INVENTORIES
Inventories consist primarily of pre-recorded video cassettes and are valued at
the lower of cost (first-in, first-out) or market.
FILM COSTS
Film costs are paid to obtain film license rights and are amortized in the same
proportion that current revenues bear to estimated remaining lifetime revenues.
Estimates of total lifetime revenues and expenses are periodically reviewed by
management and revised if warranted by changing conditions. Where all or a
portion of the film costs appear not to be recoverable through estimated
remaining lifetime revenues, the nonrecoverable portion is charged to expense.
F-9
PRISM ENTERTAINMENT CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
SUMMARY OF ACCOUNTING POLICIES
(CONCLUDED)
================================================================================
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is provided by the
straight-line method at rates adequate to allocate the cost of applicable assets
over their expected useful lives.
INCOME TAXES
The Company provides for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Under SFAS
No. 109, deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after December 15,
1995. SFAS No. 121 establishes new guidelines regarding when impairment losses
on long-lived assets, which include plant and equipment, and certain
identifiable intangible assets, should be recognized and how impairment losses
should be measured. The Company does not expect adoption of SFAS No. 121 to
have a material affect on its financial position or results of operations.
Statements of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123) issued by the Financial Accounting Standards
Board (FASB) is effective for specific transactions entered into after December
15, 1995, while the disclosure requirements of SFAS No. 123 are effective for
financial statements for fiscal years beginning no later than December 15, 1995.
The new standard establishes a fair value method of accounting for stock-based
compensation plans and for transactions in which an entity acquires goods or
services from nonemployees in exchange for equity instruments. The Company
has determined it will not change its accounting policy for stock based
compensation and will provide the required supplemental proforma financial
statement disclosures.
F-10
PRISM ENTERTAINMENT CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
SUMMARY OF ACCOUNTING POLICIES
(CONCLUDED)
================================================================================
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are computed based on the net income or net loss for
the year, divided by the weighted average number of common shares of Company
stock outstanding during each year. The number of common shares used in the
years ended January 31, 1996, 1995 and 1994 in the computation of primary
earnings per share were 2,213,000, 2,213,000, and 2,195,000. The number of
common shares used in the years ended January 31, 1996, 1995 and 1994 in the
completion of fully diluted earnings were 2,213,000, 2,213,000 and 3,203,000.
The shares to be issued upon the exercise of options, and the assumed conversion
of the convertible subordinated debentures are not included in the calculation
of earnings per share for the years ended January 31, 1996 and 1995 as they
produce an anti-dilutive result.
CONCENTRATION OF CREDIT RISK
The Company's trade receivables are primarily from major video distributors and
certain large retailers in the United States and Canada. The Company performs
ongoing credit evaluations and does not require collateral. The Company has a
trade receivables insurance policy to protect it from credit risk associated
with such receivables in the event the customer files for bankruptcy.
RECLASSIFICATIONS
Certain reclassification have been made in the 1995 and 1994 financial
statements to conform with 1996 classifications.
F-11
PRISM ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - PETITION FOR RELIEF UNDER CHAPTER 11 AND BASIS OF PRESENTATION
On December 1, 1995, Prism Entertainment Corporation and Subsidiaries (the
"Company") filed petitions for relief under Chapter 11 of the federal bankruptcy
laws in the United States Bankruptcy Court ("Bankruptcy Filing"). Under Chapter
11, certain claims against the Company in existence prior to the filing of the
petitions for relief under the federal bankruptcy laws are stayed while the
Company continues business operations as Debtor-in-Possession. These claims are
reflected in the January 31, 1996 balance sheet as "liabilities subject to
compromise." Additional claims (liabilities subject to compromise) may arise
subsequent to the filing date resulting from rejection of executory contracts,
including leases, and from the determination by the court (or agreed to by
parties in interest) of allowed claims for contingencies and other disputed
amounts. Claims collateralized against the Company's assets ("collateralized
claims") also are stayed, although the holders of such claims have the right to
move the court for relief from the stay. Collateralized claims are
collateralized primarily by liens on the Company's assets.
The financial statements have been prepared by Prism Entertainment Corporation
and Subsidiaries in accordance with Statement of Position 90-7: Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code. These
financial statements have been prepared assuming that the Company will continue
as a going concern. The Company incurred a loss of ($8,315,000) for the year
ended January 31, 1996 and has an accumulated deficit of ($4,950,000) at January
31, 1996. Further, the Company is in default under the terms of its line of
credit agreement. Because of these and other factors, the Company is in
reorganization under the federal bankruptcy laws in the United States Bankruptcy
Court. These matters raises substantial doubt about the ability of the Company
to continue as a going concern. The financial statements do not include any
adjustments to the financial statements that might be necessary should the
Company be unable to continue as a going concern.
Management's plans in this regard are to present a Plan of Reorganization which
will be approved by the Bankruptcy Court which will include a significant
reduction of the Company's pre-petition obligations and may include plans to
merge with or acquire certain companies which the Company believes would
complement their business activities. Also, the Company does not plan to engage
in the in-house production of films or in the acquisition of home video and
television rights to films and other programing from third parties during the
period they are in bankruptcy.
NOTE 2 - INVESTMENT IN/DUE FROM AFFILIATE
Effective March 10, 1990, the Company completed the sale of 90% of the capital
stock of Fox/Lorber to a group headed by Fox/Lorber's executive officers. The
selling price was $1,475,000 in cash and a 12% promissory note in the principal
amount of $850,000. In addition, Fox/Lorber's executives surrendered an
aggregate of 111,000 shares of the Company's common stock and options to
purchase 70,000 shares of the Company's common stock. At January 31, 1996 and
1995, $257,000 and $351,000 remains receivable on the promissory note. The
promissory note is due on December 15, 1997, with monthly payments of $8,717.95
plus interest.
The Company's remaining 10% investment in Fox/Lorber was recorded at cost
amounting to $300,000. During the year ended January 31, 1995 the Company
exchanged its investment for certain royalty rights.
F-12
PRISM ENTERTAINMENT CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
================================================================================
NOTE 3 - FURNITURE AND EQUIPMENT, NET
Furniture and equipment consist of the following:
1996 1995
-------- --------
Computer equipment $243,000 $535,000
Furniture, fixtures and equipment 202,000 202,000
Leasehold improvements 9,000 9,000
-------- --------
454,000 746,000
Less accumulated depreciation 197,000 205,000
-------- --------
$257,000 $541,000
======== ========
Included in computer equipment is $48,000 of assets acquired under capital lease
obligations. Accumulated depreciation was $24,000 and $14,400 at January 31,
1996 and 1995.
NOTE 4 - ACCRUED EXPENSES
Accrued expenses not subject to compromise consist of the following:
1996 1995
-------- ----------
Sales taxes $825,000 $ 951,000
Royalties - 69,000
Other 51,000 115,000
-------- ----------
$876,000 $1,135,000
======== ==========
NOTE 5 - LINE OF CREDIT
On March 31, 1995 the Company entered into a $6,000,000 revolving line of credit
with a bank, with interest at the bank's prime rate (8.5% at January 31, 1996)
plus 1.5% per annum, collateralized by substantially all the assets of the
Company. The line of credit was reduced to $5,000,000 on December 31, 1995 and
expires on June 15, 1996. Borrowing is based upon a certain percentage of
acceptable receivables. In conjunction with the receipt of the new line of
credit, the Company granted to the bank a warrant to purchase up to
approximately 10% of the Company's common stock at $2.00 per share which
approximates the fair market value of the stock at the grant date. The warrant
expires on March 14, 1998. Upon receipt of the new line of credit the Company
repaid the outstanding balance under its previous line of credit. The
outstanding balance under the respective lines of credit at January 31, 1996 and
1995 was $3,989,000 and $2,964,000. The average amount outstanding during the
year ended January 31, 1996 was $4,716,661, the maximum amount outstanding was
$5,000,000, and the weighted average interest rate was 10.3%. The loan agreement
contains various covenants. The Company was not in compliance with several of
these covenants as of January 31, 1996. Restricted cash of $887,000 at January
31, 1996 consists primarily of cash set aside to pay down the line of credit
that has been stayed by the bankruptcy court.
F-13
PRISM ENTERTAINMENT CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
================================================================================
NOTE 6 - DEFERRED INCOME - RELATED PARTY
The Company has entered into an agreement for the licensing of certain
distribution rights with a related party. At January 31, 1996 and 1995, the
Company had deferred income of $895,000 and $682,000 relating to advances
received from the related party. During the years ended January 31, 1996, 1995
and 1994, $765,000, $923,000 and $1,212,000 was recognized as income.
NOTE 7 - COMMON STOCK
COMMON STOCK OPTIONS
In June 1985, the Company adopted a stock option plan whereby certain employees
and independent contractors may be granted options to purchase the Company's
common stock. The Board of Directors has reserved 200,000 shares for the option
plan and has granted options to certain employees and independent contractors at
the fair market price at the date of grant. No option under the plan may be
exercised after ten years following the date of the grant.
A summary of the activity of the Company's stock option plan is as follows:
Number
Date of Grant of Shares Option Price
- ---------------------------------- ---------- --------------
Outstanding at February 1, 1993 51,000 $2.75 - $3.125
Cancelled -
Granted 114,000 $3.00
--------
Outstanding at January 31, 1994 165,000 $2.75 - $3.125
Cancelled (20,000) $3.00 - $3.125
Granted -
--------
Outstanding at January 31, 1995 145,000 $2.75 - $3.125
Cancelled (100,000) $2.75 - $3.125
Granted 5,000 $2.50
--------
Outstanding at January 31, 1996 50,000
========
As of January 31, 1996 all options are exercisable.
F-14
PRISM ENTERTAINMENT CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
================================================================================
NOTE 8 - INCOME TAXES
The provision (benefit) for income taxes for the years ended January 31, 1996,
1995 and 1994 consists of the following:
Current Deferred Total
---------- ---------- ----------
Year ended January 31, 1996:
Federal $ - $(713,000) $(713,000)
State - $(201,000) $(201,000)
--------- --------- ---------
$ - $(914,000) $(914,000)
========= ========= =========
Year ended January 31, 1995:
Federal $ - $(146,000) $(146,000)
State - (41,000) (41,000)
--------- --------- ---------
$ - $(187,000) $(187,000)
========= ========= =========
Year ended January 31, 1994:
Federal (net of the benefit of a net operating
loss carryforward of $435,000) $ - $ - $ -
State 73,000 (21,000) 52,000
--------- --------- ---------
$ 73,000 $ (21,000) $ 52,000
========= ========= =========
Reconciliation of the federal statutory rate with the Company's effective tax
rate is summarized as follows:
1996 1995 1994
----------------------- --------------------- ---------------------
Percent Percent Percent
of of of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Loss
------------ -------- ---------- -------- ---------- --------
Computed expected tax
expense (benefit) $(2,965,000) (34.0)% $(199,000) (34.0)% $ 436,000 34.0%
State-income tax,
net of federal
income tax benefit - - - - 78,000 6.1
Utilization of net
operating loss
carryforward - - - - (435,000) (33.9)
Tax without future
benefit 2,027,000 23.2 - - - -
Other 24,000 .3 12,000 2.0 (27,000) (2.1)
----------- ------- ---------- ------- ---------- --------
$ (914,000) (10.5)% $(187,000) (32.0)% $ 52,000 4.1%
=========== ======= ========== ======= ========== ========
F-15
PRISM ENTERTAINMENT CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
================================================================================
NOTE 8 - INCOME TAXES (Continued)
The Company adopted SFAS No. 109, "Accounting for Income Taxes", effective
February 1, 1993. The effect of adopting SFAS No. 109 resulted in a $285,000
cumulative adjustment which increased net income to properly reflect the net
deferred tax liability on the Company's financial statements.
For the years ended January 31, 1996 and 1995, deferred taxes result from
temporary differences in recognition of certain revenue and expense for tax and
financial reporting. The source of these temporary differences and the related
tax effects are related to the amortization of royalty advances (Section 481(a)
adjustment), inventory contributions and other items.
At January 31, 1996 and 1995, the tax effect of the temporary differences
between the financial statement carrying amounts and tax bases of assets and
liabilities that cause deferred tax (assets) liabilities consist of the
following:
1996 1995
----------- -----------
Amortization of royalty advances $1,133,000 $1,133,000
Charitable inventory contributions (34,000) (34,000)
Inventory reserve (75,000) (90,000)
Sales return allowance (124,000) (95,000)
Deferred income (391,000) -
Federal net operating loss carryforward (2,654,000) -
State net operating loss carryforward (362,000) -
---------- ----------
Net deferred tax asset (2,507,000) 914,000
Less valuation allowance 2,507,000 -
Total $ - $ 914,000
========== ==========
As of January 31, 1996, the Company had $7,806,000 in federal net operating loss
carryforwards and $3,903,000 in state net operating loss carryforwards expiring
in 2011. Due to management not being able to conclude that it is more likely
than not that the deferred tax asset will be realized, a valuation allowance has
been recorded for the full amount.
NOTE 9 - OBLIGATIONS UNDER CAPITAL LEASES
The future minimum lease payments under capitalized equipment leases together
with the present value of the minimum lease payments as of January 31, 1996 are
as follows:
Year ending January 31, Amount
----------------------- --------
1997 $35,000
1998 35,000
1999 8,000
-------
Total minimum lease payments 78,000
Less amount relating to interest 8,000
-------
Present value of minimum lease payments
under capital leases $70,000
=======
F-16
PRISM ENTERTAINMENT CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
================================================================================
NOTE 10 - CONVERTIBLE SENIOR SUBORDINATED DEBENTURES
During the year ended January 31, 1991, the Company sold $5,138,000 of
Convertible Senior Subordinated Debentures ("the Debentures"). Costs incurred
in connection with the issuance were $933,000 and are being amortized over the
term of the Debentures. At January 31, 1996 and 1995, accumulated amortization
on the related issuance costs was $543,000 and $413,000. The Debentures bear
interest at the rate of 13% per annum, payable monthly, and will mature on
December 1, 1999. Holders may convert the Debentures into shares of the
Company's common stock at a conversion price (subject to adjustment in certain
events) of $5 per share. On February 28, 1991, the Company completed the
offering of the Debentures by selling an additional $22,000. At January 31,
1996, the Company is not able to estimate the fair value of the Debentures as
the Company filed a petition for relief under Chapter 11 of the federal
bankruptcy laws in the United States Bankruptcy Court and the ultimate
settlement of this liability is unknown.
NOTE 11 - LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise consist of the following at January 31, 1996
Amount
-----------
Accounts payable $ 1,525,000
Accrued expenses 250,000
Convertible senior subordinated debentures (Note 10) 4,958,000
Obligations under capital leases (Note 9) 70,000
Deferred income - related party 895,000
Minimum guarantees 2,548,000
-----------
$10,246,000
===========
NOTE 12 - COMMITMENTS AND CONTINGENCIES
LEASES
The Company is committed under noncancelable operating leases for certain
equipment. During the year ended January 31, 1996, the Company modified its
facilities lease and is now on a month-to-month basis. The leases expire
through September 30, 1998. Future minimum aggregate lease payments for these
leases are as follows:
Year Ending
January 31, Amount
- -------------- -------
1997 $21,000
1998 21,000
1999 8,000
-------
$50,000
=======
Rent expense for the years ended January 31, 1996, 1995 and 1994 was $199,000,
$237,000 and $127,000.
F-17
PRISM ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONCLUDED)
================================================================================
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Barry Collier, the Company's
President and Chairman of the Board, which provides for base compensation of
$250,000 adjusted for inflation. In addition, Mr. Collier will receive an
annual bonus equal to five percent of the Company's pre-tax profits, as defined
in the agreement, up to an aggregate annual compensation (salary and bonus) of
$750,000. In the event Mr. Collier's employment is terminated prior to the July
31, 1998 expiration, for any reason other than "justifiable cause" as defined,
the Company will pay Mr. Collier $440,000 for each year remaining in the term
plus an additional sum of $440,000. The Company also has an employment contract
with one other member of management for $150,000 per year ending on September 6,
1997.
LEGAL PROCEEDINGS
The Company is a defendant in a lawsuit (along with the Company's President and
a former director) filed by the former principal shareholder of Atlantic
Entertainment Corporation ("Atlantic"). The lawsuit alleges that the plaintiff
is a third party beneficiary of a purported 1988 agreement providing for the
merger of Atlantic and the Company. In that alleged capacity, the plaintiff
sued for breach of the alleged merger and for various alleged acts in the
performance or making of the alleged merger agreement. On April 26, 1995, the
Los Angeles Superior Court ruled in favor of the defendants on their motion for
summary judgment and ordered the case dismissed. On May 3, 1995, the Los
Angeles Superior Court entered judgment in favor of the defendants. The
plaintiff filed a motion for reconsideration, which was dismissed on July 21,
1995. The plaintiff filed an appeal on August 4, 1995, which is currently
pending but has been stayed as against the Company because of its bankruptcy.
The Company believes it will prevail in the appeal and therefore no liability
has been recorded in the financial statements.
NOTE 13 - MAJOR CUSTOMERS AND FOREIGN SALES
For the year ended January 31, 1996, one major customer accounted for sales of
$1,620,000. For the year ended January 31, 1995, one major customer accounted
for sales of $2,676,000. For the year ended January 31, 1994, two major
customers accounted for sales of $3,709,000 and $2,079,000.
During the years ended January 31, 1996, 1995 and 1994, the Company had
approximately $2,662,000, $4,346,000 and $3,500,000 in foreign sales.
NOTE 14 - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of the year ended January 31, 1996, the Company
recorded an adjustment in the amount of $4,890,000 relating to an increase in
amortization expense based on a revision of the Company's estimated ultimate
revenues. The adjustment increased net loss by $2.21 per share for the year
ended January 31, 1996.
F-18
PRISM ENTERTAINMENT CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
================================================================================
Column A Column B Column C Column D Column E
---------- ---------- ----------------------- ------------ ----------
Additions
-----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Period
---------- ---------- ---------- ------------- ----------
Allowances deducted
from assets to
which they apply:
1996
Allowance for
doubtful accounts
receivable $ 49,000 $498,000 $ - $ - $547,000
========== ========== ========== ============= ==========
1995
Allowance for
doubtful accounts
receivable $135,000 $189,000 $ - $275,000/(1)/ $ 49,000
========== ========== ========== ============= ==========
1994
Allowance for
doubtful accounts
receivable $406,000 $135,000 $ - $406,000/(1)/ $135,000
========== ========== ========== ============= ==========
(1) To write off accounts for which provision had been made.
F-19