SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For Fiscal Year Ended Commission File December 31, 1995 Number 0-13158 DELPHI FILM ASSOCIATES III (Exact name of registrant as specified in its charter) New York 13-3177344 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 666 Third Avenue, New York, New York 10017 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 983 9040 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interests 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 report) 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 March 15, 1996, there were 9,702 units of limited partnership interests outstanding, all held by non-affiliates. The aggregate market value of those interests is not determinable because there is no active public trading market for the units. See Item 5. Market for the Registrant's Common Equity and Related Security Holder Matters. PART I. Item 1. Business. Introduction. Delphi Film Associates III (the "Partnership") is a limited partnership which was organized under the law of the State of New York in September 1983 to participate in the production, acquisition, ownership and exploitation of feature length motion pictures through a joint venture with Columbia Pictures Industries, Inc. ("Columbia"), known as Columbia-Delphi III Productions (the "Columbia Joint Venture"), and through a joint venture with Tri-Star Pictures, predecessor-in-interest to TriStar Pictures, Inc. ("TriStar"), known as Tri-Star-Delphi III Productions (the "Tri-Star Joint Venture"). The terms of the TriStar Joint Venture and the Columbia Joint Venture are substantially the same. These two joint ventures are referred to collectively as the "Joint Ventures" and sometimes individually as a "Joint Venture," and the Partnership's co- venturer in each of the joint ventures is sometimes referred to as the "Studio Venturer." A public offering (the "Offering") of limited partnership interests in the Partnership, at $5,000 per unit, was completed in July 1984 with the sale of 9,702 units. Tricol Partners, a partnership consisting of TriStar and Columbia, is a limited partner of the Partnership and contributed $l5,000,000 for the purchase of 3,000 units of limited partnership interests. Net proceeds to the Partnership after deducting selling commissions, organizational expenses and other expenses of the Offering were approximately $44,100,000. In addition, the general partner of the Partnership, The Delphi Group (the "General Partner"), contributed approximately $490,000 as its capital contribution to the Partnership. Production and Acquisition of Films. Until the funds the Partnership agreed to contribute to each Joint Venture were fully committed, each Joint Venture had the right to produce or acquire and exploit each film that met certain criteria for which its Studio Venturer commenced production after the expiration of the Studio Venturer's similar existing commitment to its joint venture with Delphi Film Associates II ("Delphi II"). Delphi II was a limited partnership organized in October 1982 to participate in the production, acquisition, ownership and exploitation of films through Columbia- Delphi Productions II and Tri-Star-Delphi II Productions, which was liquidated in December 1995. Each Joint Venture also acquired interests in certain films produced by independent producers that were distributed by the distribution arm of its Studio Venturer. The Partnership, through each Joint Venture, has an interest ranging from 5% to 25% in each of the Joint Ventures' films. The Partnership's ownership interest with respect to each film is generally equal to the percentage the Partnership's cash contributions for production or acquisition of a film bears to the total cash contributions required for production or acquisition of that film. The Partnership has an interest in 34 films (seven through the Columbia Joint Venture and 27 through the Tri Star Joint Venture) all of which have been released. See "Films in Release." Seven of the Tri-Star Joint Venture films were co-produced with Tri-Star-Delphi II Productions. The Partnership, through the Tri-Star Joint Venture, owns a 10% interest in those films. In each of 1985, 1986 and 1988, the Joint Ventures were granted participation interests in certain additional films (the "Additional Films"). The Joint Ventures were granted a participation interest in three Additional Films in 1985, one film through the Columbia Joint Venture ("The Karate Kid: Part II") and two films through the Tri-Star Joint Venture ("Let's Get Harry" and "Nothing In Common"). The Partnership, through the Joint Ventures, owns a 10% interest in each of these films. The Partnership did not make capital contributions for its participation interests in these Additional Films, but is entitled to a share of the proceeds from each of these films to the extent those proceeds exceed the amount that the Partnership would have contributed had the Joint Venture paid for its interest. The Partnership does not anticipate receiving any revenue with respect to "Let's Get Harry" and "Nothing in Common." Through December 31, 1995, the Partnership has received approximately $3,401,000 with respect to "The Karate Kid: Part II." In 1986, the Partnership, through the Tri-Star Joint Venture, also received a participation interest in two motion pictures ("The Principal" and "Suspect"). The Partnership made no capital contribution for its interest in these films. The Partnership's interest in each of these films is substantially the same as described for "The Karate Kid: Part II," "Let's Get Harry" and "Nothing In Common," except that the Partnership is entitled to receive an amount, aggregating not more than $520,000, based on the worldwide theatrical gross receipts of "The Principal" and "Suspect." Through December 31, 1995, the Partnership has received $516,000 with respect to "The Principal" and "Suspect". In 1988, the Tri-Star Joint Venture was granted a participation interest by TriStar in the motion picture "Rambo III." The Partnership is entitled to 5% of net proceeds after "Breakeven" has been reached. For this purpose, "Breakeven" is defined as the point at which 10% of net proceeds (after recoupment of deferred distribution fees) equals 5% of the production cost of the film (including an overhead charge of 12-1/2%). The Partnership made no capital contributions for its interest in this film. Payments due with respect to the interest in "Rambo III" will be made in June 1996, subject to being paid earlier under certain circumstances. As of December 31, 1995, the Partnership had accrued revenues of approximately $138,000 in respect of its interest in "Rambo III." See "Films in Release." The Partnership's contributions for the production and acquisition of films aggregated approximately $56,384,000 (including interest). Approximately two-thirds of the Partnership's contributions were made to the Tri- Star Joint Venture, and the balance was contributed to the Columbia Joint Venture. As a result of the performance of the films in which the Partnership has an interest, Distribution Fee Reduction Payments were made in 1992 and 1991 to the Columbia Joint Venture and the Tri-Star Joint Venture by their respective Distributors. As of December 31, 1995, approximately $528,000 and $1,467,000 had been received by the Partnership through the Columbia Joint Venture and the Tri- Star Joint Venture, respectively, which are net of amounts withheld by the Distributor for recoupment of the Advances. See "Reduction of Distribution Fee and Payment to Joint Ventures." The Partnership is in the process of evaluating the value of its interest in the film assets for the purpose of possibly selling that interest and eventually liquidating the Partnership. The General Partner presently anticipates that the Partnership will be liquidated by the end of 1996. However, cash distributions will be made to the partners to the extent, and only to the extent, the proceeds from the sale of the Partnership's interest in the film assets in connection with the liquidation are in excess of a reserve for the Partnership's remaining operating expenses. Distribution of Films. The films of the Columbia Joint Venture and the TriStar Joint Venture are being distributed pursuant to distribution agreements between Columbia Pictures, a division of Columbia ("Columbia Pictures"), and the Columbia Joint Venture, and between TriStar and the Tri- Star Joint Venture, respectively. Columbia Pictures and TriStar, as distributors, are sometimes referred to collectively as the "Distributors" and individually as a "Distributor." The Distributor has the ultimate authority for all decisions with respect to the distribution of the films. The Partnership, through each Joint Venture, is generally entitled to receive an amount equal to the product of its percentage interest in a film multiplied by the greater of (a) an amount equal to 100% of the net proceeds (as defined below) from the distribution of a film and (b) an amount equal to 32% of gross receipts from the distribution of a film. Distribution arrangements with respect to films in which a Joint Venture has an interest that were produced by independent producers may vary from those with respect to films produced by a Joint Venture. The Partnership and the Studio Venturer share in the amount to which the Joint Ventures are entitled from the distribution of any film in proportion to their respective interests in the film. The distribution agreements provide, with certain exceptions, that gross receipts consist of all sums received by the Studio Venturer from the exploitation of a film throughout the world. Net proceeds with respect to each film generally are determined by deducting from gross receipts: (a) a distribution fee equal to 17-1/2% of substantially all of the gross receipts of the film. The Distributor's entitlement to this distribution fee is deferred until the Joint Venture has received from the distribution of that film an amount equal to the amount contributed by the Joint Venture to produce or acquire an interest in the film, other than amounts paid in the nature of interest (See "Reduction of Distribution Fee and Payment to the Joint Ventures"); (b) all expenses incurred in the distribution, promotion and marketing of the film, including expenditures for prints and advertising; and (c) payments to third party participants who have a contingent participation in the film. The extent to which payments to third party participants may be deducted from the gross receipts of a film in determining net proceeds is limited by the distribution agreements. The Joint Ventures' films are subject to agreements between Home Box Office, Inc. ("HBO") and each of Columbia and TriStar with respect to HBO's exhibition of those films on its pay television services. Although the terms of the agreement between HBO and Columbia (the "Columbia-HBO Agreement") differ in certain respects from the terms of the agreement between HBO and TriStar, pursuant to both Joint Ventures' distribution agreements, gross receipts of films have been calculated on the basis of the terms of the Columbia-HBO Agreement. Under that agreement, Columbia received substantial minimum license fees based generally on a film's production cost and additional amounts if a film's domestic box office performance exceeded certain levels. In addition, under that agreement HBO may acquire the exclusive pay television rights for a substantial number of films for a limited period of time, in which case the license fee based on box office performance was increased for those films. Most of the Columbia Joint Venture's and the Tri-Star Joint Venture's films have been exhibited on HBO's pay television services. The Joint Ventures' distribution agreements with the Distributors provide that for purposes of determining the amounts to which the Joint Ventures are entitled based on net proceeds, gross receipts include an amount equal to the higher of the license fees based on domestic box office performance provided for in the Columbia-HBO Agreement and the minimum license fee based on a film's production cost. However, for purposes of determining the amounts to which the Joint Ventures are entitled based on gross receipts, gross receipts include only the license fee based on domestic box office performance. Columbia Pictures entered into an arrangement with CBS Inc. ("CBS") for CBS to license for exhibition on the CBS television network, a specified number of motion pictures from among a specified number of groups of motion pictures under an arrangement providing for CBS to pay a specified average license fee for the motion pictures in each group licensed by CBS. The Columbia Joint Venture and its Distributor have agreed that, subject to adjustment in certain circumstances, gross receipts for films licensed to CBS under this arrangement have included an amount equal to the higher of the license fees paid by CBS and the comparable fair market value for the license rights involved for the relevant license period. Certain films in which the Partnership owns an interest have been licensed for network television exhibition under this arrangement. Certain of the Tri-Star Joint Venture's films have been licensed for network television exhibition on CBS or on other television networks on a film-by-film basis. The films in which the Partnership owns an interest are subject to agreements between each Distributor and Columbia TriStar Home Video (formerly known as RCA/Columbia Pictures Home Video) and Columbia TriStar Home Video (International) Inc. (formerly known as RCA/Columbia Pictures International Video). The distribution agreements between each Joint Venture and its Distributor provide for a specified royalty for videocassettes and discs regardless of the amounts payable to TriStar or Columbia under their respective agreements with such joint ventures (which may exceed the amounts includable in gross receipts). Many films in which the Partnership has an interest have been licensed by the Distributor for exhibition on cable television services other than HBO and Cinemax, independent television stations in the United States and on foreign television stations. Generally, these films have been made available for foreign television exhibition and domestic independent television exhibition approximately three and five years, respectively, after a film's domestic theatrical release. Pursuant to an agreement between TriStar and the Tri Star Joint Venture entered into in 1985, TriStar agreed to make a payment in 1991 to the Tri-Star Joint Venture increasing gross receipts otherwise payable in respect of syndicated television. In addition, in 1986, TriStar agreed to prepay the Tri-Star Joint Venture in 1987, on a discounted basis, an amount relating to network television license fees and syndicated television minimum license fees. All payments to the Tri-Star Joint Venture with respect to these payments were allocable to the Partnership. Each Distributor reports gross receipts and net proceeds for each film to the Joint Venture on behalf of which it acts, on a quarterly basis, and makes payments to that Joint Venture based on those reports when the reports are delivered. In addition to distributing motion pictures produced or acquired by the Joint Ventures, each Distributor distributes films in which joint ventures between each of Columbia and TriStar and certain other limited partnerships (the "Delphi Partnerships") own an interest, as well as films in which neither the Partnership nor any of the Delphi Partnerships own an interest. Reduction of Distribution Fee and Payment to Joint Ventures. The agreements relating to the distribution of films owned by the Joint Ventures provided for a payment (the "Distribution Fee Reduction Payment") to be made by each Distributor of an amount by which, as of June 1991, contributions by each Joint Venture for the production of and acquisition of interests in its respective films, other than sequels, (the "Expenditures") exceeded amounts paid to the Joint Venture with respect to those films. As of December 31, 1995, the Partnership received, in the aggregate, approximately $528,000 and $1,467,000 (net of amounts withheld by the Distributor for the recoupment of the Advances) from the Columbia Joint Venture and the Tri- Star Joint Venture, respectively, which represents the Partnership's share of accrued distribution fees paid with respect to the Distribution Fee Reduction Payments. Since these payments were not sufficient to enable either Joint Venture to recoup its Expenditures, each Distributor is required to pay to its Joint Venture an amount equal to all subsequent distribution fees earned by it from the distribution of films on behalf of that Joint Venture up to that Joint Venture's unrecouped Expenditures. If the Joint Ventures are able to recoup their Expenditures, the Distributors would be entitled to recoup these payments, with interest calculated at 110% of the prime rate of interest from time to time, from amounts thereafter otherwise payable to the Partnership. Based on the anticipated performance of the Partnership's films, each Distributor is required to continue making Distribution Fee Reduction Payments with respect to its films. Accordingly, the Partnership's share of distribution fees earned and expected to be earned by the Distributors, as of December 31, 1995, of approximately $44,000 and $395,000 have been accrued by the Partnership and included in the receivable from the Columbia Joint Venture and the Tri-Star Joint Venture, respectively. Interest-free advances (the "Advances") from the Distributors were allocated to the Partnership in the amount of $333,000 and $667,000 from the Columbia and the TriStar Distributors, respectively. In July, 1991, an agreement was reached between each Distributor and each Joint Venture whereby the recoupment of Advances paid by the Distributor to the Joint Venture would generally be deferred until the earlier of December 31, 1993 or the date of receipt of proceeds of a sale or transfer by the Partnership of its interest in the Joint Ventures or the sale or transfer by all of the limited partners of the Partnership of their limited partnership interests. Since no such sale or transfer was agreed to, in writing, by December 31, 1993, the Distributors were entitled to retain an amount equal to the unrecouped portion of the Advances from all amounts thereafter otherwise payable pursuant to the Distribution Agreement and allocable to the Partnership. As of December 31, 1995, the Advances from the Distributors had been fully recouped and, therefore, all subsequent amounts will be allocated to the Partnership. Since the Distribution Fee Reduction Payment is limited by the amount of distribution fees received by the Distributors, it is anticipated that the Distribution Fee Reduction Payments received from the Distributors will not enable the Partnership, through each Joint Venture, to recoup its Expenditures. Films in Release. All seven films in which the Columbia Joint Venture has an interest have been released. Certain information concerning these films is set forth below: Partnership's Approximate Initial Percentage Title Release Date Interest Hardbodies May 1984 10% Micki & Maude December 1984 25% Fast Forward February 1985 25% Perfect June 1985 20.4% The Bride August 1985 25% Big Trouble November 1985 25% The Karate Kid: Part II June 1986 10% All 27 films in which the Tri-Star Joint Venture has an interest have been released. Certain information concerning these films is set forth below: Partnership's Approximate Initial Percentage Title Release Date Interest The Evil That Men Do March 1984 (Foreign) 15% September 1984 (Domestic) Where The Boys Are May 1984 15% The Natural May 1984 9.9% The Muppets Take Manhattan July 1984 10% Places In The Heart September 1984 10% Songwriter October 1984 10% Lovelines October 1984 10% Blame It On The Night October 1984 10% Birdy December 1984 25% Runaway December 1984 25% Berry Gordy's The Last Dragon March 1985 25% Alamo Bay April 1985 25% Little Treasure May 1985 10% Rambo: First Blood Part II May 1985 7.5% Private Resort May 1985 25% Lifeforce June 1985 7.5% Legend Of Billie Jean July 1985 25% Real Genius July 1985 25% My Man Adam October 1985 25% Santa Claus: The Movie November 1985 5% Iron Eagle January 1986 10% Labyrinth June 1986 5% Nothing In Common July 1986 10% Let's Get Harry October 1986 10% The Principal September 1987 10% Suspect October 1987 10% Rambo III May 1988 5% All of the films of both Joint Ventures have been theatrically released both domestically and in foreign markets. In addition, all of these films have been made available on video cassettes and have been exhibited on pay television. Certain of these films have been exhibited on network television and, all of these films are currently available or under license for domestic syndicated television exhibition and foreign television exhibition. See "Distribution of Films". In addition to having a 10% participation interest in the motion pictures "The Principal" and "Suspect," the Partnership, through the Tri-Star Joint Venture, is entitled to receive an amount aggregating not more than $520,000 based on specified percentages of the worldwide theatrical gross receipts of those films. Through December 31, 1995, the Partnership had received $516,000 with respect to these participation interests. See "Business - Production and Acquisition of Films." Competition. Competition in the motion picture industry is intense, both in theatrical distribution as well as in the ancillary markets where the Partnership's films are now being distributed. All of the "major" studios and independent distribution companies are distributing films that compete for the attention of purchasers of product for these ancillary markets which include pay cable television, home video, network television exhibition, and syndicated television exhibition both foreign and domestic. The Partnership's films compete in many of these markets not only with films that were released contemporaneously, but also with many films that were released in prior and subsequent years. The level of theatrical success that a film enjoyed is often an important factor with respect to results achieved in these ancillary markets. Employees. The Partnership has no employees. The General Partner, however, retains the services of Magera Management Corporation ("Magera") to provide operational and financial services to it. See Item l0 "Directors and Executive Officers of the Partnership-Operational and Financial Services." Magera has eight employees who perform services for the General Partner, and for the general partners of other private and public limited partnerships, including the other Delphi Partnerships. Item 2. Properties. The executive offices of the Partnership and the General Partner are located at 666 Third Avenue, New York, New York 10017. The Partnership pays no rent. Item 3. Legal Proceedings. None. Item 4. Submission of Matters to a Vote of Security Holders. None. PART II. Item 5. Market for the Registrant's Common Equity and Related Security Holder Matters. The Partnership is a limited partnership; there is no established public market for limited partnership units of the Partnership. Effective November 9, 1992, the Partnership was advised that Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") introduced a new limited partnership secondary service available to its clients through Merrill Lynch's Limited Partnership Secondary Transaction Department. Beginning with the December 1994 client account statements, Merrill Lynch implemented new guidelines for providing estimated values of limited partnerships and other direct investments reported on client account statements. Pursuant to the guidelines, estimated values for limited partnership interests originally sold by Merrill Lynch (such as the Partnership's Units) will be provided two times per year to Merrill Lynch by independent valuation services. The estimated values will be based on financial and other information available to the independent services on the prior August l5th for reporting on December year-end client account statements, and on information available to the services on March 31st for reporting on June month-end Merrill Lynch client account statements. Merrill Lynch clients may contact their Merrill Lynch Financial Consultants or telephone the number provided to them on their account statements to obtain a general description of the methodology used by the independent valuation services to determine their estimates of value. The estimated values provided by the independent services are not market values and Unit holders may not be able to sell Units or realize the amount upon a sale. In addition, Unit holders may not realize the independent estimated value upon the liquidation of the Partnership over its remaining life. As of March 15, 1996, there were approximately 3,800 holders of record of limited partnership units of the Partnership. Cash Distributions. The Partnership commenced making cash distributions in February 1986. The following chart sets forth the cash distributions made by the Partnership through March 15, 1996: Year Amount Per Unit 1986 $ 650 1987 975 1988 350 1989 100 1990 100 1991 460 1992 275 1993 75 1994 25 1995 60 1996 (through March 15) 0 Total $ 3,070 Accordingly, as of March 15, 1996, the partners have received distributions aggregating 61.4% of their investment in the Partnership. The Partnership does not currently anticipate that the partners will receive cash distributions equal to their capital contribution to the Partnership. Item 6. Selected Financial Data. (000's omitted except for per unit information) Year Ended December 31, 1995 1994 1993 1992 1991 < Operating revenues(1): $ 0 $ 0 $ 0 $ 0$ 0 Share of profit in motion picture ventures, net: $1,447 $ 241 $ 602 $ 1,206 $2,034 Net profit (loss): $1,182 $ (162) $ 185 $ 840 $1,755 Net profit (loss) per unit: $ 121 $ (17) $ 19 $ 86$ 179 Total assets: $2,872 $ 2,253 $ 2,668 $ 3,207 $5,108 Total liabilities: $ 55 $ 30 $ 38 $ 27$ 73 Cash distributions per unit: $ 60 $ 25 $ 75 $ 275$ 460 (1) The Partnership's interests in the Joint Ventures are not included in Operating Revenues as they are accounted for by the equity method. /TABLE Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 1. Liquidity and Capital Resources. The Partnership has fully satisfied its commitment to contribute funds to the Joint Ventures for the production of, and acquisition of interests in, films. At December 31, 1995, the Partnership held cash of approximately $155,000 and short-term investments of approximately $986,000. Short-term investments consist solely of U.S. Government Securities. As of December 31, 1995, the Partnership has received, in the aggregate, approximately $528,000 and $1,467,000 (net of amounts withheld by the Distributor for the recoupment of the Advances) from the Columbia Joint Venture and the TriStar Joint Venture, respectively, which represent accrued distribution fees paid with respect to the Distribution Fee Reduction Payments. Since these payments were not sufficient to enable either Joint Venture to recoup its Expenditures, each Distributor will be required to pay to its Joint Venture an amount equal to all subsequent distribution fees earned by it from the distribution of films on behalf of that Joint Venture up to that Joint Venture's unrecouped Expenditures. If the Joint Ventures are able to recoup their Expenditures, the Distributors would be entitled to recoup these payments, with interest calculated at 110% of the prime rate of interest from time to time, from amounts thereafter otherwise payable to the Partnership. Based on the anticipated performance of the Partnership's films, each Distributor is required to continue making Distribution Fee Reduction Payments with respect to its films. Accordingly, the Partnership's share of distribution fees earned and expected to be earned by the Distributors, as of December 31, 1995, of approximately $44,000 and $395,000 have been accrued by the Partnership and included in the receivable from the Columbia Joint Venture and the Tri-Star Joint Venture, respectively. Since the Distribution Fee Reduction Payment is limited by the amount of distribution fees received by the Distributors, it is anticipated that the Distribution Fee Reduction Payments received from the Distributors will not enable the Partnership, through each Joint Venture, to recoup its Expenditures. The Partnership received Advances in the amount of $333,000 and $667,000 from the Columbia and the TriStar Distributors, respectively. In July, 1991, an agreement was reached between each Distributor and each Joint Venture whereby the recoupment of Advances by the Distributor to the Joint Venture would generally be deferred until the earlier of December 31, 1993 or the date of receipt of proceeds of a sale or transfer by the Partnership of its interest in the Joint Venture or the sale or transfer by all of the limited partners of the Partnership of their limited partner interests. Since no such sale or transfer was agreed to, in writing, by December 31, 1993, the Distributors were entitled to retain amounts equal to the unrecouped portion of the Advances from all amounts thereafter otherwise payable pursuant to the distribution agreement and allocable to the Partnership. As of December 31, 1995, the $333,000 Advance from the Columbia Distributor had been fully recouped and as such, all subsequent amounts will be allocated to the Partnership. As of December 31, 1994, the $667,000 Advance from the TriStar Distributor had been fully recouped and, as such, all subsequent amounts are being allocated to the Partnership. The Partnership is in the process of evaluating the value of its interest in the film assets for the purpose of possibly selling that interest and eventually liquidating the Partnership. The General Partner presently anticipates that the Partnership will be liquidated by the end of 1996. No assurance can be provided that the film assets will be successfully sold, or if sold, on such schedule. Upon the ultimate sale of the film assets, the Partnership will commence taking steps to liquidate and dissolve. Since the Partnership's obligation to make contributions to the Joint Ventures for the production of, and acquisition of interests in, films has been satisfied, all revenues received by the Partnership is used to establish a reserve for operating expenses of the Partnership and, to the extent possible, to make cash distributions to partners. The Partnership does not anticipate significant future revenues and accordingly, the Partnership does not currently anticipate making cash distributions to partners on a quarterly basis. However, the Partnership may make future distributions if it realizes proceeds from its interest in films or from the sale of its interest in films (should the sale occur) net of a reserve for the Partnership's operating expenses. The most recent cash distribution by the Partnership was made in November 1995. 2. Results of Operations. The Partnership's operating results are primarily dependent upon the operating results of the Joint Ventures and are significantly impacted by the Joint Ventures' policies. The performance of each film is based upon the amount expended for production and other costs associated with a film and the revenue generated by a film. The amount and timing of revenue generated by each film is dependent upon the degree of acceptance by the consumer public and the particular ancillary market in which the film is then being exhibited. Amounts contributed toward each film are compared periodically to the expected total revenue to be generated for that film, and write-downs may occur to the extent the amounts invested exceed the expected total revenue for that film. Additionally, each Joint Venture may record income with respect to Distribution Fee Reduction Payments, to the extent available, which may allow it to recover its investment in films. For the year ended December 31, 1995, the Columbia Joint Venture had a net profit of which the Partnership's share was approximately $228,000 due primarily to the profitable results of certain films and the accrual of Distribution Fee Reduction Payments. The Tri-Star Joint Venture had a net profit of which the Partnership's share was approximately $1,219,000, due primarily to the recognition of distributions accrued in excess of the Partnership's investment in the Tri-Star Joint Venture, the profitable results of certain films and the accrual of Distribution Fee Reduction Payments. In addition, the Partnership earned approximately $66,000 from its short- term investments and incurred approximately $331,000 of expenses from its operations, resulting in an overall net profit of approximately $1,182,000. For the year ended December 31, 1994, the Columbia Joint Venture had a net profit of which the Partnership's share was approximately $166,000 due primarily to the profitable results of certain films offset, in part, by expenses related to foreign exchange losses. The Tri-Star Joint Venture had a net profit of which the Partnership's share was approximately $75,000, due primarily to the profitable results of certain films and the accrual of Distribution Fee Reduction Payments offset, in part, by expenses related to foreign exchange losses. In addition, the Partnership earned approximately $42,000 from its short term investments and incurred approximately $445,000 of expenses from its operations, resulting in an overall net loss of approximately $162,000. For the year ended December 31, 1993, the Columbia Joint Venture had a net profit of which the Partnership's share was approximately $340,000 due primarily to the profitable results of certain films and the resolution of several outstanding issues with its Distributor. The Tri Star Joint Venture had a net profit of which the Partnership's share was approximately $262,000, due primarily to the accrual of Distribution Fee Reduction Payments and the profitable results of certain films. In addition, the Partnership earned approximately $49,000 from its short-term investments and incurred approximately $466,000 of expenses from its operations, resulting in an overall net profit of approximately $185,000. The increase in interest income for the year ended December 31, 1995 as compared with the prior year is due primarily to higher interest rates earned on for short-term investments during 1995. The decrease in interest income for the year ended December 31, 1994 as compared with the prior year is due primarily to the availability of less funds for short-term investments during 1994. The decrease in the Partnership's total expenses for the year ended December 31, 1995 as compared with the prior year is attributable to the Management Fee incurred in 1994 but not in 1995 offset, in part, by an increase in Other Expenses. The increase in Other Expenses is primarily due to the reimbursement to the General Partner for out-of- pocket expenses incurred in connection with its management of the Partnership's business in lieu of the Management Fee paid to the General Partner prior to 1995. The decrease in the Partnership's total expenses for the year ended December 31, 1994 as compared with the prior year is due primarily to a decrease in Other Expenses. The decrease in Other Expenses is primarily attributable to a decrease in professional fees related to the performance of fewer production and distribution audits in 1994. The Partnership does not believe that the impact of inflation on the results of its operations has been material. Item 8. Financial Statements and Supplementary Data. See the financial statements set forth in Item 14 of this annual report. Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III. Item 10. Directors and Executive Officers of the Partnership. The General Partner of the Partnership is The Delphi Group, a New York general partnership originally formed in September 1983 by Lewis J. Korman and Delphi III Partners. In January 1987, ML Film Entertainment Inc. ("ML Film"), a Delaware corporation, and a wholly-owned subsidiary of ML Leasing Equipment Corp. (which is an indirect wholly-owned subsidiary of Merrill Lynch & Co. Inc., and the successor in interest to Merrill Lynch Leasing Inc. and Merlease Leasing Corp.) and an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), was admitted as a partner in the General Partner and replaced Mr. Korman as managing partner of the General Partner (the "Managing Partner"). Set forth below is certain information regarding the management of the General Partner. ML Film. The executive officers and directors of ML Film are: Kevin K. Albert . . . . . . . . President, Director Robert F. Aufenanger . . . Executive Vice President, Director Steven N. Baumgarten . . . Vice President, Director Michael E. Lurie . . . . . . . Vice President, Director Diane T. Herte. . . . . . . . . . Treasurer Kevin K. Albert, 43, a Managing Director of Merrill Lynch Investment Banking Group ("ML Investment Banking"), joined Merrill Lynch in 1981. Mr. Albert works in the Equity Private Placement Group and is involved in structuring and placing a diversified array of private equity financings including common stock, preferred stock, limited partnership interests and other equity related securities. Mr. Albert is also a director of ML Media Management Inc. ("ML Media"), an affiliate of ML Film and a joint venturer of Media Management Partners, the general partner of ML Media Partners, L.P.; a director of ML Opportunity Management Inc. ("ML Opportunity"), an affiliate of ML Film and a joint venturer in Media Opportunity Management Partners, the general partner of ML Media Opportunity Partners, L.P.; a director of ML Mezzanine II Inc. ("ML Mezzanine II"), an affiliate of ML Film and the general partner of the managing general partner of ML Lee Acquisition Fund II, L.P. and ML Lee Acquisition Fund (Retirement Accounts) II, L.P.; a director of ML Mezzanine Inc. ("ML Mezzanine"), an affiliate of ML Film and the general partner of the managing general partner of ML Lee Acquisition Fund, L.P.; a director of Merrill Lynch Venture Capital Inc. ("ML Venture"), an affiliate of ML Film and the general partner of the Managing General Partner of ML Venture Partners I, L.P. ("Venture I"), ML Venture Partners II, L.P. ("Venture II"), and ML Oklahoma Venture Partners Limited Partnership ("Oklahoma"); and a director of Merrill Lynch R&D Management Inc. ("ML R&D"), an affiliate of ML Film and the general partner of the Managing General Partner of ML Technology Ventures, L.P. Mr. Albert also serves as an independent general partner of Venture I and Venture II. Robert F. Aufenanger, 42, a Vice President of Merrill Lynch & Co. Corporate Credit and a Director of the Partnership Management Department joined Merrill Lynch in 1980. Mr. Aufenanger is responsible for the ongoing management of the operations of the equipment and project related limited partnerships for which affiliates of ML Film serve as general partners. Mr. Aufenanger is also a director of ML Media, ML Opportunity, ML Venture, ML R&D, ML Mezzanine and ML Mezzanine II. Steven N. Baumgarten, 40, a Vice President of Merrill Lynch & Co. Corporate Credit, joined Merrill Lynch in 1986. Mr. Baumgarten shares responsibility for the ongoing partnerships for which subsidiaries of ML Leasing Equipment Corp., an affiliate of Merrill Lynch, are general partners. Michael E. Lurie, 52, a First Vice President of Merrill Lynch & Co. Corporate Credit and the Director of the Asset Recovery Management Department, joined Merrill Lynch in 1970. Prior to his present position, Mr. Lurie was the Director of Debt and Equity Markets Credit responsible for the global allocation of credit limits and the approval and structuring of specific transactions relating to debt and equity products. He also served as Chairman of the Merrill Lynch International Bank Credit Committee. Mr. Lurie is also a director of ML Media, ML Opportunity, ML Venture and ML R&D. Diane T. Herte, 35, an Assistant Vice President of Merrill Lynch & Co., Corporate Credit since 1992, joined Merrill Lynch in 1984. Ms. Herte's responsibilities include controllership and financial management functions for certain partnerships for which subsidiaries of ML Leasing Equipment Corp., an affiliate of Merrill Lynch, are general partners. Mr. Aufenanger is an executive officer of Mid Miami Diagnostics Inc. ("Mid-Miami Inc."). On October 28, 1994 both Mid-Miami Inc. and Mid-Miami Diagnostics, L.P. filed voluntary petitions for protection from creditors under Chapter 7 of the United States Bankruptcy Code in the United States Bankruptcy Court for the southern District of New York. Merrill Lynch was a co-managing underwriter of the initial public offering of Sony Pictures Entertainment, Inc. ("SPE") (then known as "Tri-Star Pictures, Inc.") securities and of several subsequent public offerings of additional SPE securities. In addition, an affiliate of the Managing Partner serves as a manager for certain film financing transactions conducted on behalf of SPE in Japan. Therefore, ML Film and its affiliates could have interests that may conflict with those of the Partnership. Merrill Lynch, or an affiliate, has served as a selling agent for the public offerings of units in each of the Delphi Partnerships. Operational and Financial Services. To assist it in the performance of its duties, the General Partner has engaged Magera, subject to the direction and supervision of the General Partner, to provide operational and financial services which are provided at no additional cost to the Partnership for each year for which there is a management fee. Magera is owned by Richard M. Mason and Aaron German. Mr. Mason, a partner of the non-managing partner of the General Partner and the President of Magera, and Mr. German, the Executive Vice President of Magera, also previously acted as consultants to SPE. Magera also provides operational and financial services to the general partners of other private and public limited partnerships, including the other Delphi Partnerships, and serves as a consultant to others engaged in the entertainment industry. Item 11. Executive Compensation. For 1995 and subsequent years, the General Partner is reimbursed for out-of-pocket expenses with respect to administering the Partnership and reporting to partners. In that regard, the General Partner, on behalf of the Partnership, has retained Magera to provide those services to the Partnership for 1995 and subsequent years. Until limited partners have received total cash distributions equal to their capital contributions (the "Capital Return"), they will receive 99% of, and the General Partner will receive 1% of, all cash distributions. The General Partner, in addition to receiving distributions in respect of the 1% interest for which it has paid, will be entitled to receive additional distributions in amounts up to 20% of all cash distributions made after the Capital Return. Prior to reaching the Capital Return, income will be allocated 99% to the limited partners and l% to the General Partner. To the extent and after the Capital Return is reached, allocations of income would be based on the aggregate allocations of income and losses and cash distributions after Capital Return is reached. The Partnership does not currently anticipate that Capital Return will be achieved. See Item 5 "Cash Distributions." Item 12. Security Ownership of Certain Beneficial Owners and Management. Tricol Partners, having an address c/o Columbia Pictures Industries, Inc., 10202 West Washington Boulevard, Culver City, California 90232, a partnership comprised of Columbia and TriStar, is the owner of 3,000 units of limited partnership interests of the Partnership, representing approximately 31% of all such units. As to any matters submitted to limited partners of the Partnership for a vote, Tricol Partners has agreed to vote its units in the same proportion as the votes of the other limited partners. To the best of the knowledge of the Partnership, no person other than Tricol Partners beneficially owns in excess of 5% of the limited partnership units of the Partnership. To the best of the knowledge of the Managing Partner, as of March 1, 1996, no person is the beneficial owner of 5% or more of the outstanding common stock of Merrill Lynch. Item 13. Certain Relationships and Related Transactions. The Partnership's operations relating to the ownership and exploitation of films involve Columbia or TriStar. See Item 1 "Business." The General Partner is entitled to management fees and to a portion of cash distributions to partners. The General Partner of the Partnership is affiliated with the general partner of the other Delphi Partnerships which are limited partnerships similar to the Partnership. PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(1) Financial Statements: Delphi Film Associates III Independent Auditors' Report Balance Sheets at December 31, 1995 and 1994 Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993 Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 Statements of Changes in Partners' Capital for the Years Ended December 31, 1995, 1994 and 1993 Notes to Financial Statements Columbia- Delphi III Productions Independent Auditors' Report Balance Sheets at December 31, 1995 and 1994 Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993 Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 Statements of Venturers' Capital for the Years Ended December 31, 1995, 1994 and 1993 Notes to Financial Statements Tri-Star-Delphi III Productions Independent Auditors' Report Balance Sheets at December 31, 1995 and 1994 Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993 Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 Statements of Venturers' Capital for the Years ended December 31, 1995, 1994, and 1993 Notes to Financial Statements (a)(2) Financial Statement Schedules: No financial statement schedules have been filed as part of this report as none are required. (a)(3) Exhibits Exhibit No. Amended Agreement of Limited Partnership (1) 4.l(a) Amendment to the Amended Agreement of Limited Partnership dated as of December 26, 1986 (3) 4.1(b) Joint Venture Agreements (1) l0.1 Product Origination Agreements (1) l0.2 Product Acquisition Agreement (1) l0.4 Distribution Agreements (1) l0.5(a) Amendment to the Columbia Distribution Agreement dated January 17, 1986 (2) 10.5(b) Amendment to the Tri-Star Distribution Agreement dated January 17, 1986 (2) 10.5(c) Financial Data Schedule 27 (1) Incorporated by reference to the Partnership's registration statement No.2-87673, as amended, on file with the Securities and Exchange Commission. (2) Incorporated by reference to the Partnership's Form 10-K for the year ended December 31, 1985 on file with the Securities and Exchange Commission. (3) Incorporated by reference to the Partnership's Form 10-K for the year ended December 31, 1986 on file with the Securities and Exchange Commission. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of the Partnership's fiscal year ended December 31, 1995. (c) Exhibits. The Exhibits required by Item 601 of Regulation S- K are submitted as a separate section following the Partnership's financial statements. (d) Financial Statement Schedules. No financial statement schedules have been filed as part of this report as none are required. 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: March 26, 1996 DELPHI FILM ASSOCIATES III By: THE DELPHI GROUP General Partner By: ML Film Entertainment Inc., Managing Partner /s/ Kevin K. Albert (Kevin K. Albert) President 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 in the capacities and on the dates indicated. Signature Title Date /s/ Kevin K. Albert Director and President of March 26, 1996 (Kevin K. Albert) the Managing Partner of the General Partner (principal executive officer of the Registrant) /s/ Robert F. Aufenanger Director and Executive Vice March 26, 1996 (Robert F. Aufenanger) President of the Managing Partner of the General Partner /s/ Steven N. Baumgarten Director and Vice President March 26, 1996 (Steven N. Baumgarten) of the Managing Partner of the General Partner Director and Vice President March 26 , 1996 (Michael E. Lurie) of the Managing Partner of the General Partner /s/ Diane T. Herte Treasurer of the March 26, 1996 (Diane T. Herte) Managing Partner of the General Partner (principal financial officer and principal accounting officer of the Registrant) EXHIBIT INDEX Page Reference in Sequentially Numbered Copy 4.1(a) Amended Agreement of Limited Partnership* 4.1(b) Amendment to the Amended Agreement of Limited Partnership dated as of December 26, 1986* l0.l Joint Venture Agreements* l0.2 Product Origination Agreements* l0.4 Product Acquisition Agreement* l0.5(a) Distribution Agreements* 10.5(b) Amendment to the Columbia Distribution Agreement dated January 17, 1986* 10.5(c) Amendment to the Tri-Star Distribution Agreement dated January 17, 1986* 27 Financial Data Schedule *Incorporated by reference INDEPENDENT AUDITORS' REPORT The Partners Delphi Film Associates III: We have audited the accompanying balance sheets of Delphi Film Associates III (a New York Limited Partnership) as of December 31, 1995 and 1994, and the related statements of operations, cash flows and changes in partners' capital for each of the years in the three-year period ended December 31, 1995. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Delphi Film Associates III (a New York Limited Partnership) at December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP New York, New York March 25, 1996 DELPHI FILM ASSOCIATES III (A New York Limited Partnership) BALANCE SHEETS (000's Omitted) December 31, 1995 1994 ASSETS Cash $ $ 155 132 Short-Term Investments (Note 2) 986 1,033 Receivable from Columbia-Delphi III Productions, net (Note 4) 640 686 Receivable from Tri-Star-Delphi III Productions, net (Note 4) 503 118 Interest in Motion Picture Venture-Columbia- Delphi III Productions (Notes 132 182 2 & 4) Interest in Motion Picture Venture-Tri-Star- Delphi III Productions (Notes 2 & 4) 456 102 Total $ $ Assets 2,872 2,253 LIABILITIES AND PARTNERS' CAPITAL Liabilities: Accrued Expenses and Accounts $ $ Payable 55 30 Total Liabilities 55 30 Partners' Capital (Note 1): General Partner 70 64 Limited Partners 2,747 2,159 Total Partners' Capital 2,817 2,223 Total Liabilities and Partners' $ $ Capital 2,872 2,253 See accompanying notes to the financial statements. DELPHI FILM ASSOCIATES III (A New York Limited Partnership) STATEMENTS OF OPERATIONS (000's Omitted, except net profit (loss) per unit) For the Year Ended December 31, 1995 1994 1993 Interest Income $ $ $ 66 42 49 Expenses: Management Fee -- 400 400 Other Expenses 331 45 66 331 445 466 Loss before Share of Profit in Motion Picture (265) (403) (417) Ventures Share of Profit in Motion Picture Venture--Columbia- Delphi III Productions (Notes 2 & 228 166 4) 340 Share of Profit in Motion Picture Venture--Tri-Star- Delphi III Productions (Notes 2 & 4) 1,219 75 262 Net Profit (Loss) $ $ $ 1,182 (162) 185 Net Profit (Loss) Per Unit of Limited Partnership Interest (9,702 Units) $ $ $ 121 (17) 19 See accompanying notes to the financial statements. DELPHI FILM ASSOCIATES III (A New York Limited Partnership) STATEMENTS OF CASH FLOWS (000's Omitted) For the Year Ended December 31, 1995 1994 1993 Cash Flow From Operating Activities: Net Profit (Loss) $ $ $ 1,182 (162) 185 Adjustments to reconcile Net Profit (Loss) to net cash provided (used) by operating activities: Share of Income in Motion (1,447) (241) (602) Picture Ventures Distributions from Joint 1,143 377 875 Ventures Changes in Assets and Liabilities: (Increase) Decrease in Receivables from Joint Ventures, net (339) (202) 20 Increase (Decrease) in Accrued Expenses and Accounts Payable 25 (8) 11 Net Cash Provided (Used) by Operating Activities 564 (236) 489 Cash Flow From Investing Activities: Purchases of Short-Term (3,609) (2,508) (2,071) Investments Redemptions of Short-Term Investments 3,656 2,658 2,303 Net Cash Provided by Investing Activities 47 150 232 Cash Flow From Financing Activities: Distributions to Partners (588) (245) (735) Net Cash Used by Financing Activities (588) (245) (735) Increase (Decrease) In Cash 23 (331) (14) Cash at beginning of year 132 463 477 Cash at end of year $ $ $ 155 132 463 See accompanying notes to the financial statements. DELPHI FILM ASSOCIATES III (A New York Limited Partnership) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 3l, 1995, 1994 AND 1993 (000's Omitted, except distributions per unit) General Limited Total Balance January 1, 1993 $ $ $ 73 3,107 3,180 Net Profit for the Year Ended December 31, 1993 2 183 185 Distributions to Partners ($75 per unit) (7) (728) (735) Balance December 31, 1993 68 2,562 2,630 Net Loss for the Year Ended December 31, 1994 (2) (160) (162) Distributions to Partners ($25 per unit) (2) (243) (245) Balance December 31, 1994 64 2,159 2,223 Net Profit for the Year Ended December 31, 1995 12 1,170 1,182 Distributions to Partners ($60 per unit) (6) (582) (588) Balance December 31, 1995 $ $ $ 70 2,747 2,817 See accompanying notes to the financial statements. DELPHI FILM ASSOCIATES III (A New York Limited Partnership) NOTES TO FINANCIAL STATEMENTS 1. General Delphi Film Associates III (the "Partnership") is a limited partnership which was formed to participate in the production, ownership, and exploitation of feature length motion pictures through Columbia-Delphi III Productions, a joint venture with Columbia Pictures Industries, Inc. ("Columbia") (the "Columbia Joint Venture"), and through TriStar-Delphi III Productions, a joint venture with TriStar Pictures, Inc. ("TriStar") (the "Tri-Star Joint Venture") (the "Joint Ventures"). The Partnership was organized under the law of the State of New York in September 1983. The Delphi Group, a New York general partnership (the "General Partner"), is the general partner of the Partnership. The General Partner, which has the full responsibility for the management of the Partnership's business, received a fee for its management services of $400,000 in each of 1994 and 1993. For 1995, the General Partner was reimbursed approximately $255,000 for out-of-pocket expenses incurred in connection with its management of the Partnership's business. A public offering (the "Offering") of limited partnership interests was completed on July l7, l984. A total of 9,702 units were sold of which 3,000 were purchased by Tricol Partners, a partnership of TriStar and Columbia. The General Partner contributed $490,000, an amount equal to 1% of the total capital contributed to the Partnership. Profits and losses have been allocated l% to the General Partner and 99% to the limited partners. The principal business of the Partnership is the production, ownership and exploitation of motion pictures through its participation in the Joint Ventures. Accordingly, the Partnership's operating results are in large part dependent upon the operating results of the Joint Ventures and are significantly impacted by the Joint Ventures' policies (see Note 4). 2. Summary of Significant Accounting Policies (a) Short-Term Investments Short-Term Investments consist solely of U.S. Government Securities which are stated at cost plus accrued interest, which approximates market value. (b) Accounting for Participation in Joint Ventures The Partnership records its investment in the Joint Ventures under the equity method of accounting. Columbia and TriStar agreed to compensate the Partnership for the unavailability to the Columbia Joint Venture and the Tri- Star Joint Venture, respectively, of investment tax credits with respect to one of the Columbia and two of the TriStar films which had been released by paying to the Partnership in l985 an amount of $l5,000 and $497,000, respectively, equal to approximately twice the investment tax credits applicable to the Partnership's interest in those films. These payments had been applied as a reduction of the Partnership's interest in the Columbia Joint Venture and Tri-Star Joint Venture, respectively. During the year ended December 31, 1995, the Partnership recognized distributions from the Tri- Star Joint Venture in excess of its Interest in Motion Picture Venture. As a result, the Partnership included an additional $497,000 in its share of profit from the Tri- Star Joint Venture. (c) Accounting for Income Taxes No provision for income taxes has been made as Delphi Film Associates III is treated as a partnership for income tax purposes, with all income tax consequences flowing directly to its partners. Effective January l, l993, the Partnership adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." As of December 31, 1995 and 1994, the tax bases of the Partnership's assets less liabilities exceeded the reported amounts by approximately $1,952,000 and $3,265,000, respectively. The adoption of the Statement had no impact on the Partnership's financial statements. 3. Supplemental Disclosure of Cash Flow Information No amounts for interest were paid in l995, l994 and l993. 4. Transactions with Joint Ventures (a) Interests in Motion Pictures The Partnership, through each Joint Venture, has interests in 28 films ranging from approximately 5% to 25% in (and has borne 5% to 25% of the cost of) the motion pictures. The Partnership also has a participation interest in six additional films in which it made no cash investment (the "Additional Films"). The Partnership has satisfied its commitment to contribute funds to the Joint Ventures for the production and acquisition of films. Approximately two-thirds of the aggregate amount committed by the Partnership for the production and acquisition of films was contributed to the Tri-Star Joint Venture and the balance to the Columbia Joint Venture. As of December 31, 1995, the Tri-Star Joint Venture had an interest in twenty-two films (exclusive of five Additional Films) for which the Partnership's cash contributions (including interest) aggregated approximately $38,795,000. As of that date, the Columbia Joint Venture had an interest in six films (exclusive of one Additional Film) for which the Partnership's cash contributions (including interest) aggregated approximately $l7,589,000. (b) Current Operations As of December 31, 1995, all thirty-four films in which the Partnership has an interest (including the six Additional Films) had been released. All of these films have completed their initial theatrical release and are being distributed in various ancillary markets. Based on the results of the films during the year ended December 31, 1995, and after deducting the net operating expenses of the Partnership, the Partnership is reporting a net profit of $1,182,000 for the year ended December 31, 1995. (c) Transactions with Columbia and TriStar The films in which the Columbia Joint Venture has an interest are being distributed pursuant to a distribution agreement between Columbia Pictures, a division of Columbia (a "Distributor"), and the Columbia Joint Venture. The films in which the Tri-Star Joint Venture has an interest are being distributed pursuant to a distribution agreement between TriStar Pictures (a "Distributor") and the Tri-Star Joint Venture. The Distributors receive a fee of l7.5% of substantially all gross receipts. However, the Distributor's entitlement to this distribution fee for each film is deferred until its Joint Venture has received from the distribution of that film an amount equal to that spent by the Joint Venture to produce or acquire an interest in the film, other than amounts spent for payments in the nature of interest (see Note 6). In light of the results of the Joint Venture films, net revenues have been computed without deducting a distribution fee to the Distributors, with the exception of nine films for which a portion of the fees were deducted. (d) Joint Venture Revenue Recognition Each Joint Venture recognizes net revenue from its Distributor on an accrual basis. Net revenues consist of the portion of net proceeds (gross receipts less a distribution fee, unless deferred, and other distribution and releasing costs) or, if greater, the portion of gross receipts payable to the Joint Venture under the distribution agreements. However, certain advances received by the Distributors which are includable in gross receipts under the distribution agreements are not reflected in the calculation of net revenues until those advances are earned. (e) Joint Venture Amortization Policies Unamortized production costs are amortized under the individual film forecast method based upon net revenues recognized in proportion to the Joint Venture's estimate of ultimate net revenues to be received. These costs are compared with net realizable value on a film by film basis, and losses are recognized to the extent of any excess of costs over net realizable value. (f) Receivable from Columbia Joint Venture, net This asset represents the excess of the amounts receivable by the Partnership from the Columbia Joint Venture over amounts payable by the Partnership to the Columbia Joint Venture. The total receivable as of December 31, 1995 of $640,000 consists of $596,000 accrued with respect to film exploitation and $44,000 accrued as a Distribution Fee Reduction Payment (as defined below in Note 6). The total receivable as of December 31, 1994 of $686,000 consisted of $647,000 accrued with respect to film exploitation and $66,000 accrued as a Distribution Fee Reduction Payment (as defined below in Note 6), partially offset by advances to the Partnership of $27,000 (see Note 5). (g) Receivable from Tri-Star Joint Venture, net This asset represents the excess of the amounts receivable by the Partnership from the Tri-Star Joint Venture over amounts payable by the Partnership to the Tri- Star Joint Venture. The total receivable as of December 31, 1995 of $503,000 consists of $108,000 accrued with respect to film exploitation and $395,000 accrued as a Distribution Fee Reduction Payment (as defined below in Note 6). The total receivable as of December 31, 1994 of $118,000 consisted of $213,000 accrued as a Distribution Fee Reduction Payment (as defined below in Note 6), partially offset by a net nonrefundable advance of $95,000. 5. Advances from Distributor The Partnership has benefited from an arrangement between each Joint Venture and its related Distributor under which up to an aggregate of $l,000,000 (the "Advances") has been made available to the Joint Ventures, for the benefit of the Partnership, as an interest free advance against payments that would otherwise be made to the Joint Ventures at a later date. The Partnership has received the entire $l,000,000 under these arrangements. Each Distributor was entitled to retain an amount equal to the unrepaid portion of its Advance from any Distribution Fee Reduction Payments (as defined below in Note 6) otherwise payable to the respective Joint Ventures for the benefit of the Partnership. However, in July, 1991, an agreement was reached between each Distributor and each Joint Venture whereby the recoupment of Advances paid by the Distributor to the Joint Venture would generally be deferred until the earlier of December 31, l993 or the date of receipt of proceeds of a sale or transfer by the Partnership of its interest in the Joint Ventures or the sale or transfer by all of the limited partners of the Partnership of their limited partnership interests. Since no such sale or transfer was agreed to, in writing, by December 31, 1993, the Distributors were entitled to retain amounts equal to the unrecouped portion of the Advances from all amounts thereafter otherwise payable pursuant to the Distribution Agreement and allocable to the Partnership. As of December 31, 1995, the $333,000 advance from the Columbia Distributor has been fully recouped and, as such, all subsequent amounts will be allocated to the Partnership. As of December 31, l994, the $667,000 advance from the TriStar Distributor had been fully recouped and, as such, all subsequent amounts are being allocated to the Partnership. 6. Distribution Fee Reduction The agreements relating to the distribution of films owned by the Joint Ventures provided for a payment (the "Distribution Fee Reduction Payment") to be made by the Distributor of an amount by which, as of June 1991, contributions by a Joint Venture for the production of and acquisition of interests in its respective films (other than sequels) (the "Expenditures") exceeded amounts paid to the Joint Venture with respect to those films. The Partnership received approximately $528,000 from the Columbia Joint Venture and $l,467,000 from the Tri-Star Joint Venture which represents accrued distribution fees paid as of December 31, 1995 with respect to the Distribution Fee Reduction Payments. These payments are net of amounts withheld by the Distributor for the recoupment of the Advances. Since these payments were not sufficient to enable either Joint Venture to recoup its Expenditures, each Distributor will be required to pay to its Joint Venture an amount equal to all subsequent distribution fees earned by it from the distribution of films on behalf of that Joint Venture up to that Joint Venture's unrecouped Expenditures. If the Joint Ventures are able to recoup their Expenditures, the Distributors would be entitled to recoup these payments, with interest calculated at ll0% of the prime rate from time to time, from amounts thereafter otherwise payable to the Partnership. Based on the anticipated performance of the films released through the Columbia Joint Venture and the Tri- Star Joint Venture, each Distributor is required to make Distribution Fee Reduction Payments with respect to its films. Accordingly, distribution fees earned and expected to be earned by the Distributors as of December 31, 1995 of approximately $44,000 and $395,000 have been accrued by the Partnership and included in the receivable from the Columbia Joint Venture and the Tri-Star Joint Venture, respectively. Since the Distribution Fee Reduction Payment is limited by the amount of distribution fees received by the Distributors, it is anticipated that the Distribution Fee Reduction Payments received from the Distributors will not enable the Partnership, through each Joint Venture, to recoup its Expenditures. The Partnership is in the process of evaluating the value of its interest in the film assets for the purpose of possibly selling that interest and eventually liquidating the Partnership. The General Partner anticipates that the Partnership will be liquidated by the end of 1996. No assurance can be provided that the film assets will be successfully sold, or if sold, on such schedule. Upon the ultimate sale of the film assets, the Partnership will commence taking steps to liquidate and dissolve. Since the Partnership's obligation to make contributions to the Joint Ventures for the production of, and acquisition of interests in, films has been satisfied, all revenues received by the Partnership are used to establish a reserve for operating expenses of the Partnership and, to the extent possible, to make cash distributions to partners. The Partnership does not anticipate significant future revenues and accordingly, the Partnership does not currently anticipate making cash distributions to partners on a quarterly basis. However, the Partnership may make future distributions if it realizes proceeds from its interest in films or from the sale of its interest in films (should the sale occur) net of a reserve for the Partnership's operating expenses. REPORT OF INDEPENDENT ACCOUNTANTS Venturers Columbia - Delphi III Productions In our opinion, the accompanying balance sheets and the related statements of operations, of cash flows and of venturers' capital present fairly, in all material respects, the financial position of Columbia - Delphi III Productions at December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Venture's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Century City, California March 22 , l996 COLUMBIA-DELPHI III PRODUCTIONS (A Joint Venture) BALANCE SHEETS (000's Omitted) December 31, 1995 1994 ASSETS Motion Picture Production and Advertising Costs, net of accumulated amortization of $76,726 and $76,532, respectively (Notes 1, 2 & 5) $ $ 760 954 Motion Picture Costs Recoverable from Distribution Fees (Notes 3, 171 262 5 & 6) Receivable from Columbia Pictures (Distributor) (Note 6) 2,010 2,263 Total $ 2,941 $ Assets 3,479 LIABILITIES AND VENTURERS' CAPITAL Liabilities: Payable to Columbia Pictures Industries, Inc. (Note 6) $ $ 1,541 1,812 Payable to Delphi Film Associates III, net (Note 6) 640 686 Advance from Columbia Pictures Industries, Inc. (Distributor) (Notes 5 & 6) -- 27 Total Liabilities 2,181 2,525 Venturers' Capital (Notes 1 & 3): Columbia Pictures Industries, 613 757 Inc. Delphi Film Associates III 147 197 Total Venturers' Capital 760 954 Total Liabilities and Venturers' $ $ Capital 2,941 3,479 See accompanying notes to the financial statements. COLUMBIA - DELPHI III PRODUCTIONS (A Joint Venture) STATEMENTS OF OPERATIONS (000's Omitted) For the Year Ended December 31, 1995 1994 1993 Net Revenues From Motion Picture Exploitation (Notes $ $ $ 2 & 3) 902 1,383 1,123 Less: Amortization of Motion Picture Production and Advertising Costs (Notes 2 & 5) 194 462 325 Income from Operations 708 921 798 Accrued Distribution Fee Reduction (Notes 3 & 139 -- - -- 5) Interest Income -- -- 352 Other Income (Expense) (Note 7) -- (199) 37 Net Income $ $ $ 847 722 1,187 See accompanying notes to the financial statements. COLUMBIA - DELPHI III PRODUCTIONS (A Joint Venture) STATEMENTS OF CASH FLOWS (000's Omitted) For the Year Ended December 31, 1995 1994 1993 Cash Flow From Operating Activities: Net Income $ $ $ 847 722 1,187 Adjustments to reconcile Net Income to net cash provided by operating activities: Amortization of Motion Picture Production and Advertising Costs 194 462 325 Accrued Distributions to 344 (27) (110) Venturers Changes in Assets and Liabilities: (Decrease) Increase in Payable to Columbia Pictures Industries, (271) 66 84 Inc. Decrease (Increase) in Receivable from Columbia Pictures 253 (245) (379) (Distributor) Decrease in Investment in Motion Picture Production and -- -- 488 Advertising Costs Decrease in Motion Picture Costs Recoverable from 91 218 269 Distribution Fees (Decrease) Increase in Payable to Delphi Film Associates III, net (46) 26 267 Decrease in Advance from Columbia Pictures Industries, Inc. (Distributor) (27) (306) - -- Net Cash Provided by Operating Activities 1,385 1,157 1,890 Cash Flow from Financing Activities: Distributions to Venturers (1,385) (1,157) (1,890) Net Cash Used by Financing Activities (1,385) (1,157) (1,890) Net Change in Cash -- -- - -- Cash at beginning of year -- -- - -- Cash at end of year $ $ $ -- -- - -- See accompanying notes to the financial statements. COLUMBIA - DELPHI III PRODUCTIONS (A Joint Venture) STATEMENTS OF VENTURERS' CAPITAL FOR THE YEARS ENDED DECEMBER 3l, 1995, 1994 AND 1993 (000's Omitted) Columbia Delphi Pictures Film Total Industries, Associates Venturers' Inc. III Capital Venturers' Capital as of $ $ $ January 1, 1993 1,731 498 2,229 Net Income for the Year Ended December 31, 1993 847 340 1,187 Accrued Distributions to Venturers (1,462) (538) (2,000) Venturers' Capital as of December 31, 1993 1,116 300 1,416 Net Income for the Year Ended December 31, 1994 556 166 722 Accrued Distributions to Venturers (915) (269) (1,184) Venturers' Capital as of December 31, 1994 757 197 954 Net Income for the Year Ended December 31, 1995 619 228 847 Accrued Distributions to Venturers (763) (278) (1,041) Venturers' Capital as of December 31, 1995 $ $ $ 613 147 760 See accompanying notes to the financial statements. /TABLE COLUMBIA - DELPHI III PRODUCTIONS (A Joint Venture) NOTES TO FINANCIAL STATEMENTS 1. General Columbia-Delphi III Productions (the "Joint Venture") is a joint venture between Columbia Pictures Industries, Inc. ("Columbia") and Delphi Film Associates III, a New York limited partnership (the "Partnership"), formed on January 3, l984 to engage in the business of producing, owning and exploiting feature length motion pictures. Through the Joint Venture, Columbia has approximately a 75%-80% interest and the Partnership has approximately a 20%-25% interest in, and each was responsible for those respective percentages of, the production cost of the Joint Venture's films ("Joint Venture Films"). The Joint Venture acquired a 20% interest in one film (in which the Partnership has a 10% interest) distributed by Columbia and a 20% interest, without cost to the Joint Venture, in one additional film distributed by Columbia in which the Partnership and Columbia each have an interest of l0% through the Joint Venture. As of December 31, 1995, all five of the Joint Venture Films and the two films in which the Joint Venture has a 20% interest had been released (see Note 5). All of the Joint Venture's films are distributed pursuant to a distribution agreement between Columbia Pictures (the "Distributor"), a division of Columbia, and the Joint Venture (see Note 2). Tricol Partners, a partnership of TriStar Pictures, Inc. (formerly Tri-Star Pictures, Inc.) ("TriStar") and Columbia, has a limited partnership interest in the Partnership which is equal to the proportion that its capital contribution of $15,000,000 bears to the aggregate capital contributed by all limited partners of $48,510,000. Columbia contributed onethird of the amount contributed by Tricol Partners. The Partnership participates in a joint venture with TriStar (the "Other Venture") similar to the Joint Venture. Sony Pictures Entertainment Inc., the parent company of Columbia and TriStar, is an indirect wholly-owned subsidiary of Sony Corporation. 2. Summary of Significant Accounting Policies Recognition of Revenue The Joint Venture recognizes net revenues from the Distributor on the accrual basis. Net revenues consist of the portion of net proceeds (gross receipts less a distribution fee, unless deferred, and other distribution and releasing costs) or, if greater, gross receipts payable to the Joint Venture under the distribution agreement. However, certain advances received by the Distributor which are includable in gross receipts under the distribution agreement are not reflected in the calculation of net revenues until those advances are earned. The Joint Venture's advertising and promotion charge expenditures were recovered (subject to certain limitations) from gross receipts from all films in which the Joint Venture has an interest. Distribution Fee The Distributor is entitled to receive a 17.5% distribution fee on all gross receipts in calculating the net proceeds to which the Joint Venture is entitled from the distribution of a film; however, the Distributor's entitlement to this distribution fee will be deferred until the Joint Venture has received from the distribution of that film an amount equal to the amount spent by the Joint Venture to produce or acquire an interest in the film, other than amounts spent for payments in the nature of interest ("Cost Return"). After Cost Return for a film, for purposes of determining any additional payments based on net proceeds to which the Joint Venture is entitled in respect of that film, the Distributor will be entitled to receive a distribution fee equal to 17.5% of all gross receipts of the film prior to Cost Return and 17.5% of all additional gross receipts after Cost Return (See Note 3). Net revenues accrued at December 31, 1995, 1994 and 1993 have been computed without deducting a distribution fee to the Distributor in light of the results of films released through those respective dates, with the exception of one films in l995 and 1994 and one film in 1993 for which a portion of the distribution fee was deducted, and the additional film that was acquired without cost to the Joint Venture. Motion Picture Production and Advertising Costs Motion picture production costs include the direct costs of production plus an overhead charge equivalent to 12.5% of the direct production costs; these costs were capitalized as incurred by the Joint Venture. Payments by the Joint Venture in respect of the advertising and promotion charge payable to the Distributor were capitalized as incurred by the Joint Venture to the extent those payments benefit future periods. These costs are amortized under the individual film forecast method based upon net revenues recognized in proportion to the Joint Venture's estimate of ultimate net revenues to be received. Unamortized production and advertising costs are compared with net realizable value on a film by film basis and losses are recognized to the extent of any excess of costs over net realizable value. However, as a result of the Joint Venture's entitlement to a payment under the circumstances described in Note 3, where losses to the Joint Venture are recorded in the aggregate from the application of the above method of accounting, a review is made of the estimated future revenues and costs on all films of the Joint Venture in release to estimate their ultimate profitability. If this review indicates that in the aggregate such films are ultimately unprofitable to the Joint Venture, an amount equal to the lesser of (a) the distribution fees earned or expected to be earned by the Distributor on films released or (b) the ultimate estimated aggregate loss from production and acquisition of motion pictures is accrued as Motion Picture Costs Recoverable from Distribution Fees. 3. Distribution Fee Reduction (See Note 5) The Joint Venture was entitled to a payment from the Distributor in reduction of the Distributor's aggregate distribution fee if, by mid-l991, the Joint Venture had not received net proceeds and gross receipts (excluding amounts paid to the Joint Venture for the recovery of advertising and promotion charge payments) at least equal to the amounts spent by the Joint Venture for the production of films and the acquisition of interests in films (excluding certain amounts spent for payments in the nature of interest) (the "Expenditures"). Consequently, payments of $230,000 and $218,000 were made in 1995 and 1994, respectively, representing the amount available for the Joint Venture to be repaid, without interest, its unrecouped Expenditures to the extent of the aggregate distribution fee previously received by the Distributor. Since the cumulative payments to December 31, l995 were not sufficient to enable the Joint Venture to recoup its Expenditures, the Distributor will pay the Joint Venture an amount equal to all subsequent distribution fees earned by it until the Joint Venture has recouped an amount equal to its Expenditures. The payments to the Joint Venture are allocated to the Partnership and Columbia based on their respective percentage interest in each film for which a distribution fee was received. After the Joint Venture recoups the Expenditures, the Distributor will be entitled to recoup these payments, with an amount in the nature of interest, from the Joint Venture's share of subsequent net proceeds and gross receipts and from the proceeds of any subsequent sale of the Joint Venture's interest in films. If the gross receipts from a film do not exceed the costs of distributing the film, or if the most recent payment to the Joint Venture with respect to the film is based on gross receipts, no amounts from the distribution of that film will be available for payment to the Joint Venture for this purpose. 4. Income Taxes No provision for income taxes is made in the Joint Venture's financial statements since the venturers treat the Joint Venture as a partnership for income tax purposes, with all income tax consequences flowing directly to the venturers. Effective January l, l993, the Partnership adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." As of October 31, 1995 and 1994 (the Joint Venture's tax year end is October 31), the tax bases of the Joint Venture's assets less liabilities exceeded amounts reported in the financial statements at December 31, 1995 and l994 by approximately $6,047,000 and $7,683,000, respectively. Management estimates that the tax bases of the Joint Venture's assets and liabilities did not differ significantly between October 31 and December 31 in 1995 and l994. The adoption of the Statement had no impact on the Joint Venture's financial statements. 5. Current Operations As of December 31, 1995, the Distributor had released all seven films in which the Joint Venture has an interest (see Note l). The Joint Venture is not expected to recoup its investment in four of these films out of the proceeds from their distribution. For the years ended December 31, 1995, 1994 and 1993, motion picture production costs have been reduced by amortization of $194,000, $462,000 and $325,000, respectively. Based on the anticipated performance of the films released through December 31, 1995 and 1994, approximately $171,000 and $262,000, respectively, were accrued as Motion Picture Costs Recoverable from Distribution Fees in the accompanying financial statements. The current year decrease in Motion Picture Costs Recoverable from Distribution Fees of $91,000 is the result of payments made by the Distributor of approximately $230,000 (see Note 3) partially offset by, additional accruals of $139,000 due to changes in expected distribution fees. During 1989 (and amended in 1990), an agreement was reached between the Joint Venture and the Distributor pursuant to which the Distributor made non-interest bearing advances to the Joint Venture up to an aggregate of $333,000 against amounts to be due to the Joint Venture. Amounts advanced have been allocated to the Partnership in order to make cash distributions to its partners. The entire $333,000 had been advanced to the Partnership. In July, l99l, an agreement was reached between the Distributor and the Joint Venture whereby the recoupment of advances paid by the Distributor to the Joint Venture in the amount of $333,000 would generally be deferred until the date of receipt of proceeds of a sale or transfer by the Partnership of its interest in the Joint Venture or the sale or transfer by all of the limited partners of the Partnership of their limited partnership interests. Since no such sale or transfer was agreed to, in writing, on or before December 31, 1993, the Distributor was entitled to retain an amount equal to the unrecouped portion of the advances from all amounts thereafter otherwise payable pursuant to the Distribution Agreement and allocable to the Partnership. In accordance with the aforementioned agreement, as of December 31, l995, the Distributor has recouped all of this advance which would otherwise have been payable to the Joint Venture and allocable to the Partnership. 6. Receivables and Payables An analysis of the Joint Venture's receivables and payables is as follows: AT DECEMBER 31, 1995 Receivable Payable Payable Payable to from to to to the Distributor Distributor Columbia Partnership (000's omitted) Net Proceeds and Gross $ $ $ $ Receipts 2,010 0 1,414 596 Accrued Distribution Fee Reduction 171 0 127 44 Total $ $ $ $ 2,181 0 1,541 640 AT DECEMBER 31, 1994 Receivable Payable Payable Payable to from to to to the Distributor Distributor Columbia Partnership (000's omitted) Net Proceeds and Gross $ $ $ $ Receipts 2,263 0 1,616 647 Accrued Distribution 262 0 196 66 Fee Reduction Advance to Partnership 0 27 0 (27) Total $ $ $ $ 2,525 27 1,812 686 7. Foreign Exchange Gains and Losses The distribution agreement between the Joint Venture and the Distributor provides that revenues earned in foreign currencies be valued as of the date that monies are remitted or are "freely remittable" to the United States. Other Expense for the year ended December 31, l994 of $199,000 represents the cumulative difference between the monies remitted in U.S. dollars and the value previously recorded based on the exchange rate at the time of revenue recognition in the applicable international territory. No such revenue valuation adjustment was necessary in 1995. REPORT OF INDEPENDENT ACCOUNTANTS Venturers TriStar - Delphi III Productions In our opinion, the accompanying balance sheets and the related statements of operations, of cash flows and of venturers' capital present fairly, in all material respects, the financial position of TriStar - Delphi III Productions at December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Venture's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Century City, California March 22, l996 TRI-STAR-DELPHI III PRODUCTIONS (A Joint Venture) BALANCE SHEETS (000's Omitted) December 31, 1995 1994 ASSETS Motion Picture Production and Advertising Costs, net of accumulated amortization of $194,664 and $194,137, respectively (Notes 1, 2 & 5) $ $ 2,666 3,193 Motion Picture Costs Recoverable from Distribution Fees (Notes 3, 1,432 964 5 & 6) Receivable from TriStar Pictures, Inc. (Distributor) (Note 6) 476 (287) Total $ 4,574 $ Assets 3,870 LIABILITIES AND VENTURERS' CAPITAL Liabilities: Payable to TriStar Pictures Inc., net (Note 6) $ 1,405 $ 559 Payable to Delphi Film Associates III, net (Note 6) 503 118 Total Liabilities 1,908 677 Venturers' Capital (Notes 1 & 3): TriStar Pictures, Inc. 2,210 2,594 Delphi Film Associates III 456 599 Total Venturers' Capital 2,666 3,193 Total Liabilities and Venturers' $ $ Capital 4,574 3,870 See accompanying notes to the financial statements. TRI-STAR-DELPHI III PRODUCTIONS (A Joint Venture) STATEMENTS OF OPERATIONS (000's Omitted) For the Year Ended December 31, 1995 1994 1993 Net Revenues From Motion Picture Exploitation (Notes $ $ $ 2 & 3) 1,634 900 764 Less: Amortization of Motion Picture Production and Advertising Costs (Notes 2 & 5) 527 208 293 Income from Operations 1,107 692 471 Accrued Distribution Fee Reduction (Notes 3 & 951 318 274 5) Other (Expense) Income (Note 7) -- (629) 5 Net Income $ $ $ 2,058 381 750 See accompanying notes to the financial statements. TRI-STAR-DELPHI III PRODUCTIONS (A Joint Venture) STATEMENTS OF CASH FLOWS (000's Omitted) For the Year Ended December 31, 1995 1994 1993 Cash Flow From Operating Activities: Net Income $ $ $ 2,058 381 750 Adjustments to reconcile Net Income to net cash provided by operating activities: Amortization of Motion Picture Production and Advertising Costs 527 208 293 Accrued Distributions to (1,230) 1,810 80 Venturers Changes in Assets and Liabilities: Increase (Decrease) in Payable to TriStar Pictures, Inc. 846 (1,078) (34) (Increase) Decrease in Receivable from TriStar Pictures, Inc. (763) 909 (311) (Distributor) (Increase) Decrease in Motion Picture Costs Recoverable from (468) 901 391 Distribution Fees Increase (Decrease) in Payable to Delphi Film Associates III, net 385 (65) (46) Decrease in Advance from TriStar Pictures, Inc. (Distributor) -- (667) - -- Net Cash Provided by Operating Activities 1,355 2,399 1,123 Cash Flow from Financing Activities: Distributions to Venturers (1,355) (2,399) (1,123) Net Cash Used by Financing Activities (1,355) (2,399) (1,123) Net Change in Cash -- -- - -- Cash at beginning of year -- -- - -- Cash at end of year $ $ $ -- -- - -- See accompanying notes to the financial statements. TRI-STAR-DELPHI III PRODUCTIONS (A Joint Venture) STATEMENTS OF VENTURERS' CAPITAL FOR THE YEARS ENDED DECEMBER 3l, 1995, 1994 AND 1993 (000's Omitted) Delphi TriStar Film Total Pictures, Associates Venturers' Inc. III Capital Venturers' Capital as of $ $ $ January 1, 1993 2,987 707 3,694 Net Income for the Year Ended December 31, 1993 488 262 750 Accrued Distributions to Venturers (706) (337) (1,043) Venturers' Capital as of December 31, 1993 2,769 632 3,401 Net Income for the Year Ended December 31, 1994 306 75 381 Accrued Distributions to Venturers (481) (108) (589) Venturers' Capital as of December 31, 1994 2,594 599 3,193 Net Income for the Year Ended December 31, 1995 1,336 722 2,058 Accrued Distributions to Venturers (1,720) (865) (2,585) Venturers' Capital as of December 31, 1995 $ $ $ 2,210 456 2,666 See accompanying notes to the financial statements. TRI-STAR-DELPHI III PRODUCTIONS (A Joint Venture) NOTES TO FINANCIAL STATEMENTS 1. General Tri-Star-Delphi III Productions (the "Joint Venture") is a joint venture between TriStar Pictures, Inc. (formerly TriStar Pictures, Inc.) ("TriStar") ("TSPI") and Delphi Film Associates III, a New York limited partnership (the "Partnership"), formed on April l8, l985 to engage in the business of producing, owning and exploiting feature length motion pictures. Generally, through the Joint Venture, TSPI has a 75% interest and the Partnership has a 25% interest in, and each was responsible for those respective percentages of, the production cost of films in which the Joint Venture has a 100% interest and which were produced by the Joint Venture ("Joint Venture Films"). The Joint Venture engaged TSPI to produce the Joint Venture Films. The Joint Venture also has a 20-30% interest in certain films (the "Acquired Films"), the other 70-80% interest of which is held by Tri-Star-Delphi II Productions, a joint venture between TSPI and Delphi Film Associates II, a New York limited partnership, which was liquidated in December 1995. In addition, the Joint Venture conveyed a 20% interest in one film to Tri-Star-Delphi II Productions. The remaining 80% interest is held 55% by TSPI and 25% by the Partnership. The Joint Venture has a 20% interest, without cost to the Partnership, in two additional films distributed by TSPI in which the Partnership has a l0% interest. However, no participation interest amounts are payable to the Partnership with respect to these two films pursuant to the distribution agreement unless and until, and then only to the extent that, the amounts payable exceed 10% of the direct production cost of the film plus an overhead charge equivalent to l2.5% of the direct production cost. During l988, the Partnership, through the Joint Venture, was granted a 5% participation interest without cost to the Joint Venture in one additional film distributed by TSPI. The Partnership will be entitled to 5% of net proceeds after "Breakeven" has been reached. "Breakeven" in this instance is defined as the point at which l0% of net proceeds equals 5% of the production cost of the film (including an overhead charge of 12.5%). In addition, the Partnership through the Joint Venture has a gross participation interest without cost to the Joint Venture in two additional films. The Joint Venture has acquired interests in other films which are being distributed by TSPI ("Other Films"). The respective venturer's percentage interests in these Other Films was determined at the time of the Joint Venture's acquisition of an interest in these films and ranged from 5-l0% for each of the venturers. All of the Joint Venture's films are distributed pursuant to a distribution agreement with TSPI (the "Distributor")(See Note 2). The general partner of the Partnership is affiliated with the general partner of Delphi Film Associates II. As of December 31, 1995, the Joint Venture had released all twenty-seven films in which the Joint Venture has an interest. The Partnership participates in a joint venture (the "Other Venture") with Columbia Pictures Industries, Inc. ("Columbia") similar to the Joint Venture. Tricol Partners, a partnership of TSPI and Columbia, has a limited partnership interest in the Partnership which is equal to the proportion that its capital contribution of $15,000,000 bears to the aggregate capital contributed by all limited partners of $48,510,000. TSPI contributed two- thirds of the amount contributed by Tricol Partners. Sony Pictures Entertainment Inc., the parent company of Columbia and TriStar, is an indirect wholly-owned subsidiary of Sony Corporation. 2. Summary of Significant Accounting Policies Recognition of Revenue The Joint Venture recognizes net revenues from the Distributor on an accrual basis. Net revenues consist of net proceeds (gross receipts less a distribution fee, unless deferred, and other distribution and releasing costs) or, if greater, gross receipts payable to the Joint Venture under the distribution agreement. However, certain advances received by the Distributor which are includable in gross receipts under the distribution agreement are not reflected in the calculation of net revenues until those advances are earned. Distribution Fee TSPI is entitled to receive a distribution fee equal to 17.5% on all gross receipts in calculating net proceeds to which the Joint Venture is entitled from the distribution of a film; however, TSPI's entitlement to this distribution fee is deferred until the Joint Venture has received from the distribution of that film an amount equal to the amount spent by the Joint Venture to produce or acquire an interest in that film, other than amounts spent for payments in the nature of interest ("Cost Return"). After Cost Return for a film, in calculating subsequent payments to the Joint Venture based on net proceeds, the Distributor will be entitled to recoup from gross receipts the entire deferred amount of the distribution fee plus its 17.5% distribution fee on a current basis (see Note 3). Net revenues accrued at December 31, 1995, 1994 and 1993 have been computed without deducting a distribution fee to the Distributor in light of the results of films released through those respective dates, with the exception of seven films in 1995 and six films in l994 and l993 for which a portion of the distribution fee has been deducted from accrued revenues. Motion Picture Production and Advertising Costs Motion picture production costs include the direct costs of production plus an overhead charge equivalent to 12.5% of the direct production costs; these costs were capitalized as incurred by the Joint Venture. Payments by the Joint Venture in respect of the advertising and promotion charge payable to the Distributor were capitalized as incurred by the Joint Venture to the extent those payments benefit future periods. These costs are amortized under the individual film forecast method based upon net revenue recognized in proportion to the Joint Venture's estimate of ultimate net revenues to be received. Unamortized production costs are compared with net realizable value on a film by film basis and unamortized advertising costs are compared with net realizable value in the aggregate: losses are recognized to the extent of any excess of costs over net realizable value. However, as a result of the Joint Venture's entitlement to a payment under the circumstances described in Note 3, where losses are recorded in the aggregate from the application of the above method of accounting, a review is made of the estimated future revenues and costs on all films of the Joint Venture in release to estimate their ultimate profitability. If this review indicates that in the aggregate such films are ultimately unprofitable to the Joint Venture an amount equal to the lesser of (a) the distribution fees earned or expected to be earned by the Distributor on films released or (b) the ultimate estimated aggregate loss from production and acquisition of motion pictures is accrued as Motion Picture Costs Recoverable from Distribution Fees. 3. Distribution Fee Reduction (see Note 5) The Joint Venture was entitled to a payment from TSPI in reduction of its aggregate distribution fee if, by mid- 1991, the Joint Venture had not received net proceeds and gross receipts (excluding amounts paid to the Joint Venture for the recovery of its advertising and promotion charge payments) at least equal to the amounts spent by the Joint Venture for the production of films and the acquisition of interests in films (excluding certain amounts spent for payments in the nature of interest) (the "Expenditures"). Consequently, payments of $483,000, $1,218,000 and $665,000 were made in 1995, 1994 and l993, respectively, representing the amount available for the Joint Venture to be repaid, without interest, its unrecouped Expenditures to the extent of the aggregate distribution fee previously received by the Distributor. Since the cumulative payments through December 31, 1995 were not sufficient to enable the Joint Venture to recoup its Expenditures, the Distributor will pay to the Joint Venture an amount equal to all subsequent distribution fees earned by it until the Joint Venture has recouped an amount equal to its Expenditures. The payments to the Joint Venture are allocated to the Partnership and TSPI based on their respective percentage interest in each film for which a distribution fee was received. After the Joint Venture recoups the Expenditures, the Distributor will be entitled to recoup these payments, with an amount in the nature of interest, from the Joint Venture's share of subsequent net proceeds and gross receipts, from the proceeds of any subsequent sale of the Joint Venture's interest in the films and from certain other amounts payable to the Joint Venture. The amount available for payment to the Joint Venture by the Distributor is limited to the Joint Venture's appropriate ownership percentage in that film multiplied by the distribution fee paid to the Distributor for that film. If the gross receipts from a film do not exceed the costs of distributing the film or, generally, if the most recent payment to the Joint Venture with respect to the film is based on gross receipts, no amounts from the distribution of that film will be available for payment to the Joint Venture for this purpose. 4. Income Taxes No provision for income taxes is made in the Joint Venture's financial statements since the venturers treat the Joint Venture as a partnership for income tax purposes, with all income tax consequences flowing directly to the venturers. Effective January l, l993, the Joint Venture adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." As of October 31, 1995 and 1994 (the Joint Venture's tax year end is October 31), the tax bases of the Joint Venture's assets less liabilities exceeded amounts reported in financial statements at December 31, l995 and l994 by approximately $23,758,000 and $24,407,000, respectively. Management estimates that the tax bases of the Joint Venture's assets and liabilities did not differ significantly between October 31 and December 31 in l995 and l994. The adoption of the Statement had no impact on the Joint Venture's financial statements. 5. Current Operations As of December 31, 1995, the Distributor had released all twenty-seven films in which the Joint Venture has an interest. The Joint Venture is not expected to recoup its investment in fourteen of these films out of the proceeds from their distribution. For the years ended December 31, 1995, 1994 and 1993, motion picture production and advertising costs have been reduced by amortization of $527,000, $208,000 and $293,000, respectively. Based upon the anticipated performance of the films released, approximately $1,432,000 and $964,000, respectively, were accrued as Motion Picture Costs Recoverable from Distribution Fees at December 31, 1995 and l994, respectively, in the accompanying financial statements. The current year increase in Motion Picture Costs Recoverable from Distribution Fees of $468,000 consists of an increase in the estimated distribution fee to be earned by the Distributor of approximately $951,000 partially offset by a Distribution Fee Reduction Payment of $483,000 (see Note 3). An agreement was reached during 1989 (and amended in 1990) between the Joint Venture and the Distributor whereby the Distributor agreed to make non-interest bearing advances to the Joint Venture of up to an aggregate amount of $667,000 against amounts to be due to the Joint Venture. Amounts advanced have been allocated to the Partnership in order for it to make cash distributions to its partners. The entire $667,000 had been advanced to the Partnership. In July, l99l, an agreement was reached between the Distributor and the Joint Venture whereby the recoupment of advances paid by the Distributor to the Joint Venture in the amount of $667,000 would generally be deferred until the date of receipt of proceeds of a sale or transfer by the Partnership of its interest in the Joint Venture or the sale or transfer by all of the limited partners of the Partnership of their limited partnership interests. Since no such sale or transfer was agreed to, in writing, on or before December 31, 1993, the Distributor is entitled to retain an amount equal to the unrecouped portion of the advances from all amounts thereafter otherwise payable pursuant to the Distribution Agreement and allocable to the Partnership. As of December 31, 1995, the entire advance of $667,000 has been recouped by the Distributor. 6. Receivables and Payables An analysis of the Joint Venture's receivables and payables is as follows: AT DECEMBER 31, 1995 Receivable Payable Payable to from to to the Distributor TSPI Partnership (000's omitted) Net Proceeds and Gross $ $ $ Receipts 476 368 108 Accrued Distribution Fee Reduction 1,432 1,037 395 Total $ $ $ 1,908 1,405 503 AT DECEMBER 31, 1994 Receivable Payable Payable to from to to the Distributor TSPI Partnership (000's omitted) Net Proceeds and Gross $ $ $ Receipts (287) (192) (95) Accrued Distribution Fee Reduction 964 751 213 Total $ $ $ 677 559 118 A contra receivable balance from the Distributor arises as unearned advances previously remitted to the Joint Venture by the Distributor (See Note 2) exceed regular receivables. 7. Foreign Exchange Gains and Losses The distribution agreement between the Joint Venture and the Distributor provides that revenues earned in foreign currencies be valued as of the date that monies are remitted or are "freely remittable" to the United States. Other Expense for the year ended December 31, l994 of $629,000 represents the cumulative difference between the monies remitted in U.S. dollars and the value previously recorded based on the exchange rate at the time of revenue recognition in the applicable international territory. No such revenue valuation adjustment was necessary in 1995.