Shareholders' Letter
Ismaning,
July 11, 2003
Dear Shareholders,
A great deal has been going on at Intertainment in the course of 2003 and during the closing months of 2002. The next
few months will also be very important for us. Today, we are presenting the figures for fiscal year 2002 and the first
quarter of 2003. I am therefore very pleased to take this opportunity to give you a detailed outline of the position at
Intertainment in the shareholders' letter.
You will undoubtedly be most interested in the proceedings against our former joint-venture partner, US film producer
Franchise Pictures. The date for the start of the trial was recently set for August 5. The parties have been allowed 16
trial days and proceedings are currently scheduled to end at the beginning of September. The United States District
Court judge announced this decision at a Pretrial Conference. The start of the trial had already been postponed once in
November 2002 and the judge rejected attempts by Franchise lawyers to obtain another postponement.
We are extremely pleased with the decision. The Franchise case has now been blocking progress at Intertainment since
2000. We are very keen to put this matter to rest.
As you probably know, we filed a lawsuit against Franchise on account of budget fraud at the Federal District Court in
Los Angeles in December 2000. Franchise presented accounts for grossly inflated budgets on joint film productions and
this caused us damage in real terms amounting to at least 100 million dollars. The lawsuit we filed therefore also
provided for this level of compensation for damages.
We also succeeded in getting two RICO claims admitted by the court in May 2002. RICO claims are a special feature of the
American Federal Rules of Civil Procedure. They allow victims of organized criminality three times the amount payable in
compensation for damages and reimbursement of lawyers' costs. If the trial is decided in favor of Intertainment, this
would entail compensation for damages amounting to more than 300 million dollars.
Although confidentiality clauses imposed by the court do not permit us to provide information on key items of evidence,
the facts that have been published to date or are in any case available for the public domain give a very clear picture.
The court responsible for the trial proceedings already decided in November 2002 that specific budget items declared by
Franchise did not exist. Franchise has itself additionally adjusted some of the budgets for the disputed films downward
and also submitted these new budget items to us. In our opinion, these remained excessive, but the budgets adjusted
downward would have already presented us with an entitlement to repayment. In addition, Elie Samaha, CEO of Franchise,
has publicly admitted in the run-up to the trial that the company operated with different budgets.
In view of the presence of members of the Intertainment Board of Management at the proceedings, it is necessary to
postpone our Annual General Meeting until after the judgment has been handed down. It will not be held as planned on
August 28, but will now take place on September 22.
If you have followed the Franchise case in the past, you will know that the fraud could only have been perpetrated by
collusion between Franchise Pictures and its partners. These partners were Comerica Bank and the insurance companies
World Wide Film Completion and Film Finances.
In December 2002, we filed a lawsuit against Comerica Bank and other parties involved. We believe that our case has been
strengthened since one of the RICO claims admitted by the court is based on the premises that Franchise, Comerica and
WorldWide Film Completion had formed a criminal association with a uniform decision-making structure aimed specifically
at damaging Intertainment. We believe that a judgment against Franchise would therefore have a predetermining effect for
the trial against Comerica Bank and the insurance companies.
In conjunction with the Franchise issue, I hope you understand why you have had to wait so long for our figures relating
to 2002. It was absolutely necessary for us to undertake a definitive assessment of facts that might exert a significant
influence on balance-sheet items and statements in the annual financial statements.
As far as we were concerned, 2002 itself was a year of transition with the first key steps toward a turnaround for
Intertainment. Operations were focused primarily on two issues. Firstly, we had finished exploiting the rights in the
films that we had received from Franchise before we noticed the fraud. Secondly, we were working toward creating the
right conditions to allow us to launch a new cinema film in 2003. This would allow us to compensate for the lack of
revenues caused by the conclusion to exploitation of Franchise films. In financial terms, it was crucial to bring about
a significant reduction in the high losses sustained in the past in order to create the right conditions for a more
successful future at Intertainment. We have been largely successful in achieving our aims.
Our sales for 2002 fell from 31.3 million euros to 19.0 million euros. However, the decline in film license business is
compensated by extremely gratifying development in the merchandising area. Proceeds from sales of film rights fell from
28.4 million euros to 14.5 million euros, while merchandising underwent an increase from 2.8 million to 4.5 million
euros.
Earnings are significantly improved compared with 2001. This is particularly due to the fact that in line with
expectations we succeeded in significantly reducing the unscheduled charges related to the Franchise issue. In 2001, we
were subject to unscheduled charges amounting to 142.4 million euros and an unscheduled result of -88.9 million euros.
In 2002, the unscheduled result amounted to just -3.3 million euros. Overall, we improved EBIT from -100.2 million euros
to -16.1 million euros. We sustained a net loss for the year of 16.1 million euros in 2002 compared with 86.8 million
euros for 2001. Our earnings from ordinary activities slid -6 million to - 13.7 million euros. This is principally due
to high write-downs on film assets.
I should now like to give a brief review of our figures for the first quarter of 2003. This provides you with conclusive
evidence that the initial exploitation period for Franchise films has virtually been concluded. Our sales fell from 2.5
million euros in the first quarter of 2001 to 0.7 million euros. Nevertheless, we succeeded in improving earnings. The
net loss for the quarter was 2.8 million euros following a loss of 3.7 million euros in the same quarter for the
previous year.
In view of these sales figures, it is all the more important that our joint venture with American producer Arnold
Kopelson now starts to generate earnings. In concrete terms, this is all about the thriller "Blackout". This
film is a joint production by Intertainment, Paramount Pictures and Kopelson. Paramount holds the North American
exploitation rights in the film and we hold all the rights for the rest of the world. The film stars Samuel L. Jackson -
he also played one of the main roles in Pulp Fiction - Ashley Judd and Andy Garcia in the main roles. We worked
intensively on the film during the course of 2002. Filming has been completed and we are currently in the final stages
of post-production.
Our objective is to develop and produce high-quality mainstream films together with Kopelson. We believe that
"Blackout" represents the successful outcome of this strategy.
In order to reduce the risks resulting from such expensive film projects, we are pursuing a strategy of selling part of
the territorial rights for all productions with Kopelson in advance. We had therefore already started with pre-sales for
"Blackout" in 2002 and we have continued this drive during the current year. Exploitation has been extremely
successful. As a consequence, there is now firm evidence that despite low sales in the first quarter we will achieve
significantly higher sales over the entire year than in 2002. It is worth noting that pre-sales impact on revenues when
the film is screened.
Apart from the production of "Blackout", we also cooperated intensively with Arnold Kopelson on development of
other film material. We have been continuing this work during the course of the current year.
A few days ago we also concluded a strategic partnership with OpenPictures. In particular, it is intended to strengthen
our operational business. OpenPictures is a comparatively young Munich media company. It has already gained an
outstanding reputation and has very good contacts in the film and finance industries.
In concrete terms, the partnership comprises the following key points:
Intertainment and OpenPictures intend to finance and market jointly international feature films. It is conceivable that
OpenPictures will already start getting involved in films that Intertainment is currently developing. It is also
entirely possible that Intertainment may in turn be involved in film projects operated by OpenPictures. This would allow
us to increase our product portfolio and diversify our risks.
Intertainment has also granted OpenPictures the right to market selected films from the Intertainment film library in
German-speaking territories over an initial period of seven years. OpenPictures will concentrate in particular on
selling free and pay-TV rights for these films.
Independently of cooperation on an operational level, this partnership also offers OpenPictures the option of getting
involved in the costs of our litigation against Franchise and any other legal costs resulting from litigation against
the other parties involved in the fraud. Finance for the legal proceedings is subject to the agreement of Intertainment.
There are currently no grounds for seeking outside finance to fund the costs of the trial. However, it is extremely good
to have a strong financial partner like OpenPictures in the background when it comes to future proceedings.
And to conclude, our strategic partnership may lead to OpenPictures taking a strategic stake in Intertainment.
Yours sincerely,
Rüdiger Baeres
Chief Executive Officer