<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NUMBER 000-29642
FILM ROMAN, INC.
(Exact name of registrant as specified in charter)
DELAWARE 95-4585357
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
12020 CHANDLER BOULEVARD, SUITE 200
NORTH HOLLYWOOD, CALIFORNIA 91607
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 761-2544
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. YES [ ] NO [X].
APPLICABLE TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES [ ] NO [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
As of November 13, 1996, 8,446,690 shares of common stock, par value $.01
per share, and were outstanding.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 3
Balance Sheets as of December 31, 1995 and September 30,
1996 (unaudited).............................................. 3
Statements of Operations for the Three and Nine Months Ended
September 30, 1995 and September 30, 1996 (unaudited)......... 4
Statements of Cash Flows for the Nine Months Ended
September 30, 1995 and September 30, 1996 (unaudited)......... 5
Notes to Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 12
Item 6. Exhibits and Reports on Form 8-K................................. 12
Signatures................................................................. S-1
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FILM ROMAN, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,176,090 $ 3,403,895
Accounts receivable 430,184 677,539
Film costs, net of accumulated amortization of $118,316,120 (1995)
and $141,488,303 (1996) 12,379,146 27,819,482
Property and equipment, net of accumulated depreciation and amortization
of $549,028 (1995) and $725,941 (1996) 336,875 831,156
Refundable income taxes 487,500 155,000
Deposits and other assets 140,583 742,732
----------- -----------
Total Assets $18,950,378 $33,629,804
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable $ 508,433 $ 3,153,135
Accrued expenses 682,183 1,482,197
Dividends payable 650,000 1,820,000
Debt 1,737,145 1,230,000
Deferred revenue 6,791,779 19,160,717
----------- -----------
Total liabilities 10,369,540 26,846,049
Class A Redeemable Preferred Stock, $.01 par value, 1,200,000 shares
authorized, issued and outstanding, $12,000,000 liquidation preference 6,748,788 7,474,400
Stockholder's equity (deficiency)
Class B Convertible Preferred stock, $.01 par value, 750,000
shares authorized, issued and outstanding, $7,500,000 liquidation
preference 300 300
Common stock, no par value, 10,000,000 shares authorized,
1,713,000 shares issued and outstanding in 1995 and 1996 700 700
Additional paid-in capital 4,716,656 4,941,656
Accumulated deficit (2,885,606) (5,633,301)
----------- -----------
Total stockholder's equity (deficiency) 1,832,050 (690,645)
----------- -----------
Total liabilities and stockholder's equity (deficiency) $18,950,378 $33,629,804
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
FILM ROMAN, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1995 1996 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 7,552,898 $11,108,312 $20,911,652 $24,824,010
Cost of Revenue 7,578,225 10,245,746 20,191,137 23,172,800
Selling, general and
administrative expenses 902,163 1,002,187 2,080,494 2,596,659
----------- ----------- ----------- -----------
Operating loss (927,490) (139,621) (1,359,979) (945,449)
Interest income 39,971 39,618 40,069 136,041
Interest expense (16,158) (8,279) (42,643) (41,045)
----------- ----------- ----------- -----------
Loss before provision for
income taxes (903,677) (108,282) (1,362,553) (850,453)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss $ (903,677) $ (108,282) $(1,362,553) $ (850,453)
=========== =========== =========== ===========
Net loss $ (903,677) $ (108,282) $(1,362,553) $ (850,453)
Accretion of the difference
between the carrying value
and the liquidation value of
the Class A Redeemable
Preferred Stock (242,415) (242,415) (242,415) (727,245)
Class A Redeemable
Preferred Stock Dividend (160,000) (240,000) (160,000) (720,000)
----------- ----------- ----------- -----------
Net loss attributable to
common stock $(1,306,092) $ (590,697) $(1,764,968) $(2,297,698)
=========== =========== =========== ===========
Net loss per share $ (0.34) $ (0.15) $ (0.46) $ (0.60)
=========== =========== =========== ===========
Weighted average number of
shares outstanding 3,860,792 3,860,792 3,860,792 3,860,792
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,362,553) $ (850,453)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 80,100 176,914
Amortization of film costs 20,636,474 23,172,183
Compensation expense in connection with the issuance of 242,400 -
common stock options to an employee
Issuance of New Warrants - 225,000
Changes in operating assets and liabilities:
Accounts receivable 197,180 (247,355)
Film costs (24,518,489) (38,612,519)
Refundable income taxes (487,500) 332,500
Deposits and other assets 43,129 (602,149)
Accounts payable 818,515 2,644,702
Accrued expenses (311,640) 800,014
Deferred revenue 2,352,876 12,368,938
------------ ------------
Net cash used in operating activities (2,309,508) (592,225)
INVESTING ACTIVITIES:
Additions to property and equipment (127,878) (671,195)
------------ ------------
Net cash used in investing activities (127,878) (671,195)
FINANCING ACTIVITIES:
Proceeds from issuance of Class A Preferred Stock and 10,984,220 (1,628)
Warrants, net of issuance costs
Borrowings under debt 3,756,826 4,660,000
Repayments on debt (3,581,755) (5,167,147)
Dividends declared and paid to common stockholder (1,751,500) -
------------ ------------
Net cash provided by (used in) financing activities 9,407,791 (508,775)
Net increase (decrease) in cash 6,970,405 (1,772,195)
------------ ------------
Cash and cash equivalents at beginning of period 435,580 5,176,090
Cash and cash equivalents at end of period $ 7,405,985 $ 3,403,895
============ ============
Supplemental disclosure of cash flow information: $ 42,643 $ 41,045
Cash paid during the period for: ------------ ------------
Interest
Income taxes $ - $ -
------------ ------------
</TABLE>
Supplemental disclosure of non-cash financing activities:
For the nine months ended September 30, 1995 and 1996, the Company accrued
dividends of $160,000 and $720,000, respectively, on the outstanding shares of
its Class A Redeemable Preferred Stock and $100,000 and $450,000, respectively,
on the outstanding shares of its Class B Convertible Preferred Stock. In
addition, the Company recorded accretion of the difference between the carrying
value and the liquidation value of $242,415 and $727,245, respectively, on the
outstanding shares of its Class A Redeemable Preferred Stock.
See accompanying notes.
5
<PAGE>
FILM ROMAN, INC.
NOTES TO FINANCIAL STATEMENTS
(1) - BASIS OF PRESENTATION
Film Roman, Inc., a Delaware corporation (the "Company"), was
incorporated in May 1996 in order to hold all of the outstanding stock of Film
Roman, Inc., a California corporation ("Film Roman California"), following a
Reorganization as described in Note 2 below. The Company currently conducts all
of its operations through its wholly owned subsidiary Film Roman California.
The accompanying unaudited financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments consisting
only of normal recurring accruals necessary to present fairly the financial
position of the Company as of September 30, 1996 and the results of its
operations for the three and nine months ended September 30, 1995 and 1996 and
the cash flows for the nine months ended September 30, 1995 and 1996 have been
included. The results of operations for interim periods are not necessarily
indicative of the results which may be realized for the full year. For further
information, refer to the financial statements and footnotes thereto included in
the Company's Form S-1 registration statement (No. 333-03987) filed with the
Securities and Exchange Commission.
(2) - REORGANIZATION AND INITIAL PUBLIC OFFERING
On October 3, 1996, the Company effected a reorganization (the
"Reorganization") pursuant to which (i) Film Roman California merged with and
into a wholly owned subsidiary of the Company; (ii) each outstanding share of
common stock of Film Roman California ("California Common Stock") was converted
into 1.25 shares of common stock of the Company, $.01 par value ("Common Stock")
(including shares of California Common Stock issued immediately prior to such
merger upon the "cashless" exercise of certain warrants and upon conversion of
all outstanding shares of Class B Convertible Preferred Stock); (iii) each
outstanding share of Class A Redeemable Preferred Stock was converted into one
share of redeemable preferred stock of the Company, $.01 par value ("Redeemable
Preferred Stock"); (iv) all outstanding employee options and certain warrants
for the purchase of Common Stock, pursuant to the anti-dilution provisions
thereof, became options and warrants to purchase Common Stock (with options and
warrants to purchase each share of California Common Stock becoming options and
warrants to purchase 1.25 shares of Common Stock at 80% of the exercise price
theretofore applicable); and (v) a warrant issued to the President of the
Company for the purchase of 185,000 shares of California Common Stock was
cancelled. As a result of the foregoing, Film Roman California became a wholly
owned subsidiary of the Company, and the stockholders of Film Roman California
became stockholders of the Company. The Reorganization was effected pursuant to
an Plan of Reorganization Agreement dated as of May 15, 1996, as amended, by and
among the Company, Film Roman California and the stockholders of Film Roman
California.
On October 4, 1996, the Company completed its initial public offering
("Offering") of 3,300,000 shares of its Common Stock. Of the 3,300,000 shares
of Common Stock sold in the Offering, 3,275,364 shares were issued and sold by
the Company and 24,636 shares were sold by certain stockholders of the Company.
Net proceeds to the Company pursuant to the Offering totalled approximately
$29.3 million, after deducting underwriting discounts and offering expenses
payable by the Company.
Immediately following the closing of the Offering, the Company
redeemed for cash $7.5 million liquidation preference of Redeemable Preferred
Stock. The shares of Redeemable Preferred Stock that were not redeemed for cash
were redeemed for Common Stock (at a redemption price of 1.3072 shares of
6
<PAGE>
Common Stock for each share of Redeemable Preferred Stock) and, as a result,
586,690 shares of Common Stock were issued upon such redemption on October 30,
1996.
(3) - NET LOSS PER COMMON SHARE
The per share data is based on the weighted average number of common
and common equivalent shares outstanding during the period and are calculated in
accordance with a Staff Accounting Bulletin of the Securities and Exchange
Commission whereby common and common share equivalents issued within a 12-month
period prior to an initial public offering are treated as outstanding for all
periods presented if the issue price was less than the proposed initial public
offering price. In addition, shares issuable upon the exercise of options and
warrants and convertible preferred stock within the 12-month period are
considered to have been outstanding since inception of the Company. For the
three and nine months ended September 30, 1996, the net loss per Common Share
gives effect to the accretion of the difference between the carrying value and
the liquidation value of the Class A Redeemable Preferred Stock of $242,415 and
$727,245, respectively, and to the accrual of dividends of 240,000 and $720,000,
respectively, on the Class A Redeemable Preferred Stock.
For the three and nine months ended September 30, 1995, the net loss
per Common Share gives effect to the accretion of the difference between the
carrying value and the liquidation value of the Class A Redeemable Preferred
Stock of $242,415 and to dividends of $160,000 on the Class A Redeemable
Preferred Stock.
The per share data does not give effect to the Reorganization or the
shares issued in the Offering as such events occurred subsequent to September
30, 1996.
(4) - FILM COSTS
The components of unamortized film costs consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 30, AS OF SEPTEMBER 30,
1995 1996 (UNAUDITED)
------------------ -------------------
<S> <C> <C>
Animated film productions released, $ 5,391,275 $ 4,656,502
less amortization
Animated film productions in process 6,253,597 22,004,121
Animated film productions in development 734,274 1,158,859
----------- -----------
$12,379,146 $27,819,482
=========== ===========
</TABLE>
(5) 1996 COMMITMENT
In September 1996, Film Roman California secured a commitment (the
"Commitment") from certain of its existing stockholders to purchase up to $3.0
million of its 12% Senior Secured Notes due December 20, 1996 ("Senior Notes").
No Senior Notes have been or will be issued. As consideration for the receipt of
the Commitment, Film Roman California issued certain warrants which, in
connection with the Reorganization and pursuant to the anti-dilution provisions
thereof, became warrants for the purchase of 72,066 shares of Common Stock at an
exercise price of $7.00 per share. The New Warrants are exercisable beginning
September 1997 and expire in September 2001. The New Warrants will be
immediately exercisable upon a merger or consolidation involving the Company
(other than the Reorganization) or in the event of a sale of all or
substantially all of the assets of the Company. During the three months ended
September 30, 1996, the Company recorded an expense of $225,000 relating to the
issuance of the New Warrants and transactions costs associated with the
Commitment.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in the forward-looking statements contained
herein as a result of the risk factors set forth in the Company's prospectus
dated September 30, 1996 and as a result of other factors.
GENERAL
Film Roman, Inc., a Delaware corporation (the "Company"), was
incorporated in May 1996 in order to hold all of the outstanding capital stock
of Film Roman, Inc., a California corporation ("Film Roman California"). On
October 3, 1996, the Reorganization was effected pursuant to which Film Roman
California became a wholly owned subsidiary of the Company. See Note 2 to Notes
to Financial Statements.
The Company creates, develops, produces and distributes high quality,
family-oriented animated television programming. Historically, the Company has
produced substantially all of its programming for third parties on a "fee-for-
services" basis. Increasingly, the Company is producing programming for which
it controls the "proprietary rights" associated with such programming
(including, for example, international distribution and licensing and
merchandising rights).
The Company produces a limited number of television series in any year
and is substantially dependent on revenues from licensing these programs to
broadcasters. The Company's future performance will be affected by issues
facing all producers of animated programming, including risks related to the
limited number of time slots allocated to children's and/or animated television
programming, the intense competition for those time slots, the declining license
fees paid to producers of programming by broadcasters and the regulations
implemented by the Federal Communications Commission governing program content.
In addition, the Company has recently begun to expand its internal creative
development of proprietary characters and program concepts by establishing an
international distribution division and a licensing and merchandising division
to support the exploitation of its proprietary rights. As a result of these new
initiatives, the Company has incurred additional overhead and other costs which
has depressed operating results. While the Company seeks to limit its financial
risk associated with its proprietary programming by obtaining commitments prior
to production to cover at least 50% of its direct production costs, there can be
no assurance that the Company will be able to cover the balance of its
production costs and overhead costs relating to production, licensing and
distribution through the exploitation of its proprietary rights. As a result of
the foregoing risks, there can be no assurance that the Company will be able to
generate revenues that exceed its costs.
1996 PRODUCTION
The Company is currently producing 161 episodes of programming to be
aired during the 1996-97 broadcast season. The Company estimates that
approximately 120 of such episodes will be produced and delivered to
broadcasters in 1996. The approximately 120 episodes that the Company expects
to produce and deliver in 1996 represent an increase of 47 episodes (or 64%)
from the number of episodes produced and delivered in 1995. Approximately 42%
of these episodes are proprietary productions for which the Company expects to
recognize revenues over a period of years (unlike fee-for-services productions,
for which all or most revenues are recognized upon delivery). In addition, the
Company has commenced production of 13 episodes of Blues Brothers: The Animated
Series which are scheduled to be aired during the 1997-98 broadcast season.
8
<PAGE>
REVENUE AND COST RECOGNITION
The Company follows FASB 53 for accounting practices related to
revenue recognition and amortization of production costs for its fee-for-
services and proprietary programming.
Revenues from license and production agreements, which may provide for
the receipt by the Company of nonrefundable guaranteed amounts, are recognized
when the license period begins and the programming is available pursuant to the
terms of the agreement, typically when the finished episode has been delivered
to and accepted by the customer. Amounts in excess of minimum guarantees under
such agreements are recognized when earned. Cash collected in advance of the
time of availability of programming is recorded as deferred revenue ($19.2
million at September 30, 1996).
Broadcasters typically make most of their annual programming
commitments in the first and second quarters so that programs will be ready for
broadcast in the third and fourth quarters of the same year. As a result, the
Company's revenues are concentrated in the third and fourth quarters.
All costs incurred in connection with an individual program or film,
including acquisition, development, production and allocable production overhead
costs and interest are capitalized as film costs. At September 30, 1996, the
Company's capitalized film costs balance was $27.8 million. These costs are
stated at the lower of unamortized cost or estimated net realizable value.
Estimated total production costs for an individual program or film are amortized
in the proportion that revenue realized relates to management's estimate of the
total revenue expected to be received from such program or film. Estimated
liabilities for third party participations are accrued and expensed in the same
manner as film costs are amortized. Due to the inherent uncertainties of
forecasting both total revenue and total expense, at any time one or the other
can be overstated or understated, resulting in potential adjustments to the
financial statements, including losses.
The Company's cash flows are not necessarily related to revenue
recognition and amortization of production costs. Cash is received and costs
are incurred (and paid) throughout the year. In the fourth quarter, and to a
lesser extent the third quarter, cash used in operations typically exceeds cash
generated by operations as completed shows are delivered to broadcasters.
OVERHEAD ALLOCATION
Overhead is allocated to particular productions on the basis of the
total allocable overhead times the ratio of direct production costs incurred on
a program to total production costs incurred during the period. Total allocable
overhead is determined on the basis of management's estimates of the percentage
of overhead costs which can be attributed to the productions in progress during
the period.
INCOME TAXES
Prior to August 4, 1995, the Company was an S Corporation subject to
taxation under Subchapter S of the Internal Revenue Code of 1986, as amended
(the "Code"). As a result, the net income of the Company, for federal (and some
state) income tax purposes, was reported by and taxed directly to the Company's
sole stockholder, rather than the Company. The Company's S Corporation status
terminated on August 4, 1995 and the Company became a C Corporation subject to
corporate taxation. No provision for income taxes has been recorded by the
Company since August 4, 1995, as the Company has only recorded losses since that
date.
9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
Total revenue increased by 46%, or $3.5 million, to $11.1 million for
the three months ended September 30, 1996 from $7.6 million for the comparable
period in the prior year. The Company produced and delivered 7 "proprietary"
episodes during the three months ended September 30, 1996, as compared to three
episodes in the comparable period for 1995, resulting in a $1.2 million increase
in total revenue. The Company delivered 25 "fee-for-services" episodes during
the three months ended September 30, 1996, compared with 17 episodes in the
comparable period in 1995. Fee-for-services revenue increased 35% or $2.0
million for the period. Other revenue increased by $0.3 million primarily due
to a $0.5 increase in revenues generated by the interactive division and
partially offset by a $0.2 decrease in ancillary revenue.
Total cost of revenue increased by 34%, or $2.6 million, to $10.2
million for the three months ended September 30, 1996 from $7.6 million for the
three months ended September 30, 1995. Total cost of revenue, as a percentage
of sales, decreased to 92% for the three months ended September 30, 1996, from
100% in the comparable period in 1995. This decrease was primarily a result of
the higher margins earned on proprietary programming as well as improved margins
on fee-for-services programming.
Operating loss was $0.1 million for the three months ended September
30, 1996, as compared to a loss of $0.9 million for the three months ended
September 30, 1995.
Total selling, general and administrative expenses increased by $0.1
million to $1.0 million for the three months ended September 30, 1996 from $0.9
million for the three months ended September 30, 1995, primarily due to costs
incurred of $0.2 million in connection with the issuance of the New Warrants
pursuant to the Commitment.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995.
Total revenue increased by 19%, or $3.9 million, to $24.8 million for
the nine months ended September 30, 1996 from $20.9 million for the comparable
period in the prior year. The Company recognized an additional $2.1 million of
revenue during the current period in connection with proprietary episodes
initially produced and delivered in prior periods with no comparable source of
such revenue for the nine months ended September 30, 1995. The Company produced
and delivered 10 proprietary episodes in the nine months ended September 30,
1996, as compared to 3 episodes in the comparable period for 1995, resulting in
a $1.8 million increase in revenue. While the Company delivered a similar
amount of fee-for-services episodes during the current period as compared to the
same period in the prior year, revenue decreased $2.1 million primarily due to a
change in the mix of episodes delivered. The Company delivered more episodes
for Saturday morning programming but fewer prime-time episodes which command
significantly higher fees per episode. Other revenue, primarily generated from
the production of interactive products, commercials and specials, increased by
$2.1 million.
Total cost of revenue increased by 15%, or $3.0 million, to $23.2
million for the nine months ended September 30, 1996 from $20.2 million for the
nine months ended September 30, 1995. Cost of revenue, as a percentage of
sales, decreased to 94% for the nine months ended September 30, 1996 from 97%
for the nine months ended September 30, 1995. The decrease was primarily a
result of the higher margins earned on proprietary episodes, as well as improved
margins on fee-for-services programming.
Operating loss decreased $0.5 million to $0.9 million for the nine
months ended September 30, 1996, as compared to a $1.4 million operating loss
for the nine months ended September 30, 1995.
10
<PAGE>
Total selling, general and administrative expenses increased by 24% to
$2.6 million for the nine months ended September 30, 1996 from $2.1 million for
the nine months ended September 30, 1995, primarily relating to overhead costs
for the interactive division ($0.2 million) which was established in late 1995
and the costs incurred in connection with the issuance of the New Warrants ($0.2
million).
LIQUIDITY AND CAPITAL RESOURCES
As the Company endeavors to develop and produce more proprietary
programs, retain more of the proprietary rights thereto, and increase its
presence in the licensing and merchandising and international distribution
markets, greater capital resources will be required. The Company seeks to limit
the financial risk associated with its proprietary programming by obtaining
commitments prior to production to cover at least 50% of its direct production
costs, but the Company must utilize its own funds to cover remaining production
costs and overhead costs relating to production, licensing and distribution.
For the nine months ended September 30, 1996, net cash used in
operating activities was $0.6 million due to use of cash in connection with film
production activities offset by an increase in deferred revenue and fluctuations
in other operating assets and liabilities. For the nine months ended September
30, 1996, net cash used for investing activities was $0.7 due to additions to
property and equipment. Net cash used in financing activities for the first
nine months of 1996 was $0.5 million due primarily to the repayment of debt.
On October 4, 1996, the Company completed its Offering of 3,300,000
shares of its Common Stock. Of the 3,300,000 shares of Common Stock sold in the
Offering, 3,275,364 shares were issued and sold by the Company and 24,636 shares
were sold by certain stockholders of the Company. Net proceeds to the Company
pursuant to the Offering totalled approximately $29.3 million, after deducting
underwriting discounts and offering expenses payable by the Company.
Approximately $9.3 million of such proceeds were used to pay accrued and unpaid
dividends on the Redeemable Preferred Stock and Class B Convertible Preferred
Stock and to redeem $7.5 million liquidation preference of the Redeemable
Preferred Stock.
The Company has a $1.2 million revolving credit facility (the
"Revolving Credit Facility") with a bank. Borrowings under the Revolving Credit
Facility accrue interest at a variable rate and are due and payable on demand.
The obligations under the Revolving Credit Facility are secured by various
assets of the Company and are guaranteed by the Company's President and Chief
Executive Officer. At September 30, 1996, $1.2 million had been drawn upon the
Revolving Credit Facility.
The Company is seeking to obtain a new bank facility in the principal
amount of approximately $5.0 million. There can be no assurance that it will be
able to obtain a new bank facility on terms that are satisfactory to the
Company. Management believes that, the Company's cash and cash equivalents and
anticipated cash flow from operations will be sufficient to fund the Company's
operating requirements for at least the next year, whether or not the Company
enters into a new bank facility.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings and is
not aware of any pending or threatened litigation that, if decided adversely to
the Company, would have a material adverse effect upon the Company's business,
results of operations or financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11 Statement regarding computation of earnings per share.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1996.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 13, 1996
FILM ROMAN, INC.
By: /s/ Phil Roman
--------------
Phil Roman
President, Chief Executive Officer and Director
By: /s/ Greg Arsenault
------------------
Greg Arsenault
Senior Vice President - Finance and Administration
S-1
<PAGE>
EXHIBIT 11
EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1995 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average shares
outstanding............................ 1,713,000 1,713,000 1,713,000 1,713,000
Incremental effect of issuance of
Convertible Preferred Stock within
one year prior to an initial public
offering at a price below the
offering price (i.e. cheap stock)...... 750,000 750,000 750,000 750,000
Incremental effect of issuance of
warrants and options within one
year prior to an initial public
offering with an exercise price
below the offering price (i.e. cheap
stock) based on the treasury stock
method using the offering price........ 1,397,792 1,397,792 1,397,792 1,397,792
----------- ---------- ----------- -----------
3,860,792 3,860,792 3,860,792 3,860,792
=========== ========== =========== ===========
Net loss attributable to common
stock.................................. $(1,306,092) $ (590,697) $(1,764,968) $(2,297,698)
=========== ========== =========== ===========
Net loss per share...................... $ (0.34) $ (0.15) $ (0.46) $ (0.60)
=========== ========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF FILM ROMAN, INC., AS OF AND FOR THE THREE
MONTH AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 3,403,895 3,403,895
<SECURITIES> 0 0
<RECEIVABLES> 677,538 677,538
<ALLOWANCES> 0 0
<INVENTORY> 27,819,482 27,819,482
<CURRENT-ASSETS> 0 0
<PP&E> 1,557,097 1,557,097
<DEPRECIATION> 725,941 725,941
<TOTAL-ASSETS> 23,629,804 23,629,804
<CURRENT-LIABILITIES> 0 0
<BONDS> 1,230,000 1,230,000
0 0
7,474,400 7,474,400
<COMMON> 700 700
<OTHER-SE> (691,345) (691,345)
<TOTAL-LIABILITY-AND-EQUITY> 33,629,804 33,629,804
<SALES> 11,108,312 24,824,010
<TOTAL-REVENUES> 11,108,312 24,824,010
<CGS> 10,245,746 23,172,800
<TOTAL-COSTS> 10,245,746 23,172,800
<OTHER-EXPENSES> 1,002,187 2,596,659
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 31,339 94,996
<INCOME-PRETAX> (108,282) (850,453)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (108,282) (850,453)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (108,282) (850,453)
<EPS-PRIMARY> (0.15) (0.60)
<EPS-DILUTED> 0 0
</TABLE>
