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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 of (I.R.S. Employer
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 [ X ] NO [ ].
APPLICABLE ONLY 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 Sections 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 October 31, 1997, 8,454,690 shares of common stock, par value $.01
per share, were issued and outstanding.
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<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<C> <S> <C>
Item 1. Financial Statements ..................................... 3
Consolidated Balance Sheets as of December 31, 1996
and September 30, 1997 (unaudited)...................... 3
Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 1996 and
September 30, 1997 (unaudited).......................... 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1996 and September 30,
1997 (unaudited)........................................ 5
Notes to Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ......................... 12
Signatures ........................................................ S-1
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FILM ROMAN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents .................................................. $ 13,738,927 $ 15,428,605
Accounts receivable ........................................................ 6,956,409 3,857,799
Film costs, net of accumulated amortization of $169,094,868 (December
31, 1996) and $199,738,562 (September 30, 1997) ............................ 21,268,945 19,711,792
Property and equipment, net of accumulated depreciation and
amortization of $934,192 (December 31,1996) and $1,103,902
(September 30, 1997) ....................................................... 537,389 423,924
Deposits and other assets .................................................. 315,625 437,020
------------ ------------
Total Assets ............................................................... $ 42,817,295 $ 39,859,140
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable .......................................................... $ 3,790,136 $ 1,662,933
Accrued expenses .......................................................... 1,830,314 2,548,965
Deferred revenue .......................................................... 13,409,592 15,655,353
------------ ------------
Total liabilities ......................................................... 19,030,042 19,867,251
Stockholders' equity
Preferred Stock, $0.01 par value, 5,000,000 shares authorized,
none issued ........................................................ ---- ----
Common stock, $0.01 par value, 20,000,000 shares authorized,
8,449,690 shares issued and outstanding at December 31, 1996 and
8,454,690 shares issued and outstanding at September 30, 1997 ............. 84,498 84,548
Additional paid-in capital ................................................ 36,305,684 36,305,684
Accumulated deficit ....................................................... (12,602,929) (16,398,343)
------------ ------------
Total stockholders' equity .......................................... 23,787,253 19,991,889
------------ ------------
Total liabilities and stockholders' equity .......................... $ 42,817,295 $ 39,859,140
============ ============
</TABLE>
See accompanying notes.
3
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FILM ROMAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
-------------------------------- --------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . $11,108,312 $10,475,613 $24,824,010 29,717,115
Cost of revenue . . . . . . . . . . . 10,245,746 12,712,838 23,172,800 30,643,694
Selling, general and
administrative expenses . . . . . . 1,002,187 1,142,930 2,596,659 3,318,752
----------- ----------- ----------- -----------
Operating loss . . . . . . . . . . . (139,621) (3,380,155) (945,449) (4,245,331)
Interest income . . . . . . . . . . . 39,618 185,026 136,041 449,918
Interest expense . . . . . . . . . . (8,279) ---- (41,045) ----
----------- ----------- ----------- -----------
Loss before provision for
income taxes . . . . . . . . . . . (108,282) (3,195,129) (850,453) (3,795,413)
Provision for income taxes . . . . . ---- ---- ---- ----
----------- ----------- ----------- -----------
Net loss . . . . . . . . . . . . . . $ (108,282) $(3,195,129) $ (850,453) $(3,795,413)
=========== =========== =========== ===========
Accretion of the difference
between the carrying value
and the liquidation value of
the Class A Redeemable
Preferred Stock . . . . . . . . . . (242,415) ---- (727,245) ----
Class A Redeemable
Preferred Stock Dividend . . . . . (240,000) ---- (720,000) ----
----------- ----------- ----------- -----------
Net loss attributable to
common stock . . . . . . . . . . . . $ (590,697) $(3,195,129) $(2,297,698) $(3,795,413)
=========== =========== =========== ===========
Net loss per share . . . . . . . . . $ (0.12) $ (0.38) $ (0.48) $ (0.45)
=========== =========== =========== ===========
Weighted average number of
shares outstanding . . . . . . . . 4,824,519 8,454,690 4,824,519 8,453,023
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
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FILM ROMAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1997
----------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (850,453) $ (3,795,413)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176,914 169,710
Amortization of film costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,172,183 30,643,694
Issuance of New Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000 ----
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (247,355) 3,098,610
Film costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38,612,519) (29,086,541)
Refundable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332,500 800
Deposits and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (602,149) (122,195)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,644,702 (2,127,203)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,014 718,650
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,368,938 2,245,761
------------ ------------
Net cash (used in) provided by operating activities . . . . . . . . . . . . . . . . . . . . (592,225) 1,745,873
INVESTING ACTIVITIES:
Additions to property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (671,195) (56,245)
------------ ------------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (671,195) (56,245)
FINANCING ACTIVITIES:
Proceeds from issuance of Class A Redeemable Preferred Stock and
Warrants, net of issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,628) ----
Options Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ---- 50
Borrowings under debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,660,000 ----
Repayments on debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,167,147) ----
------------ -----------
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . (508,775) 50
Net (decrease) increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,772,195) 1,689,678
------------ -----------
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . 5,176,090 13,738,927
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,403,895 $ 15,428,605
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,045 $ ----
------------ ------------
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ---- $ ----
------------ ------------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
For the nine months ended September 30, 1996 the Company accrued dividends
of $720,000 on the outstanding shares of its Class A Redeemable Preferred Stock
and $450,000 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 $727,245 on the outstanding shares
of its Class A Redeemable Preferred Stock.
See accompanying notes.
5
<PAGE>
FILM ROMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) - BASIS OF PRESENTATION
Film Roman, Inc., a Delaware corporation (the "Company"), currently conducts
all of its operations through its wholly owned subsidiary Film Roman, Inc., a
California corporation ("Film Roman California"). The accompanying consolidated
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, 1997 and the results of its operations for the three
and nine months ended September 30, 1996 and 1997, and the cash flows for the
nine months ended September 30, 1996 and 1997 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 Annual
Report on Form 10-K for the year ended December 31, 1996 filed with the
Securities and Exchange Commission.
(2) - NET LOSS PER COMMON SHARE
For the three months and the nine months ended September 30, 1996, per share
data is based on the weighted average number of common and common equivalent
shares outstanding during the period, and is 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 months and the
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 $242,414, 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 months and the nine months ended September 30, 1997, the per
share data is based on the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares,
consisting of outstanding stock options, are not included since they are
antidilutive.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 128, Earnings Per Share ("SFAS
No. 128"), which is effective for annual and interim financial statements issued
for periods ending after December 15, 1997 and early adoption is not permitted.
When adopted, SFAS No. 128 will require restatement of prior years' earnings per
share ("EPS"). SFAS No. 128 was issued to simplify the standards for calculating
EPS previously in APB No. 15, Earnings Per Share. SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS. The new rules also
require dual presentation of basic and diluted EPS on the face of the statement
of operations for companies with a complex capital structure. For the Company,
basic EPS will exclude the dilutive effects of stock options and warrants.
Diluted EPS for the Company will reflect all potential dilutive securities.
Under the provisions of SFAS No. 128, basic and diluted EPS would have been the
same for the three months and the nine months ended September 30, 1996 and 1997
as the reported amounts for such periods.
6
<PAGE>
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income ("Statement No. 130"). Statement No. 130 establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Statement No. 130 applies to all
enterprises that provide a full set of general purpose financial statements.
Statement No. 130 becomes effective for all financial statements for fiscal
years beginning after December 15, 1997, with earlier application permitted.
Further, in June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information ("Statement No. 131").
Statement No. 131 changes the way public companies report segment information in
annual financial statements and also requires those companies to report selected
segment information in interim financial reports to shareholders. The proposal
supersedes FASB Statement 14 on segments and does not apply to nonpublic
enterprises or to not-for-profit organizations. Statement No. 131 becomes
effective for all financial statements for fiscal years beginning after December
15, 1997, with earlier adoption permitted. The Company believes that Statements
No. 130 and 131 will not have a material effect on its financial statements.
(3) - FILM COSTS
The components of unamortized film costs consist of the following:
<TABLE>
<CAPTION>
As of As of
December 30, 1996 September 30, 1997
----------------- (unaudited)
------------------
<S> <C> <C>
Animated film productions released, less amortization... $ 7,946,483 $ 6,469,469
Animated film productions in process.................... 13,069,981 13,000,594
Animated film productions in development................ 252,481 241,729
----------- -----------
$21,268,945 $19,711,792
=========== ===========
</TABLE>
(4) - BLUES BROTHERS: THE ANIMATED SERIES
The Company put its proprietary production of "Blues Brothers: The Animated
Series" (the "Blues Brothers") into hiatus in March 1997 following discussions
between the Company and United Paramount Network ("UPN") with respect to certain
creative aspects of the project. Although in August 1997 UPN announced its
intention to run the series in the fall of 1998, the network subsequently
changed its programming strategy to de-emphasize prime time animation, which led
to UPN's decision in September 1997 to cancel its plans to air the Blues
Brothers. In September 1997, UPN and the Company entered into a settlement
whereby UPN compensated the Company for a portion of the costs associated with
the production of the show. The Company's investment amounted to approximately
$6.0 million as of September 30, 1997, and the Company recorded a write off in
the quarter ended September 30, 1997, of approximately $2.0 million.
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. Such forward-looking statements
relate to, among other things, the Company's future production and delivery
schedule (including the number of episodes of programming to be produced and
delivered in 1997 and 1998); production fees, services and costs; and liquidity.
These forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties, including
without limitation, those described under the caption "Risks Related to the
Business" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996. Actual results could differ materially from these forward-
looking statements.
GENERAL
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. Fees paid to the Company for these production services
generally range from $300,000 to $600,000 per episode and typically cover all
direct production costs plus a profit margin. The Company has begun to produce
programming for which it controls some of the "proprietary rights" associated
with such programming (including, for example, international distribution and
licensing and merchandising rights). Fees paid to the Company for these
production services typically do not cover all direct production costs.
Generally, the Company seeks to cover at least 50% of its production costs prior
to production of its proprietary programs and seeks to cover the remaining
production costs through the exploitation of the proprietary rights associated
with these programs. As a result, the Company may recognize revenue associated
with its proprietary programming over a period of years.
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 limited access to
distribution channels (particularly for programs produced by independent
studios), the declining license fees paid to producers of programming by
broadcasters and the regulations implemented by the Federal Communications
Commission governing program content. 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. The Company expects to
report a loss for the year ended December 31, 1997.
1997 AND 1998 PRODUCTION AND DELIVERIES
The Company has completed production of all of the 159 episodes of
programming that it committed to produce and deliver for the 1996-97 broadcast
season. The Company has begun production of 56 episodes of fee-for-services
programming which are currently scheduled to air during the 1997-98 season. As
of September 30, 1997, the Company had no commitments to produce or deliver any
new episodes of proprietary programming for the 1997-98 season.
The Company presently expects to deliver approximately 66 episodes of
programming in 1997. Of these 66 episodes, 31 are fee-for-services programs for
airing during the 1996-97 season, 10 are proprietary
8
<PAGE>
programs, also airing during the 1996-97 season, and the remaining 25 are fee-
for-services programs which are currently scheduled to air during the 1997-98
season. Some of the 25 episodes for the 1997-98 season which are currently
expected to be delivered in 1997 may be delivered in 1998. Similarly, some of
the episodes for the 1997-98 season which the Company presently expects to
deliver in 1998 may be delivered in 1997. The estimated delivery of 66 episodes
in 1997 represents a decrease of 75 episodes (or 53%) from the number of
episodes delivered in 1996.
BLUES BROTHERS: THE ANIMATED SERIES
The Company put its proprietary production of the "Blues Brothers" into hiatus
in March 1997 following discussions between the Company and UPN with respect to
certain creative aspects of the project. Although in August 1997 UPN announced
its intention to run the series in the fall of 1998, the network subsequently
changed its programming strategy to de-emphasize prime time animation, which led
to UPN's decision in September 1997 to cancel its plans to air the Blues
Brothers. In September 1997, UPN and the Company entered into a settlement
whereby UPN compensated the Company for a portion of the costs associated with
the production of the show. The Company's investment amounted to approximately
$6.0 million as of September 30, 1997, and the Company recorded a write off in
the quarter ended September 30, 1997, of approximately $2.0 million.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Total revenue decreased by 6%, or $0.6 million, to $10.5 million for the three
months ended September 30, 1997, from $11.1 million for the comparable period in
the prior year. The total decrease in revenue is primarily a result of the
absence of any interactive revenue in the current quarter compared to the
comparable quarter in the prior year because the Company shut down its
Interactive Department in 1997. The Company delivered 11 episodes of
programming during the three months ended September 30, 1997 compared to 32
episodes delivered during the three months ended September 30, 1996.
The Company delivered 11 "fee-for-services" episodes during the three months
ended September 30, 1997, compared with 25 episodes in the comparable period in
1996. Fee-for-services revenue decreased 33%, or $2.7 million, to $5.3 million
from $8.0 million during the respective periods.
The Company delivered no "proprietary" episodes during the three-month period
ended September 30, 1997,compared with seven episodes in the comparable period
in 1996. "Proprietary revenue" consists of revenue derived from the U.S.
license fees paid upon the initial delivery of a new episode of proprietary
programming to a U.S. broadcaster and from the exploitation of the proprietary
rights (e.g., merchandising, licensing and/or international distribution rights)
associated with the proprietary episodes in the Company's library that were
initially delivered in prior periods. Although the Company did not deliver any
proprietary episodes during the quarter ended September 30, 1997, total
proprietary revenue increased by 133% or $2.8 million, to $4.9 million from $2.1
million during the comparable quarter in 1996, as a result of the "Blues
Brothers" settlement and an increase in revenue from the exploitation of the
proprietary rights associated with the programs in the Company's library.
Other revenue decreased by approximately $0.7 million during the three months
ended September 30, 1997 as compared to the same period of the prior year, due
primarily to a $0.4 million decrease in revenue resulting from the shutdown of
the Interactive Department as well as a $0.3 million decrease in revenue from
commercials and specials.
9
<PAGE>
Total cost of revenue increased by 24%, or $2.5 million, to $12.7 million for
the three months ended September 30, 1997, from $10.2 million for the three
months ended September 30, 1996. Total cost of revenue, as a percentage of
sales, increased by 29% to 121% for the three months ended September 30, 1997,
as compared to 92% for the three months ended September 30, 1996, primarily as a
result of the "Blues Brothers" settlement, lower "proprietary" margins, and an
additional write down to net realizable value as a result of changes in the
Company's estimated future revenues from certain of its episodic programming.
Total selling, general and administrative expenses for the three months ended
September 30, 1997 increased by $0.1 million to $1.1 million for the three
months ended September 30, 1997 from $1.0 million for the comparable period in
1996.
Operating loss increased to $3.4 million for the three months ended September
30, 1997, as compared to $0.1 million for the comparable period in 1996, as a
result of the "Blues Brothers" settlement and lower "proprietary" margins.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996.
Total revenue increased by 20%, or $4.9 million, to $29.7 million for the nine
months ended September 30, 1997, from $24.8 million for the comparable period in
the prior year. Total revenue increased primarily as a result of the "Blues
Brothers" settlement. The Company delivered a total of 48 episodes of
programming for the nine months ended September 30, 1997 as compared to 49
episodes delivered for the comparable period in 1996.
The Company delivered 38 "fee-for-services" episodes during the nine months
ended September 30, 1997, compared to 39 episodes in the comparable period in
1996. Fee-for-services revenue increased 28%, or $4.3 million, to $19.7 million
for the nine months ended September 30, 1997, from $15.4 million during the
comparable period in 1996 primarily as a result of delivering more Prime Time
episodes which generally generate higher per-episode fees than Saturday morning
episodes.
The Company delivered 10 "proprietary" episodes during each of the nine month
periods ended September 30, 1997 and 1996. "Proprietary" revenue increased by
52%, or $2.5 million, to $7.3 million for the nine months ended September 30,
1997, from $4.8 million for the comparable period in 1996. This increase was
due primarily to an increase in revenue from the settlement of the "Blues
Brothers" which was partially offset by the fact that the proprietary episodes
delivered in 1997 were syndicated episodes that generated a lower fee per
episode than the episodes delivered to major networks in 1996.
Other revenue decreased by approximately $1.9 million during the nine months
ended September 30, 1997, as compared to the same period of the prior year, due
primarily to a combined decrease of approximately $2.5 million in revenue
generated by the Company's participation in net profits from certain of its fee-
for-services series and revenue from commercials and specials. This decrease
was offset by an increase in revenue of approximately $0.6 million from the
creative services division and the Company's Interactive Department, which was
subsequently shut down in the first quarter of 1997.
Total cost of revenue increased by 32%, or $7.4 million, to $30.6 million for
the nine months ended September 30, 1997, from $23.2 million for the nine months
ended September 30, 1996. Total cost of revenue, as a percentage of sales,
increased by 10% to 103% for the nine months ended September 30, 1997, as
compared to 93% for the nine months ended September 30, 1996, primarily as a
result of the "Blues Brothers" settlement, lower "proprietary" margins, and an
additional write down to net realizable value as a result of changes in the
Company's estimated future revenues from certain of its episodic programming.
10
<PAGE>
Total selling, general and administrative expenses for the nine months ended
September 30, 1997 increased by $0.7 million to $3.3 million from $2.6 million
for the comparable period in 1996, due primarily to increased professional fees,
the write off of certain development costs and ongoing costs of operating a
public company.
Operating loss was $4.2 million for the nine months ended September 30, 1997,
as compared to a loss of $0.9 million for the nine months ended September 30,
1996.
LIQUIDITY AND CAPITAL RESOURCES
Greater capital resources are required for the Company to develop and produce
proprietary programs, retain the proprietary rights associated with such
programs, and increase it presence in the licensing and merchandising and
international distribution markets. 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. The Company
seeks to cover the remaining production costs through the exploitation of the
proprietary rights associated with the programs in its library (e.g.,
merchandising, licensing and/or international distribution rights).
Historically, in the fourth quarter, and to a lesser extent the third quarter,
cash used in operations typically exceeded cash generated by operations as
completed shows were delivered to broadcasters. However, the Company has begun
to exploit, to a greater extent, the international distribution rights
associated with the proprietary programs in its library. As a result, the
Company expects that cash used in or provided by operations will fluctuate
greatly from quarter to quarter, due in part, to the international sales and
collections cycle related to the programs in its library.
For the nine months ended September 30, 1997, net cash provided by operating
activities was approximately $1.7 million due to an increase in deferred revenue
as well as a decrease in accounts receivable, offset by cash used in connection
with film production activities and fluctuations in other operating assets and
liabilities.
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.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(A) EXHIBITS
<S> <C>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------------------------------------------
+2.1 Plan of Reorganization Agreement dated as of May 15, 1996 by and among the Registrant, Film
Roman, Inc., a California corporation ("Film Roman California"), and certain stockholders party thereto
+2.2 First Amendment to Plan of Reorganization Agreement dated as of September 9, 1996
+3.1 Certificate of Incorporation of Registrant
+3.2 Bylaws of Registrant
3.3 Amendment to Bylaws of Registrant dated as of August 5, 1997
+4.1 Specimen Stock Certificate
+*10.1 Employment Agreement dated as of August 7, 1995 by and between Film Roman California and Mr.
Phil Roman
10.2 Intentionally Omitted
10.3 Intentionally Omitted
+*10.4 Employment Agreement dated as of December 15, 1995 by and between Film Roman California and
Ms. Jacqueline Blum
+*10.5 Employment Agreement dated as of January 2, 1996 by and between Film Roman California
and Mr. Gregory Arsenault
+*10.7 Stock Option Plan of Registrant
+*10.8 Form of Non-Qualified Stock Option Agreement for Employees
+*10.9 Form of Incentive Stock Option Agreement for Employees
10.10 Intentionally Omitted
+10.11 Lease for Registrant's headquarters and studio in North Hollywood, California
+10.12 Promissory Note for $1,230,000 between Film Roman, Inc and First Charter Bank, N.A.
+10.13 Rights Agreement dated May 30, 1995 between Daniel Aykroyd, Judith Belushi Pisano and
Film Roman, Inc.
+10.14 Agreement dated December 11, 1990, between Film Roman, Inc. and Alevy Productions, Inc.
+10.15 Series Production Agreement dated as of April 27, 1990 between Fox Children's Network and
Film Roman, Inc.
+10.16 Agreement dated as of June 20, 1995, between Film Roman, Inc. and Starstream Limited
+10.17 Amendment dated December 18, 1992 between Film Roman, Inc. and Fox Children's Network
+10.18 Amendment dated March 22, 1994 between Film Roman, Inc. and Fox Children's Network
+10.19 Agreement dated October 5, 1994 between Flying Heart, Inc. and Film Roman, Inc.
+10.20 Agreement dated February 20, 1996 with Live Film and Mediaworks, Inc. and Film Roman, Inc.
+10.21 Letter Agreement dated January 9, 1995 with Agreement dated November 22, 1993, revised December
9, 1994, December 13, 1993, June 23, 1994 and August 1, 1994 between Fox Children's Network
("FCN") and Film Roman, Inc.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------------------------------
<C> <S>
+10.22 Agreement dated June 1, 1995, between Fox Children's Network and Film Roman, Inc.
+10.23 Amendment dated March 1, 1996 to the Agreement dated as of November 22, 1993 between Fox
Children Network and Film Roman, Inc.
+10.24 Agreement dated September 12, 1994 between Film Roman, Inc. and Tone Loc, Inc.
+10.25 Agreement dated as of May 7, 1993 between Film Roman, Inc. and Adelaide Productions, Inc.
+10.26 Amendment dated as of May 18, 1994 revised as of June 14, 1994 between Film Roman, Inc. and
Adelaide Productions, Inc.
+10.27 Amendment dated as of June 20, 1994 revised as of July 7, 1994 between Film Roman, Inc. and
Adelaide Productions, Inc.
+10.28 Agreement dated November 9, 1993 between Film Roman, Inc. and Felix The Cat Creations, Inc.
+10.29 Agreement dated as of June 28, 1994 between CBS Entertainment and Film Roman, Inc.
+10.30 Agreement dated September 27, 1994 between Felix The Cat Creations, Inc. and Film Roman, Inc.
+10.31 Letter Agreement dated June 6, 1995 between Felix The Cat Corporation and Film Roman, Inc.
+10.32 Agreement dated September 1, 1995 between Felix Comics, Inc. and Film Roman, Inc.
+10.33 Agreement dated November 20, 1995 between Felix The Cat Creations, Inc. and Film Roman
+10.34 Amendment to Output Distribution Agreement dated February 1, 1994 between Film Roman,
Inc. and Taurus Film GmbH & Company
+10.35 Output Distribution Agreement dated as of September 1, 1994 between Film Roman, Inc. and
Taurus Film GmbH & Company
+10.36 Agreement dated April 1, 1991 between United Media/Mendelson Production and Film Roman, Inc.
re: Prime Time Television special
+10.37 Agreement dated April 1, 1991 between United Media/Mendelson Production and Film Roman, Inc.
re: Saturday Morning Series
+10.38 Co-Production Agreement dated June 11, 1993 between Canal Plus and Bluebird Toys (the
U.K.) Limited and Film Roman, Inc. regarding Mighty Max
+10.39 Agreement dated April 12, 1994 between Canal Plus and Bohbot Entertainment Worldwide, Inc. and
Film Roman, Inc
+10.40 Form of Agreement between Film Roman, Inc. and Threshold Entertainment
+10.41 Agreement dated as of March 30, 1995 as revised May 10, 1995 between Film Roman, Inc. and
Greengrass Productions, Inc.
+10.42 Agreement dated as of April 15, 1996 between Film Roman, Inc. and The Harvey Entertainment
Company
+10.43 Agreement dated as of January 29, 1992 between Film Roman, Inc. and 20th Television
+10.44 Agreement dated as of March 7, 1996, between Film Roman, Inc. and LUK International
+10.45 Agreement dated as of May 22, 1996, between Film Roman, Inc. and Canal-Plus--Spain
+10.46 Co-Production Agreement between Television Espanola, S.A. and Film Roman, Inc.
+10.47 Commitment Letter dated September 9, 1996 from certain stockholders of Film Roman California
*10.48 Employment Agreement dated as of August 1, 1997 by and between Film Roman California and Mr.
Jon Vein
11 Earnings Per Share
+21.1 Subsidiaries of the Registrant
27 Financial Data Schedule
99.1 Press Release dated August 27, 1997 re: appointment of David B. Pritchard
</TABLE>
- --------------------
13
<PAGE>
+ Incorporated by reference to the similarly numbered exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-03987)
as filed with the Securities and Exchange Commission on September 30, 1996.
* Management contract or other compensation plan or arrangement.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 1997.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 14, 1997
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 3.3
CERTIFICATE OF SECRETARY
The undersigned, being the duly elected Secretary of Film Roman, Inc.,
a Delaware corporation (the "Corporation"), does hereby certify that the
following resolution was duly adopted by the Corporation's Board of Directors at
a meeting held on August 5, 1997, and that said resolution is in full force and
effect as of the date hereof:
RESOLVED, that the first sentence of Article III, Section 2. Number
and Qualification of Directors, of the Bylaws of Film Roman, Inc. shall be
amended in its entirety as follows:
The number of directors of the corporation shall be at least six (6),
but not more than nine (9), with the actual number of directors to be determined
from time to time by a resolution of the board of directors.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this
13th day of November, 1997.
/s/ Dixon Q. Dern
----------------------------
Dixon Q. Dern
Secretary
<PAGE>
EXHIBIT 10.48
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
THIS AGREEMENT (this "Agreement") is made as of the 1st day of August,
1997, by and between FILM ROMAN, INC., a California corporation, 12020 Chandler
Street, North Hollywood, California 91607 ("Company") and JON F. VEIN, c/o Patti
Felker, Esq., Nelson, Guggenheim, Felker & Levine, 10880 Wilshire Blvd., Suite
2070, Los Angeles, California 90024 ("Executive").
In consideration of the mutual covenants contained herein and other
good and valuable considerations, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Employment:
----------
1.1 Company shall employ Executive and Executive accepts such
employment with the Company upon the terms and conditions set forth in this
Agreement.
1.2 During the Term (defined below), Executive shall serve as Senior
Vice President, performing (i) services as supervisor of the business affairs,
internal legal areas, features and all interactive and information technology
areas of the Company and (ii) services involved in exploring and developing
areas of activity in which the Company might be involved including additional
feature length motion pictures, and (iii) any other duties, including all
activities incidental thereto, customarily associated with Executive's title and
job description in businesses with operations similar to that of Company, and
such other duties which are consistent with Executive's title as may be assigned
to him by the Company's Board of Directors (the "Board") or its successors or
assigns. Nothing herein shall be construed as limiting a review of Executive's
title during the Term.
1.3 Executive shall devote Executive's best efforts and Executive's
exclusive full business time and attention (as required by the President or the
Board) to the business and affairs of Company and its subsidiaries, if any. In
connection with the foregoing, Executive shall be expected to render services at
such times (including full business hours) and at such places as the Board may
from time to time designate; provided, however, that if Company were to
designate or to determine that Executive is to render services outside of the
Metropolitan Los Angeles Area, Executive shall not be required to render such
services for any continuous period of more than thirty (30) days without his/her
consent.
1.4 Executive shall only report to the Chairman and the Chief
Executive Officer of the Company.
1.5 Executive shall perform Executive's duties and responsibility to
the best of Executive's abilities in a diligent, trustworthy, business-like and
efficient manner and shall comply with Company's reasonable instructions and
regulations in all matters, including, if applicable, artistic taste.
<PAGE>
1.6 Reference is made to Company's "Employee Handbook" as the same
may be currently in effect or hereafter modified (modifications, if any, which
are inconsistent with specific provisions of this Agreement shall not be deemed
incorporated herein). Executive acknowledges that Executive has reviewed and is
aware of the contents of such Handbook. Said Employee Handbook shall be deemed
a part of this Agreement. Notwithstanding the foregoing, termination of
Executive's employment shall be governed by Section 3 of this Agreement.
1.7 Executive shall cooperate with Company to enable Company to
obtain, at its expense, life insurance on the life of Executive for the benefit
of Company in such amounts as Company may from time to time determine; provided,
however, that failure to qualify for such life insurance shall not be deemed a
breach of this Agreement.
2. Term:
----
2.1 The term (herein "Term") of this Agreement shall commence as of
August 4, 1997, and shall continue, unless sooner terminated as elsewhere
provided, for one (1) "contract year," as defined below.
2.2 The term "contract year" as used above means a period of fifty-
two (52) consecutive weeks.
3. Termination:
-----------
3.1 Company's Right to Terminate: Company shall have the right to
----------------------------
terminate the Term of this Agreement prior to the expiration date specified
herein:
(i) Upon the death of Executive;
(ii) For cause. "Cause" as used herein means (a) commission of
a felony or a crime involving moral turpitude or the commission of any
other act involving willful malfeasance with respect to Company, (b)
conduct tending to bring Company into substantial public disgrace or
disrepute, (c) gross negligence or willful misconduct with respect to
Company or (d) any other material breach of this Agreement. Company shall
be entitled to terminate this Agreement pursuant to clauses (c) and (d)
herein only if Executive fails to cure such defect within three (3)
business days following Executive's receipt of written notice of
Executive's failure to satisfy Executive's obligations under this
Agreement; and
(iii) without cause (it being understood that termination of the
Term pursuant to Section 7 and 8 of this Agreement are considered
terminations without cause).
2
<PAGE>
3.2 Effect of Termination:
---------------------
(a) With Cause: If Company terminates this Agreement for cause
----------
Company shall have no further obligation to pay Executive any salary payments
(other than accrued but unpaid salary, vacation, expense reimbursement, if any,
and retirement benefits, if any) and no further obligation to pay any bonuses
other than those theretofore earned, but unpaid, it being understood that the
bonus referred to in paragraph 4.3(a) below is fully earned.
(b) Other: If Company terminates this Agreement for death,
-----
disability or without cause Company shall have the obligation to pay accrued
bonus, if any, for Company's fiscal year (the "fiscal year") when such
termination occurs (pro-rated to reflect the number of days worked in such year
prior to termination), vacation, unpaid expense reimbursement, and accrued but
unpaid retirement benefits, if any. If termination is because of death or
disability, base salary shall be prorated to time of termination; if termination
is without cause, Company shall pay all remaining salary for the remainder of
the then current term, provided however that such salary payments shall be
mitigated and reduced by any payments which Executive may receive during such
period for services rendered whether as an Executive, an independent contractor,
or as a self-employed person.
3.3 Termination by Executive:
------------------------
Executive may terminate this Agreement within ninety (90) days
after September 15, 1997. In such event, the Company shall have the obligation
to pay all accrued but unpaid salary, bonus, if any, for the Company's 1997
fiscal year (pro-rated to reflect the number of days worked in such year prior
to termination), vacation, expense reimbursement, if any, and retirement
benefits, if any.
4. Salary and Bonuses: Provided Executive fully and faithfully renders
------------------
all services required hereunder and is not otherwise in material, uncured
(within 30 days) breach hereof, Company will pay salary (in equal weekly or by-
weekly installments) and bonuses as follows:
4.1 Base Salary:
-----------
$225,000.00 for the Term, payable in weekly or bi-weekly
installments, as Company elects.
4.2 Signing Bonus:
-------------
Additionally, upon execution hereof, Company shall pay Executive
a one-time signing bonus of Twenty-Five Thousand ($25,000.00) Dollars.
3
<PAGE>
4.3. Feature Film Bonuses:
--------------------
(a) Executive shall receive bonuses with respect to the project
currently entitled, "There Goes The Neighborhood," which is the subject of a
development-production agreement (the "DP Agreement") between Company and
Universal Pictures dated as of March 4, 1996. Such bonuses shall equal
(i) five (5%) percent of all fees including producing fee
(limited to $1.0 million) and the animation production fee (of $1.5 million
to $2 million) which are referred to in paragraphs 6.(a)(ii) and 6(b),
respectively, of the DP Agreement; and
(ii) seven (7%) percent of the contingent payments of all
types (including advances thereon) from all sources referred to in
paragraphs 7, 10(g), 10(h) and 10(j) of the DP Agreement.
Said bonuses shall be payable only to the extent Company actually receives
revenues upon which bonuses are based and at the time when the same are so
received by Company, or within sixty (60) days thereafter, whether such revenues
are received during or after the Term. If Company becomes obligated to return
any portion of a payment, Executive shall likewise return his share of the same.
The bonuses referred in this subparagraph (a) are fully vested.
(b) Executive shall be eligible to receive bonuses with respect
to any additional feature length film projects intended for initial theatrical
release ("feature length films") which Executive initiates or sets up during the
Term and which results in commencement of principal photography or animation
(i.e. both storyboard and subsequent animation activities) within three (3)
years of the date when a firm commitment is entered into for such project it
being understood that "setting up" as used herein means the securing of a firm
commitment for development of the project, with the understanding that such
commitment may be on a "step" basis whereby the contracting party has an option
(as opposed to an obligation) to proceed with principal photography or
animation.
Notwithstanding the foregoing the maximum number of feature
length film projects as to which Executive will be entitled to receive bonuses
under this subparagraph (b) shall be five (5), (in addition to "There Goes The
Neighborhood"); however if Executive were to secure a multiple picture agreement
during the Term, Company will give good faith consideration as to whether or not
to consider all of the feature length films covered under that multiple picture
commitment as one (1) picture commitment for purposes of determining the
limitation of five (5) films referred to above, but the decision of Company,
acting reasonably, shall be final. If Company becomes involved in any feature
films submitted by or through David Pritchard and/or Pritchard/Ecclesine
Productions, Inc. which are in development as of the date of this Agreement, the
same shall not be treated as a feature length film hereunder.
4
<PAGE>
The bonuses as to which Executive shall be eligible with
respect to such additional feature length films are as follows:
(i) five (5%) percent of any fixed executive producer fees,
animation production fees, or corporate production fees of the types
referred to in paragraphs 6.(a) and 6.(b) of the DP Agreement, no matter
how characterized; and
(ii) seven (7%) percent of any contingent payments of
adjusted gross receipts, net profits or the like (however denominated) from
all sources including but not limited to revenues which are actually
received by Company from distribution and exploitation of any such feature
length film and from ancillary, subsidiary and/or merchandising rights
relative thereto.
Said bonuses shall be payable only to the extent Company actually receives
revenues upon which such bonuses are based and at the time when the same are so
received by Company, or within sixty (60) days thereafter, whether such revenues
are received during or after the Term. If Company becomes obligated to return
any portion of a payment, Executive shall likewise return his share of the same.
(c) If for any reason there is a dispute as to who has initiated
or set up a feature length film project the determination shall be made by an
arbitrator or arbitrators pursuant to paragraph 15 of this Agreement, with the
understanding that the arbitrator(s) will be instructed that his/her/their
decision need not be an "all or nothing at all" decision, i.e. the arbitrator(s)
can award all or a portion of or none of the bonus to Executive depending upon
the determination as to Executive's involvement in a particular project.
4.4 Company's obligation for payment of compensation hereunder shall
be subject to all present and future laws, rules, regulations and Executive
orders affecting such obligation. No withholding, deduction, reduction or
limitation of payments hereunder by reason of any such law, rule, regulation or
order shall be deemed a breach of this Agreement or relieve Executive from
Executive's obligations hereunder or give Executive any right to terminate this
Agreement. If Company is unable to make full payments hereunder because of any
wage control law or regulation, Company shall pay Executive any portion of such
payment (which is not paid when due) at such time when such law or regulation no
longer prohibits such payment (unless such law or regulation prohibits such
retroactive payments).
5. Expenses:
--------
5.1. (a) Executive is authorized to incur reasonable expenses in
connection with Company's business in such amounts as may be from time to time
approved by the Company. Company agrees to pay or to reimburse Executive for
such expenses which are reasonably incurred by Executive on behalf of or for the
benefit of Company within 30 days of the presentation by Executive of an
itemized account of such expenditures setting forth the date, the purposes for
which incurred, and the amounts thereof, and such other information as
5
<PAGE>
Company may reasonably require, together with such receipts showing payments as
Executive has been able to obtain; provided, however, that Executive shall not
be required to obtain approval of reasonable expenses incurred in connection
with business lunches.
(b) Further, Executive shall be entitled to a Company telephone
and corporate credit card. Executive shall also be entitled to a car allowance
in the amount of Five Hundred Dollars ($500.00) per month, which amount shall be
reported on Executive's W-2 or Form 1099 (as Company may determine) and shall
cover all normal work-related automobile expenses and shall be payable in
accordance with Company's then-existing policies (currently, payment to be made
at the beginning of each applicable month). Executive shall also be reimbursed
for the monthly "base rate" on one cellular phone and for all reasonable
cellular phone charges related to Executive's duties under this Agreement.
Additionally, Company will reimburse Executive for California State Bar
membership fees as well as local Bar association membership fees, American Bar
Association membership fees and reasonable fees associated with legal seminars
in Los Angeles County attended by Executive in order to obtain MCLE credit
required by the California State Bar; reimbursement for any other organizational
membership fees shall be subject to Company's prior reasonable approval. The
Company shall furnish Executive with air travel and ground travel, as required.
Air travel shall be business class if three classes of travel are furnished on
any flight (unless any other employees, clients or business associates are in
first class on such flight) and shall be first class if only two classes of
travel are furnished on such flight.
(c) Executive shall be entitled to a full-time secretary.
6. Benefits:
--------
6.1 Medical Plans, etc.
-------------------
(a) During the Term, Executive shall also be entitled to and
shall be accorded all rights and benefits under any life insurance, health and
major medical insurance policy or policies, and any other plans or benefits,
pension plans which Company may provide for Executives generally during the
Term. The Company agrees that it shall provide Executive with such rights and
benefits under such life insurance, health and major medical insurance policy or
policies that are comparable to the rights and benefits afforded to any other
Senior Vice President or Executive Vice President of the Company.
(b) During each contract year Executive shall also be entitled to
(i) three (3) weeks of paid vacation at times to be mutually agreed to and (ii)
sick leave, both in accordance with Company's policy. In the event Executive's
employment is terminated during any contract year pursuant to Section 3 of this
Agreement, Executive shall be paid for his accrued but unused vacation time
(pro-rated based on the number of days for which Executive was employed during
any contract year).
6
<PAGE>
6.2 Employee Stock Options:
----------------------
(a) Executive is currently entitled to participate in the
Company's Stock Option Plan in accordance with the Stock Option Agreement
heretofore entered into between Company and Executive. There shall be no change
in Executive's rights under said Agreement; provided, however, that if, during
the Term, the Company should reduce the exercise price of all or a portion of
the options granted to any employee of the Company who was an employee prior to
August 22, 1997 (other than Phil Roman) (the "Existing Employees") to a per
share exercise price less than the per share exercise price of the options
granted to Executive in January 1996 and/or if the Company should issue
additional stock options, stock or stock appreciation rights to any Existing
Employee, Executive shall be entitled to have that portion of his options re-
priced to equal such lower exercise price (in the same portion as the portion of
the options that were re-priced to such Existing Employee) and shall be entitled
to receive such additional options, stock or stock appreciation rights, as the
case may be, upon the same terms as the additional options, stock or stock
appreciation rights issued to such Existing Employee; it being understood that
this "most favored nations" provision will not apply to stock options granted to
Phil Roman or any employee that is not an Existing Employee.
7. Incapacity:
----------
7.1 If Executive is physically or mentally incapacitated from
rendering services hereunder, and if Executive's incapacity or disability shall
continue for a period or aggregate of periods of sixty (60) days or more during
any contract year of the Term of this Agreement, Company may, at its option,
terminate and cancel Executive's employment hereunder by notice mailed or
delivered to Executive at any time prior to Executive's return to work
hereunder. Executive shall be deemed to be physically or mentally incapacitated
if Executive is unable for any reason whatsoever to devote full time to the
business of the Company, as determined by the Board.
7.2 If Company determines that Executive is permanently disabled and
if Executive does not agree, determination shall be made by a panel of three (3)
doctors, the first to be chosen by Company, the second to be chosen by Executive
and the third to be chosen by the first two. Any doctor selected by a party
will not be affiliated, associated or related to the party selecting that doctor
in any manner whatsoever. The opinion of a majority of the panel of doctors
shall be binding on the parties hereto. Each party shall bear its own cost for
their own doctor, and the parties shall split the cost of the third doctor
(unless it is determined that Executive is not permanently incapacitated, in
which even all doctor costs shall be borne by Company).
8. Force Majeure; Discontinuance of Business:
-----------------------------------------
8.1. If Company is prevented from or materially hampered or
interrupted in conducting its business by reason of any present or future
statute, law, ordinance, regulation, order, judgment or decree, or by reason of
any act of God, or by reason of any contingency beyond the control of Company,
then, if all other Employees are also suspended. Executive's
7
<PAGE>
services and compensation hereunder may be suspended as often as any such event
occurs and during such period of time as any such event continues while all such
other Employees' salaries continue to be suspended. The term of this Agreement
shall automatically be extended by the period of any suspension hereunder. If
such suspension continues for eight (8) consecutive weeks or more either party
may terminate the Term while such suspension is still in effect, except that
Company may negate Executive's termination by then terminating such suspension
with the understanding that the Term may not again be suspended for the same
cause.
9. Company's Rights:
----------------
9.1 Executive acknowledges that Company, as employer of Executive,
shall own all right, title and interest in and to the results of Executive's
services hereunder, including all material developed or conceived by Executive
within the scope of Executive's employment. Company shall have the right to use
all such materials and the elements thereof and the programs or other
productions in which the material is contained worldwide and in perpetuity,
without limitation or restriction whatsoever and Company may distribute,
broadcast and otherwise exhibit, use and/or exploit, in whole or in part,
worldwide, in perpetuity, same in any manner and through any media, whether
presently in existence or subsequently devised, as Company may elect. Executive
hereby waives the so-called "moral rights" of an author. Executive agrees and
acknowledges that for purposes of Section 201 of the United States Copyright Act
and for ownership purposes, Company is the "employer for hire" of Executive and
shall have all ownership rights in the material and services of Executive
hereunder as the author thereof. Company shall have no obligation to use the
product of Executive's services.
9.2. Without limiting the foregoing, Executive agrees that all
inventions, innovations, improvements, developments, methods, designs, analyses,
drawings, reports, and all similar or related information which relates to
Company's or any of its subsidiaries' actual or anticipated business, research
and development or existing or future products or services and which are
conceived, developed or made by Executive within the scope of Executive's
employment while employed by Company or its predecessor belong to Company or
such subsidiary. Executive will promptly disclose to the Board and perform all
actions reasonably requested by the Board (whether during or after the Term) to
establish and confirm such ownership (including, without limitation,
assignments, consents, powers of attorney and other instruments).
9.3. Company shall have the right to use, disseminate, reproduce,
print and publish Executive's name, approved likeness, voice and approved
biographical material concerning Executive as news or informative matter in
connection with Company's business. Executive has the right to approve, which
approval shall not be unreasonably withheld, any trade announcement concerning
Executive.
9.4. Executive's services and rights herein granted are unique in
character and value such that the loss thereof could not be reasonably
compensable in damages in an action at law. Accordingly, Company shall be
entitled to seek equitable relief by way of injunction or otherwise to prevent
the breach or continued breach of this Agreement. The sole right of
8
<PAGE>
Executive as to any breach or alleged breach hereof by Company shall be the
recovery of money damages, and the rights herein granted by Executive shall not
be terminated by reason of such breach. The waiver by either party of any
breach hereof shall not be deemed a waiver of any prior or subsequent breach
hereof. All remedies of either party shall be cumulative and the pursuit of one
remedy shall not be deemed a waiver of any other remedy.
10. Federal Communications Act:
--------------------------
Reference is hereby made to Section 507 of the Federal Communications
Act, making it a criminal offense for any person, in connection with the
production or preparation of any program intended for broadcasting, to accept or
pay any money, service or other valuable consideration for the inclusion of any
matter as part of any such program or program matter without disclosing in
advance the same to the employer of the person to whom such payment is made or
to the person for whom such program is being produced, or to the station over
which such program is broadcast. Executive understands that it is the policy of
Company not to permit any Employee of Company to accept or pay any such
consideration, and Executive represents and agrees that Executive has not
accepted and will not accept, and has not paid and will not pay, any money,
services, or other valuable consideration for the inclusion of any "plug,"
reference or product identification, or any other matter in the programs
produced hereunder.
11. Confidential Information:
------------------------
Executive acknowledges that the information, observations, work
product, trade secrets and data obtained by Executive while employed by Company
and its subsidiaries concerning the business or affairs of the Company or any
subsidiary thereof ("Confidential Information") are the property of Company or
such subsidiary. Therefore, Executive agrees that Executive shall not disclose
to any unauthorized person or use for Executive's own account any Confidential
Information without the prior written consent of the Board, unless and to the
extent that the aforementioned matters (i) become generally known to and
available for use by the public other than as a result of Executive's acts or
omissions to act or (ii) must be disclosed under a subpoena or other
governmental order or (iii) was possessed by Executive prior to Executive's
employment by the Company, or (iv) are within the scope of Executive's duties.
Executive shall deliver to Company at the termination of the employment period,
or at any other time Company may request, all memoranda, notes, plans, records,
reports, computer tapes and software and other documents and data (and copies
thereof) relating to the Confidential Information, work product or the business
of Company or any subsidiary which Executive may then possess or have under
Executive's control; provided, however, that Executive shall be permitted to
retain his rolodex and legal form files.
12. Non-Compete, Non-Solicitation:
-----------------------------
12.1 Executive acknowledges that in the course of Executive's
employment with Company, Executive has and will become familiar with
Confidential Information concerning Company and its subsidiaries and that
Executive's services have been and will be of special, unique and extraordinary
value to Company and its subsidiaries. Therefore, during
9
<PAGE>
the Term, Executive will not be an Executive, consultant, advisor, director,
shareholder or partner of any other person, firm or corporation; provided that
Executive may, in any event, own up to five (5%) percent of the stock of a
publicly-held corporation whose stock is traded on a national securities
exchange or in an over-the-counter market.
12.2 During Executive's employment and for two (2) years after the end
of the Term Executive will not attempt to hire or to solicit (for Executive's
own purposes or for any other company) any Employee of or independent contractor
rendering exclusive services to Company at the time of such attempt or
solicitation. Further, during Executive's employment and for two (2) years
after the end of the Term Executive will not (i) transfer or attempt to transfer
any projects in which Company is involved (whether in negotiation, development
or production) from Company to Executive or to any other company and/or (ii)
encourage any company or business with whom Company is doing business (e.g. a
network or other exhibitor) from ceasing to do business with Company with
respect to any project which is then in negotiation, development or production.
13. Notices: All notices required to be given hereunder shall be in
-------
writing and shall be delivered personally, electronically, or by express,
certified or registered mail to the respective addresses of the parties hereto
set forth elsewhere in this Agreement, or at such other addresses as may be
designated by written notice. Delivery of any notice shall be deemed
conclusively made (i) if personally delivered at the time of delivery, (ii) if
delivered by transmittal over electronic or telephonic transmitting devices
(such as telex or telecopy) to the addressee's telecopy or telex number, at the
time of transmittal, provided that the party to whom the notice is delivered has
a compatible device, (iii) if delivered by any private overnight express mail
service, twenty-four (24) hours after deposit with such service (this period
shall be seventy-two (72) hours if addressed to or from a party outside the
United States), (iv) if mailed, properly addressed and postage prepaid, three
(3) business days from date of mailing (seven (7) business days if mailed to or
from a country other than U.S.). A copy of any notice hereunder to Company
shall also be given to the Law Offices of Dixon Q. Dern, P.C., 1901 Avenue of
the Stars, Suite 400, Los Angeles, California 9967; a copy of any notice to
Executive shall also be given to Executive, 2731 Oakhurst Avenue, Los Angeles,
CA 90034 and to Nelson, Guggenheim, Felker & Levine LLP, 10880 Wilshire
Boulevard, Suite 2070, Los Angeles, California 90024; Attention: Patti C.
Felker, Esq.
14. Immigration:
-----------
Company's engagement of Executive is subject to Executive's compliance
with the terms and provisions of the Federal Immigration and Naturalization Act.
In that regard concurrently with the execution of this Agreement Executive shall
provide Company with such proof of Company's United States Citizenship or
authorization to work in the United States as may be required by the Immigration
and Naturalization Service and shall also complete and return to Company an I-9
Form or such other forms as may be required. The Company acknowledges that
Executive has provided such proof, authorization or information required
pursuant to this Section 14.
10
<PAGE>
15. Arbitration:
-----------
Any controversy or claim arising out of, or relating to, this
Agreement, the breach thereof, or the coverage of this arbitration provision
shall be settled by arbitration pursuant to the provisions of Section 1280, et
seq. of the California Code of Civil Procedure (or such substitute provisions
therefor then in effect); provided, that any arbitrator(s) selected shall have
experience in or knowledge of the business(es) in which Company is engaged. Any
such arbitration shall be conducted in Los Angeles, California. The arbitration
of such issues, including the determination of the amount of any damages
suffered by any party hereof by reason of the acts or omissions of another shall
be to the exclusion of any court of law except as set forth below. The decision
of the arbitrators or a majority of them shall be final and binding on all
parties and their respective heirs, executors, administrators, successors and
assigns. Any action to secure a judicial confirmation of the arbitration award
may be brought in any state or federal court of competent jurisdiction. If the
parties or the arbitrators appointed by them are unable to agree upon the
selection of a neutral arbitrator then either party may, at its election,
require that the arbitration shall be conducted under the auspices and rules of
the American Arbitration Association (AAA) and that the neutral arbitrator shall
be selected by the AAA. Arbitration hereunder shall not, in any event, (i)
prevent any party from seeking and obtaining equitable relief, including, but
not limited to, prohibitory or mandatory injunctions, specific performance or
extraordinary writs, in any court of law or equity having jurisdiction, nor (ii)
prevent any party from joining any other party as defendant in any action
brought by or against a third party, nor (iii) prevent any party from filing
legal action hereunder to effectuate any attachment or garnishment, provided
that such party stipulates in such action, at any other party's request, to
arbitration on the merits of said case, nor (iv) prevent a party from filing
legal action to compel arbitration under the arbitration provisions hereof.
16. General Provisions:
------------------
16.1 Warranties: Executive warrants that he[she] is free to enter
----------
into this Agreement and will not knowingly do or permit any act which will
interfere with or derogate from the full performance of his services or
Company's exercise of the rights herein granted.
16.2 Indemnity: Executive shall hold Company, its licensees and
---------
assigns, and the directors, officers, Employees and agents of the foregoing,
harmless from all claims, liabilities, damages, costs and legal fees arising
from any breach by Executive of any warranty or agreement made by Executive
hereunder. Company will hold Executive harmless from all claims, liabilities,
damages, costs and legal fees arising from the use of any material supplied
Executive by Company or incorporated at Company's discretion or in connection
with or arising out of the performance of his duties pursuant to this Agreement.
The party receiving notice of any claim or action subject to indemnity hereunder
shall promptly notify the other party. This indemnity shall survive any
termination or expiration of this Agreement.
16.3 Waiver: A waiver by either party of any of the terms or
------
conditions of this Agreement in any one instance shall not be construed to be a
waiver of such term or condition for the future, or any subsequent breach
thereof; all remedies, rights, undertakings,
11
<PAGE>
obligations and agreements contained in this Agreement shall be cumulative, and
none of them shall be in limitation of any other remedy, right, undertaking,
obligation or agreement of either party.
16.4 Construction: This Agreement shall be governed by and construed
------------
in accordance with the laws of the State of California applicable to contracts
entered into and fully to be performed therein. In view of the fact that this
Agreement was in whole or in part negotiated and entered into in California, the
parties consent to and agree to submit to the jurisdiction of the courts of the
State of California (and/or the federal courts within California), and each
party agrees that service of process may be effected by mail (certified or
registered mail, return receipt requested), to or by personal service upon such
party (or any officer of a corporate party) at such party's address as set forth
in this Agreement or such other address as such party may specify in writing.
Wherever the context of this Agreement requires it, each gender shall
be deemed to embrace and include the others, and the singular shall be deemed to
embrace and include the plural.
16.5 Severability of Provisions: If any provision hereof as applied
--------------------------
to either party or to any circumstance shall be adjudged by a court to be void
or unenforceable, the same shall in no way affect any other provisions hereof,
the application of such provision in any other circumstances or the validity or
enforceability hereof.
16.6 Entire Understanding: This Agreement contains the entire
--------------------
understanding of the parties hereto relating to the subject matter herein
contained and supersedes any and all prior negotiations, understanding and
agreements between the parties (whether oral or in writing); this Agreement
cannot be changed, rescinded or terminated except by a writing signed by the
Company.
16.7 Successors and Assigns: Except where expressly provided to the
----------------------
contrary, this Agreement, and all provisions hereof, shall inure to the benefit
of and be binding upon the parties hereto, their successors in interest,
assigns, administrators, executors, heirs and devisees.
16.8 Paragraph Titles: The titles of the paragraphs of this Agreement
----------------
are for convenience only and shall not in any way affect the interpretation of
any paragraphs of this Agreement or of the agreement itself.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
FILM ROMAN, INC.
"Company"
By /s/ Phil Roman
------------------------------
Its Chairman
/s/ Jon F. Vein
------------------------------
JON F. VEIN, "Executive"
13
<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,
1996 1997 1996 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding.......... 2,141,250 8,454,690 2,141,250 8,453,023
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)......................... 937,500 ---- 937,500 ----
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......................... 1,745,769 ---- 1,745,769 ----
---------- ----------- ----------- -----------
4,824,519 8,454,690 4,824,519 8,453,023
========== =========== =========== ===========
Net loss attributable to common stock........ $ (590,697) $(3,195,129) $(2,297,698) $(3,795,413)
========== =========== =========== ===========
Net loss per share........................... $ (0.12) $ (0.38) $ (0.48) $ (0.45)
========== =========== =========== ===========
</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 PERIODS ENDED SEPTEMBER 30, 1997, 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-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 15,428,605 15,428,605
<SECURITIES> 0 0
<RECEIVABLES> 3,857,799 3,857,799
<ALLOWANCES> 0 0
<INVENTORY> 19,711,792 19,711,792
<CURRENT-ASSETS> 0 0
<PP&E> 1,527,826 1,527,826
<DEPRECIATION> 1,103,902 1,103,902
<TOTAL-ASSETS> 39,859,140 39,859,140
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 84,548 84,548
<OTHER-SE> 36,305,684 36,305,684
<TOTAL-LIABILITY-AND-EQUITY> 39,859,140 39,859,140
<SALES> 10,475,613 29,717,115
<TOTAL-REVENUES> 10,475,613 29,717,115
<CGS> 12,712,838 30,643,694
<TOTAL-COSTS> 12,712,838 30,643,694
<OTHER-EXPENSES> 1,142,930 3,318,752
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 185,026 449,918
<INCOME-PRETAX> (3,195,129) (3,795,413)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,195,129) (3,795,413)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,195,129) (3,795,413)
<EPS-PRIMARY> (0.38) (0.45)
<EPS-DILUTED> 0 0
</TABLE>
<PAGE>
EXHIBIT 99.1
FOR IMMEDIATE RELEASE
AUGUST 27, 1997
FILM ROMAN APPOINTS DAVID PRITCHARD PRESIDENT AND CHIEF
EXECUTIVE OFFICER
NORTH HOLLYWOOD, CA. AUGUST 27, 1997 - Film Roman today announced the
appointment of industry veteran David B. Pritchard to the position of President
and Chief Executive Officer. Pritchard, who has extensive creative and
corporate experience within the entertainment industry, will join Film Roman in
September.
With a career in the industry spanning over 16 years, Pritchard has
experience in most aspects of TV and film production. In addition to various
senior corporate roles at HBO and Gulf & Western (Paramount), Pritchard has
established and operated two successful production companies.
Phil Roman will remain as Chairman and will continue to play an active
role in the company. Commenting on the appointment, Roman said, "We are
delighted to have David aboard as President and CEO. This will allow me the
opportunity to focus my efforts on the creative process which is what I enjoy
most. I am looking forward to working with my creative team on the development
of new animation products and allowing David to focus on the business aspects of
the company."
Pritchard was previously CEO and partner of Pritchard/Ecclesine, a live
action and animated TV and Film Production company. It is anticipated that
several of the productions currently underway will be transferred from
Pritchard/Ecclesine to Film Roman for continued development. From 1990 through
1996, Pritchard was Founder and President of Popular Arts Entertainment, Inc. a
broad based production company. Under his leadership, Popular Arts grew into
one of the more successful reality television production companies producing
pilots, specials, and series for Comedy Central, A&E, CBS, fX, New Line
Syndication and more. As well, Pritchard was instrumental in creating several
computer animation programs, including the award winning, "Dr. Katz Licensed
Therapist" for Comedy Central. In 1995, Pritchard and Popular Arts produced one
of the first interactive TV channels to air on Time Warner Full Service Network.
The channel was a family home entertainment guide hosted by animated characters.
From 1983 to 1989, Pritchard was vice president corporate affairs at HBO where
he was responsible for all public and financial affairs including responsibility
for relationships with Wall Street. From 1979 to 1983 he was director of
corporate planning and human resources at Gulf & Western where, during his time
the corporation acquired or divested over sixty different companies. Prior to
1979, Pritchard held various corporate positions, including vice president of
financial planning at Chase Manhattan Bank, planning analyst
<PAGE>
with Schlumberger Ltd., and various management consultancy positions. He was
educated at Missouri State University and Washington University in St. Louis.
"We believe David Pritchard is the executive we have been looking for to
run Film Roman. His superb track record, breadth and depth of entertainment
industry experience make him an ideal candidate to lead the company into the
future," said Roman. "With David leading the Corporation, I am confident we
have an executive with the range of relevant corporate experience necessary to
not only capitalize on the progress we have made to date but also to help return
the company to profitability. David is joining the Company at an exciting
time," concluded Roman.
"Film Roman is emerging from its first year as a public company poised to
strengthen shareholder value. This is a great time to be in the animation
business and I am confident we can capitalize on the worldwide growth
opportunities ahead of us," said David Pritchard. "Film Roman has a reputation
as the standard bearer for prime time animation, and the Company has made a
major contribution to Saturday morning, with "Bruno the Kid", "Bobby's World"
and "Felix the Cat". All of these properties will continue to benefit from Film
Roman's creative nurturing and supportive distribution relationships. In
addition, the Company has a slate of strong projects in development, the ability
to recognize and aggressively acquire new properties, and most of all, strong
creative leadership from founder Phil Roman, who will remain very active.
Finally, the Company is staffed with a wealth of talented people that can
deliver the highest quality of animation on time and budget.
"I can't wait to get to work," Pritchard concluded. "This is a dream job
for someone with business judgment, and creative instincts who likes to work
hard having fun selling cartoons."
Film Roman is the Emmy Award-winning animation studio whose list of credits
include "The Simpsons," "King of the Hill," "Bruno the Kid," "Bobby's World,"
and "The Mask."
When used in the preceding discussion, the words "believes", "expects" or
"intends to" and similar conditional expressions are intended to identify
forward-looking statements. Such forward-looking statements relate to, among
other things, profitability, potential revenue sources, liquidity, future
strategies and growth plans. These forward-looking statements are based largely
on the Company's current expectations and are subject to a number of risks and
uncertainties. Such risks and uncertainties include, but are not limited to,
conditions in the general economy and the entertainment industry, access to
distribution channels, demand for animated programming, the availablity of time
slots for animated programming and other risks described under the caption
"Risks Related to the Business" in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 and in the Company's other SEC reports and
filings. Actual results could differ materially from these forward-looking
statements.
<PAGE>
For more information about Film Roman via facsimile at no cost, simply call
1-800-PRO-INFO and dial client code "ROMN."
