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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 MARCH 31, 1999
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 [ X ] 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 April 30, 1999, 8,524,190 shares of common stock, par value $.01
per share, were issued and outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.......................................... 3
Consolidated Balance Sheets as of December 31, 1998
and March 31, 1999 (unaudited)............................ 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and
March 31, 1999 (unaudited)................................ 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and
March 31, 1999 (unaudited)................................ 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 19
Signatures............................................................... S-1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FILM ROMAN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash and cash equivalents ..................................... $ 11,287,386 $ 9,426,701
Accounts receivable ........................................... 1,089,218 431,296
Film costs, net of accumulated amortization of
$244,777,898 (1998) and $256,174,004 (1999) ................. 20,903,771 20,259,605
Property and equipment, net of accumulated depreciation and
amortization of $1,559,112 (1998) and $1,658,534 (1999) ..... 979,090 904,478
Deposits and other assets ..................................... 489,205 496,462
------------ ------------
Total Assets .................................................. $ 34,748,670 $ 31,518,542
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable .............................................. $ 628,221 $ 614,288
Accrued expenses .............................................. 2,350,695 2,344,363
Deferred revenue .............................................. 19,671,667 16,995,342
------------ ------------
Total liabilities ............................................. 22,650,583 19,953,993
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000
shares authorized, none issued .............................. -- --
Common stock, $.01 par value, 20,000,000 shares authorized,
8,522,190 shares issued and outstanding in 1998 and 1999 .... 85,223 85,223
Additional paid-in capital .................................... 36,305,684 36,305,684
Accumulated deficit ........................................... (24,292,820) (24,826,358)
------------ ------------
Total stockholders' equity .................................... 12,098,087 11,564,549
------------ ------------
Total liabilities and stockholders' equity ............. $ 34,748,670 $ 31,518,542
============ ============
</TABLE>
See accompanying notes.
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FILM ROMAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1999
---------- -----------
<S> <C> <C>
Revenue ............................................... $9,300,710 $12,289,912
Cost of revenue ....................................... 8,968,795 11,396,106
Selling, general and administrative expenses .......... 1,305,069 1,536,025
---------- -----------
Operating loss ........................................ (973,154) (642,219)
Interest income ....................................... 207,447 113,799
Loss before provision for income taxes ................ (765,707) (528,420)
Provision for income taxes ............................ -- 5,118
Net loss .............................................. $ (765,707) $ (533,538)
========== ===========
Net loss per common share basic & diluted ............. $ (0.09) $ (0.06)
========== ===========
Weighted average number of shares outstanding
basic and diluted ................................... 8,460,690 8,522,190
========== ===========
</TABLE>
See accompanying notes.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1999
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss .............................................................. $ (765,707) $ (533,538)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization .................................... 53,139 99,421
Amortization of film costs ....................................... 8,968,795 11,396,106
Changes in operating assets and liabilities:
Accounts receivable .............................................. (137,497) 657,922
Film costs ....................................................... (6,440,232) (10,751,940)
Deposits and other assets ........................................ (188,258) (7,256)
Accounts payable ................................................. (641,301) (13,933)
Accrued expenses ................................................. 156,564 (6,332)
Deferred revenue ................................................. (457,960) (2,676,326)
------------ ------------
Net cash provided by (used in) operating activities .............. 547,543 (1,835,876)
INVESTING ACTIVITIES:
Additions to property and equipment .................................. (96,227) (24,809)
------------ ------------
Net cash used in investing activities ............................ (96,227) (24,809)
FINANCING ACTIVITIES:
Net cash used in financing activities ................................ -- --
Net increase (decrease) in cash ...................................... 451,316 (1,860,685)
Cash and cash equivalents at beginning of period ..................... 15,986,250 11,287,386
------------ ------------
Cash and cash equivalents at end of period ........................... $ 16,437,566 $ 9,426,701
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ......................................................... $ -- $ --
------------ ------------
Income taxes ..................................................... $ 800 $ 1,600
============ ============
</TABLE>
See accompanying notes
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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 subsidiaries, Film
Roman, Inc., a California corporation; Namor Productions, Inc., a California
corporation; Chalk Line Productions, Inc., a California corporation and Level 13
Entertainment, Inc., a Delaware corporation. 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 March 31, 1999 and the results of its operations for the three
months ended March 31, 1998 and 1999 and the cash flows for the three months
ended March 31, 1998 and 1999 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, 1998 (the "Form 10-K") filed with the
Securities and Exchange Commission.
(2) - NET LOSS PER COMMON SHARE
For the three months ended March 31, 1998 and 1999, 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.
(3) - FILM COSTS
The components of unamortized film costs consist of the following:
DECEMBER 31, MARCH 31,
1998 1999 (UNAUDITED)
----------- ---------------
Film productions released,
net of amortization .................... $ 4,185,682 $ 3,978,202
Film productions in process ................... 16,390,064 15,725,757
Film productions in development ............... 328,025 555,646
----------- -----------
$20,903,771 $20,259,605
=========== ===========
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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. THE WORDS "EXPECT", "ESTIMATE",
"ANTICIPATE", "PREDICT", "BELIEVE", "PLAN", "SHOULD", "MAY" AND "PROJECTS" AND
SIMILAR EXPRESSIONS AND VARIATIONS THEREOF ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS RELATE TO, AMONG
OTHER THINGS, TRENDS AFFECTING THE FINANCIAL CONDITION OR RESULTS OF OPERATIONS
OF THE COMPANY, THE 13 EPISODES OF "THE DOWNTOWNERS" ORDERED BY CASTLE ROCK
ENTERTAINMENT AND TENTATIVELY SCHEDULED TO DEBUT ON THE WB NETWORK ("THE WB")
DURING THE FALL 1999 SEASON AND THE TRANSFER OF PRODUCTION RESPONSIBILITY OF THE
"FAMILY GUY" TO TWENTIETH CENTURY FOX TELEVISION; THE COMPANY'S FUTURE
PRODUCTION AND DELIVERY SCHEDULE (INCLUDING THE NUMBER OF EPISODES OF
PROGRAMMING TO BE PRODUCED AND DELIVERED DURING THE 1999-2000 TELEVISION
SEASON); PLANS TO ENTER INTO NEW BUSINESS AREAS BEYOND THE COMPANY'S CORE
BUSINESS OF ANIMATION TELEVISION PRODUCTION; THE COMPANY'S OBJECTIVES, PLANNED
OR EXPECTED ACTIVITIES AND ANTICIPATED FINANCIAL PERFORMANCE 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 "RISK FACTORS" INCLUDED IN
THIS REPORT AND IN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998.
ACTUAL RESULTS COULD DIFFER FROM THESE FORWARD-LOOKING STATEMENTS. THE COMPANY
DOES NOT MAKE PROJECTIONS OF ITS FUTURE OPERATING RESULTS AND UNDERTAKES NO
OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER
AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
GENERAL
Film Roman, Inc. ("Film Roman" or the "Company") develops, produces and
distributes a broad range of television programming for the television network,
cable television, first-run domestic syndication and international markets. In
1998, the Company expanded its operations to include, on a limited basis, the
development and production of feature-length theatrical motion pictures. The
Company, founded in 1984, is one of the leading independent animation studios in
North America, having produced numerous high quality animated series including
BOBBY'S WORLD, THE SIMPSONS, KING OF THE HILL, THE MASK, BRUNO THE KID, C-BEAR
AND JAMAL, THE TWISTED TALES OF FELIX THE CAT, MORTAL KOMBAT, GARFIELD &
FRIENDS, THE CRITIC and most recently THE DOWNTOWNERS.
The Company develops, produces and distributes a broad range of television
programming, and in the past year has expanded its feature motion picture
development efforts. Historically, the Company has produced most 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 animated 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
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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 is currently seeking to enter into new business areas beyond
its core business of animation television production such as live action
television production, feature film production (both live action and animation),
computer generated animation and direct-to-video production (both live action
and animation) and alternative forms of distribution. The Company's future
performance will be affected by unpredictable and changing factors that
influence the success of an individual television program, feature film or
direct-to-video release such as personal taste of the public and critics as well
as public awareness of a production and the successful distribution of a
production. Although the Company intends to attempt to limit the risks involved
with television, film and direct-to-video production, the Company will likely be
unable to limit all financial risk, and the level of marketing, promotional and
distribution activities and expenses necessary for such production cannot be
predicted with certainty. The Company has a very limited history of developing,
producing or distributing live action television, computer generated animation
or film productions, and there can be no assurance that the Company can compete
successfully with more established persons or entities. Live action production
involves many of the risks associated with animation production as well as
additional risks inherent to live action that are outside of the Company's
control. These risks include, but are not limited to, the risk of strike by
actors and film crew, increased union activity, delay in production due to
weather and other local conditions, inability to obtain proper permitting at a
desired site, at desired times and/or under desired terms, and accidents or
injury to actors and film crew. No assurance can be given that the Company will
produce any live action television, film or direct-to-video productions or that,
if produced, such productions will be profitable.
RECENT DEVELOPMENTS
On May 13, 1999, Twentieth Century Fox Television and the Company announced
that due to production differences, the companies have mutually agreed that Fox
should take over animation responsibilities of FAMILY GUY effective June 1,
1999. Fox has decided to bring the animation in-house. The Company has agreed to
work closely with Fox during the transition period. Through March 31, 1999, the
Company substantially completed production of 15 episodes and delivered one
completed episode of FAMILY GUY. The gross margin earned on the delivery of the
FAMILY GUY episode in the first quarter of 1999 was not material to results of
operations.
THE COMPANY'S 1999-2000 PRODUCTION SCHEDULE
Historically, the Company's primary source of revenue has been the
development and production of high quality, prime time and Saturday morning
animated series.
The market for television programming is composed primarily of the
broadcast television networks (ABC, CBS, NBC, Fox, United Paramount Network and
Warner Bros., a division of Time Warner Entertainment Company L.P.), syndicators
of first-run programming (such as Columbia, Inc., and Buena Vista Television)
which license programs on a station-by-station basis, and basic and pay cable
networks (such as the Fox Family Channel).
For the 1998-1999 broadcast season, the Company produced 24 episodes of
KING OF THE HILL, 23 episodes of THE SIMPSONS and 13 episodes of THE MR. POTATO
HEAD SHOW for the Fox Broadcasting Company. The Company is currently scheduled
to produce the following programming for the 1999-2000 broadcast season.
THE SIMPSONS. The Company is scheduled to produce 22 new episodes of THE
SIMPSONS for exhibition over the Fox Broadcasting Network. Entering its eleventh
season and now the longest-running prime time animated series in television
history, THE SIMPSONS has been honored with a Peabody Award, 10 Emmy Awards,
seven Annie Awards, three Genesis Awards, three International Monitor Awards and
three Environmental Media Awards,
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among numerous other nods. THE SIMPSONS has transformed the way the television
industry and audiences perceive animation and comedy series in general.
KING OF THE HILL. The Company is currently scheduled to produce 24 new
episodes of KING OF THE HILL to be exhibited on the Fox Broadcasting Network.
KING OF THE HILL is the hit half-hour, animated comedy, voted the Best
Television Show of 1997 by TV Guide and Entertainment Weekly, that tells often
hilarious stories about Hank Hill, his family and their neighbors in the
fictional suburb of Arlen, Texas, the heartland of America.
THE DOWNTOWNERS is a new half-hour, prime time television series which is
scheduled to be broadcast in the fall of 1999 on The WB network. The Company is
currently scheduled to produce 13 episodes of THE DOWNTOWNERS. THE DOWNTOWNERS
is the first prime time animated comedy to focus on the lives of
twenty-somethings and teens. THE DOWNTOWNERS explores the world of four diverse
roommates who inhabit a downtown loft in a fictional big city. The Company is
scheduled to produce 13 new episodes of THE DOWNTOWNERS for The WB during the
1999 fall season.
In addition to the television series described above, the Company is
currently in post production for one movie-of-the-week, JOHNNY TSUNAMI, for the
Disney Channel, currently scheduled to air in July 1999. Through March 31, 1999,
the Company completed production of one episode and substantially completed
production of 14 episodes of FAMILY GUY for Twentieth Century Fox Television.
The production for this series is scheduled to be transferred to Fox on June 1,
1999. The Company has in various stages of development a slate of proprietary
animated programs, including prime time, Saturday morning, teen-oriented and
feature film products.
There can be no assurance that any of these programs will be relicensed for
additional broadcast seasons through renewal of existing licenses or issuances
of new licenses or, if so, licensed, that the terms of the license agreements
will be as favorable to the Company as those of existing licenses.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Total revenue increased by 32%, or $3.0 million, to $12.3 million for the
quarter ended March 31, 1999, from $9.3 million for the quarter ended March 31,
1998. Total revenue increased primarily because the Company delivered 18
episodes of programming in the first quarter of 1999 as compared to 14 episodes
in the first quarter of 1998. Of these episodes, one was an episode of FAMILY
GUY. The Company also substantially completed production of 14 episodes of
FAMILY GUY for Fox during the first quarter of 1999. The Company is scheduled to
transfer production of this series to Fox on June 1, 1999.
The Company delivered 18 "fee-for-services" episodes during the quarter
ended March 31, 1999, compared to 14 episodes in the comparable period in 1998.
Fee-for-services revenue increased 41%, or $3.3 million, to $11.3 million for
the quarter ended March 31, 1999, from $8.0 million in the comparable period in
1998 as a result of delivering more episodes and an increase in the license fee
of episodes delivered.
The Company delivered no "proprietary" episodes for the quarters ended
March 31, 1999 and 1998. "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. "Proprietary" revenue
decreased by 40%, or $0.2 million, to $0.3 million for the quarter ended March
31, 1999, from $0.5 million in 1998. This decrease was a result of lower
international sales of the Company's proprietary programming in its library.
Other revenue decreased to $0.7 million for the quarter ended March 31,
1999 compared to $0.8 million for the quarter ended March 31, 1998.
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Total cost of revenue increased by 27%, or $2.4 million, to $11.4 million
for the quarter ended March 31, 1999, from $9.0 million for the quarter ended
March 31, 1998. Total cost of revenue as a percentage of sales decreased 3% to
93% for the quarter ended March 31, 1999, from 96% in the comparable period in
1998 due to higher episodic margins.
Total selling, general and administrative expenses for the quarter ended
March 31, 1999 increased by $0.2 million to $1.5 million from $1.3 million for
the comparable period in 1998, due primarily to increased development costs
offset by lower costs in the International and the Licensing and Merchandising
Department.
Operating loss was $0.6 million for the quarter ended March 31, 1999, as
compared to a loss of $1.0 million for the quarter ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash and short-term investments of
approximately $9.4 million compared to $11.3 million at December 31, 1998. The
Company's cash and short-term investment balances have continued to decline
since December 31, 1998 and the Company expects to experience further declining
balances during the remainder of fiscal 1999. Management believes that its
existing cash balances and short-term investments, combined with anticipated
cash flow from operations , will nevertheless be sufficient to meet its cash
requirements through the next 12 months. However, if the Company is successful
in the execution of its more aggressive and broad production strategies, it will
be required to make additions to personnel and augment its development and
production capabilities in the areas of animated programming, computer generated
animated programming, live action television series, feature films and
direct-to-video films. In such a case, the Company may need to secure additional
equity or debt financing prior to the end of fiscal 1999 in order to fulfill its
growth strategies. Recent operating losses, the Company's declining cash
balances, trends in the entertainment industry adversely affecting independent
production companies similar to the Company, and the Company's historical stock
performance may make it difficult for the Company to attract equity investments
on terms that are deemed to be favorable to the Company. In addition, the losses
in fiscal 1997 and fiscal 1998 make it more difficult for the Company to attract
significant debt financing. As a consequence, there can be no assurance that the
Company will be successful in arranging for additional equity or debt financing
at levels sufficient to meet its planned needs. The failure to obtain such
financing could have an adverse effect on the implementation of the Company's
growth strategies.
For the three months ended March 31, 1999, net cash used for operating
activities was $1,835,876 due to cash used in connection with film production
activities and a decrease in deferred revenue, offset by cash generated in
connection with a decrease in accounts receivable. For the three months ended
March 31, 1999, net cash used for investing activities was $24,809 due to
additions to property and equipment. No cash was used in financing activities
for the first three months of 1999.
The Company recognizes revenues in accordance with the provisions of
Financial Accounting Standards Board Statement No. 53 (FAS 53). Cash collected
in advance of revenue recognition is recorded as deferred revenue. As of March
31, 1999, the Company had a balance in its deferred revenue account of $17.0
million. There will be no net cost to the Company (future receipts less future
expenditures) to finish the programs for which cash has been collected in
advance and included in deferred revenue.
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IMPACT OF YEAR 2000
GENERAL OVERVIEW:
The Company's Year 2000 Project is currently proceeding on schedule. The
Company began its assessment in the Spring of 1998 in response to a need to
address the issue of older computer programs and embedded computer chips'
inability to distinguish between the year 1900 and the year 2000. Critical
programs with the Company were written to use two digits rather than four digits
to define the applicable year. As a result, those programs have time-sensitive
software that recognizes a date using 00 as the year 1900 rather than the year
2000. This programming method could cause a system failure or miscalculation
which could cause the disruption of operations, including, among other things, a
temporary inability to process transactions, send invoices or engage in similar
normal business activities.
The current assessment project schedule is to be Year 2000 compliant by
mid-1999 in all areas within the Company. Areas deemed critical with potential
to affect the Company's ability to do business (i.e. Computer Server Room,
Finance, Human Resources, Legal) are Year 2000 compliant at this time.
PROJECT:
The Company's Year 2000 Project is divided into three sections -
Applications Software, Communications systems (telephones, voicemail, etc.) and
Infrastructure.
The methodology used to assess these three primary sections includes: a)
prioritizing by critical area; b) inventorying for potential Year 2000 problems
(i.e. computer workstations, servers, software); c) repairing/recoding program
code (where applicable) and/or replacing hardware/software as necessary; d)
testing material items; and e) designing and implementing contingency and
business continuation plans for the Company.
As of May 1, 1999, the priority assessment has been completed as it relates
to the Company's computer systems and mission critical software systems as
detailed below. Year 2000 issues as they relate to the physical premises
(building power, incoming phone service, etc.) are outside the Company's control
and correspondence inquiring as to Year 2000 compliance has been delivered to
the principals of the building's property management, phone system suppliers,
alarm system suppliers and communications service providers (i.e. MCI, Pacific
Bell). The results thus far indicate that the Company's internal alarm systems
and communications systems are Year 2000 compliant. The concern now is whether
or not incoming services are Year 2000 compliant. Because it is not possible to
gauge the readiness of third-party vendors, the Company is in the process of
drafting a contingency plan in the event that the Company's third-party vendors
do not complete their Year 2000 implementations in time. This contingency plan
is scheduled to be drafted and implemented by mid-1999.
Inventorying of potential Year 2000 systems is 100% complete overall within
the Company and 100% complete in areas deemed critical.
As of May 1, 1999, the main accounting system in use by the Company, Show
Auditor, has been recoded to comply with Year 2000 issues and has been tested as
compliant. Software changes have also been implemented within the Company's
network servers, Human Resources division, International division and Legal
division to meet Year 2000 compliance. Compliance is 99% completed at the
desktop application level (word processing, spreadsheets and operating systems)
at each of the Company's computer workstations. This has been accomplished by
either installing the latest software patches, upgrading software or replacing
software as necessary. The Company's communications systems are Year 2000
compliant as mentioned above; therefore, recoding or replacing is not necessary
at this time. The Company has instituted a policy of buying only Year 2000
compliant computer systems and applications to assure that all new machines are
Year 2000 compliant. Further, the Company acquired hardware technology from
Micro2000, Inc. to insert into older computer systems
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to make them Year 2000 compliant at the hardware level. As of May 1, 1999, the
Centurion Y2K hardware card has been tested and implemented. All infrastructure
activities are expected to be completed by mid-1999.
The Company expects to begin final testing on all internal Applications
Software and hardware systems by May 31, 1999. The purpose of this phase is to
assure that all Year 2000 compliance changes are in fact working as expected.
This phase will also involve the installation of any last minute software
patches as provided by software developers/manufacturers. Testing of
Communications systems and Infrastructure systems will also occur at this time.
The Company is involved in prioritizing non-computer-related systems to
assess their potential impact to the Company's operations. These systems would
include operations such as delivery services, materials suppliers, etc. A
contingency plan to address any of these systems which prove to be critical to
the Company's operations will be drafted by the Company and implemented by
mid-1999.
COSTS:
The total cost of the required modifications necessary to become Year 2000
compliant is not expected to be material to the Company's financial position and
is estimated at approximately $100,000. This does not include the Company's
potential share of Year 2000 costs that may be incurred by the Company by way of
partnerships and joint ventures in which the Company participates but is not the
controlling entity. Accordingly, the foreseeable costs arising from such
third-party relationships cannot be determined at this time. The total amount
expended on the Year 2000 Project through May 1, 1999 was $29,000 which was
related to the cost to repair or replace software and related hardware problems.
RISKS:
The failure to correct material Year 2000 problems could result in an
interruption in, or a failure of, certain normal business operations. These
failures could potentially materially affect the Company's results of operations
and financial condition; however, due to the general uncertainty which is
inherent in potential Year 2000 problems, resulting in part from the uncertainty
of the Year 2000 readiness of third-party suppliers, customers or partners, the
Company is unable to determine, at this time, whether the consequences of Year
2000 failures will have a material impact on the Company's results of operations
or financial condition.
The Year 2000 assessment project is the Company's response to this
potential problem and is expected to significantly reduce the Company's level of
uncertainty about the Year 2000 problem and the compliance and readiness of its
material third-party vendors. The Company believes that with the implementation
of new systems and completion of the Year 2000 project as scheduled, the
possibility of significant interruptions affecting the Company's operations
should be reduced.
Readers are cautioned that forward-looking statements contained in this
Year 2000 disclosure should be read in conjunction with the Company's
disclosures under the heading, "Risk Factors" in the Company's 10-K for the year
ended December 31, 1998 and in this Report. Readers should understand that the
dates on which the Company believes the Year 2000 project will be completed are
based upon Management's best estimates, which were derived utilizing numerous
assumptions of future events, including the availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved, or that there will not be a
delay in, or increased costs associated with, the implementation of the
Company's Year 2000 compliance project. A delay in specific factors that might
cause differences between the estimates and actual results include, but are not
limited to, the availability and cost of personnel trained in these areas, the
ability to correct all relevant computer code, timely responses to and
corrections by third-parties and suppliers, the ability to implement interfaces
between the new systems and the systems not being replaced, and similar
uncertainties. Due to the general uncertainty inherent in the Year 2000
Page 12
<PAGE>
problem, resulting in part from the uncertainty of Year 2000 readiness of
third-parties and the inter-connection of national and international businesses,
the Company cannot ensure that its ability to timely and cost effectively
resolve problems associated with the Year 2000 issue may not affect its
operations and business, or expose it to third-party liability.
RISKS FACTORS
DEPENDENCE ON A LIMITED NUMBER OF TELEVISION PROGRAMS
Our revenue has historically come from the production of a relatively small
number of animated television programs. THE SIMPSONS, KING OF THE HILL, and THE
MR. POTATO HEAD SHOW accounted for approximately 40%, 41% and 6%, respectively,
of our total revenue for the year ended December 31, 1998. As audiences' tastes
change frequently, we cannot assure you that broadcasters will continue to
broadcast our "proprietary" or "fee-for-services" programs or that we will
continue to be engaged to produce. We currently enjoy limited profit
participation and/or limited licensing and merchandising participation in KING
OF THE HILL and THE DOWNTOWNERS. However, we cannot assure you that:
o those shows will remain on the air
o we will continue to produce them, or
o they will be sufficiently successful to generate participation to us
While we continually endeavor to develop new programming, there can be no
assurance that revenue from existing or future programming will replace a
possible loss of revenue associated with the cancellation of any particular
program.
IMPACT OF FCC REGULATIONS REQUIRING EDUCATIONAL CONTENT PROGRAMMING
Certain FCC rules may adversely affect the number of time slots available
for our productions. These regulations strongly encourage broadcasters (through
license renewal procedures) to (1) offer at least three hours per week of
programming specifically designed to serve the educational and information needs
of children ages 16 and under, (2) identify each program as educational, (3)
schedule this programming weekly, and (4) offer this programming in 30-minute
formats. While the full impact of the regulations on aggregate demand for
children's programming remains uncertain, we have experienced some significant
impact. CBS, one of our primary customers over the years, elected to change its
programming slate to conform to the FCC regulations. In its first year
implementing this strategy, CBS did not order any new animated programming from
us. In its second year of implementation, CBS reduced its license fees. In
addition, it is possible that programming qualifying for the new FCC
requirements will have a competitive advantage over non-qualifying programs.
This could further diminish the number of time slots available for our existing
programs, thus intensifying the strong competition for the remaining time slots.
RISKS OF VERTICAL INTEGRATION
Over the last decade, broadcasters, distributors and producers of televison
and motion picture programming have become increasingly integrated vertically
through mergers, acquisitions, partnerships, joint ventures or other
affiliations. We have not entered into any of these relationships. These
relationships, coupled with the recent repeal of certain regulations of the FCC
which had limited the ability of network broadcasters to control certain rights
in television programming, has resulted in broadcasters working with their
affiliated producers of animated programming. This result limits the number of
time slots available for other producers. We cannot assure you that the number
of time slots currently available for children's and/or animated programming
and, specifically, for animated programming supplied by independent animation
studios, will not decrease, or that we will compete successfully for available
time slots.
DECLINING VALUE OF LICENSE FEE AGREEMENTS AND INCREASING CONTROL OF
PROPRIETARY RIGHTS BY BROADCASTERS
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<PAGE>
Competition created by the emergence of new broadcasters (such as UPN, WB,
Nickelodeon and the USA Network) has provided television audiences with more
choices, thereby generally reducing the number of viewers watching any one
program. As a result, the market share of, and license fees paid by, FOX, CBS
and ABC have decreased. There continues to be intense competition for the time
slots offered by the networks, especially FOX, CBS and ABC. This trend continues
to depress license fees to a level that may make it difficult for us to finance
certain proprietary programs. Moreover, broadcasters are demanding a greater
percentage of the revenue generated from the exploitation of proprietary rights
associated with the programs which they license. Broadcasters may also seek to
control and exploit all of the proprietary rights associated with the programs
which they license. We believe that these industry-wide trends may have a
significant adverse impact on our business, results of operations and financial
condition.
IT IS POSSIBLE THAT OUR CURRENT PROGRAMS MAY NOT SUSTAIN THEIR POPULARITY
AND OUR NEW PROGRAMS MAY NOT BECOME POPULAR
We derive substantially all of our revenue from the production and
distribution of animated television programs. Each production is an individual
artistic work, and consumer reaction will determine its commercial success. We
cannot assure you that we will be able to continue to create entertaining
episodes for our existing programs or that we will be able to create new
programs that are appealing to broadcasters. When advertisers decide whether to
pay for advertising during a program's broadcast, they look closely at Nielsen
ratings. Broadcasters also consider Nielsen ratings when deciding whether to
renew a series or license a new series. Producers of syndicated programming,
like us, often receive payments from syndicators based on a share of the revenue
received from advertisers who advertise during a specific program. We try to
develop and produce programming that will perform well in the Nielsen ratings
system. Nielsen ratings for our programming depend on many factors beyond our
control, including:
o audience reaction
o competing programming
o availability of alternative forms of entertainment
o time slots when aired
o critical reviews
We cannot assure you that our programs will obtain favorable Nielsen
ratings or that broadcasters will license the rights to broadcast any of our
programs in development or will renew licenses to broadcast programs which we
currently produce. Even if a broadcaster renews the license to broadcast our
programming, we cannot guarantee that our program will remain popular. If our
programming becomes less popular, we will most likely derive less revenue which
could impact our financial condition.
OUR REVENUES RESULT FROM SALES TO A LIMITED NUMBER OF MAJOR CUSTOMERS.
During the year ended December 31, 1998, we derived approximately 80% and
5% of our net sales from our top two customers, Twentieth Television (a Division
of Twentieth Century Fox) and Fox Kids Network. Neither of these customers is
contractually obligated to continue to do business with us. On May 13, 1999,
Twentieth Century Fox Television and we jointly announced that due to production
differences, we mutually agreed that Fox should assume responsibility for the
production of FAMILY GUY. We expect that the transfer will be effective June 1,
1999. In order to be successful, we must continue our relationships with our
customers; we must continue to develop relationships with new customers; and our
existing programs must continue to be broadcast. In the event our relationship
with either of our top customers terminates, we could experience an adverse
impact on our business.
RISKS RELATED TO EXPANSION OF PRODUCTION OF PROPRIETARY PROGRAMMING
We produce substantially all of our programming on a "fee-for-services"
basis. As a result, we do not typically own or control licensing or distribution
rights, but may have profit participation rights based on a percentage of
adjusted gross profits or net profits earned by the owners of these distribution
rights. The fees we receive for these production services typically cover all
direct production costs plus a margin. We intend to expand our production of
Page 14
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programming for which we own or control licensing and/or distribution rights
("proprietary programming"). These rights may include domestic and international
broadcast distribution, home video distribution, licensing and merchandising,
feature film and interactive/game development ("proprietary rights"). While we
seek to limit the financial risk associated with our proprietary programming by
obtaining commitments prior to production to cover at least 50% of our direct
production costs, we cannot be sure that we will be able to recover the balance
of our production and overhead costs through the exploitation of our remaining
rights. We derived $4.9 million, and $3.3 million, in revenues from proprietary
programming for the years ended December 31, 1997 and 1998, respectively. Since
we only recently have begun to retain the proprietary rights associated with our
animated programs, we have a limited history of operations and experience
related to the exploitation of these rights.
RISK OF BUDGET AND COST OVERRUNS
We review cost reports and update our cost projections regularly. Although
we have generally completed each of our productions within its budget, we cannot
assure you that the actual production costs for our programming will remain
within budget. Risks such as production delays, higher talent costs, increased
subcontractor costs, political instability overseas, and other unanticipated
events may substantially increase production costs and delay completion of the
production of any one or more of our programs.
RISKS RELATED TO OVERESTIMATION OF REVENUE OR UNDERESTIMATION OF COSTS
We follow Financial Accounting Standards Board Statement No. 53, "Individual
Film Forecast" ("FASB 53"), regarding revenue recognition and amortization of
production costs. 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 television and film costs. These
costs are stated at the lower of unamortized cost or estimated net realizable
value. We amortize our estimated total production costs for an individual
program or film in the proportion that revenue realized relates to management's
estimate of the total revenue expected to be received from such program or film.
As a result, if revenue or cost estimates change with respect to a program or
film, we may be required to write-down all or a portion of our unamortized costs
for the program or film. We cannot assure you that these write-downs will not
have a significant impact on our results of operations and financial condition.
SEASONALITY
Our results of operations depend on our production and delivery schedule of
television programs. Broadcasters typically make most of their annual
programming commitments in the first and second quarters of any calendar year so
that new programs will be ready for delivery in the third quarter and, to a
greater extent, the fourth quarter of that year. Producers typically recognize
revenues from license and production agreements when the producer delivers the
finished product to the customer and the customer accepts it. As a result of the
production cycle, we do not recognize revenue evenly throughout the year. We
typically recognize a significant portion of our revenue in the fourth quarter.
Our results of operations fluctuate materially from quarter to quarter and year
to year. The results of any one period do not necessarily indicate results for
future periods. Cash flows also fluctuate and do not necessarily correlate with
revenue recognition
COMPETITION
PROGRAMMING. The creation, development, production and distribution of
television programming, together with the exploitation of the proprietary rights
related to such programming, is a highly competitive business. We compete with
producers, distributors, licensors and merchandisers, many of whom are larger
and have greater financial resources than we do. Although the number of outlets
available to producers of animated programming has increased with the emergence
of new broadcasters, the number of time slots available to independent producers
of children's and animated programming remains limited. Moreover, because
license fees in the United States have dropped substantially recently, companies
that do not rely on U.S. broadcast license fees to finance the production of
animation programming, particularly international animation companies which
receive governmental subsidies, have achieved a competitive advantage. These
companies now serve as an additional source of competition for the limited
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<PAGE>
slots available to independent animation companies. We also believe that we face
competition from a variety of companies in three principal areas: (1) for the
time slots for animated programming offered by broadcasters, (2) for the
acquisition of characters, story lines, plots and ideas and (3) for the right to
license and distribute our products throughout the United States and
internationally.
CREATIVE PROPERTIES AND CREATIVE PERSONNEL. We compete with other
animation companies for characters, storylines, plots and ideas created by third
parties. Third parties select us based on their perception of whether we are
best able to create and develop a successful program from the initial idea or
character. We also compete with other animation companies (including the film
and television animation operations of major studios) for the animators,
writers, producers and other creative personnel needed to successfully develop
and produce animated programming. We believe that we compete for creative
properties and creative personnel with a variety of companies including The Walt
Disney Company, Warner Bros., Hanna-Barbera, DIC, Klasky-Csupo, Marvel
Entertainment, Saban Entertainment, Cinar Films, DreamWorks SKG, Nelvana,
Universal Cartoon Studios, Sony Cartoon Studios and Hyperion Productions, many
of which have greater financial resources to obtain creative properties and
creative personnel.
LICENSING AND MERCHANDISING. In the first quarter of 1998, we decided
to reduce our fixed overhead by outsourcing our licensing and merchandising
activities. However, we expect that the exploitation of our licensing and
merchandising rights will remain an important part of our strategy. We compete
with other owners of creative content who seek to license their characters and
properties to a limited number of distributors. In connection with our recent
initiatives to exploit the proprietary rights associated with our programming,
we have entered into several licensing and merchandising agreements. However,
for the year ended December 31, 1998, we derived no significant revenue from our
licensing and merchandising activities and we cannot assure you that we will
derive significant revenue in the future.
RISKS RELATED TO INTERNATIONAL OPERATIONS
RISKS OF INTERNATIONAL BUSINESS GENERALLY. Part of our strategy
involves our current and planned activities in a number of developing nations.
There are many risks inherent in our international business activities. Our
projects could be adversely affected by:
o reversals or delays in the opening of foreign markets to new
competitors;
o unexpected changes in regulatory requirements;
o export controls, tariffs and other barriers;
o currency fluctuations;
o investment policies;
o nationalization, expropriation and limitations on repatriation of cash;
and
o social and political risks.
OVERSEAS SUBCONTRACTORS. Like other producers of animated programming, we
subcontract some of the less creative and more labor-intensive components of our
production process to animation studios located in low-cost labor countries,
primarily in the Far East. As the number of animated feature films and animated
television programs increases, the demand for the services of overseas studios
has increased substantially. This increased demand may lead overseas studios to
raise their fees which may result in increased animated programming production
costs or our inability to contract with our preferred overseas studios.
Many of the subcontractors we use are located in South Korea and, to a
lesser extent, Taiwan, the Philippines and China. Each of these areas has
recently experienced significant political and/or economic turmoil, such as, but
not limited to, devaluation of the won and other Asian currencies. The Asian
markets may continue to deteriorate, which could have a substantial impact on
our ability to contract favorably with studios in Asia. These conditions could
cause significant disruptions in the delivery of animation products to us. In
that event, we may be required to retain new subcontractors. We cannot assure
you that different subcontracting arrangements will be as favorable to us as our
current arrangements.
Page 16
<PAGE>
INTERNATIONAL SALES-MARKET FRACTIONALIZATION. We derived approximately
8% and 4% of our revenue for the years ended December 31, 1997 and 1998,
respectively, from licensing international distribution rights to our
proprietary programming. We anticipate that revenue from these activities will
not grow substantially until we produce additional proprietary programming for
which we own and control international distribution rights. Just as in the US,
there are an increasing number of broadcast outlets for animation in most major
international territories. While this has created more opportunities to sell
product, on the one hand, the total advertising dollars available is now being
spread amongst this larger number of outlets, so the revenues each broadcaster
receives and, consequently, the amount of the license fees they can pay, has
begun to diminish substantially. Our ability to continue to expand our
international business (as well as our ability to contract upon favorable terms
with overseas studios) depends, in part, on the local economic conditions,
currency fluctuations, local changes in regulatory requirements, compliance with
a variety of foreign laws and regulations, and cultural barriers. In addition,
political instability in a foreign nation may adversely affect our ability to
distribute our product in that country. As a result, we cannot assure you that
our international operations will be profitable.
RISKS ASSOCIATED WITH POSSIBLE NEW BUSINESSES
Due in part to the recent changes in the television industry described in
this Report, we have made, and intend to continue to make a substantial
commitment to new business areas beyond our core business of animation
television production. We have begun live action television production, feature
film development with the expectation of production (both live action and
animation) and direct-to-video production (both live action and animation). Some
of this production may be on a "fee-for-services" or a "proprietary" basis. The
television, feature film and direct-to-video industries are highly speculative
and involve a substantial degree of risk. The success of an individual
television program, feature film or direct-to-video release depends upon
unpredictable and changing factors, such as personal tastes of the public and
critics. In addition, we are evaluating entering the Internet distribution
market through the Level 13 branded animation destination. This is a new
business for us that may require that we use significant resources in an effort
that may not be successful. Therefore, there is a substantial risk that our
projects will not be successful, resulting in costs not being recouped and
anticipated profits not being realized. Although we intend to limit the risks of
production through co-production, pre-sale financing and/or distribution
arrangements, we will likely be unable to limit all of the financial risk of a
television production, feature film or direct-to-video release. In addition,
because the success of a television production, feature film or direct-to-video
release, and Internet distribution depends upon consumer taste and critical
response, as well as public awareness and the successful distribution of a
production, we cannot predict the level of marketing, promotional and
distribution activities and expenses necessary in any particular instance.
Moreover, we have no history of developing, producing, or distributing live
action television or film productions, or with exhibition over the Internet and
we cannot assure you that we can compete successfully with more established
persons or entities. Live action production involves many of the risks
associated with animation production that are described in this Report, as well
as additional risks inherent to live action that are outside of our control,
including the risk of work stoppage or strike, increased union activity, delay
in production due to weather and other local conditions, inability to obtain
proper permitting to film at a desired site, at desired times and/or under
desired terms, and accidents or injury to actors and film crew. We cannot be
sure that we will produce any live action television or film projects or that,
if produced, that such projects will be profitable. The World Wide Web is an
evolving marketplace, and we cannot predict consumer taste or the underlying
technology. Likewise, we cannot assure you that we will be successful should we
decide to promote Level 13 as an independent animation destination/network.
TECHNOLOGICAL CHANGES; POSSIBLE CHANGES IN PRODUCTION OF OUR PRODUCTS
The proliferation of new production technologies may change the manner in
which we create and distribute programming. Recently, certain animators have
begun to use computer-generated animation, including three-dimensional digital
animation, instead of two-dimensional cel animation, to create their animated
programming. We cannot be sure that the introduction and proliferation of
three-dimensional digital animation or other technological changes will not
cause our historical methods of producing animation to become less cost
competitive or less appealing to our audiences. In addition, we cannot be sure
that we will be able to adapt to such changes in a cost-effective manner.
Page 17
<PAGE>
DEPENDENCE UPON KEY PERSONNEL
Our success depends to a significant extent upon the expertise and services
of David Pritchard, our President and Chief Executive Officer. The loss of the
services of Mr. Pritchard and/or other key management personnel could have an
adverse effect on our business, results of operations and financial condition.
We have employment agreements with Mr. Pritchard and certain of our other key
management personnel. We do not currently carry "key man" life insurance
policies on any of our executives. We cannot be sure that we will be able to
retain our existing management personnel.
In addition, our continued success is highly dependent on the artistic and
production capabilities of our creative staff. We are a signatory to the Screen
Actors Guild collective bargaining agreement and certain of our voice-over
actors are Screen Actors Guild members. We also have a wholly owned subsidiary,
Namor Productions Inc., which is a signatory to the Writer's Guild of America
collective bargaining agreement. We believe that our future success will depend,
in part, on our continuing ability to attract, retain and motivate qualified
personnel in both our existing and new businesses.
CASUALTY RISKS
Substantially all of our operations and personnel are located in our North
Hollywood headquarters, resulting in vulnerability to fire, flood, power loss,
telecommunications failure or other local conditions, including the risk of
seismic activity. If a disaster were to occur, our disaster recovery plans may
not be adequate to protect the Company and our business interruption insurance
may not fully compensate us for our losses.
POSSIBLE ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS
Certain provisions of our certificate of incorporation, by-laws and Delaware
law (including a stockholders rights plan (sometimes referred to as a "poison
pill") which we adopted in 1998) could be used by our incumbent management to
make it substantially more difficult for a third party to acquire control of the
Company. These provisions could discourage potential takeover attempts and could
adversely affect the market price of our common stock.
In addition, our corporate documents authorize the Board of Directors to
issue shares of preferred stock and to establish the rights of that preferred
stock without stockholder approval. If the Board issues preferred stock, it
could have the effect of delaying or preventing a change in control of our
company, even if a change in control were in our best interests.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Amendment to Employment Agreement dated December 17, 1998 between
Film Roman California and Greg Arsenault
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
March 31, 1999.
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<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: May 14, 1999
FILM ROMAN, INC.
By: /S/ DAVID PRITCHARD
-----------------------------
David Pritchard
President and Chief Executive
Officer and Director
By: /S/ GREG ARSENAULT
-----------------------------
Greg Arsenault
Senior Vice President -
Finance and Administration
Page 20
EXHIBIT 10.1
as of December 17, 1998
Mr. Gregory Arsenault
6542 Yarmouth Avenue
Reseda, CA 91335
Dear Mr. Arsenault:
Please refer to that certain Executive Employment Agreement between
you and us dated January 1, 1996 (herein the "Agreement"), wherein we are
referred to as "Company" and you are referred to as "Executive."
This Agreement shall be and hereby is amended and modified as follows:
1. Notwithstanding anything in paragraph 2.1 to the contrary the "initial
term" of the Agreement shall, by mutual agreement, terminate as of October 31,
1998, with the result that compensation for 1998, as specified in paragraph
4.1(b) of the Agreement shall be prorated accordingly.
2. In lieu of provisions of 2.2 of the Agreement, relating to an option
to extend the term, Company and Executive agree that the Term of the Agreement
shall be and hereby is extended for a period of fourteen (14) months commencing
November 1, 1998 and continuing through December 31, 1999, subject to all rights
of termination set forth elsewhere in the Agreement (which period is hereinafter
referred to as the "extended term").
3. The compensation payable to you for the extended term shall be
$233,333.00, payable in equal weekly installments during the extended term.
The compensation payable herein shall be in lieu of any compensation
otherwise specified in paragraph 4.1(b) or (c) of the Agreement.
4. In addition to stock options heretofore granted to Executive under the
1996 Stock Option Plan for employees, Company hereby grants to Executive
effective as of the date hereof the right, to purchase 30,000 shares of
Company's common stock at the exercise price equal to its fair market value (as
defined in the Plan) as of the date of this amendment, i.e. as of December 17,
1998, which price is $1.50 per share. Said option shall vest equally over five
(5) years, commencing
<PAGE>
immediately, i.e. twenty (20%) percent shall vest concurrently herewith and
twenty (20%) shall vest on each of the first, second, third and fourth
anniversaries of the date hereof. All other terms and conditions relative to
such options shall be determined by reference to the 1996 Stock Option Plan, it
being understood in this regard that Company and Executive shall execute a stock
option agreement pertaining to the options granted hereunder, which stock option
agreement shall be substantially in the same form as the stock option agreement
now in force between the parties with respect to options heretofore granted.
5. No term or condition of the Agreement is amended or modified except as
expressly set forth above and the Agreement as so modified is hereby mutually
confirmed and ratified.
Please indicate your agreement with the foregoing by signing in the
space provided below.
Very truly yours,
FILM ROMAN, INC.
By: /S/ DAVID PRITCHARD
-------------------------------------
President and Chief Executive Officer
ACCEPTED AND AGREED TO
/S/ GREGORY ARSENAULT
- ---------------------------------
GREGORY ARSENAULT
<TABLE> <S> <C>
<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 PERIOD ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,426,701
<SECURITIES> 0
<RECEIVABLES> 431,296
<ALLOWANCES> 0
<INVENTORY> 20,259,605
<CURRENT-ASSETS> 0
<PP&E> 2,563,012
<DEPRECIATION> 1,658,534
<TOTAL-ASSETS> 31,518,542
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 85,223
<OTHER-SE> 11,479,326
<TOTAL-LIABILITY-AND-EQUITY> 31,518,542
<SALES> 12,289,912
<TOTAL-REVENUES> 12,289,912
<CGS> 11,396,106
<TOTAL-COSTS> 11,396,106
<OTHER-EXPENSES> 1,536,025
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113,799
<INCOME-PRETAX> (528,420)
<INCOME-TAX> 5,118
<INCOME-CONTINUING> (533,538)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (533,538)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> 0
</TABLE>
