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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 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
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FILM ROMAN, INC.
(Exact name of registrant as specified in charter)
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Delaware 95-4585357
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
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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
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Securities registered pursuant to 12(b) of the Act:
None
Securities registered pursuant to 12(g) of the Act:
Common Stock, $.01 par value
Preferred Stock Purchase Rights
(Title of Class)
Check 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 [_].
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to this
Form 10-K. [_]
As of March 20, 2000, the aggregate market value of voting stock held by
nonaffiliates of the registrant was approximately $5,679,730 (based upon the
last reported sales price of the Common Stock as reported by the NASDAQ
National Market). Shares of Common Stock held by each executive officer,
director, holders of greater than 10% of the outstanding Common Stock of the
registrant and persons or entities known to the registrant to be affiliates of
the foregoing have been excluded in that such persons may be deemed to be
affiliates. This assumption regarding affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 20, 2000, 8,565,190 shares of Common Stock, par value $.01 per
share, were outstanding.
The Exhibit Index appears on page 26.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Registrant's 1999 Annual Meeting of
Stockholders to be held June 14, 2000 are incorporated by reference to Items
10, 11, 12 and 13 of Part III.
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TABLE OF CONTENTS
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PART I................................................................... 1
Item 1. BUSINESS.................................................... 1
Overview.................................................... 2
1999 Milestones............................................. 2
Strategy.................................................... 2
The Company's 2000 Production Schedule...................... 3
Principal Elements of the Company's Business................ 4
Government Regulations...................................... 9
Trademarks.................................................. 9
Employees................................................... 9
Item 2. PROPERTIES.................................................. 10
Item 3. LEGAL PROCEEDINGS........................................... 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 10
PART II.................................................................. 11
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 11
Item 6. SELECTED FINANCIAL DATA..................................... 12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 14
General..................................................... 14
Revenue and Cost Recognition................................ 15
Overhead Allocation......................................... 15
Results of Operations....................................... 15
Liquidity and Capital Resources............................. 17
Impact of Year 2000......................................... 18
Risk Factors................................................ 18
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.. 21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 21
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 21
PART III................................................................. 22
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 22
Executive Officers and Directors............................ 22
Item 11. EXECUTIVE COMPENSATION...................................... 23
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 23
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 23
PART IV.................................................................. 24
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.................................................... 24
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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION. This Report contains
statements that constitute "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act, 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. The words "expect", "estimate",
"anticipate", "predict", "believe", "plan", "should", "will", "may",
"projects" and similar expressions and variations thereof are intended to
identify forward-looking statements. Such statements appear in a number of
places in this filing and include statements regarding the intent, belief or
current expectations of the Company, its directors or officers with respect
to, among other things, (a) trends affecting the financial condition or
results of operations of the Company, (b) the business and growth strategies
of the Company, and (c) the Company's objectives, planned or expected
activities and anticipated financial performance. The stockholders of the
Company are cautioned not to put undue reliance on such forward-looking
statements. Such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected in this Report, for the reasons, among
others, discussed in the Section "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Risk Factors". The Company
undertakes no obligation to publicly revise these forward-looking statements
to reflect events or circumstances that arise after the date hereof. Readers
should carefully review the risk factors described in other documents the
Company files from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-Q to be filed by the Company in
calendar years 1999 and 2000 and any Current Reports on Form 8-K filed by the
Company.
PART I
Item 1. BUSINESS
Overview
Film Roman, Inc. ("Film Roman" or the "Company") was founded in 1984 and
has grown into one of the leading independent animation studios in the world.
Film Roman has produced or is producing some of the world's best known
animated series, including The Simpsons, King of the Hill, The Mask, Bobby's
World, The Twisted Tales of Felix the Cat, and Garfield and Friends. Over the
years the Company has primarily produced animation for television, both on a
fee-for-services and a proprietary basis. While the Company is currently
aggressively pursuing both of these areas, the Company is also continuing
expansion of its production capabilities into live action, and expansion of
its intended markets beyond television, including motion pictures, cable,
direct-to-video, commercials, and the Internet. As the Company moves into
these other areas, it is also responding to the changes that are taking place
in the media and entertainment areas.
Over the past few years there has been a consolidation of media and
entertainment companies. Management believes that this has created both an
obstacle and an opportunity for content creators and producers, such as Film
Roman; an obstacle, because the many delivery channels are concentrated in few
hands; an opportunity, because these distribution outlets have a continuing
need for content, and, with the possible exception of the children's
television market, it has become apparent that these outlets cannot supply all
of the content through their vertically integrated affiliated companies. These
distributors all compete for the content that a limited number of creators and
producers can create and/or produce. Most major media distributors have a
series of strategic relationships in order to supply their continually growing
need for content.
As management moves toward creating, selling and producing content for a
wide range of distribution outlets, including television, motion pictures,
made for cable productions, and direct-to-video productions, both in its core
business of animation and in live action, the Company intends to use its
relationships developed from these endeavors to forge a series of strategic
relationships with major distributors. If Film Roman is successful in
establishing one or more of these types of relationships, management believes
the Company will be in a better position to produce its own proprietary
projects as well as produce fee-for-services projects for its partners.
It is the goal of management to more firmly establish Film Roman as a
broadbased developer, packager and producer of programming, whether it is for
a 10-second commercial, a 2-hour motion picture, or a 10-hour mini-series,
both on a fee-for-services and proprietary basis.
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1999 Milestones
. Continued the production and delivery of King of the Hill (25 episodes
delivered for Twentieth Century Fox Television, airing on Fox Broadcast
Network), The Simpsons (23 episodes delivered for Twentieth Century Fox
Television, airing on Fox Broadcast Network), Family Guy (15 episodes
delivered for Twentieth Century Fox Television, airing on Fox Broadcast
Network) and Mission Hill (10 episodes delivered for CastleRock
Television, airing on The WB Network).
. Began production of The Oblongs, a new prime time animated series, on a
work-for-hire basis (13 episodes for Warner Bros. Television intended for
broadcast on The WB Network).
. Began production on Doomsday, a new proprietary prime time animated
series (13 episodes intended for broadcast on United Paramount Network).
. Entered into a development/production agreement for My First Mister, the
Company's first live action film, which is intended for theatrical
distribution by Paramount Classics, and which will be third-party
financed.
. Produced and delivered to the Disney Channel a live action movie-of-the-
week, Johnny Tsunami.
. Launched Level 13, a website (www.level13.net) dedicated primarily to
animated shorts.
. Engaged John Hyde as the Company's president and CEO, replacing David
Pritchard.
Strategy
Building on the cornerstone of its reputation as a quality animation
supplier to the U.S. and international broadcast marketplace, the Company is
currently pursuing active development, both on a proprietary and fee-for-
services basis, of (i) animated and live action television programming for
broadcast on cable networks, as well as for syndication, (ii) third-party
financed feature films, (iii) computer animation projects, (iv) a short-
subject acquisition program and production of shorts, (v) direct-to-video
production, (vi) Internet programming and (vii) animated commercials. The
Company's current strategy can be summarized as follows:
. Create and Develop Popular Proprietary Productions. The Company believes
that it has the capacity to create successful franchises in both animated
and live action television, feature film, computer animation, commercials
and direct-to-video productions. The Company further believes that its
reputation for high-quality animation and artistic integrity helps it to
attract premiere creative artists and storytellers whose characters and
concepts, when imaginatively developed and artistically produced, have
the potential of developing into character franchises.
. Continue to Pursue Work-For-Hire Productions. Capitalizing on its
reputation as one of the premiere producers of high quality animation,
the Company believes that it can pursue work-for-hire animated
productions on an opportunistic basis to use its production capacity to
increase the Company's revenues and profitability.
. Continue International Exploitation of Library. The Company's programs
are currently licensed for broadcast in over fifty countries. The Company
seeks to continue to exploit its library of programs into international
markets; however, the Company shall also explore potential alternatives
to determine if there are more efficient and profitable means of
distributing its library.
. Pursue Co-Production Relationships. The Company intends to continue to
pursue and evaluate potential business opportunities with domestic and
international co-financing partners, with the goal that
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risks may be shared, complementary skills may be exploited and foreign
subsidies may be utilized in the production of new entertainment
properties.
. Explore Internet and Other Alternative Distribution Arrangements. The
Company is exploring Internet and other alternative distribution
arrangements for its programs, and in that regard, in the Fall of 1999
the Company launched a website for Level 13 Entertainment, Inc ("Level
13") at www.level13.net. The Company intends to bring in strategic,
content and/or financial partners in order to build and expand Level 13
as a stand-alone, advertising-supported, broadband-delivered animation
destination on the World Wide Web. See "Principal Elements of the
Company's Business--Distribution of Proprietary Programming--Animation
Acquisition/Alternative Distribution".
. Reduce Overhead and Development Costs. The Company has realigned its
management structure and reduced the general overhead to streamline the
operation and substantially reduce costs. Further, the amount of
development money spent on any individual project has been greatly
reduced and the projects being developed have and will be more
deliberately targeted at specific buyers, thereby reducing the overall
costs of development and overhead associated with that development, while
at the same time increasing the likelihood of selling projects in each
area of the Company's production objectives.
The Company believes its reduced overhead, realigned management and focused
development will allow the Company to more successfully invest its time and
dollars in a broad and diverse range of programming. This diverse production
should ultimately lead to strategic distribution relationships that will
generate both proprietary and fee-for-service animation and live action
productions. There can be no assurance that the Company will be successful in
implementing any or all aspects of this strategy. The discussion of the
Company's strategy contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Actual results could differ materially from
those projected in these forward-looking statements as a result of certain
risk factors described elsewhere in this Report or other factors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors."
The Company is a Delaware corporation with its principal executive offices
located at 12020 Chandler Boulevard, Suite 300, North Hollywood, California
91607, and its telephone number is (818) 761-2544.
The Company's 2000 Production Schedule
The Company has historically been a major producer of animated prime time,
first run syndicated, and Saturday morning programming. The market for these
programs is composed of television networks (ABC, CBS, NBC, FOX, UPN and
Warner Brothers); syndicators of first run programming that license
programming on local stations nationwide (Columbia-Tristar, Universal,
Paramount, King, Fox, MGM and Viacom); and cable networks and services (USA,
Disney Channel, Fox Family, HBO, Showtime and TNT).
The Company is currently scheduled to produce the following programming for
the 2000-2001 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
twelfth season and now the longest-running prime time animated series in
television history, The Simpsons has been honored with a number of awards,
including a Peabody Award, Emmy Awards, Annie Awards, Genesis Awards,
International Monitor Awards and Environmental Media Awards, among numerous
other honors. 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.
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The Oblongs. The Company is currently scheduled to produce 13 episodes
of The Oblongs which is currently scheduled to be broadcast in the fall of
2000 on the WB Network. The Oblongs is a new half-hour, prime time animated
television series.
Doomsday. The Company is currently scheduled to produce 13 episodes of
Doomsday, which is intended to be broadcast starting in the first quarter
of 2001 on UPN. Doomsday is a new half-hour, prime time television series,
in which the Company has a proprietary interest.
X-Men. The Company is currently scheduled to produce 13 episodes of X-
Men, which is scheduled to air Saturday mornings in the fall of 2000 on the
WB Network. X-Men is a new half-hour animated television series.
My First Mister. The Company completed principal photography for My
First Mister, a live-action feature film financed by a third party which
stars Albert Brooks and Leelee Sobiesky and is directed by Christine Lahti.
Principal Elements of the Company's Business
The Company's business of developing, producing and distributing a broad
range of television programming for the television network, cable television,
direct-to-video, first-run domestic syndication and international markets and
developing and producing, on a limited basis, feature-length theatrical motion
pictures and television commercials is described in the sections below.
Fee-for-Services Productions. Production work on a fee-for-services basis
has historically accounted for the largest and most reliable portion of the
Company's revenues. The Company intends to continue to pursue production work
on a fee-for-services basis, primarily for prime time animated television
programming, as well as in the other new areas of production. During 1999 the
Company delivered 23 episodes of The Simpsons and 25 episodes of King of the
Hill, was engaged by Fox Television to produce 15 episodes of the new prime
time animated series Family Guy (after which Fox took over production), and
was engaged by Castle Rock Productions to produce Mission Hill. In addition,
the Company has been marketing its commercial production services and during
1999 created a number of animated broadcast commercials for Anheuser Busch
Entertainment (Shamu and Crew) and 20th Century Fox Film Corporation (The
Simpsons and King of the Hill). Management believes that the fee-for-services
business, in particular prime time animation shows, will remain a cornerstone
of the Company's business, and intends to pursue additional work as such shows
become available.
Acquisition, Creation and Development of Proprietary Programming. The
Company pursues ideas and properties it believes contain unique and commercial
story lines and/or characters. These ideas and properties may originate from a
variety of sources. As a result of the Company's reputation and position in
the entertainment industry, many creators, rights holders, writers,
broadcasters and studios bring new concepts to the Company for development and
production. The Company may enter into an option agreement to acquire rights
to an existing property, which the Company may then develop internally into
either an animation or live action program. The Company will then take the
project to the networks or the studios for further development, financing
and/or distribution.
Once the Company has created this new idea or acquired the rights to the
existing property, the Company continues the development process by preparing
a presentation to "pitch" the project to a domestic buyer (and, on some
occasions, to international broadcasters and/or theatrical distributors).
These presentations generally consist of treatments, story premises, scripts,
artwork, designs and/or character designs and/or test animation or
presentations. With respect to television production, if a broadcaster or
cable network is interested in developing the idea further, the broadcaster
will generally acquire an exclusive option to order the production of a
certain number of episodes based on the idea and will agree to reimburse the
Company for all or a portion of the development costs if it does not
ultimately order production of any episodes. A broadcaster generally
collaborates in the later stages of development and will have the right to
approve the selection of the writers, directors, artists,
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and actors, and the creation of a pilot script. The creation, acquisition and
development of a new program can take from three to twelve months, and
sometimes longer.
In the case of the animated shorts acquisition program, the Company may
determine that it is in its best interest to finance 100% of the programming
that the Company may make available to Level 13, or produce a particular
program in its own facility.
The Company is currently developing:
. A slate of proprietary animated programs including prime time, Saturday
morning, teen oriented, and feature film projects. These projects will
depend, in varying degrees, on the Company's ability to arrange for U.S.
broadcast, U.S. theatrical exhibition, worldwide distribution, and/or
international co-production.
. Live action series and specials, ranging from prime time dramas and
comedies to Saturday morning children's programs.
. A slate of feature film projects which the Company intends to present to
the major studios and independent financiers.
. A number of computer animated short films, which the Company believes can
be utilized as character tests and concept trials. These shorts, in
addition to those acquired from third parties, may serve as the basis for
new television series or feature films, and can be distributed via the
Company's website, www.level13.net (See "--Distribution of Proprietary
Programming--Animation Acquisition/Alternative Distribution").
Securing Funding for Proprietary Programming. Historically, the Company
produced animated programming almost exclusively on a "fee-for-services"
basis. In 1995 the Company began producing proprietary animated programming.
The Company generally does not commence production on proprietary programming-
whether animated or live action- unless the Company has obtained commitments
to cover at least 50% of the Company's direct production costs. The Company
generally secures these commitments in one or both of the following ways: (i)
a combination of network, cable, syndication, or other license fees for
exploitation of the program in the United States, and (ii) pre-sale to
distributors and/or co-production partners in foreign territories. The Company
typically funds the balance of the production costs on a current basis. Since
the Company began producing proprietary programming in 1995, the Company has
delivered 96 half-hour episodes and 12 one-hour episodes of proprietary
programming.
The Company intends to approach the development and production of live
action proprietary programming in much the same way as it does animated
programming. In most cases the Company intends to have pre-negotiated
distribution for the project, which distribution commitments will be an
integral factor in financing and commencing production of such programming.
The Company currently intends only to invest in the production of a program if
the Company secures a guaranteed distribution agreement from a major
television network, cable network, syndication company or substantial co-
production partner, or in the case of a feature film, a portion of the
financing and distribution from a U.S. or international distributor. As of
December 31, 1999, the Company had the commitment to produce thirteen (13) new
episodes of the new proprietary television program Doomsday for the 2000-2001
television season.
While the Company generally seeks to limit its financial risk associated
with its proprietary programming by obtaining commitments from third parties
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 this amount
or the balance of its production costs and overhead costs relating to
production, licensing and distribution through the exploitation of its
remaining rights. The Company may not cover its costs for the following
reasons: (i) a proprietary program may be cancelled; (ii) a proprietary
program and/or its related licensed products may not appeal to the Company's
targeted audience or may not appeal to the same audience targeted by a
licensee; (iii) the Company and/or its licensee may not effectively market and
distribute the Company's programming domestically or internationally; or (iv)
the actual production costs may exceed the original budget. Moreover, since
certain international distribution arrangements and other domestic and
international licensing activities are conditioned upon the
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United States broadcast of a minimum number of programming episodes on a
network or cable channel, no assurance can be given that any series will be
broadcast in the United States for a sufficient period in order to meet these
contractual conditions.
Production
Animated Television Production. The Company generally commences production
of animated television programs during the first and second quarters of any
calendar year for delivery commencing during the third quarter, and to a
greater extent, the fourth quarter of that same year. The Company typically
has seven to nine months to produce and deliver an order of 13 half-hour
episodes (the number of episodes commonly ordered for the first year of a
program). As discussed above, the Company's animation strategy is to continue
to pursue both fee-for-services and proprietary production opportunities.
While the processes involved in producing an animated show are similar for
both proprietary and fee-for-services programs, the Company may not be
responsible (especially in the case of fee-for-services work) for the entire
production process as outlined below.
The first step of the Company's production process is generally the
creation of the script. The Company will generally select a story editor to
supervise the preparation of each episode's script by various freelance script
writers. The artists depict the story and action in storyboards, which provide
a blueprint for the animation process. Voices and songs are recorded and the
recordings are analyzed and timed so that the animation can be synchronized to
the voice track. Based on the script and storyboard, the Company's artists
create character designs, as well as key background drawings and paintings.
These essential elements are assembled into a pre-production package for each
episode which is then shipped to an overseas subcontractor. Subcontractors use
the pre-production materials to perform most of the labor-intensive aspects of
production. Most of these subcontractors are located in low-cost labor
countries in the Far East, including South Korea, Taiwan, China and the
Philippines. The subcontractor ships the negative and work print for each
episode to the Company. The film is then taken through a post-production
process, which includes editing the picture and dialogue, transferring the
filmed images to video tape, creating sound effects, composing and producing
the musical score and mixing and synchronizing the sound to the picture. After
the post production process, an episode is ready for delivery.
Live Action Television Production. Live action television productions
typically follow a production process similar to animation. Independent
producers such as the Company generally make sales presentations to the
broadcast networks and cable channels during the spring and fall seasons and
receive orders for production beginning in the early summer or early winter.
Once an initial series or pilot script has been ordered, the independent
producer hires a writer approved by the broadcaster, syndication company or
cable channel, that is, the distributor, to write the initial episodes of a
series or a pilot. Once the pilot script is delivered to the distributor, the
distributor decides whether to order a pilot or episodes to be produced. Most
broadcasters and cable channels order pilots before ordering multiple episodes
of a series, while a syndication company usually orders multiple episodes.
Generally the broadcast networks order a small number such as six to eight
episodes for a new series, while the cable networks or syndication company
order 13 to 22 episodes. Once a pilot or multiple episodes are ordered, the
independent producer hires the staff of actors, writers and directors and a
sound stage with the light, camera and grip equipment necessary to produce a
live action series. All of the staff and the equipment involved in a live
action production are assigned to the specific production. The independent
producer edits the footage shot on the sound stage, mixing the video images
with sound and music, and delivers a finished program to the distributor.
Computer Animation Production. The Company has the ability, on a limited
basis primarily for tests and shorts, to produce computer animation on various
platforms. If and when the Company sells computer-animated projects to third
parties, the Company may contract with third party providers to produce the
program on a fee-for-services basis, or it may elect to produce the program
internally and will staff those projects accordingly.
Feature Film Production. The Company has developed a number of feature film
projects, both live action and animated. The Company commenced production of
its first live action theatrical motion picture, My First Mister, in the first
quarter of 2000. This film, directed by Christine Lahti, stars Albert Brooks
and Leelee Sobiesky and is anticipated to be released in the fourth quarter of
2000 by Paramount Classics, a Viacom company.
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Additionally, the Company together with Universal Pictures/MCA and Dustin
Hoffman's Punch Productions, developed the feature film titled There Goes The
Neighborhood. Film Roman has acquired the turnaround rights to There Goes The
Neighborhood (i.e., an option to re-acquire the underlying rights as well as
the rights in the development from Universal, which option can be exercised by
paying Universal its expenses incurred in the development of the feature film,
plus certain additional consideration) and will attempt to secure another
studio financier/distributor in conjunction with Dustin Hoffman's Punch
Productions. The film, if produced, will feature a mixture of live action and
animation (similar to that of Who Framed Roger Rabbit?). While no assurance
can be given that There Goes the Neighborhood will be produced, the Company
currently has a number of other feature film projects in internal development.
The only feature film that the Company is currently producing is My First
Mister. The Company recently entered into an agreement with the Walt Disney
Company for the development and possible production of a theatrical motion
picture based on the television series The Greatest American Hero. The Company
intends to obtain financing for its feature films through both strategic
alliances with major studios and independent film and video distribution
companies. As a result, the Company may be unable to retain control of all or
a significant portion of the rights associated with these feature films.
Distribution of Proprietary Programming
Domestic Television Distribution. Prior to commencing production of its
proprietary programming, the Company generally licenses broadcast rights to a
United States broadcaster. See "--Securing Funding Production for Proprietary
Programming." License fees paid by networks and cable networks for the
Company's proprietary programming can cover as much as 50% of the Company's
direct production costs. In some cases, notably for Saturday morning type
children's programs, the license fees can be less than 20% of the Company's
direct production costs. License fees paid by first-run syndicators for the
Company's proprietary programming generally cover less than 50% of the
Company's direct production costs, and, under certain circumstances, first-run
syndicators pay no license fees. The Company may choose to enter into such a
no-license-fee arrangement when it can share in a portion of the revenues
generated from the sale of advertising aired by a syndicator during the
broadcast of the Company's programming and when the Company has obtained
financing to cover a portion of its direct production costs from sources other
than the syndicator. If the Company's program is highly rated in syndication,
the Company may earn more in revenues from advertisers (since those
advertisers will often be willing to pay higher fees to have their commercials
aired during the broadcast of the Company's program) than the Company would
have earned in revenues from a license fee arrangement with a syndicator that
does not require the syndicator to share advertising revenues with the
Company. Conversely, however, if the Company's program is poorly rated in
syndication, the Company will likely earn less in revenues than if it had
negotiated to receive a license fee.
The license agreement typically includes provisions governing the license
fee, the term during which the program will be broadcast, the number of
episodes and the territories in which the episodes will be broadcast. Upon the
expiration of an initial broadcast license, the exhibition rights for the
applicable program revert to the Company and are available for re-licensing.
International Distribution. Consistent with the Company's strategy to
broaden its line of proprietary programming is its desire to elevate the
profile of its international division and its ability to capture the economic
benefits of owning and controlling the international distribution rights to
its proprietary programming. Recently the international market for American
filmed entertainment product has become increasingly fractionalized and
competitive, similar to the changes experienced in the U.S. In the face of an
increasingly difficult international marketplace, the Company believes that
owning and controlling the international distribution rights to its
programming will be necessary to: (i) successfully finance projects; (ii)
generate significant revenue from the licensing of such programming; and (iii)
support its related international licensing and merchandising efforts.
Furthermore, a strong international division provides the Company with direct
access to market information and feedback, which is increasingly necessary to
produce programs that are marketable on a worldwide basis. In light
7
<PAGE>
of the fact that the Company's Library has not increased in some time, the
Company is exploring other more cost effective forms of international
distribution, while still pursuing international alliances. Since the
establishment of its international distribution division, the Company has
entered into audio-visual license arrangements with international broadcasters
and distributors to exhibit and distribute certain of the Company's
proprietary programming. For the years ended December 31, 1998 and 1999, the
Company's international distribution activities generated revenues of $1.4
million and $0.9 million, respectively (or 4% and 2%, respectively, of total
revenue for such periods).
Home Video Distribution. As described above, one part of the Company's
strategy to expand its product base is to enter the direct-to-video animation
and live action production and distribution business. The Company may provide,
in some cases, a portion of the production funds in return for distribution
guarantees and/or a substantial portion of the production funds from a major
home video distributor. The Company believes that it can create and develop
high quality popular direct-to-video animated and live action programming that
can be economically produced and exploited domestically and internationally.
Animation Acquisition/Alternative Distribution. In late 1999, the Company's
wholly-owned subsidiary, Level 13, launched its website, www.level13.net. The
site is primarily targeted to adults in their twenties, and focuses almost
exclusively on animated short films, some of which were acquired, some of
which were commissioned and others of which were produced by Level 13 or the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors--Risk Associated With Possible New
Businesses".
Library
The Company has retained the proprietary rights associated with the
programs in its library. The Company holds the proprietary rights associated
with the Animated Classic Showcase for fifteen years, and holds most of the
other proprietary rights for the programs listed in the table below in
perpetuity, subject to the rights granted to its licensees.
Build Library Value. The Company owns a library of proprietary
entertainment and intends to add future product by continuing to produce high
quality programming, including broadcast television, cable and direct-to-video
productions, which can be licensed and re-licensed in the world-wide
television, film and video marketplaces. Programming is typically licensed for
five-year cycles. A library of proprietary programming can provide a future
revenue stream, as such programs are re-licensed for broadcast after the
expiration of the initial broadcast license, but such revenue is typically at
reduced rates compared to the initial broadcast license. Programs in the
Company's library can also be licensed to new channels and outlets in emerging
markets around the world.
The following matrix lists the titles currently in the Company's library,
along with the rights the Company possess for each such title.
<TABLE>
<CAPTION>
Domestic International
Distribution Distribution
Number of -------------- ---------------
Episodes Home Home Licensing and
Series Title Produced TV Video TV Video Merchandising Interactive
------------ ------------ ------ ------- ------ --------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Animated Classic
Showcase............... 12 (x 1 hr.) X X X X X X
The Twisted Tales of
Felix the Cat.......... 21 (x 2 hr.) X X X X *
C-Bear and Jamal........ 13 (x 2 hr.) X X X X X X
BRUNO the Kid........... 36 (x 2 hr.) X X X X X X
Mortal Kombat: Defenders
of the Realm........... 13 (x 2 hr.) X X X X
The Mr. Potato Head
Show................... 13 (x 2 hr.) X X *
</TABLE>
- --------
* The Company is entitled to certain licensing, merchandising, and toy
revenue associated with The Twisted Tales of Felix the Cat and The Mr.
Potato Head Show but does not control those rights.
8
<PAGE>
In addition to the series listed above, the Company owns approximately 131
animated short-subjects of various lengths for which the Company has Internet
distribution/exhibition rights. On a large number of those shorts, the Company
has also obtained options to acquire all of the underlying proprietary rights
in such shorts.
Government Regulations
The Federal Communications Commission ("FCC") repealed its financial
interest and syndication rules, effective as of September 21, 1995. Those FCC
rules, which were adopted in 1970 to limit television network control over
television programming and thereby foster the development of diverse
programming sources, had restricted the ability of the three established,
major United States television networks (ABC, CBS and NBC) to own (or to be
owned by) a syndicated television programmer and to own financial interests in
programming aired on their networks. As a consequence, broadcasters have
continued to increase in-house productions of television programming for the
networks' own use and in the network programs in which a network holds a
financial interest. The Company believes that this change, compounded by the
vertical integration discussed above, has had a significant negative impact on
the Company's core animation business to the extent that the networks target
children's programming.
Broadcast customers of the Company are subject to the provisions of the
Children's Television Act of 1990 and the implementing rules issued by the
FCC. These rules, which were amended in August 1996 and became fully effective
in September 1997, require television broadcast station licensees, over the
term of their licenses, to serve the educational and informational needs of
children through their overall programming and programming specifically
designed to serve such needs. The FCC strongly encourages broadcasters
(through the license renewal process) to air between the hours of 7:00 AM and
10:00 PM at least three hours per week of regularly-scheduled programs each at
least 30 minutes in length that have as a significant purpose serving the
educational and informational needs of children aged 16 and under. Such
programming must be specifically identified as educational or informational
programming. While the Company is not subject to the direct jurisdiction of
the FCC, these FCC requirements may influence the content of the Company's
programming in order for the Company to place programs on FCC-licensed
stations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors--Impact of FCC Regulations Requiring
Educational Content Programming."
The Company may be subject to local content and quota requirements in the
international markets, which effectively prohibit or limit access to
particular markets. The Company also seeks to comply with self-regulatory
rules relating to children's programming of the Children's Advertising Review
Unit of The Council of Better Business Bureaus and of the national television
networks by reviewing the proposed content of each property prior to
acquisition and acquiring rights to and distributing only those children's
properties for which there will be no material restrictions on exhibition to
children.
Trademarks
The Company has a registered service mark for the Film Roman name and logo
and a registered trademark for "C-Bear and Jamal". The Company has
applications pending with the United States Patent and Trademark Office to
register several trademarks and service marks, including C-Bear and Jamal,
BRUNO the Kid, Bearsy Bears, Abby Abelskever, 21, Dumont's Double Wide, Big B
and the Level 13 Entertainment name and logo. In addition, the Company has
registered certain "URL" Internet related addresses. Pursuant to arrangements
with the owners of the programs it produces, the Company utilizes certain
trademarks and copyrighted materials, including The Simpsons, Garfield,
Bobby's World, Felix the Cat, The Mask, Richie Rich, Mortal Kombat, Mighty Max
and King of the Hill.
Employees
As of December 31, 1999, the Company had approximately 386 full-time
employees. The Company also regularly engages numerous freelance creative
staff and other independent contractors on a project-by-project
9
<PAGE>
basis. The Company is subject to the terms in effect from time to time of
various industry-wide collective bargaining agreements, including with the
Screen Actors Guild. The Company believes that its relations with its
employees are good.
Item 2. PROPERTIES
The Company conducts its operations through its 87,000 square foot studio
and headquarters located in North Hollywood, California. These facilities are
occupied pursuant to a lease that expires in August 2003 (and contains a
renewal option). The Company also leases certain other production facilities
nearby its headquarters, none of which is considered material. The Company
believes that its current studio and headquarter's facilities are adequate to
meet its needs for the foreseeable future. If the Company continues to grow or
add new shows, additional facilities may be needed.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings and is not
aware of any pending or threatened litigation that, if decided adversely to
the Company, would have a material adverse effect upon the Company's business,
results of operations or financial condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1999.
10
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock (the "Common Stock") is quoted on the Nasdaq
National Market under the symbol "ROMN." The following table sets forth the
high and low closing sale price per share for the Common Stock for each
quarter since the quarter ended December 31, 1997.
<TABLE>
<CAPTION>
1998 High Low
---- ------ ------
<S> <C> <C>
1st Quarter................................................. $1.750 $1.250
2nd Quarter................................................. $1.625 $1.250
3rd Quarter................................................. $1.625 $1.063
4th Quarter................................................. $1.563 $0.719
<CAPTION>
1999
<S> <C> <C>
1st Quarter................................................. $4.500 $1.500
2nd Quarter................................................. $5.625 $2.938
3rd Quarter................................................. $3.750 $2.188
4th Quarter................................................. $2.688 $1.188
<CAPTION>
2000
<S> <C> <C>
1st Quarter (through March 20, 2000)........................ $2.375 $1.688
</TABLE>
At March 23, 2000, there were 47 stockholders of record, excluding the
number of beneficial owners whose shares were held in street name. The Company
believes that the number of beneficial holders is significantly in excess of
this amount.
The Company has not paid dividends on the Common Stock since inception and
does not anticipate paying dividends in the foreseeable future. Management
anticipates that all earnings and other cash resources of the Company, if any,
will be retained by the Company for investment in the business.
11
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1995, 1996,
1997, 1998 and 1999 are derived from the Company's consolidated financial
statements audited by Ernst & Young LLP, independent auditors. The selected
financial data presented below and under "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" should be read in
conjunction with the Company's consolidated financial statements, including
the notes thereto, appearing elsewhere in this Report.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(in thousands, except per share and share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 34,341 $ 49,698 $ 42,296 $ 32,946 $ 48,605
Expenses:
Cost of revenue........ 33,156 50,779 43,013 32,670 48,684
Selling, general and
administrative
expenses.............. 2,963 3,850 4,745 7,715 7,756
---------- ---------- ---------- ---------- ----------
Operating loss.......... (1,778) (4,931) (5,462) (7,439) (7,835)
Interest income
(expense), net......... 89 298 649 707 359
---------- ---------- ---------- ---------- ----------
Loss before provision
for income taxes....... (1,689) (4,633) (4,813) (6,732) (7,476)
Provision for income
taxes.................. -- -- -- 145 17
Net loss................ (1,689) (4,633) (4,813) (6,877) (7,493)
Net loss attributable to
common stock (1)....... $ (2,574) $ (9,267) $ (4,813) $ (6,877) $ (7,493)
========== ========== ========== ========== ==========
Net loss per common
share (1)(2) basic and
diluted................ $ (0.55) $ (1.67) $ (0.57) $ (0.81) $ (0.88)
========== ========== ========== ========== ==========
Pro forma net loss per
common share (3) basic
and diluted............ $ (.43) $ -- $ -- $ -- $ --
========== ========== ========== ========== ==========
Weighted average number
of shares.............. 4,653,750 5,553,094 8,453,440 8,507,026 8,523,609
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------
1995 1996 1997 1998 1999
------ ------- ------- ------- ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................ $5,176 $13,739 $15,986 $11,287 $7,558
Film costs, net of amortization.......... 12,379 21,269 16,084 20,904 18,703
Total assets............................. 18,950 42,817 34,379 34,749 28,150
Short-term debt.......................... 1,737 -- -- -- --
Redeemable Preferred Stock............... 6,749 -- -- -- --
Stockholders' equity..................... 1,832 23,787 18,974 12,098 4,611
</TABLE>
- --------
(1) For the year ended December 31, 1995, the net loss attributable to common
stock gives effect to the accretion of the difference between the
carrying value and the liquidation value of the Company's Class A
Redeemable Preferred Stock of $484,829 and to the accrual of dividends of
$400,000 on the Class A Redeemable Preferred Stock. For the year ended
December 31, 1996, net loss attributable to common stock gives effect to
the accretion of the difference between the carrying value and the
liquidation value of the Class A Redeemable Preferred Stock of $757,544
and to the accrual of dividends of $750,000 on the Class A Redeemable
Preferred Stock, and the excess of the price paid for the redemption of
the Class A Redeemable Preferred Stock over its carrying value of
$3,126,755.
(2) For the year ended December 31, 1995, the per share data is based on the
weighted average number of common and common equivalent shares
outstanding during the period giving effect to the conversion of the
12
<PAGE>
common stock of the Company's predecessor ("Predecessor Common Stock") into
1.25 shares of Common Stock of the Company ("Common Stock") and are
calculated in accordance with a Staff Accounting Bulletin of the Securities
and Exchange Commission ("SAB") No. 98 whereby common stock, options or
warrants to purchase common stock or other potentially dilutive instruments
issued for nominal consideration must be reflected in basic and diluted per
share calculations for all periods in a manner similar to a stock split,
even if antidilutive. For the year ended December 31, 1996, the weighted
average number of common and common equivalent shares outstanding have been
calculated in accordance with the SAB No. 98 for the period prior to the
completion of the Company's initial public offering giving effect to the
conversion of Predecessor Common Stock into 1.25 shares of Common Stock and
in accordance with Statement of Financial Accounting Standards ("SFAS")
Number 128, Earnings per Share for the period after such offering. For the
years ended December 31, 1997, 1998 and 1999 the per share data has been
calculated in accordance with SFAS No. 128. Common equivalent shares,
consisting of outstanding stock options, are not included since they are
antidilutive.
(3) The Company operated as an S Corporation until August 4, 1995. As an S
Corporation, the Company was subject to no federal income taxes and only
minimum state taxes. The pro forma loss per common share amounts reflect
adjustments for additional income taxes that would have been reported if
the Company had been a C Corporation based upon an estimated statutory
rate of 34% in 1995.
<TABLE>
<CAPTION>
Year Ended
December 31,
1995
------------
<S> <C>
Loss attributable to common stock as reported................... $(2,574)
Pro forma provision for income taxes............................ 574
Pro forma (loss)................................................ $(2,000)
=======
Pro forma (loss) per common share basic and diluted............. $ (0.43)
=======
</TABLE>
13
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Film Roman, Inc. ("Film Roman" or the "Company") was founded in 1984 and
has grown into one of the leading independent animation studios in the world.
Film Roman has produced or is producing some of the world's best known
animated series, including The Simpsons, King of the Hill, The Mask, Bobby's
World, The Twisted Tales of Felix the Cat, and Garfield and Friends. Over the
years the Company has primarily produced animation for television, both on a
fee-for-service and a proprietary basis.
Production work on a fee-for-services basis has historically accounted for
the largest and most reliable portion of the Company's revenues. Fees paid to
the Company for these production services generally range from $300,000 to
$800,000 per episode and typically cover all direct production costs plus a
profit margin. The Company also produces 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 and from fees from producing programs for third parties. 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 FCC governing program content. While the
Company seeks to limit its financial risk associated with its proprietary
programming by obtaining commitments from third parties 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 is also continuing expansion of its production capabilities
into live action, and expansion of its intended markets beyond television,
including motion pictures, cable, direct-to-video, commercials, and the
Internet. 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 theatrical 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, 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
14
<PAGE>
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.
Revenue and Cost Recognition
The Company follows FASB 53 for accounting practices related to revenue
recognition and amortization of production costs for its fee-for-services and
proprietary programming.
Revenues from license and production agreements, which may provide for the
receipt by the Company of nonrefundable guaranteed amounts, are recognized
when the license period begins and the programming is available pursuant to
the terms of the agreement, typically when the finished episode has been
delivered to or made available to and accepted by the customer. Amounts in
excess of minimum guarantees under such agreements are recognized when earned.
Cash collected in advance of the time of availability of programming is
recorded as deferred revenue ($19.3 million at December 31, 1999).
All costs incurred in connection with an individual program or film,
including acquisition, development, production and allocable production
overhead costs are capitalized as film costs. At December 31, 1999, the
Company's capitalized film costs balance was $18.7 million. These costs are
stated at the lower of unamortized cost or estimated net realizable value.
Estimated total production costs for an individual program or film are
amortized in the proportion that revenue realized relates to management's
estimate of the total revenue expected to be received from such program or
film. Estimated liabilities for third party participations are accrued and
expensed in the same manner as film costs are amortized. Due to the inherent
uncertainties of forecasting both total revenue and total expense, at any time
one or the other can be overstated or understated, resulting in potential
adjustments to the amortization rate or net realizable value calculation.
The Company's cash flows are not necessarily related to revenue recognition
and amortization of production costs. Cash is received and costs are incurred
(and paid) throughout the year. 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. 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.
Overhead Allocation
Overhead is allocated to particular productions on the basis of the total
allocable overhead times the ratio of direct production costs incurred on a
program to total production costs incurred during the period. Total allocable
overhead is determined on the basis of management's estimates of the
percentage of overhead costs which can be attributed to the productions in
progress during the period.
Results of Operations
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Total revenue increased by 48%, or $15.7 million, to $48.6 million for the
year ended December 31, 1999, from $32.9 million for the prior year. Total
revenue increased primarily because the Company delivered more episodes of
programming in 1999 as compared to 1998. The Company delivered a total of 73
episodes of programming for the year ended December 31, 1999 as compared to 57
episodes delivered in 1998.
The Company delivered 73 "fee-for-services" episodes during the year ended
December 31, 1999, compared to 44 episodes in 1998 as a result of providing
services on more shows in 1999 compared to 1998.
15
<PAGE>
Fee-for-services revenue increased 70%, or $18.5 million, to $45.0 million for
the year ended December 31, 1999, from $26.5 million in 1998 as a result of
delivering more episodes of programming.
The Company delivered no "proprietary" episodes for the year ended December
31, 1999, compared to 13 episodes in 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 73%, or $2.4 million, to $0.9 million for
the year ended December 31, 1999, from $3.3 million in 1998. This decrease was
a result of delivering no "proprietary" episodes in 1999, and lower
international sales of the Company's library programming in 1999.
Other revenue decreased by approximately $0.4 million for the year ended
December 31, 1999, as compared to the prior year, due primarily to lower
revenues from commercials and net profit participations, offset by higher
specials revenue and other creative services revenue.
Total cost of revenue increased by 49%, or $16.0 million, to $48.7 million
for the year ended December 31, 1999, from $32.7 million for the year ended
December 31, 1998. Total cost of revenue as a percentage of sales increased 1%
to 100% for the year ended December 31, 1999, from 99% in 1998. For the year
ended December 31, 1999, the Company recorded write downs of film inventory
due to changes in estimates of net realizable value amounting to $2,354,000.
Total selling, general and administrative expenses for the year ended
December 31, 1999 increased by $0.1 million to $7.8 million from $7.7 million
for the comparable period in 1998, due primarily to an increase in the cost of
the Company's development spending. This increase was offset by a decreased
spending in the international division and in various general and
administrative areas.
Operating loss was $7.8 million for the year ended December 31, 1999, as
compared to a loss of $7.4 million for the year ended December 31, 1998.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Total revenue decreased by 22%, or $9.4 million, to $32.9 million for the
year ended December 31, 1998, from $42.3 million for the prior year. Total
revenue decreased in part because the Company delivered fewer episodes of
programming in 1998 as compared to 1997. The Company delivered a total of 57
episodes of programming for the year ended December 31, 1998 as compared to 68
episodes delivered in 1997. However, the primary reason for the decrease in
total revenue is that in September 1997, United Paramount Network ("UPN") and
the Company entered into a settlement whereby UPN compensated the Company for
a portion of the costs associated with Blues Brothers: The Animated Series
("Blues Brothers"). UPN had initially ordered the series and subsequently
cancelled its order while the series was in production. The Company's
investment amounted to approximately $6.0 million as of December 31, 1997, and
the Company received revenue of $4.0 million and recorded a write-off for the
year ended December 31, 1997, of approximately $2.0 million.
The Company delivered 44 "fee-for-services" episodes during the year ended
December 31, 1998, compared to 58 episodes in 1997 as a result of providing
services on fewer shows in 1998 compared to 1997. Fee-for-services revenue
decreased 13%, or $4.1 million, to $26.5 million for the year ended December
31, 1998, from $30.6 million in 1997 as a result of delivering no Saturday
morning episodes.
The Company delivered 13 "proprietary" episodes for the year ended December
31, 1998, compared to 10 episodes in 1997. "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"
16
<PAGE>
revenue decreased by 63%, or $5.6 million, to $3.3 million for the year ended
December 31, 1998, from $8.9 million in 1997. This decrease resulted from
Blues Brothers settlement revenue being included in 1997 but not 1998, and
lower international sales of the Company's library programming in 1998.
Other revenue increased by approximately $0.3 million for the year ended
December 31, 1998, as compared to the prior year, due primarily to higher
revenues from commercials and specials, and net profit participations, offset
by lower interactive revenue and other creative services revenue.
Total cost of revenue decreased by 24%, or $10.3 million, to $32.7 million
for the year ended December 31, 1998, from $43.0 million for the year ended
December 31, 1997. Total cost of revenue as a percentage of sales decreased by
3%, to 99% for the year ended December 31, 1998, from 102% for the year ended
December 31, 1997. Costs as a percentage of revenue decreased primarily
because the costs for the twelve months ended December 31, 1997 included a
write-off related to Blues Brothers as discussed earlier. The overall decrease
was partially offset by a 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 year ended
December 31, 1998 increased by $3.0 million to $7.7 million from $4.7 million
for the comparable period in 1997, due primarily to an increase in the cost of
the Company's development infrastructure and an increase in the expense of
certain development costs, as well as an accrual for the charges related to
the Company's termination of its employment contract with the founder of the
Company. These increases were partially offset by outsourcing the Company's
licensing and merchandising activities.
Operating loss was $7.4 million for the year ended December 31, 1998, as
compared to a loss of $5.5 million for the year ended December 31, 1997.
Liquidity and Capital Resources
At December 31, 1999, the Company had cash and short-term investments of
approximately $7.6 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 cash to decline further during
fiscal 2000. 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. Nonetheless the Company may need to secure additional equity or
debt financing during fiscal 2000 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 Company's losses may
make it more difficult for the Company to attract 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 and its
ability to successfully run its operation.
For the fiscal year ended December 31, 1999, net cash used in operating
activities was approximately $3.3 million due to cash used in connection with
film production activities offset by an increase in accounts payable and a
decrease in accounts receivable. Cash used in investing activities for the
year ended December 31, 1999 was $0.4 million. Cash provided by financing
activities for the year ended December 31, 1999 was $2,860.
17
<PAGE>
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 December 31, 1999, the Company had a balance in its deferred revenue
account of $19.3 million. There will be an approximate net cost to the Company
(future receipts less future expenditures) of $1.1 million to finish the
programs for which cash has been collected in advance and included in deferred
revenue.
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission
critical information technology and non-information technology systems and
believes those systems successfully responded to the Year 2000 date change.
The Company expensed approximately $40,000 during 1999 in connection with
remediating its systems. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal
systems or the products and services of third parties utilized by the Company.
The Company will continue to monitor its mission critical computer
applications and those of its suppliers and vendors throughout the year 2000
to ensure that any latent Year 2000 matters that may arise are addressed
promptly.
Risk Factors
The Company's business is subject to numerous risk factors, not all of
which can be known or anticipated and any one of which could adversely impact
the Company or its financial condition. Some of those risk factors are as
follows:
Failure to Renew Licenses or Production Agreements. There can be no
assurance that any of the programs being produced by the Company will be
relicensed for additional broadcast seasons or renewed for production or, if
so relicensed or renewed, that the terms of the license agreements or
production agreements will be as favorable to the Company as those of existing
licenses or production agreements.
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. King of the Hill, The Simpsons, Family Guy and Mission
Hill accounted for approximately 33%, 30%, 14% and 12% respectively, of our
total revenue for the year ended December 31, 1999. We cannot assure that
broadcasters will continue to broadcast our "proprietary" or "fee-for-
services" programs or that we will continue to be engaged to produce such
programs.
Impact of FCC Regulations. Certain FCC rules may adversely affect the
number of time slots available for our productions.
Risks of Vertical Integration. Over the last decade, broadcasters,
distributors and producers of television 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. As a result, the number of time slots available
for children's and/or animated programming and, specifically, for animated
programming supplied by independent animation studios, may decrease, making it
more difficult to compete successfully for available time slots.
Declining Value of License Fee Agreements and Increasing Control of
Proprietary Rights by Broadcasters. 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 may continue to decrease and
make it difficult for us to finance certain proprietary programs.
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 program is
an individual artistic work, and consumer reaction will determine its
commercial success. We cannot assure 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.
18
<PAGE>
Risks Related to Expansion of Production of Proprietary Programming. We
intend to expand our production of programming for which we own or control
certain 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 the development of 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.
Risk of Budget and Cost Overruns. Although we review costs reports and
update our cost projections regularly and have generally completed each of our
productions within its budget, we cannot assure that the actual production
costs for our programming will remain within budget.
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.
Competition. 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 slots available to independent animation companies. As a
result of these factors, the Company cannot make assurances that we will be
able to remain competitive.
Risks Related to International Operations. There are many risks inherent in
our international business activities. Our projects could be adversely
affected by:
. reversals or delays in the opening of foreign markets to new
competitors;
. unexpected changes in regulatory requirements;
. export controls, tariffs and other barriers;
. currency fluctuations;
. investment policies;
. nationalization, expropriation and limitations on repatriation of cash;
and
. social and political risks.
19
<PAGE>
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 production
costs or our inability to contract with our preferred overseas studios.
Risks Associated with Possible New Businesses. 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). 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. 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.
Technological Changes; Possible Changes in Production of Our Products. The
proliferation of new production technologies may change the manner in which
the animation industry creates and distributes 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.
Dependence upon Key Personnel. Our success depends to a significant extent
upon the expertise and services of John Hyde, our President and Chief
Executive Officer. Although we have employment agreements with Mr. Hyde and
certain of our other key management personnel, the loss of services of Mr.
Hyde and/or other key management personnel could have an adverse effect on our
business, results of operations and financial condition. We do not currently
carry "key man" life insurance policies on any of our executives.
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 of Directors 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.
Volatility of Stock Price
The market price of our common stock, which trades on the Nasdaq National
Market, could fluctuate significantly in response to our operating results and
other factors.
20
<PAGE>
We Do not Intend To Pay Dividends
We have never paid dividends and currently do not intend to declare or pay
dividends. We plan to follow a policy of retaining earnings to finance the
growth of our business. Whether or not we declare or pay dividends is up to
our Board of Directors and will depend on our results of operations, financial
condition, contractual and legal restrictions and other factors our Board of
Directors deems relevant at that time.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not utilize market risk sensitive instruments (such as
derivative financial instruments) for trading or other purposes.
The Company has low exposure to interest rate risk. The Company currently
does not have any debt (fixed or floating rate) other than trade liabilities
and invests its cash assets in debt instruments with maturities of less than
90 days. Thus, a decrease (or increase) in future interest rates will directly
and proportionately decrease (or increase, respectively) the Company's future
interest income. For the twelve months ended December 31, 1999, the Company
earned interest income of $359,118.
The Company is not exposed to significant foreign exchange rate risk. All
of the Company's contracts with foreign subcontractors are dollar-denominated.
The Company makes limited international sales in foreign currencies, the
aggregate of which the Company estimates to be less than one percent of the
Company's yearly revenue.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data are set forth in this
annual report on Form 10-K commencing on page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers and Directors
The directors and executive officers of the Company at March 15, 2000 are
identified below:
<TABLE>
<CAPTION>
Name Age Position (1)
---- --- -----------
<S> <C> <C>
John W. Hyde............ 58 President, Chief Executive Officer (Class III Director)
Jon F. Vein............. 36 Executive Vice President
Gregory Arsenault....... 42 Senior Vice President--Finance and Administration
Robert Cresci (3)....... 56 Class I Director
Dixon Q. Dern........... 71 Class III Director
Peter Mainstain (3)..... 51 Class II Director
Daniel Villanueva (2)... 62 Class III Director
Leonard J. Grossi (2)
(3).................... 54 Class I Director
</TABLE>
- --------
(1) Each director holds office until his resignation or removal and until his
successor shall have been duly elected and qualified. Elections with
respect to the Class I Directors, Class II Directors and Class III
Directors will be held at the Annual Meeting of Stockholders in 2000, 2001
and 2002 respectively.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
The principal occupations and positions for the past five years and in
certain cases prior years, of the directors and executive officers named above
are as follows:
John W. Hyde. John Hyde joined Film Roman as President and CEO in December
1999. Mr. Hyde is CEO and the principal of Producers Sales Organization, which
holds investments in film negatives, film and television rights, a music
library and agricultural real estate. Mr. Hyde was the Trustee, General
Manager and FCC license holder for KADY-TV from July 1996 through the sale of
the television station in July 1998, since which time Mr. Hyde has remained as
Trustee to disburse the funds from the sale. From August 1994 through July
1998, Mr. Hyde was Trustee and CEO of Cannon Pictures, Inc. and Cannon
Television Inc. Mr. Hyde was CEO of MCEG Sterling, Inc. from December 1990
through December 31st 1995, at which time MCEG was part of a three-way merger
with Orion Pictures, Inc. and Actava Group, Inc. Prior to his term at MCEG,
Mr. Hyde held numerous senior executive positions in the entertainment
industry. Mr. Hyde graduated from New York University in 1963.
Jon F. Vein. In February 1995, Mr. Vein joined Film Roman as a Executive
Vice President where he oversees business and legal affairs and new business
development for the Company. Mr. Vein also established and oversees the
Company's feature film division. Prior to joining the Company, Mr. Vein
practiced entertainment law at Dern & Donaldson from 1990 to 1993 and at Dern
& Vein from 1993 to 1995. Mr. Vein received his Bachelor of Science degree in
electrical engineering-computer science and material sciences engineering from
the University of California at Berkeley in 1986 and his Juris Doctor degree
from The Harvard Law School in 1989.
Gregory Arsenault. Mr. Arsenault joined the Company in 1991 as Accounting
Manager, served as Controller for two years, served as Vice President of
Finance for two years and was promoted to Senior Vice President-Finance and
Administration in 1996. Mr. Arsenault oversees the Company's accounting
department and the administrative activities of the Company. Prior to joining
Film Roman, Mr. Arsenault served as an accounting systems consultant for LIVE
Entertainment and began his professional career at Peat, Marwick, Mitchell and
Co. Mr. Arsenault received his Bachelor of Science degree in accounting from
the University of Southern California in 1980.
22
<PAGE>
Robert Cresci. Mr. Cresci has been a Director of Film Roman since August
1995 and has been a Managing Director of Pecks Management Partners Ltd., an
investment management firm, since September 1990. Mr. Cresci currently serves
on the board of directors of Bridgeport Machines, Inc., EIS International,
Inc., Sepracor, Inc., Arcadia Financial, Ltd., Hitox, Inc., Educational
Medical, Inc., Aviva Petroleum, Candlewood Hotel Co., Castle Dental Inc.,
Seracare Inc. and Sound Media Inc.
Dixon Q. Dern. Mr. Dern has been a director of Film Roman since August
1995. Mr. Dern has practiced entertainment law for over 40 years and currently
owns and operates his own private practice which specializes in entertainment,
copyright and communications law.
Daniel Villanueva. Mr. Villanueva is chairman of Bastion Capital
Corporation; a Los Angeles based buyout fund. Previously, he was a director
and officer of Spanish International Communications Corporation, and later,
director of 7UP Bottling of Southern California and is currently a trustee of
the Metropolitan West Group of mutual funds and a member of the board of
directors of NUMEX Corp. Mr. Villanueva is a former player in the National
Football League for both the Los Angeles Rams and Dallas Cowboys.
Leonard J. Grossi. Mr. Grossi joined the Board of Directors in January
2000. In 1998, Mr. Grossi founded, and Mr. Grossi is currently CEO of, both
Baseline Media & Entertainment, Inc., a broadcast, media and entertainment
consulting firm, and Mile Square Entertainment, Inc., (where, additionally, he
is Executive Producer) a Television and Motion Picture development, production
and distribution company. Mr. Grossi is a partner in LSLG Associates, which
owns a 49% interest in WHPN-TV, a Madison, Wisconsin UPN affiliate. Mr. Grossi
will become a minority owner and CEO of KDI Channel 17, a Spanish language,
independent, low-power television station in San Diego being purchased by a
local tribe of Native Americans. From October 1994 to February 1998, Mr.
Grossi was Senior Executive Vice President of UPN and functioned as the
company's founding Chief Operating Officer. From August 1986 to October 1994,
Mr. Grossi served as Executive Vice President of Twentieth Century Fox
Television, managing worldwide production, marketing and distribution
activities. Mr. Grossi's other prominent positions include CEO of Metromedia
Producers Corporation; COO of Sound Video Unlimited; and from 1978 to 1983 was
head of Finance and Administration for Paramount's Worldwide Television and
Video Distribution divisions.
In February 2000, the Company and William Shpall mutually agreed that Mr.
Shpall's employment as Chief Operating Officer of the Company would be
terminated, whereupon the Company and Mr. Shpall entered into an agreement
whereby Mr. Shpall would be engaged as a consultant by the Company until
September 30, 2000.
The balance of the information required by this item is incorporated by
reference to the Company's definitive Proxy Statement filed pursuant to
Regulation 14A under the Exchange Act in connection with the Company's 2000
Annual Meeting of Stockholders.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement filed pursuant to Regulation 14A under
the Exchange Act in connection with the Company's 2000 Annual Meeting of
Stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement filed pursuant to Regulation 14A under
the Exchange Act in connection with the Company's 2000 Annual Meeting of
Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement filed pursuant to Regulation 14A under
the Exchange Act in connection with the Company's 2000 Annual Meeting of
Stockholders.
23
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules required to be filed hereunder are
indexed on page F-1 hereof.
(b) No reports on Form 8-K were filed during the quarter ended December 31,
1999.
(c) Those Exhibits, and the Index thereto, required to be filed by Item 601
of Regulation S-K are attached hereto. Certain management contracts and other
compensation plans or arrangements required to be filed are identified on the
attached Index with an asterisk.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized as of
the 30th day of March, 2000.
FILM ROMAN, INC.
/s/ John Hyde
By: _________________________________
John Hyde
President and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John Hyde and Dixon Dern, or any one of them,
his attorney-in-fact and agent, with full power of substitution for him, in
any and all capacities, to sign any amendments to this Annual Report on Form
10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact, or their
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John Hyde Chief Executive Officer, March 30, 2000
____________________________________ President and Director
John Hyde
/s/ Gregory Arsenault Senior Vice President- March 30, 2000
____________________________________ Finance and Administration
Gregory Arsenault (Principal Accounting and
Financial Officer)
/s/ Robert Cresci Director March 30, 2000
____________________________________
Robert Cresci
/s/ Peter Mainstain Director March 30, 2000
____________________________________
Peter Mainstain
/s/ Dixon Q. Dern Director March 30, 2000
____________________________________
Dixon Q. Dern
/s/ Daniel Villanueva Director March 30, 2000
____________________________________
Daniel Villanueva
/s/ Leonard Grossi Director March 30, 2000
____________________________________
Leonard Grossi
</TABLE>
25
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
+3.1 Certificate of Incorporation of Film Roman, Inc., a Delaware
corporation (the "Company")
+3.2 Bylaws of the Company
3.3 Amendment to Bylaws of the Company dated as of August 5, 1997
(Incorporated by reference to Exhibit 3.3 to the Company's Form 10-Q
for the quarter ended September 30, 1997)
#4.1 Specimen Stock Certificate
*10.1 Executive Engagement Agreement, dated as of December 9, 1999, between
the Company and Producers Sales Organization, furnishing the services
of John W. Hyde.
#*10.2 Employment Agreement dated as of January 2, 1996 by and between Film
Roman California and Mr. Gregory Arsenault (Exhibit 10.5)
*10.3 Employment Agreement dated as of December 31, 1999 by and between Film
Roman California and Mr. Jon Vein
*10.4 Intentionally Omitted
*10.5 Amendment dated as of January 14, 2000 to Employment Agreement dated
as of August 1, 1997 between Film Roman California and Mr. Jon Vein
*10.6 1999 Non-Employee Director Stock Option Plan of the Company
(Incorporated by reference to Exhibit No. 4.1 to the Company's
registration statement on Form S-8 (Registration No. 333-90009), as
filed with the Securities and Exchange Commission on October 29,
1999.)
*10.7 Stock Option Plan of the Company (Incorporated by reference to Exhibit
10.7 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997)
&*10.8 Form of Non-Qualified Stock Option Agreement for Employees
&*10.9 Form of Incentive Stock Option Agreement for Employees
*10.10 First Amendment to 1996 Stock Option Plan of Film Roman, Inc.
(Incorporated by reference to Exhibit 10.10 to the Company's Form 10-Q
for the quarter ended June 30, 1998)
#10.11 Lease for Registrant's headquarters and studio in North Hollywood,
California
10.12 Intentionally Omitted
10.13 Intentionally Omitted
#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.
#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's 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 Intentionally omitted
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
#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, Inc.
#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 January 29, 1992 between Film Roman, Inc. and
20th Television (Exhibit 10.43)
#10.42 Agreement dated as of March 7, 1996, between Film Roman, Inc. and LUK
International (Exhibit 10.44)
#10.44 Co-Production Agreement between Television Espanola, S.A. and Film
Roman, Inc. (Exhibit 10.46)
10.45 Agreement dated as of February 26, 1998 between Claster Television and
Film Roman, Inc. in connection with "Mr. Potato Head" (As indicated by
asterisk, selected text of the agreement has been redacted pursuant to
a confidentiality request) (Incorporated by reference to Exhibit 10.45
of the Company's Form 10-Q for the quarter ended June 30, 1998)
10.46 Agreement dated as of February 26, 1998 between Fox Kids Worldwide,
Inc. and Film Roman, Inc. in connection with "Mr. Potato Head" (As
indicated by asterisk, selected text of the agreement has been
redacted pursuant to a confidentiality request) (Incorporated by
reference to Exhibit 10.46 of the Company's Form 10-Q for the quarter
ended June 30, 1998)
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
</TABLE>
- --------
+ Incorporated by reference to the similarly numbered exhibit (or to the
exhibit number listed in parentheses) to the Company's Registration
Statement on Form S-1 (Registration No. 333-03987) as filed with the
Securities and Exchange Commission on May 17, 1996.
# Incorporated by reference to a similarly numbered exhibit (or to the
exhibit number listed in parentheses) to Amendment Number 1 to the
Company's Registration Statement on Form S-1, on Form S-1/A (Registration
No. 333-03987), as filed with the Securities and Exchange Commission on
July 12, 1996.
& Incorporated by reference to a similarly numbered exhibit to Amendment
Number 3 to the Company's Registration Statement on Form S-1, on Form S-1/A
(Registration No. 333-03987), as filed with the Securities and Exchange
Commission on September 30, 1996.
* Management contract or other compensation plan or arrangement.
27
<PAGE>
FILM ROMAN, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Index to Consolidated Financial Statements................................ F-1
FILM ROMAN, INC.
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999............ F-3
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1998, and 1999................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1998, and 1999...................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Film Roman, Inc.
We have audited the accompanying consolidated balance sheets of Film Roman,
Inc. as of December 31, 1998 and 1999, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Film Roman,
Inc. as of December 31, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
Los Angeles, California
March 17, 2000
F-2
<PAGE>
FILM ROMAN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents.......................... $ 11,287,386 $ 7,557,673
Accounts receivable................................ 1,089,218 480,832
Film costs, net of accumulated amortization ....... 20,903,771 18,703,495
Property and equipment, net of accumulated
depreciation and amortization of $1,559,112 (1998)
and $2,021,674 (1999)............................. 979,090 950,651
Deposits and other assets.......................... 489,205 457,093
------------ ------------
Total assets....................................... $ 34,748,670 $ 28,149,744
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accounts payable................................... $ 628,221 $ 1,714,705
Accrued expenses................................... 2,350,695 2,496,581
Deferred revenue................................... 19,671,667 19,327,253
------------ ------------
Total liabilities.................................. 22,650,583 23,538,539
Commitments
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 8,524,190 shares issued
and outstanding in 1999......................... 85,223 85,243
Additional paid-in capital......................... 36,305,684 36,311,837
Accumulated deficit................................ (24,292,820) (31,785,875)
------------ ------------
Total stockholders' equity......................... 12,098,087 4,611,205
------------ ------------
Total liabilities and stockholders' equity....... $ 34,748,670 $ 28,149,744
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
FILM ROMAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenue................................ $42,296,156 $32,945,502 $48,605,144
Cost of revenue........................ 43,012,909 32,670,121 48,683,993
Selling, general and administrative
expenses.............................. 4,745,363 7,714,450 7,756,561
----------- ----------- -----------
Operating loss......................... (5,462,116) (7,439,069) (7,835,410)
Interest income........................ 648,792 707,146 359,118
Loss before provision for income
taxes................................. (4,813,324) (6,731,923) (7,476,292)
----------- ----------- -----------
Provision for income taxes............. -- 144,644 16,763
----------- ----------- -----------
Net loss............................... $(4,813,324) $(6,876,567) $(7,493,055)
=========== =========== ===========
Net loss per common share basic and
diluted............................... $ (0.57) $ (0.81) $ (0.88)
=========== =========== ===========
Weighted average number of shares
outstanding and diluted............... 8,453,440 8,507,026 8,523,609
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
FILM ROMAN, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Total
----------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
--------- ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance as of December
31, 1996............... 8,449,690 $84,498 $36,305,684 $(12,602,929) $23,787,253
Options exercised....... 5,000 50 -- -- 50
Net loss................ -- -- -- (4,813,324) (4,813,324)
--------- ------- ----------- ------------ -----------
Balance as of December
31, 1997............... 8,454,690 84,548 36,305,684 (17,416,253) 18,973,979
Options exercised....... 67,500 675 -- -- 675
Net loss................ -- -- -- (6,876,567) (6,876,567)
--------- ------- ----------- ------------ -----------
Balance as of December
31, 1998............... 8,522,190 $85,223 $36,305,684 $(24,292,820) $12,098,087
Options exercised....... 2,000 20 2,840 -- 2,860
Compensation expense
relating to
Employee stock options.. -- -- 3,313 -- 3,313
Net loss................ -- -- -- (7,493,055) (7,493,055)
--------- ------- ----------- ------------ -----------
Balance as of December
31, 1999............... 8,524,190 $85,243 $36,311,837 $(31,785,875) $ 4,611,205
========= ======= =========== ============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
FILM ROMAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net loss............................ $ (4,813,324) $ (6,876,567) $ (7,493,055)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization....... 264,302 360,618 462,562
Amortization of film costs.......... 43,012,909 32,670,121 48,683,993
Compensation expense relating to
employee stock options............. -- -- 3,313
Changes in operating assets and
liabilities:
Accounts receivable................. 5,728,267 138,924 608,386
Film costs.......................... (37,828,074) (37,489,782) (46,483,717)
Deposits and other assets........... (229,302) 55,722 32,112
Accounts payable.................... (2,780,550) (381,365) 1,086,484
Accrued expenses.................... 374,100 146,281 145,886
Deferred revenue.................... (1,218,942) 7,481,017 (344,414)
------------ ------------ ------------
Net cash provided by (used in)
operating activities............... 2,509,386 (3,895,031) (3,298,450)
Investing activities:
Additions to property and
equipment.......................... (262,113) (804,508) (434,123)
------------ ------------ ------------
Net cash used in investing
activities......................... (262,113) (804,508) (434,123)
Financing activities:
Option and warrants exercised and
other.............................. 50 675 2,860
------------ ------------ ------------
Net cash provided by financing
activities......................... 50 675 2,860
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents................... 2,247,323 (4,698,864) (3,729,713)
Cash and cash equivalents at
beginning of period................ 13,738,927 15,986,250 11,287,386
------------ ------------ ------------
Cash and cash equivalents at end of
period............................. $ 15,986,250 $ 11,287,386 $ 7,557,673
============ ============ ============
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest............................ $ 12,837 $ -- $ --
============ ============ ============
Income taxes........................ $ -- $ 34,308 $ 16,763
============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
FILM ROMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. Summary of Significant Accounting Policies
Business and Organization
Film Roman, Inc., a Delaware corporation (the "Company"), was incorporated
in May 1996. 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; Diversion Entertainment, Inc., a Delaware corporation
and Level 13 Entertainment, Inc., a Delaware corporation. The Company operates
in one segment and 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 Family Guy and Mission Hill.
Cash and Cash Equivalents and Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments with
high credit, quality financial institutions with original maturities when
purchased of three months or less and therefore are subject to little risk.
The Company has not incurred any losses relating to these investments.
The Company performs production services for various companies within the
entertainment industry and licenses various rights in its product to
distributors throughout the world. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not
require collateral. At December 31, 1999, substantially all of the Company's
trade receivables were from customers in the entertainment industry.
Receivables generally are due within 30 days. Credit losses relating to
customers in the entertainment industry consistently have been within
management's expectations.
The Company's cash and short-term investment balances have continued to
decline since December 31, 1998 and the Company expects cash to decline
further during fiscal 2000. 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.
Financial Instruments
Financial instruments are carried at historical cost which approximates
fair value.
Revenue Recognition
The Company recognizes revenues in accordance with the provisions of
Financial Accounting Standards Board Statement No. 53 (FAS 53). Revenues from
license and production agreements, which may provide for the receipt by the
Company of nonrefundable guaranteed amounts, are recognized when the license
period begins and the programming is available pursuant to the terms of the
agreement, typically when the finished product has been delivered to or made
available to and accepted by the customer. Amounts in excess of minimum
guarantees under such agreements are recognized when earned. Cash collected in
advance of the time of availability of programming is recorded as deferred
revenue.
F-7
<PAGE>
FILM ROMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Film Costs
Costs incurred in connection with the acquisition of story rights, the
development of stories, production and allocable production overhead are
capitalized as film costs. Film costs are stated at the lower of unamortized
cost or estimated net realizable value. In accordance with FAS 53, the
individual film forecast method is used to amortize film costs. Costs
accumulated in the production of a film are amortized in the proportion that
gross revenues realized bear to management's estimate of the total gross
revenues expected to be received. Estimated liabilities for third party
participations are accrued and expensed in the same manner as film costs are
amortized.
Revenue estimates on a film-by-film basis are reviewed periodically by
management and are revised, if warranted, based upon management's appraisal of
current market conditions. Based on this review, if estimated future gross
revenues from a film are not sufficient to recover the unamortized costs, the
unamortized film cost shall be written down to net realizable value. In
unusual cases, such as a change in public acceptance of certain types of films
or actual costs substantially in excess of budgeted costs, a write-down to net
realizable value may be required before the film is released.
Depreciation and Amortization
Property and equipment are recorded at cost. Depreciation on furniture and
equipment is computed by the double-declining balance method over their
estimated useful lives, ranging from five to seven years. Leasehold
improvements are amortized over their estimated useful lives, or the remaining
term of the related lease, whichever is shorter, using the straight-line
method.
Income Taxes
The Company uses the liability method required by Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes". Deferred
taxes are provided for any differences between the carrying value of assets
and liabilities for financial reporting and tax purposes.
Stock-based Compensation
The Company accounts for its stock compensation arrangements under the
provisions of Accounting Principles Board (APB) No. 25, "Accounting for Stock
Issued to Employees" and intends to continue to do so.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Comprehensive Income (Loss)
The Company has adopted the disclosure requirements of SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 requires the Company to display
an amount representing comprehensive income for the year in a financial
statement which is displayed with the same prominence as other financial
statements. The Company had no items of comprehensive income (loss) during the
reporting periods.
Net Loss Per Common Shares
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, (1,000,023 (1997), 1,829,034
(1998) and 1,262,000 (1999)) are not included since they are antidilutive.
F-8
<PAGE>
FILM ROMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
2. Film Costs
The components of unamortized film costs consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
----------- -----------
<S> <C> <C>
Film productions released, net of amortization..... $ 4,185,682 $ 1,029,946
Film productions in process........................ 16,390,064 17,174,838
Film productions in development.................... 328,025 498,711
----------- -----------
$20,903,771 $18,703,495
=========== ===========
</TABLE>
Based on management's estimates of future gross revenues as of December 31,
1999, approximately 51% of unamortized film costs applicable to released films
will be amortized during the three years ending December 31, 2002 due to
product availability extending past that date.
3. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Leasehold improvements............................ $ 263,087 $ 386,481
Furniture and fixtures............................ 297,132 588,224
Office equipment.................................. 1,977,983 1,997,620
----------- -----------
2,538,202 2,972,325
Less accumulated depreciation and amortization.... (1,559,112) (2,021,674)
----------- -----------
$ 979,090 $ 950,651
=========== ===========
</TABLE>
4. 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 the 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 December 31,
1997, and the Company recorded a write-off for the year ended December 31,
1997, of approximately $2.0 million.
F-9
<PAGE>
FILM ROMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
5. Income Taxes
The significant components of the Company's net deferred tax assets
(liabilities), for which a 100% valuation allowance has been provided and
which have not been recognized in the Company's financial statements, are as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1999
------------ -----------
<S> <C> <C>
Film costs........................................ $ (371,000) $ 72,000
Property and Equipment............................ (13,000) (14,000)
Nondeductible accrual............................. 166,000 141,000
Foreign Tax Credit Carryforward................... 145,000 162,000
Other............................................. 179,000 188,000
Net operating loss carryforwards.................. 6,722,000 9,255,000
------------ -----------
Valuation allowance............................... 6,828,000 9,804,000
(6,828,000) (9,804,000)
------------ -----------
$ -- $ --
============ ===========
</TABLE>
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998 1999
---- -------- -------
<S> <C> <C> <C>
Current:
Foreign................................................ -- $145,000 $17,000
=== ======== =======
</TABLE>
A reconciliation of income tax computed at the statutory federal income tax
rate to the effective tax rate for the Company is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Provision for income taxes at
statutory rate of 35%.............. $(1,685,000) $(2,407,000) $(2,656,000)
Permanent Differences............... 2,000 69,000 59,000
Benefit of deferred tax assets not
currently recognized............... 1,663,000 2,338,000 2,597,000
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
At December 31, 1999, the Company had available federal and state tax net
operating loss carryforwards of approximately $23,138,000 and $11,566,000,
respectively, expiring through 2019 and 2004, respectively. At December 31,
1999, the Company had available foreign tax credit carryforwards of
approximately $162,000.
6. Stockholders' Equity
The Company's Board of Directors, without the approval of the holders of
the Common Stock, is authorized to designate for issuance up to 5,000,000
shares of preferred stock, par value $0.01 per share, in such series and with
such rights, privileges and preferences as the Board of Directors may from
time to time determine. Issuance of preferred stock may adversely affect the
rights, privileges and preferences afforded the holders of Common Stock,
including a decrease in the amount available for distribution to holders of
the Common Stock in the event of a liquidation or payment of preferred
dividends. Issuance of shares of preferred stock may also have the effect of
preventing or delaying a change in control of the Company without further
action by the stockholders and could make removal of present management of the
Company more difficult. The Company currently has no plans to designate and/or
issue any shares of preferred stock.
F-10
<PAGE>
FILM ROMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
7. Commitments
The Company leases facilities for office space and its animation studios
under an operating lease for a five-year period expiring August 31, 2003 with
an option for an additional five-year term. Under the terms of the lease
agreement the Company is required to pay a pro-rata share of the building's
operating expenses, maintenance and property taxes. The lease agreement
includes certain free rent periods and an escalation in the monthly rental
amount, as defined. The accompanying statement of operations for the years
ended December 31, 1997, 1998 and 1999 reflects rent expense on a straight-
line basis over the term of the lease. The Company also has various lease
agreements for equipment and additional office space which expire through
2002. The following is a schedule of the future minimum lease payments under
all noncancelable operating lease agreements:
<TABLE>
<S> <C>
Year ending December 31
2000........................................................... $1,827,433
2001........................................................... 1,303,777
2002........................................................... 1,263,050
2003........................................................... 858,026
2004........................................................... --
----------
Total minimum lease payment.................................. $5,252,286
==========
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999, prior to
any allocation of rent to capitalized film costs, was $1,316,520, $1,337,663,
and $1,280,933, respectively.
At December 31, 1999, the Company had outstanding employment agreements
with various employees with initial terms ranging from one to two years. Under
the terms of the agreements, the Company is obligated to pay the following
amounts:
<TABLE>
<S> <C>
Year ending December 31
2000............................................................ $1,673,605
2001............................................................ 275,000
2002 to 2004 ................................................... --
----------
$1,948,605
==========
</TABLE>
Company warrants for the purchase of 72,066 shares of Common Stock at an
exercise price of $7.00 per share are outstanding. The warrants are currently
exercisable and expire in September 2001. As of December 31, 1999, no warrants
had been exercised.
8. 401(k) Profit Sharing Plan
The Company has a defined contribution Profit Sharing 401(k) Savings Plan
which covers substantially all of its employees. The plan became effective on
January 1, 1991 and was amended effective January 1, 1992. Under the terms of
the plan, employees can elect to defer up to 15% of their wages, subject to
certain Internal Revenue Service (IRS) limitations, by making voluntary
contributions to the plan. Additionally, the Company, at the discretion of
management, can elect to match up to 100% of the voluntary contributions made
by its employees. The Company has received determination letters from the IRS
indicating that the above plan is qualified within the terms of the applicable
provisions of the Employee Retirement Income Security Act of 1974.
For the years ended December 31, 1997, 1998, and 1999 the Company
contributed $120,431, $125,818 and $167,881 respectively, to the plan on
behalf of its employees.
F-11
<PAGE>
FILM ROMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
9. Significant Customers and Properties
In 1997, the Company earned revenue from three significant customers of
$26,400,000 (62%), $4,000,000 (9%), and $3,750,000 (9%). In 1998, the Company
earned revenue from one significant customer of $26,390,000 (80%). In 1999,
the Company earned revenue from two significant customers of $37,620,000 (77%)
and $5,930,000 (12%).
In 1997, the Company earned revenue from four significant properties of
$13,660,000 (32%), $12,750,000 (30%), $4,000,000 (9%) and $3,750,000 (9%). In
1998, the Company earned revenue from two significant properties of
$13,350,000 (41%) and $13,040,000 (40%). In 1999, the Company earned revenue
from four significant properties of $16,260,000 (33%), $14,740,000 (30%),
$6,620,000 (14%) and $5,930,000 (12%).
10. Stock Option Plans
In 1996 the Company adopted a stock option plan (the "1996 Plan"). All
regular salaried employees of the Company may, at the discretion of the
compensation committee of the Board of Directors, be granted incentive and
non-qualified stock options to purchase shares of Common Stock at an exercise
price not less than 100% of the fair market value of such shares on the grant
date. Directors of the Company, consultants and other persons who are not
regular salaried employees of the Company are not eligible to receive
incentive stock options, but are eligible to receive non-qualified stock
options.
The maximum number of shares subject to the 1996 Plan is 2,100,000 and the
1996 Plan will terminate on August 7, 2005, unless sooner terminated by the
Board of Directors. The options generally vest over a five-year period and
expire ten years from the date of issuance.
On June 16, 1999, the shareholders ratified the 1999 Non-Employee
Director's Stock Option Plan ("1999 Plan"). As amended by the Board of
Directors the 1999 Plan provides that on the date of each annual meeting of
the Company, each non-employee Director who is then serving on the Board shall
be granted options to purchase 5,000 shares of Common Stock with an effective
date of grant as of the date of such annual meeting. The exercise price for
such option shall be 100% of the fair market value of such shares on the grant
date. The maximum number of shares subject to the 1999 Plan is 100,000 and the
1999 Plan will terminate on June 16, 2009, unless sooner treatment by the
Board of Directors. The options vest upon issuance and expire ten years from
the date of issuance.
As of December 31, 1997, 1998, and 1999, 1,000,023, 1,829,034 and 1,262,000
shares of Common Stock were reserved for future issuances related to options,
respectively.
F-12
<PAGE>
FILM ROMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
The Company applies Accounting Principles Board Opinion 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for the
1996 Plan and the 1999 Plan. Accordingly, no compensation cost has been
recognized for the 1996 Plan and the 1999 Plan. Had compensation cost for the
1996 Plan and the 1999 Plan been determined based on the fair value at the
grant date for such awards, as set forth under FASB Statement No. 123,
Accounting for Stock-Based Compensation (FAS 123), the Company's net loss and
net loss per common share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net loss
As reported......................... $(4,813,324) $(6,876,567) $(7,493,055)
Pro forma........................... $(5,110,690) $(7,502,017) $(7,831,169)
Net loss per share
As reported......................... $ (0.57) $ (0.81) $ (0.88)
Pro forma........................... $ (0.60) $ (0.88) $ (0.92)
</TABLE>
Since compensation expenses associated with option grants is recognized
over the vesting period, the initial impact of applying FAS 123 on pro forma
net loss and pro forma net loss per share is not representative of the
potential impact on pro forma amounts in future years, when the effect of the
recognition of a portion of compensation expenses from multiple awards would
be reflected.
The weighted average fair value of options granted during the year was
$2.86, $1.82 and $3.70 for the years ended December 31, 1997, 1998 and 1999.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
Year ended
December 31,
------------------
1997 1998 1999
----- ---- -----
<S> <C> <C> <C>
Dividend yield........................................... -- -- --
Expected volatility...................................... 89.7% 84.5% 96.8%
Risk-free interest rate.................................. 6.18% 5.0% 6.38%
Expected term (years).................................... 8 8 8
</TABLE>
F-13
<PAGE>
FILM ROMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
A summary of stock option activity under the 1996 Plan and the 1999 Plan is
as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
--------- --------
<S> <C> <C>
Balance at December 31, 1996 (including 192,000 options
exercisable at a weighted average exercise price of
$5.00 per share)....................................... 840,125
Granted................................................ 388,023 $1.625
Exercised.............................................. (5,000) $0.008
Cancelled.............................................. (223,125) $ 8.01
---------
Balance at December 31, 1997 (including 252,375 options
exercisable at a weighted average exercise price of
$5.95 per share)....................................... 1,000,023
=========
Granted................................................ 1,381,511 $1.433
Exercised.............................................. -- $ --
Cancelled.............................................. (552,500) $8.178
---------
Balance at December 31, 1998 (including 780,009 options
exercisable at a weighted average exercise price of
$1.72 per share)....................................... 1,829,034
=========
Granted................................................ 205,000 $2,479
Exercised.............................................. (2,000) $1,458
Cancelled.............................................. (770,034) $1,607
---------
Balance at December 31, 1998 (including 698,817 options
exercisable at a weighted average exercise price of
$1.39 per share)....................................... 1,262,000
=========
</TABLE>
Exercise prices for options outstanding as of December 31, 1999, ranged
from $0.008 to $4.13. The weighted-average remaining contractual life of these
options is 8.2 years.
As of December 31, 1998 and 1999, shares available under the 1996 Plan and
the 1999 Plan for future grants of options were 337,996 and 1,003,030
respectively.
11. Related Party Transactions
A firm in which an outside director of the Company is a shareholder
provides accounting and tax services to the Company and fees paid to that firm
during 1997, 1998 and 1999 amounted to $12,350, $0 and $10,575 respectively. A
firm in which an outside director of the Company is a partner acts as a legal
consultant to the Company and fees paid to that firm during 1997, 1998 and
1999 amounted to $135,000, $121,000 and $87,615, respectively. An outside
director of the Company acts as a financial consultant to the Company and fees
paid to that director during 1997, 1998 and 1999 amounted to $145,000, $0 and
$0, respectively.
12. Fourth Quarter Adjustment
During the fourth quarter of fiscal 1999, the Company recorded write downs
of film inventory due to changes in estimates to net realizable value
amounting to $2,026,000.
F-14
<PAGE>
EXHIBIT 10.1
EXECUTIVE ENGAGEMENT AGREEMENT
------------------------------
THIS AGREEMENT is made as of the 9th day of December, 1999, by and
between FILM ROMAN, INC., a Delaware Corporation, 12020 Chandler Street, North
Hollywood, California 91607 ("Company") and PRODUCERS SALES ORGANIZATION, a
California Corporation, c/o Fairlea Ranch, P. O. Box 93603 ("Contractor")
furnishing the services of John W. Hyde ("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 engage Contractor to furnish the services of
Executive and Contractor and Executive accept such engagement with the Company
upon the terms and conditions set forth in this agreement.
1.2 During Term (defined below) Contractor shall furnish Executive's
services to serve as a consultant; additionally, during the period from the
commencement of the Term through December 31, 2001 and, at Company's option,
during the period from January 1, 2002 through December 31, 2002, Executive
shall have the title of President and Chief Executive Officer of Company and
such subsidiaries as may be designated by Company.
In addition to consulting to the Company, Executive's obligations
(and rights) while serving as President and Chief Executive Officer shall be
commensurate with those normally performed by a President and Chief Executive
Officer. In rendering services hereunder Executive shall report only to the
Board of Directors (the "Board"). In this connection Executive shall promptly
establish and submit a business plan to the Board, and Executive shall adhere to
the Company's business plan as proposed by Executive and approved by the Board.
In preparing the business plan it is contemplated that Executive will (i)
incorporate proposals for substantial cost cuts in the operation of the Company,
(ii) incorporate proposals for implementing infusion of cash for the Company, it
being understood by Executive that this will be a major goal of the business
plan and (iii) make recommendations for restructuring of the accounting and
administrative departments of the Company.
1
<PAGE>
Executive shall serve as a Member of the Board during the Term
hereof, but not otherwise.
1.3 Executive shall devote Executive's best efforts and Executive's
exclusive full business time and attention to the business of Company (except
that such services shall be non-exclusive during the third contract period
[defined below] if Company does not elect to continue Executive as President and
Chief Executive Officer during that period). In connection with the foregoing,
Executive shall be expected to render services at such times and at such places
as the Board may from time to time designate; provided, however, that if Board
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 consent. Executive may continue to exercise direct oversight over Fairlea
Ranch and his involvement with Crownstar, LLC, provided such activities do not
interfere with his performance hereunder.
1.4 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.
2. Term:
----
The Term ("Term") of this Agreement shall commence as of December 9,
1999, and shall continue unless sooner terminated as elsewhere provided for
three (3) consecutive "contract periods," as follows:
(i) first contract period: December 9, 1999 through
December 31, 2000;
(ii) second contract period: January 1, 2001 through
December 31, 2001; and
(iii) third contract period: January 1, 2002 through
December 31, 2002.
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;
2
<PAGE>
(ii) For cause. "Cause" as used herein means (a) conviction of a
felony or a crime involving moral turpitude or the commission of any other act
involving willful malfeasance with respect to Company, (b) gross negligence or
willful misconduct with respect to Company, (c) Executive's failure to adhere to
Board policies or the Board-approved business plan which is not cured within
five (5) business days after notice of the same from Company, or (d) any other
material breach of this agreement not covered above which is not cured within
five (5) business days after notice of the same from Company.
(iii) As provided in paragraphs 8 and 9 below; and
(iv) Without cause.
3.2 Effect of Termination:
---------------------
(a) With Cause: If Company terminates this agreement for cause
----------
Company shall have no further obligation to pay Contractor any compensation
(other than accrued but unpaid compensation or expense reimbursement and accrued
but unpaid vacation days, if any).
(b) Death, Disability: If Company terminates this agreement
-----------------
because of Executive's death or disability (as defined below) Company shall have
the obligation to pay Contractor Contractor's compensation hereunder up to the
time of such termination (including that attributable to vacation time allowed
to Executive which has accrued but not been taken), and any unpaid expense
reimbursement.
(c) Without Cause: If termination hereunder is without cause
-------------
Company shall pay all remaining compensation for the remainder of the first and
second contract periods of the Term and the third contract period if Company has
elected to cause Executive to serve as President and Chief Executive Officer
during such third contract period subject to Company's right to fully mitigate
payment obligations by crediting against such amounts any sums received by
Contractor or Executive for Executive's services rendered to any other company
or entity not controlled by Executive in an entertainment executive capacity.
4. Compensation:
------------
Company shall pay Contractor the following compensation for its
furnishing of Executive's services hereunder.
3
<PAGE>
(a) For the first contract period, Company shall pay Contractor
monthly payments of $20,833.33 for each calendar month of such period, or
prorata for any portion of the calendar month which payment is based on an
annual payment at the rate of $250,000.00 per annum.
(b) For each month of the second contract period Company shall pay
Contractor at the rate of $22,916.67 per month for each month of such period,
i.e. based on a rate of $275,000.00 per annum.
(c) If Company elects to continue to require Contractor to furnish
Executive's services both as a consultant and as President and Chief Executive
Officer during the third contract period then Company shall pay Contractor the
sum of $25,000.00 per month for each month of such period, i.e. based on the
rate of $300,000.00 per annum. If Company elects to require Contractor to
furnish Executive's services as a consultant only then Company shall pay to
Contractor only such amounts as may be equal to the annual base fee and fees for
meetings then paid to other Members of the Board.
It is understood that Executive shall not be entitled to any payments
as a Board Member except as provided in paragraph 4.(c) above. Additionally
neither Contractor nor Executive shall be entitled to any stock options granted
to Board Members it being understood that the stock options granted to
Contractor and Executive shall be only those provided for in paragraph 7 below.
5. Expenses:
--------
5.1 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 Contractor, or at
its direction, Executive for such expenses which are reasonably incurred by
Executive on behalf of or for the benefit of Company upon the presentation by
Contractor or Executive from time to time 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 Company may reasonably require,
together with such receipts showing payments as Executive has been able to
obtain. If Executive is required to travel, he shall receive business class
airfare (first class if business class not available) except on flights within
California, and first class accommodations.
5.2 Executive shall be entitled to a car allowance in the amount of
Five Hundred Dollars ($500.00) per month, which amount shall be reported as
income to Contractor 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).]
4
<PAGE>
6. Benefits:
--------
(a) During any periods during which Executive is serving as President
and Chief Executive Officer and during which PSO is entitled to payments
hereunder Company shall reimburse PSO for any amounts paid by it under any
health plan maintained by it for Executive's benefit, it being understood
however that the maximum reimbursement hereunder shall not exceed the amounts
which Company would have been obligated to pay had Executive been insured (as an
individual without dependents) under Company's then current health insurance
plan.
(b) PSO shall secure and maintain workers compensation insurance
pertaining to Executive's services unless Company is able to cover Executive
under its workers compensation insurance coverage as the "special Employer" of
Executive for such purposes. Whether or not Executive is so covered, PSO and
Executive both will agree that they shall not make any third party claim with
respect to any injury which Executive might receive.
(c) Company understands that Contractor affords Executive four (4)
weeks paid vacation per year; Executive shall be entitled to such vacation time,
consistent with the reasonable time requirements of Company without reduction of
compensation to Contractor.
(d) Executive shall be entitled to designate the person to act as his
assistant, provided that such assistant's salary is consistent with those
generally paid by Company for assistants to members of top management. Company
shall employ such assistant directly, on at-will basis.
7. Stock Options:
-------------
(a) In consideration for furnishing of Executive's services as
aforesaid Contractor will be entitled to participate in the Company's Employee
Stock Option Plan. Said Plan includes usual provisions included in a non-
qualified stock option plan including the right to satisfy the exercise price
with cash, promissory notes (if secured to the reasonable satisfaction of
Company) or, with Company's agreement, stock in the Company. Executive
acknowledges that such Plan is not intended to be an "incentive stock option"
within the meaning of Section 422A of the Internal Revenue Code of 1986 as
amended and is to be considered in all respects as "non-qualified." Contractor
and Executive have been furnished with a copy of Company's 1996 Stock Option
Plan ("Plan") and a copy of Company's standard form Non-Qualified Stock Option
Agreement.
5
<PAGE>
(b) Subject to Contractor's and Executive's execution of Company's
standard form of Non-Qualified Stock Option Agreement (as modified by this
Agreement) effective as of the date hereof Company grants to Contractor the
right and option to purchase from Company all or any part of an aggregate of
100,000 shares of Company's common stock and effective as of January 3, 2000,
the right and option to purchase from Company all or any part of an aggregate of
400,000 shares of Company's common stock, both options upon the terms and
conditions set forth in the Company's standard Non-Qualified Stock Option
Agreement, subject to the Plan, except as hereby modified.
(c) Specific terms applying to such options are as follows:
(i) Price: the exercise price for the 100,000 shares
shall be the market value as of the close of market on the date
immediately preceding the date of the grant, i.e. close of market
on December 8, 1999, and the exercise price for the 400,000
shares shall be the market value as of the close of market on
December 31, 1999 (the last market date preceding January 3,
2000).
(ii) Term: the options shall expire on the 10/th/
anniversary of the grant date unless terminated earlier per the
Plan;
(iii) Vesting: Options with respect to all 500,000
shares shall vest in equal quarterly increments over a three (3)
year period commencing January 1, 2000; the first quarterly
increment shall vest on March 30,2000, and each subsequent
quarterly increment shall vest at the expiration of each calendar
quarter thereafter;
(iv) Termination for Cause: In the event for
termination for cause, all options granted shall terminate
effective as of the date of such termination;
(v) Termination for Death or Disability: In the event
of termination for death or disability, all unvested options
shall terminate effective as of the date of such termination;
(vi) Termination Without Cause: In the event of
termination without cause, the options granted hereunder, to the
extent not theretofore vested, shall vest effective as of such
termination; and
6
<PAGE>
(vii) Exercise in the Event of Termination: Except for
termination of the agreement for cause (in which event all
options shall terminate on the date of termination) all options
to the extent exercisable at the time of termination shall be
exercisable for a period of six (6) months immediately following
the month of termination, unless they expire sooner because of
any other conditions specified in the Plan.
Contractor's rights will otherwise be identical to those
generally accorded the other participants in the Plan for whom exceptions are
not extended and Executive will be subject to the such generally applied
arrangements, terms and conditions. Notwithstanding anything above to the
contrary, with respect to stock options granted Contractor, Company may elect to
require Contractor to exercise such options on a cashless basis, deducting from
the number of option shares to be received a number of shares equal in value to
the exercise price of the option as determined in accordance with the provisions
of the Plan, as applicable.
8. Incapacity:
----------
8.1 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 eight (8) consecutive weeks or
more during any contract period of the Term of this Agreement, Company may, at
its option, terminate and cancel this Agreement by notice mailed or delivered to
Contractor 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 physical or mental reason whatsoever to devote full time to the
business of the Company, as determined by the Board.
8.2 If Company determines that Executive is permanently disabled and
if Contractor and Executive do 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 Contractor 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 event all doctor costs shall be borne by Company).
9. Force Majeure; Discontinuance of Business:
-----------------------------------------
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 top management Employees
7
<PAGE>
are also suspended. Executive's services and Contractor's 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 sixteen (16) consecutive weeks or more either party may terminate the Term
while such suspension is still in effect, except that Company may negate
Contractor's termination by then terminating such suspension with the
understanding that the Term may not again be suspended for the same cause.
10. Contractor's and Executive's Warranties and Indemnification
-----------------------------------------------------------
Agreements:
(a) Contractor and Executive each warrant that they have the right to
enter into and fully perform this Agreement. Executive further warrants that
Executive has an agreement with Contractor pursuant to the terms of which
Executive is engaged as an employee of Contractor.
(b) Contractor and Executive agree that Executive shall be considered
for all purposes as an employee of Contractor. Contractor shall assume all
obligations of employer; without limiting the foregoing Contractor shall assume
all obligations to pay any and all taxes due with respect to payments made
hereunder and all obligation to withhold taxes from any payments which may be
made by Contractor to Executive. Additionally, Contractor shall assume and pay
the employer and the employee share (to the extent not paid by Executive) of any
payments required to be paid on account of FICA, SDI, SUI or any other fund. In
the event of any contest or audit with respect to any payments made hereunder,
Contractor shall assume and pay all expenses and/or liabilities incurred in
connection with such audit.
Contractor and Executive shall defend, indemnify and hold Company
free and harmless from and against any claim, demand, loss or liability arising
out of any breach by its/him of any obligations outlined above.
(c) Executive's Inducement and Guarantee:
------------------------------------
As an inducement to Company to enter into this Agreement with
Contractor, by execution below and by execution of the attached Inducement
Letter, Executive warrants and guarantees that Executive will perform any
obligations which are required of him under this Agreement and will not do
anything or take any action or fail to take any action which would cause
Contractor to be in breach of its obligations to furnish Executive's services
under the Agreement. Executive further warrants that in the event, for any
reason, Contractor should be dissolved or otherwise unable to furnish
Executive's service, then Executive shall contract directly with Company with
respect to the furnishing of such services on the same terms and conditions as
set forth herein.
8
<PAGE>
11. Company's Rights:
----------------
11.1 Contractor and Executive acknowledges that Company, 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 his engagement. 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. Contractor and Executive agrees and
acknowledges that for purposes of Section 201 of the United States Copyright Act
and for ownership purposes, all materials and the results and proceeds of
Executive's services shall be considered "works for hire" and Company 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.
If for any reason any materials and /or the results and proceeds
of Executive's services hereunder are not considered works for hire which are
owned by Company then Contractor and Executive shall, and do hereby, assign to
Company, in perpetuity, all right (including but not limited to rights of
copyright), title and interest in and to such materials and/or the results and
proceeds of Executive's services, without any restriction or reservation
whatsoever.
11.2. Existing Rights and Properties:
------------------------------
(a) Contractor and/or Executive currently own or control certain
audiovisual or other intellectual properties or rights in certain audiovisual or
other intellectual properties (all herein for convenience the "PSO Properties").
(b) If at any time during the Term hereof (including the third
contract period) Contractor or Executive should determine to make or permit
others to make any use whatsoever of any PSO Property (other than "smartTalk"),
Contractor (on its own behalf or on behalf of Executive) shall promptly notify
Company to such effect. Thereafter for a period of fifteen (15) days Contractor
shall negotiate only with Company with respect to Company's acquiring such PSO
Property or rights therein for use by Company. If during the forty-five (45) day
"first negotiation" period Contractor and Company are unable to reach an
agreement with respect to such PSO Property, then Contractor shall be free to
enter into negotiations with other parties with respect to their acquiring such
PSO Property, provided however that if Contractor proposes to enter into any
agreement with any third party on terms equal to or more or less favorable than
those last negotiated between Contractor and Company, Contractor shall first
offer such terms
9
<PAGE>
to Company and Company shall have a "right of last refusal" for five (5)
business days thereafter within which to accept or reject the same. Any offer
made by Contractor hereunder shall be capable of being accepted solely by the
payment of money, it being understood that such offers shall not be subject to
conditions other than the payment of money that Company might not be able to
meet due to the nature of the conditions. An offer which is changed in any way
shall be deemed a new offer. It is understood that the first negotiation/last
refusal procedure outlined above shall apply to each PSO Property now owned,
created or hereafter acquired by Contractor and/or Executive.
(c) Notwithstanding anything above to the contrary it is
understood that Executive shall not render any services whatsoever in connection
with the use of any PSO Property (which is not accepted by Company) during the
first and second contract periods hereof and during the third contract period if
Company elects to continue to require Contractor to cause Executive to render as
President and Chief Executive Officer during the third contract period.
Notwithstanding that Executive may not render services in
connection with a PSO Property during the term as aforesaid, Contractor or
Executive may receive credit in connection with any use of such PSO property,
provided that the according of such credit to Executive (other than executive
producer or producer credit for "Scudder" and/or "smartTalk" which have
heretofore been established) shall be subject to Company's prior reasonable
approval, it being understood that Company's refusal to agree to the according
of such credit because of its belief that the same would conflict with Company's
business shall not be an unreasonable disapproval hereunder.
11.3. Company shall have the right to use, disseminate, reproduce,
print and publish Executive's name, likeness, voice and biographical material
concerning Executive as news or informative matter in connection with Company's
business.
11.4. 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 equitable relief by way of injunction or otherwise to prevent the
breach or continued breach of this Agreement. The sole right of 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
<PAGE>
12. 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.
13. Confidential Information:
------------------------
Executive acknowledges that the information, observations, work
product, trade secrets and data obtained by Executive while engaged 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. 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.
14. Non-Compete, Non-Solicitation:
-----------------------------
During Executive's engagement and for two (2) years after the end of
the Term Contractor and Executive will not attempt to hire or to solicit (for
its/his own purposes or for any other company) any regular employee (other than
Executive's assistant) of or independent contractor rendering artistic or
production services to Company other than freelance actors or others who render
services to Company on a non-exclusive basis. Further, during Executive's
engagement and for three (3) years after the end of the Term Contractor and
Executive will not (i) transfer or attempt to transfer any projects in which
11
<PAGE>
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.
15. 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 Company shall also be given to
Leroy Bobbitt, Esq., Bobbit & Roberts, 1260 26/th/ Street, #150 South, Santa
Monica, California 90404.
16. Immigration:
-----------
Company's engagement of Contractor to furnish services 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.
17. Arbitration:
-----------
Any controversy or claim arising out of 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.
Any arbitrators selected shall have experience in or knowledge of the business
in which the parties are primarily engaged. Any such arbitration shall be
conducted in Los Angeles, California before a single arbitrator or, if the
12
<PAGE>
parties are unable to agree upon a single arbitrator, then before three
arbitrators, one selected by each party and the third (i.e. neutral) arbitrator
to be selected by the other two arbitrators. If the parties or the arbitrator(s)
appointed by the parties are unable to agree upon the selection of a neutral
arbitrator then any party may at its election require that the neutral
arbitrator shall be selected by the American Arbitration Association, Los
Angeles, California. The arbitration of all issues including the determination
of the amount of any damages suffered by any party hereto by reason of the acts
or omissions of another shall be to the exclusion of any court of law (except
for court actions permitted as provided below). The parties each acknowledge
that they are giving up the right to a trial by jury or by the court. The
arbitrator(s) shall have the full authority to award legal or equitable relief,
such as but not limited to specific performance, as the arbitrator(s) deem
appropriate. However, the arbitrator(s) shall not have authority or jurisdiction
to award punitive damages, the same being waived. There shall be no discovery
except as authorized by the arbitrator(s). The decision of the arbitrator or a
majority of the arbitrators shall be final and binding on all parties and their
respective heirs, executors, administrators, successors and assigns. Any action
to secure judicial confirmation of the arbitration award may be brought in any
state or federal court of competent jurisdiction. The prevailing party in any
proceeding brought under this paragraph or in any proceeding brought to enforce
an arbitration award hereunder shall be entitled to its costs and to its
reasonable attorneys fees incurred in connection with the preparation and
conduct of any such arbitration and/or any other proceeding hereunder.
Arbitration hereunder shall not in any event (i) prevent any party from seeking
and obtaining interim 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
enjoining any other party in any action brought by or against a third party with
respect to the subject matter of the arbitration 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 the case, nor (iv) prevent a party from
filing legal action to compel arbitration under the arbitration provisions
hereof.
18. General Provisions:
------------------
18.1 Warranties: Contractor and Executive warrants that each is free
----------
to enter into this Agreement and will not do or permit any act which will
interfere with or derogate from the full performance of Executive's services or
Company's exercise of the rights herein granted.
18.2 Indemnity: Contractor and 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 Contractor or Executive of any warranty or agreement
made by Contractor and/or Executive hereunder. Company will hold Contractor and
Executive harmless from all
13
<PAGE>
claims, liabilities, damages, costs and legal fees arising from the use of any
material supplied Executive by Company or incorporated at Company's discretion.
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.
18.3 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, 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.
18.4 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.
18.5 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.
18.6 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 (including but not limited to the Term Sheet dated December 8, 1999)
between the parties (whether oral or in writing); this agreement cannot be
changed, rescinded or terminated except by a writing signed by the Company.
18.7 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. In this regard it is
understood that without limiting the
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foregoing Company may assign this Agreement in whole or in part to Film Roman,
Inc., a California Corporation, and/or delegate to that subsidiary the
responsibility for making payments and discharging other obligations of Company
hereunder.
18.8 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.
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/ Dixon Q. Dern
----------------------------
Its Secretary
PRODUCERS SALES ORGANIZATION
By: /s/ John W. Hyde
----------------------------
Its ------------------------
APPROVED:
/s/ John W. Hyde
--------------------------------
JOHN W. HYDE
15
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EXHIBIT 10.3
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made as of the 31st day of December, 1999, by and
between FILM ROMAN, INC., a California corporation, 12020 Chandler Street, North
Hollywood, California 91607 ("Company") and JON VEIN, 101 No. Las Palmas Avenue,
Los Angeles, California 90004 ("Executive").
In consideration of the mutual covenants contained herein and other
good and valuable consideration, 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 a senior
executive of Company as Executive Vice President performing (i) services as
supervisor of the business affairs and internal legal areas, (ii) services
overseeing feature development and production, and (iii) any other duties
including all activities incidental thereto which are consistent with
Executive's title as may be assigned to him by the Company's Chief Executive
Officer or the Board of Directors ("Board"); Executive shall be included in
consideration of material business decisions of management.
1.3 Executive shall devote Executive's best efforts and Executive's
exclusive full business time and attention (as required by the Chief Executive
Officer of the Company or the Board) to the business and affairs of Company, its
parent, and their direct or indirect wholly owned subsidiaries, if any. In
connection with the foregoing, Executive shall be located at and perform his
services primarily at the Company's principal executive offices located in the
greater Los Angeles Metropolitan area (it being understood that the performance
of Executive's duties shall include business travel from time to time outside of
such area).
1.4 Executive shall perform Executive's duties and responsibilities
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.
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1.5 Reference is made to Company's "Executive 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). Said Executive Handbook shall be deemed a part of this
Agreement, except that the Company's termination rights hereunder shall be only
as set forth in this Agreement and if there are any other inconsistencies
between the handbook and this agreement the provisions of this Agreement shall
prevail.
1.6 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, but
failure to qualify for insurance shall not be a breach hereof.
2. Term:
----
2.1 The term (herein "Term") of this agreement shall commence as of
January 1, 1999, and shall continue, unless sooner terminated as elsewhere
herein provided, for two (2) consecutive "contract years" as defined below. The
date on which the Term is scheduled to expire shall be referred to herein as the
"Expiration Date."
2.2 The term "contract year" as used above means each period of
fifty-two (52) consecutive weeks; provided, however, that if the Term were to
-------- -------
expire in the middle of any week, the Term shall be deemed extended so as to
expire on the Friday of such week.
3. Termination and Effect of Termination:
--------------------------------------
3.1 Expiration of Term. Executive's employment by the Company and
------------------
this Agreement shall automatically expire and terminate on the expiration of the
Term unless sooner terminated pursuant to the provisions of this Section 3.
3.2 Death. Executive's employment by the Company and this Agreement
-----
shall automatically terminate upon Executive's death.
3.3 Disability. The Company shall have the right and option,
----------
exercisable by giving written notice to Executive, to terminate Executive's
employment by the Company and this Agreement at any time after Executive has
been unable to perform the services or duties required of Executive in
connection with Executive's employment by the Company as a result of physical or
mental disability (or disabilities) which has (or have) continued for a period
of 60 days in the aggregate, during any twelve (12) month period. Executive
shall be deemed to be physically or mentally incapacitated if Executive is
unable for any reason whatsoever to devote substantial time to the business of
the Company, as determined by
2
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the Board in good faith. If the Company determines that Executive is disabled or
incapacitated and if Executive does not agree, determination shall be made by a
panel of three (3) doctors, the first to be chosen by the 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).
3.4 For Cause. The Company shall have the right and option,
---------
exercisable by giving written notice to Executive, to terminate Executive's
employment by the Company and this Agreement at any time after the occurrence of
any of the following events or contingencies (any such termination being deemed
to be a termination "for cause"):
(i) Executive materially breaches, materially
repudiates or otherwise materially fails to comply with or
perform any of the terms of this Agreement, any duties of
Executive in connection with Executive's employment by the
Company or any of the Company's policies or procedures, or
deliberately interferes with the compliance by any other
Executive of the Company with any of the foregoing; provided,
that if any action or omission by Executive constituting one of
the foregoing is curable and does not constitute any of the
events or actions described in clause (ii), below, Executive
shall have five (5) business days to cure such breach following
notice thereof from the Company (which notice shall be written
or, if immediate written notice is not possible, oral notice may
be given, provided that such oral notice is confirmed in writing
within the foregoing five business day period.) (For purposes of
this clause (i) and clauses (iii) and (iv), below, an action (or
omission) shall be "intentional" if Executive knows, or
reasonably should have known, that such action (or omission)
constitutes a material breach hereof). For these purposes,
actions (or omissions) by the Executive which he in good faith
believes to be in the best interests of the Company and are
permitted by this Agreement shall not be deemed in any
circumstance to constitute an action (or omission) which he
"reasonably should have known" to constitute a material breach of
this Agreement;
(ii) The conviction by Executive of a felony or
the pleading by Executive of no contest (or similar plea) to any
felony (other than a crime for which vicarious liability is
imposed upon Executive solely by reason of Executive's position
with the Company, and not by reason of Executive's conduct). For
purposes of this clause, the Company shall bear the burden of
proof in any action in which the Company attempts to terminate
Executive based upon the "commission of a felony" unless a
judgment of "guilty" has been entered against Executive in a
court of competent jurisdiction with respect to such felony; or
3
<PAGE>
(iii) Any act or omission by Executive
constituting fraud, gross negligence or willful misconduct in
connection with Executive's employment by the Company; provided,
that if any action or omission by Executive constituting one of
the foregoing is curable and does not constitute any of the
events or actions described in clause (ii) above, Executive shall
have five (5) business days to cure such breach following notice
thereof from the Company (which notice shall be written or, if
immediate written notice is not possible, oral notice may be
given, provided that such oral notice is confirmed in writing
within the foregoing five business day period).
3.5 Employment Beyond the Term. The Company shall have no obligation
--------------------------
to renew or extend the Term. Neither (i) the expiration of the Term, (ii) the
failure or refusal of the Company to renew or extend the Term, this Agreement,
or Executive's employment by the Company upon the Expiration of the Term nor
(iii) the termination of this Agreement by the Company pursuant to any provision
of this Section 3, shall be deemed to constitute a termination of Executive's
employment by the Company "without cause" for the purpose of triggering any
rights of or causes of action by Executive. The Company agrees to provide
Executive with at least three months notice of its determination whether to
extend the Term or allow the Term to expire; provided, however, if the Company
-------- -------
provides Executive with less than three months notice, the Term shall be
automatically extended at Executive's option to that date which is three months
following the giving of any such notice.
3.6 Consequences of Termination. If this Agreement, the Term or
---------------------------
Executive's employment by the Company is terminated or expires pursuant to any
provision of this Section 3 (other than Section 3.2, 3.3 or 3.7), or is
terminated by Executive, Executive's right to receive salary or other
compensation from the Company and all other rights and entitlements of Executive
pursuant to this Agreement or as an Executive of the Company shall forthwith
cease and terminate, and the Company shall have no liability or obligation
whatsoever to Executive, except that:
(i) The Company shall be obligated to pay to
Executive not later than five days following the effective date
of such termination all unpaid salary, vacation and reimbursable
expenses which shall have accrued as of the effective date of
such termination; and
(ii) The terms and conditions of applicable
Executive Benefit Plans, if any, shall control Executive's
entitlement, if any, to receive benefits thereunder.
In event of termination other than for cause Executive
shall retain rights to stock options which have theretofore
vested as provided in
4
<PAGE>
the Stock Option Agreements, as amended hereby.
3.7 Termination Without Cause. The Company shall not be obligated to
-------------------------
utilize Executive's services or any of the results and proceeds thereof or to
permit Executive to retain any corporate office or to continue to do so; and the
Company shall have the unilateral right, at any time, without notice, in the
Company's sole and absolute discretion, to terminate Executive's employment by
the Company, without cause, and for any reason or for no reason (the Company's
"Termination Rights"). The Company's Termination Rights are not limited or
restricted by, and shall supersede, any policy of the Company requiring or
favoring continued employment of its Executives during satisfactory performance,
any seniority system or any procedure governing the manner in which the
Company's discretion is to be exercised. No exercise by the Company of its
Termination Rights shall, under any circumstances, be deemed to constitute (i) a
breach by the Company of any term of this Agreement, express or implied
(including without limitation a breach of any implied covenant of good faith and
fair dealing), (ii) a wrongful discharge of Executive or a wrongful termination
of Executive's employment by the Company, or (iii) a wrongful deprivation by the
Company of Executive's corporate office (or authority, opportunities or other
benefits relating thereto). If the Company elects to terminate Executive's
employment by the Company without cause prior to the expiration of the Term, the
Company shall have no obligation or liability to Executive pursuant to this
Agreement or otherwise, except to pay to Executive not later than the effective
date of such termination (i) all unpaid vacation which shall have accrued as of
the effective date of such termination, (ii) a lump-sum payment equal to the
aggregate amount of salary provided in Section 4.1 hereto that would have been
payable to Executive during the remainder of the Term, as if Executive's
employment by the Company had not been terminated. If the Company terminates
Executive's employment without cause prior to the Expiration Date, Executive
shall have no obligation to mitigate and the Company shall have no right to
offset the Company's payment obligations against any employment income received
by Executive.
3.8 Termination by Executive. Executive shall have the right to
------------------------
terminate the term of this Agreement prior to the expiration date specified
herein:
(i) If the Company materially breaches this
Agreement (including, but not limited to, the provisions of
Section 1.2 hereof) and such breach is not cured within five (5)
business days after receipt of written notice from Executive
alleging such breach; or
(ii) Executive shall have the right and option,
exercisable by giving written notice to the Company, to terminate
Executive's employment by the Company and this Agreement at any
time during the 90-day period following the occurrence of a
Change of Control, in which case the Company shall make the
payments required by Section 3.7.
5
<PAGE>
For purposes of this agreement the term "Change of Control"
shall have the same meaning here as in the Company's current Stock Option Plan
namely,
(a) A merger or acquisition in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the State of the Company's incorporation.
(b) The sale, transfer or other disposition of all or
substantially all of the assets of the Company, or
(c) any other corporate reorganization or business combination
in which fifty (50%) percent or more of the Company's outstanding voting stock
is transferred to different holders in a single transaction or a series of
related transactions.
3.9 Consequences of Termination - By Reason of Death or Disability.
--------------------------------------------------------------
If this Agreement, the Term or Executive's employment by the
Company is terminated or expires pursuant to the provisions of Section 3.2
(Death) or Section 3.3 (Disability), Executive's right to receive salary or
other compensation from the Company and all other rights and entitlements of
Executive pursuant to this Agreement or as an Executive of the Company shall
forthwith cease and terminate, and the Company shall have no liability or
obligation whatsoever to Executive, except that:
(i) The Company shall be obligated to pay to Executive or
Executive's estate, as applicable, not later than the effective date of
such termination all unpaid salary, vacation and reimbursable expenses
which shall have accrued as of the effective date of such Termination;
(ii) The Company shall be obligated to pay to Executive or
Executive's estate, as applicable, an amount equal to the Base Salary that
would have accrued during the six months following the effective date of
such termination, as if such termination had not occurred; and
(iii) The terms and conditions of applicable Executive
Benefit Plans, if any, and the Stock Option Agreements referred to below
and as hereby amended shall control Executive's entitlement, if any, to
receive benefits thereunder.
4. Salary and Bonuses: Provided Executive fully and faithfully renders
------------------
all services required hereunder and is not otherwise in material breach hereof,
Company will
6
<PAGE>
pay salary (in equal weekly or bi-weekly installments) and bonuses as follows:
4.1 Base Salary:
-----------
(a) First contract year - for the period from January 1, 1999
until August 3, 1999: at rate of $235,000.00 per annum and
for the period from August 4, 1999 until December 31, 1999:
at rate of $250,000.00 per annum.
(b) Second contract year - for the period from January 1, 2000
until August 3, 2000: at rate of $250,000.00 per annum and
for the period from August 4, 2000 until December 31, 2000:
at rate of $275,000 per annum.
Nothing herein shall preclude Company from reviewing and
increasing any compensation provided for herein which review shall occur not
more often than semi-annually; any such increases shall require the approval of
the Board.
4.2 Bonuses: Executive may be entitled to an annual performance
-------
bonus as from time to time determined by the Board of Directors (it being
acknowledged that there is no obligation to grant such a Bonus).
4.3 Feature Film Bonuses.
--------------------
(a) Executive shall receive bonuses with respect to the project
currently entitled, "There Goes The Neighborhood," which was the subject of a
development-production agreement between Company and Universal Pictures dated as
of March 4, 1996. If such project goes into production as either a motion
picture or a television program or television series produced by Company or
under its authority such bonuses shall equal:
(i) five percent of fixed fees including
production fee (limited to $1 million of production fees) and any
animation production fee (limited to $1.5 million to $2.0 million
of such fees) payable to Company with respect to each such motion
picture or television production or episode of a television
series; and
(ii) seven percent of any contingent payments
such as gross participations, adjusted gross participations, net
profit participations or the like, no matter how characterized.
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 the 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
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<PAGE>
to in this subparagraph (a) are fully vested.
(b) Omitted
4.4 Compliance with Laws. 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) Company shall reimburse Executive for such expenses which are
reasonably incurred by Executive on behalf of or for the benefit of Company in
accordance with the Company's then current expense reimbursement policies
applicable to senior executive officers (which in any event shall be no less
favorable than that applicable to the Chief Executive Officer) and the
presentation by Executive from time to time 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 Company may reasonably require,
together with such receipts showing payments as Executive has been able to
obtain. Company shall either pay for or reimburse Executive for all such travel
expenses as well as reasonable living expenses while he is outside of the
greater Los Angeles area.
(b) Further, Executive shall be entitled to a Company telephone
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 on 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). Company shall reimburse Executive for 75% of all
charges relating to cellular telephone, and car telephone uses pertaining to
Company's business upon receipt of substantiating vouchers. With respect to the
car allowance, cellular telephone and car telephone, Company shall treat
Executive in accordance with the Company's then current policies applicable to
senior executive officers (which in any event shall be no less favorable than
that applicable to the Chief Executive Officer).
8
<PAGE>
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, disability,
health and major medical insurance policy or policies, and any other plans or
benefits, 401(K) Plan and pension plans which Company may provide during the
Term ("Employee Benefit Plans") to senior executive officers generally.
(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 on a basis accorded other senior executives generally during the
Term.
(c) Provided that Executive meets qualifications (including
medical qualifications) for the same, Company shall furnish Executive with term
life insurance having a face value of $500,000.00, which insurance coverage
shall remain in effect during the Term hereof.
6.2 Employee Stock Options:
----------------------
(a) Executive is currently entitled to participate in the
Employee Stock Option Plan of Film Roman, Inc., a Delaware corporation ("FRI
Delaware"). Said Plan includes usual provisions included in a non-qualified
stock option plan including the right to satisfy the exercise price with cash,
promissory notes (if secured to the reasonable satisfaction of FRI Delaware) or
stock in the FRI Delaware. Executive acknowledges that such Plan is not intended
to be an "incentive stock option" within the meaning of Section 422A of the
Internal Revenue Code of 1986 as amended and is to be considered in all respects
as "non-qualified." Executive's entitlement to participate in the Plan is set
forth in two (2) existing Stock Option Agreements both dated June 17, 1998; one
Stock Option Agreement relates to options pertaining to 62,500 shares and the
other relates to options pertaining to 40,000 shares.
(b) Additionally Company has caused FRI Delaware to grant to
Executive stock options concurrently herewith under the Plan pursuant to a Stock
Option Agreement dated January 1, 1999, containing the terms and conditions
summarized below, to purchase seventy-five thousand (75,000) shares of FRI
Delaware's common stock at an exercise price equal to its fair market value (as
defined in the Plan) as of December 17,
9
<PAGE>
1998, which options shall vest as follows:
(i) an option as to 37,500 shares to vest
immediately upon effective date of this agreement; and
(ii) an option as to 37,500 shares to vest in
twelve monthly installments, the first installment date being the
first day of the second contract year with respect to 6,250
shares; the following 10 installment dates being the first day of
each of the following ten months with respect to 2,840 shares;
and the last installment date being the first day of the last
month of the second contract year with respect to 2,850 shares.
Said options shall remain exercisable for a period ending on the
earlier to occur of (i) ten (10) years from the date of the grant, (ii) nine
months from the effective date of termination of this Agreement for any reason
other than Death (Section 3.2) or Disability (Section 3.3); and (iii) two years
from the effective date of termination of this Agreement by reason of Death
(Section 3.2) or Disability (Section 3.3).
(c) With respect to all stock options granted Executive, Executive
may elect to exercise such options on a cashless basis, deducting from the
number of option shares to be received a number of shares equal in value to the
exercise price of the option as determined in accordance with the provisions of
the Plan, as applicable. Without limiting the foregoing, in the event of
termination of this Agreement, unvested stock options granted hereunder shall be
canceled as and to extent provided in the Plan; except that if termination of
this agreement is by reason of Death (as provided in Section 3.2), Disability
(as provided in Section 3.3), without cause (as provided in Section 3.7 above)
or by Executive (as provided in Section 3.8 (i), (ii) or (iii) above) then and
in such event all options granted hereunder under subparagraph (b) but not yet
vested shall be accelerated and shall be considered vested as of the date of
such termination.
7. Company's Rights:
----------------
7.1 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 within the scope of his employment, 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
10
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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.
7.2 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 his 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 at Company's expense (whether during
or after the Term) to establish and confirm such ownership (including, without
limitation, assignments, consents, powers of attorney and other instruments).
7.3 Company shall have the right to use, disseminate, reproduce,
print and publish Executive's name, likeness, voice and approved biographical
material concerning Executive as news or informative matter in connection with
Company's business.
7.4 Executive's services and rights herein granted are unique in
character and value such that the loss thereof could not reasonably be
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 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.
8. Federal Communications Act:
--------------------------
To the extent that the same may be deemed applicable to any product
hereunder, 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
11
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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.
9. 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 in breach of this Agreement 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 disclosed within scope of
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 that Executive may retain his personal
rolodex and sample agreements.
10. Non-Compete, Non-Solicitation:
-----------------------------
10.1 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 the Term, Executive will not be
an employee, consultant, advisor, or director of any other person, firm or
corporation which is a Competitive Business. Further, Executive shall not become
financially interested or associated with, directly or indirectly, a Competitive
Business.
10.2 Notwithstanding anything to the contrary contained herein,
Executive
12
<PAGE>
may own up to five percent (5%) of any class of a Competitive Business'
outstanding securities which are listed on any national securities exchange,
registered under Section 12(g) of the Securities Exchange Act of 1934 or
otherwise publicly traded, provided that the holdings of Executive of any such
security of a Competitive Business do not represent more than 10% of the
aggregate of Executive's investment portfolio at any time. For these purposes,
"Competitive Business" means all persons engaging in any business which directly
competes with that of the business of the Company.
10.3 During Executive's employment and for two (2) years after the end
of the Term Executive will not attempt 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.
11. Notices:
-------
All notices required to be given hereunder shall be in writing and
shall be delivered personally, 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 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), and (iii) 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 Dixon Q. Dern, 1901 Avenue of the Stars, Suite
400, Los Angeles, California 90067.
12. Immigration:
-----------
Company's engagement of Executive is subject to Executive's compliance
with the terms and provisions of the Federal Immigration and Naturalization Act
which compliance has been effected. In that regard concurrently with the
execution of this agreement Executive shall provide Company with such proof of
Executive'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.
13
<PAGE>
13. 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.
14. General Provisions:
------------------
14.1 Warranties: Executive warrants that he 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.
14.2 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. Company shall maintain directors
and officers liability coverage during the Term which coverage shall apply to
all officers of Company including
14
<PAGE>
Executive, to extent provided therein.
14.3 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, 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.
14.4 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.
14.5 Public Announcement. Subject to the Company's obligations as a
-------------------
public company, the Company shall provide Executive with the right to review and
approve any public announcement of the terms, provisions, or execution of this
Agreement; provided, however, that Executive shall not unreasonably withhold
-------- -------
such approval. Further, the Company and Executive shall mutually approve the
timing of the release of any public announcement made with respect to
Executive's employment; provided, however, that any such release shall be made
-------- -------
within ten days of the date of execution of this Agreement.
14.6 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.
14.7 Entire Understanding: This agreement and the Stock Option
--------------------
Agreements referred to above contain the entire understanding of the parties
hereto relating to the subject matter herein contained and supersede 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 parties.
14.8 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,
15
<PAGE>
executors, heirs and devisees.
14.9 Section Titles: The titles of the Sections 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.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as
of the day and year first above written.
FILM ROMAN, INC.
By: /s/ John W. Hyde
------------------------------
Its --------------------------
/s/ Jon Vein
-----------------------------------
JON VEIN
Soc. Sec. No.: --------------------
16
<PAGE>
EXHIBIT 10.5
January 14, 2000
TO: Jon F. Vein
FROM: Dixon Q. Dern
Please refer to that certain agreement (the "Employment Agreement")
made as of December 31, 1999, by and between Film Roman, Inc. ("Company") and
you ("Executive"). Please refer further to the two Stock Option Agreements dated
June 17, 1998 between Executive and Company; which such Stock Option Agreement
relate to options pertaining to 62,500 shares and the other relates to options
pertaining to 40,000.
As additional consideration for Executive's execution of the
Employment Agreement, Company (on its own behalf and on behalf of Film Roman,
Inc., Delaware) agrees that the vesting schedule referred to in paragraph 2.3(c)
of each Stock Option Agreement shall be and is hereby modified so that any
options under either Stock Option Agreement not vested as of December 31, 1999,
shall vest in twelve (12) equal monthly installments commencing on the first day
of January 2000 and thereafter on the first day of each successive month.
Please indicate your agreement with the foregoing by signing in space
provided below.
FILM ROMAN, INC.
By: /s/ John W. Hyde
---------------------------------
Its -----------------------------
ACCEPTED AND AGREED TO:
/s/ Jon F. Vein
- -----------------------------
JON F. VEIN
<PAGE>
EXHIBIT 21.1
Subsidiaries of Film Roman, Inc.
1) Film Roman, Inc., a California Corporation
2) Namor Productions, Inc., a California Corporation
3) Chalkline Productions, Inc., a California Corporation
4) Level 13 Entertainment, Inc., a Delaware Corporation
5) Diversion Entertainment, Inc., a Delaware Corporation
6) Film Roman Records, Inc., a California Corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-19387) pertaining to the Stock Option Plan of Film Roman, Inc.
of our report dated March 17, 2000, with respect to the consolidated financial
statements of Film Roman, Inc. included in the Annual Report (Form 10-K) for the
year ended December 31, 1999.
Los Angeles, California ERNST & YOUNG LLP
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF FILM ROMAN, INC., AS OF AND FOR THE YEAR
ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,557,673
<SECURITIES> 0
<RECEIVABLES> 480,832
<ALLOWANCES> 0
<INVENTORY> 18,703,495
<CURRENT-ASSETS> 0
<PP&E> 2,972,325
<DEPRECIATION> 2,021,674
<TOTAL-ASSETS> 28,149,744
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 85,243
<OTHER-SE> 36,311,837
<TOTAL-LIABILITY-AND-EQUITY> 28,149,744
<SALES> 48,605,144
<TOTAL-REVENUES> 48,605,144
<CGS> 48,683,993
<TOTAL-COSTS> 48,683,993
<OTHER-EXPENSES> 7,756,561
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,476,292)
<INCOME-TAX> 16,763
<INCOME-CONTINUING> (7,493,055)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,493,055)
<EPS-BASIC> (0.88)
<EPS-DILUTED> (0.88)
</TABLE>
