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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 000-29642
FILM ROMAN, INC.
(Exact name of registrant as specified in charter)
Delaware 95-4585357
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
12020 Chandler Boulevard, Suite 200
North Hollywood, California 91607
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 761-2544
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. YES [X] NO [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
As of July 30, 2000, 8,565,190 shares of common stock, par value $.01 per
share, were issued and outstanding.
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements........................................................................... 3
Consolidated Balance Sheets as of December 31, 1999 and June 30, 2000 (unaudited)............ 3
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1999
and June 30, 2000 (unaudited)................................................................ 4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and
June 30, 2000 (unaudited).................................................................... 5
Notes to Consolidated Financial Statements................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................... 8
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings.............................................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders............................................ 17
Item 6. Exhibits and Reports on Form 8-K............................................................... 17
Signatures................................................................................................ 18
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FILM ROMAN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................. $ 7,557,673 $ 4,371,990
Accounts receivable....................................................... 480,832 665,754
Film costs, net of accumulated amortization of $293,461,891 (1999) and
$314,006,880 (2000)....................................................... 18,703,495 20,244,344
Property and equipment, net of accumulated depreciation and
amortization of $2,021,674 (1999 ) and $2,218,832 (2000).................. 950,651 846,005
Deposits and other assets................................................. 457,093 588,738
------------ ------------
Total Assets.............................................................. $ 28,149,744 $ 26,716,831
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.......................................................... $ 1,714,705 $ 941,843
Accrued expenses.......................................................... 2,496,581 1,993,368
Deferred revenue.......................................................... 19,327,253 21,063,720
------------ ------------
Total liabilities......................................................... 23,538,539 23,998,931
Stockholders' equity:
Preferred Stock, $0.01 par value, 5,000,000 shares authorized,
none issued............................................................. -- --
Common Stock, $0.01 par value, 20,000,000 shares authorized,
8,524,190 shares issued and outstanding at December 31, 1999 and
8,565,190 shares issued and outstanding at June 30, 2000.................. 85,243 85,653
Additional paid-in capital................................................ 36,311,837 36,370,364
Accumulated deficit....................................................... (31,785,875) (33,738,117)
------------ ------------
Total stockholders' equity................................................ 4,611,205 2,717,900
------------ ------------
Total liabilities and stockholders' equity................................ $ 28,149,744 $ 26,716,831
============ ============
</TABLE>
See accompanying notes.
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FILM ROMAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, June 30,
-------------------------- ----------------------------
1999 2000 1999 2000
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue..................................... $15,163,017 $7,936,103 $27,452,929 $20,631,784
Cost of revenue............................. 14,002,446 7,935,128 25,398,552 20,544,989
Selling, general and
administrative expenses.................. 1,531,484 871,775 3,067,509 2,178,930
----------- ----------- ----------- -----------
Operating loss.............................. (370,913) (870,800) (1,013,132) (2,092,135)
Interest income............................. 104,835 70,558 218,634 141,481
Loss before provision for income
taxes.................................... (266,078) (800,242) (794,498) (1,950,654)
Tax provision............................... 137 18 5,255 1,588
Net loss.................................... $ (266,215) $ (800,260) $ (799,753) $(1,952,242)
=========== ========== =========== ===========
Net loss per common share basic
and diluted.............................. $ (0.03) $ (0.09) $ (0.09) $ (0.23)
=========== ========== =========== ===========
Weighted average number of
shares outstanding basic and
diluted.................................. 8,523,838 8,565,190 8,523,010 8,562,157
=========== ========== =========== ===========
</TABLE>
See accompanying notes.
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FILM ROMAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months ended
June 30,
----------------------------
1999 2000
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Operating activities:
Net loss...................................................................................... $ (799,753) $ (1,952,242)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................................... 207,262 197,158
Amortization of film costs.................................................................. 25,398,552 7,935,128
Changes in operating assets and liabilities:
Accounts receivable........................................................................... 219,425 (184,922)
Film costs.................................................................................... (22,404,959) ( 9,475,977)
Deposits and other assets..................................................................... (76,107) (131,646)
Accounts payable.............................................................................. (2,254) (772,862)
Accrued expenses.............................................................................. 128,051 (503,213)
Deferred revenue.............................................................................. (5,248,745) 1,736,467
------------ ------------
Net cash used in operating activities....................................................... (2,578,528) (3,152,109)
Investing activities:
Additions to property and equipment........................................................... (191,564) ( 92,512)
------------ ------------
Net cash used in investing activities....................................................... (191,564) ( 92,512)
Financing activities:
Exercise of stock option...................................................................... 2,860 58,938
------------ ------------
Net cash provided by financing activities..................................................... 2,860 58,938
Net decrease in cash........................................................................ (2,767,232) (3,185,683)
Cash and cash equivalents at beginning of period.............................................. 11,287,386 7,557,673
------------ ------------
Cash and cash equivalents at end of period.................................................... $ 8,520,154 $ 4,371,990
============ ============
</TABLE>
See accompanying notes.
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FILM ROMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) - Basis of Presentation
Film Roman, Inc., a Delaware corporation (the "Company"), currently
conducts all of its operations through its wholly owned subsidiaries, Film
Roman, Inc., a California corporation; Namor Productions, Inc., a California
corporation; Chalk Line Productions, Inc., a California corporation; Diversion
Entertainment, Inc., a Delaware corporation and Level 13 Entertainment, Inc., a
Delaware corporation. The accompanying consolidated unaudited financial
statements of the Company have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments consisting only of normal recurring
accruals necessary to present fairly the financial position of the Company as of
June 30, 2000 and the results of its operations for the three and six months
ended June 30, 1999 and 2000 and the cash flows for the six months ended June
30, 1999 and 2000 have been included. The results of operations for interim
periods are not necessarily indicative of the results which may be realized for
the full year. For further information, refer to the financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 (the "Form 10-K") filed with the Securities and
Exchange Commission.
(2) - Net Loss per Common Share
For the three months and the six months ended June 30, 1999 and 2000, the
per share data is based on the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares,
consisting of outstanding stock options, are not included since they are
antidilutive.
(3) - Film Costs
The components of unamortized film costs consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000 (unaudited)
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<S> <C> <C>
Film productions released,
net of amortization........... $ 1,029,946 $ 735,788
Film productions in process........ 17,174,838 18,468,345
Film productions in development.... 498,711 1,040,211
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$18,703,495 $20,244,344
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</TABLE>
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(4) - Foreign Distribution Agreement
In April of this year the Company entered into a foreign distribution
agreement with the Harvey Entertainment Company. Under the terms of this
agreement, Harvey will distribute for a period of two years, outside of the US
and Canada, all television rights which the Company designates. The Company has
heretofore designated its current library for distribution under the terms of
this agreement. This arrangement enables the Company to reduce its overhead
attributable to the international division. Given the size of the Company's
library, management believes that this arrangement is more cost effective than
distributing its own product, while at the same time enabling the Company to
continue to seek co-production and other international arrangements. Moreover,
the term is sufficiently short so as to enable management to reevaluate its
international distribution strategy as the market changes.
(5) - Recent Accounting Pronouncements
In June 2000, the American Institute of Certified Public Accountants
issued SOP 00-2, "Accounting by Producers or Distributors of Films". SOP 00-2
establishes new accounting standards for producers and distributors of films,
including changes in revenue recognition and accounting for advertising,
development and overhead costs. Development costs for abandoned projects and
certain indirect overhead costs are to be charged directly to expense instead of
those costs being capitalized to film costs, which is what current guidance
prescribes. The Company is in the process of evaluating the overall impact of
SOP 00-2, which is effective for fiscal years beginning after December 15, 2000,
on its consolidated financial statements. The Company does not anticipate such
adoption will have a material impact on future earning or its financial
position.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The words "expect", "estimate",
"anticipate", "predict", "believe", "plan", "should", "may" and "projects" and
similar expressions and variations thereof are intended to identify forward-
looking statements. Such forward-looking statements relate to, among other
things, trends affecting the financial condition or results of operations of
the Company, the 13 episodes of "The Oblongs" currently scheduled to debut on
the WB network ("The WB") during the fall 2000 season and the 13 episodes of
"Doomsday" intended to be broadcast starting in the fall of 2001 on UPN, the 13
episodes of "X-Men" which is currently scheduled to air Saturday mornings in the
fall of 2000 on the WB Network; the Company's future production and delivery
schedule (including the number of episodes of programming to be produced and
delivered during the 2000 television season); plans to enter into new business
areas beyond the Company's core business of animation television production; the
Company's objectives, planned or expected activities and anticipated financial
performance and liquidity. These forward-looking statements are based largely on
the Company's current expectations and are subject to a number of risks and
uncertainties, including without limitation, those described under the caption
"Risks Related to the Business Risk Factors" in the Company's Form 10-K for the
year ended December 31, 1999. Actual results could differ from these forward-
looking statements. The Company does not make projections of its future
operating results and undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
General
Film Roman, Inc. ("Film Roman" or the "Company") develops, produces
and distributes a broad range of television programming for the television
network, cable television, first-run domestic syndication and international
markets. In 1998, the Company expanded its operations to include, on a limited
basis, the development and production of feature-length theatrical motion
pictures. The Company 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 & 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-service 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 Federal Communications Commission governing
program content. While the Company seeks to limit its financial risk associated
with its proprietary programming by obtaining commitments prior to production to
cover at least 50% of its direct
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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 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.
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 the often hilarious stories about
Hank Hill, his family and their neighbors in the fictional suburb of
Arlen, Texas, the heartland of America.
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.
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Doomsday. The Company is currently scheduled to produce 13
episodes of Doomsday, which is intended to be broadcast starting in
the fall 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 in the first quarter of
2000 principal photography for My First Mister, a live-action feature
film financed by a third party which stars Albert Brooks and Leelee
Sobiesky and directed by Christine Lahti.
Twelfth Lap. The Company is currently scheduled to produce one
movie-of-the-week, Twelfth Lap, for the Disney Channel, which is
scheduled to be broadcast during the 2001 broadcast season.
Results of Operations
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Total revenue decreased by 48%, or $7.3 million, to $ 7.9 million for
the three months ended June 30, 2000, from $15.2 million for the comparable
period in the prior year. Total revenue decreased primarily because the Company
delivered significantly fewer episodes of programming in the three months ended
June 30, 2000 as compared to the same period in 1999.
The Company delivered 11 "fee-for-services" episodes during the three
months ended June 30, 2000, compared to 27 episodes in the comparable period in
1999. Due primarily to the decrease in the number of episodes delivered, fee-
for-services revenue decreased 48%, or $6.9 million, to $7.4 million for the
three months ended June 30, 2000, from $14.3 million during the comparable
period in 1999.
The Company delivered no "proprietary" episodes during the three
months ended June 30, 2000 or 1999. "Proprietary revenue" consists of revenue
derived from 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. The Company earned
minimal proprietary revenue during the three months ended June 30, 2000 as
compared to no proprietary revenue in the comparable three month period in 1999.
This increase was a result of higher international sales of the Company's
proprietary programming in its library.
Other revenue decreased by approximately $0.4 million during the three
months ended June 30, 2000, as compared to the same period of the prior year.
This decrease was due primarily to a decrease in revenue of approximately $0.5
million delivered by the Company's commercials and specials division, the
Company's creative services division and the Company's live unit division. This
$0.5 million decrease was partially offset by an increase of approximately $0.1
million in revenue generated from the Company's participation in net profits
from certain of its fee-for-service series.
Total cost of revenue decreased by 44%, or $6.1 million, to $ 7.9
million for the three months ended June 30, 2000, from $14.0 million for the
three months ended June 30, 1999. Total cost of revenue, as a percentage of
sales, increased by 8% to 100%, primarily due to lower fee-for-service margins.
Total selling, general and administrative expenses for the three
months ended June 30, 2000 decreased by $0.6 million to $0.9 million from $1.5
million for the comparable period in 1999, due primarily to decreased
development costs.
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Operating loss was $0.9 million for the three months ended June 30,
2000, as compared to a loss of $0.4 million for the three months ended June 30,
1999.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Total revenue decreased by 25%, or $6.9 million, to $20.6 million for
the six months ended June 30, 2000, from $27.5 million for the comparable period
in the prior year. Total revenue decreased primarily because the Company
delivered significantly fewer episodes of programming in the first six months of
2000 as compared to the first six months of 1999.
The Company delivered 29 "fee-for-services" episodes during the six
months ended June 30, 2000, compared to 45 episodes in the comparable period in
1999. Fee-for-services revenue decreased 25%, or $6.5 million, to $19.2 million
for the six months ended June 30, 2000, from $25.7 million during the comparable
period in 1999.
The Company delivered no "proprietary" episodes during the six months
ended June 30, 2000 or 1999. "Proprietary" revenue remained constant at $0.3
million for the six months ended June 30, 2000 and 1999.
Other revenue decreased by approximately $0.4 million during the six
months ended June 30, 2000, as compared to the same period of the prior year,
due primarily to a combined decrease of approximately $0.7 million in revenue
from commercials and specials, from the Company's creative services division and
the Company's live action unit. The decrease was offset by an increase of $0.3
million in revenue from the Company's participation in net profits from certain
of its fee-for-service series and the Company's feature unit.
Total cost of revenue decreased by 19%, or $4.9 million, to $20.5
million for the six months ended June 30, 2000, from $25.4 million for the six
months ended June 30, 2000. Total cost of revenue, as a percentage of sales,
increased by 7% to 100%, primarily due to lower fee-for-service margins and
lower commercial and special margins.
Total selling, general and administrative expenses for the six months
ended June 30, 2000 decreased by $0.9 million to $2.2 million from $3.1 million
for the comparable period in 1999, due primarily to decreased costs in the
development department partially offset by one-time costs incurred in connection
with the termination of certain administrative employees.
Operating loss was $2.1 million for the six months ended June 30,
2000, as compared to a loss of $1.0 million for the six months ended June 30,
1999.
Certain Events
Nasdaq Small Cap Market.
Trading of our common stock was transferred from the Nasdaq National
Market to the Nasdaq Small Cap Market on June 27, 2000. This transfer was made
pursuant to an application that we filed with Nasdaq. We applied for this
transfer because we were no longer in compliance with the listing requirements
of the Nasdaq National Market.
On May 19, 2000 Mike Medavoy joined the Board of Directors of Film
Roman, Inc.
On June 16, 2000 Steve Tisch joined the Board of Directors of Film
Roman, Inc.
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Foreign Distribution Agreement
In April of this year the Company entered into a foreign distribution
agreement with the Harvey Entertainment Company. Under the terms of this
agreement, Harvey will distribute for a period of two years, outside of the US
and Canada, all television rights which the Company designates. The Company has
heretofore designated its current library for distribution under this agreement.
This arrangement enables the Company to reduce its overhead attributable to the
international division. Given the size of the Company's library, management
believes that this arrangement is more cost effective than distributing its own
product, while at the same time enabling the Company to continue to seek co-
production and other international arrangements. Moreover, the term is
sufficiently short so as to enable management to reevaluate its international
distribution strategy as the market changes.
Liquidity and Capital Resources
At June 30, 2000, the Company had cash and short-term investments of
approximately $4.4 million compared to $7.6 million at December 31, 1999. The
Company's cash and short-term investment balances have continued to decline
since December 31, 1999 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. However, if the Company is successful in the execution of its more
aggressive and broad production strategies, it may be required to make
additions to personnel and augment its development and production capabilities
in the areas of animated programming, computer generated animated programming,
live action television series, feature films and internet investments. In such
a case, the Company may need to secure additional equity or debt financing
during fiscal 2000/2001 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 and listing
performance may make it difficult for the Company to attract equity investments
on terms that are favorable to the Company. In addition, the Company's losses
may make it more difficult for the Company to attract significant debt
financing. As a consequence, there can be no assurance that the Company will be
successful in arranging for additional equity or debt financing at levels
sufficient to meet its planned needs. The failure to obtain such financing could
have an adverse effect on the implementation of the Company's growth strategies
and its ability to successfully run its operation.
For the six months ended June 30, 2000, net cash used for operating
activities was $3,152,109 due to cash used in connection with film production
activities, and with a decrease in accounts receivable offset by an increase in
deferred revenue. For the six months ended June 30, 2000, net cash used for
investing activities was $92,512 due to additions to property and equipment.
Net cash generated by financing activities for the first six months of 2000 was
$58,938 related to the exercise of Company stock options.
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 June
30, 2000, the Company had a balance in its deferred revenue account of $21.1
million. There will be no net cost to the Company (future receipts less future
expenditures) to finish the programs for which cash has been collected in
advance and included in deferred revenue.
Recent Accounting Pronouncements
In June 2000, the American Institute of Certified Public Accountants
issued SOP 00-2, "Accounting by Producers or Distributors of Films". SOP 00-2
establishes new accounting standards for producers and
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distributors of films, including changes in revenue recognition and accounting
for advertising, development and overhead costs. Development costs for abandoned
projects and certain indirect overhead costs are to be charged directly to
expense instead of those costs being capitalized to film costs, which is what
current guidance prescribes. The Company is in the process of evaluating the
overall impact of SOP 00-2, which is effective for fiscal years beginning after
December 15, 2000, on its consolidated financial statements. The Company does
not anticipate such adoption will have a material impact on future earning or
its financial position.
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 their parties. 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. For example, 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.
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 televison and motion picture programming have
become increasingly integrated vertically through mergers, acquisitions,
partnerships, joint ventures or other affiliations. We have not entered into
any of these relationships. 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,
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FOX, CBS and ABC may continue to decreased 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
production 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.
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 cost reports and
update our cost projections regularly and have generally completed each of our
production 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 it 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;
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. export controls, tariffs and other barriers;
. currency fluctuations;
. investment policies;
. nationalization, expropriation and limitations on repatriation of
cash; and
. social and political risks.
Overseas Subcontractors. Like other producers of animated programming,
we subcontract some of the less creative and more labor-intensive components of
our production process to animation studios located in low-cost labor countries,
primarily in the Far East. As the number of animated feature films and animated
television programs increases, the demand for the services of overseas studios
has increased substantially. This increased demand may lead overseas studios to
raise their fees which may result in increased 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 and 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.
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In addition, our corporate documents authorize the Board of Directors
to issue shares of preferred stock and to establish the rights of that preferred
stock without stockholder approval. If the Board issues preferred stock, it
could have the effect of delaying or preventing a change in control of our
Company, even if a change in control were in our best interests.
Nasdaq SmallCap Market. Trading of our common stock was transferred
from the Nasdaq National Market to the Nasdaq SmallCap market on June 27, 2000.
If we do not continue to meet the listing criteria for the Nasdaq SmallCap
Market, it could materially adversely affect our stock price.
Volatility of Stock Price. The market price of our common stock could
fluctuate significantly in response to our operating results and other factors.
Impending Labor Strikes. The existing collective bargaining agreement
governing contracts and agreements with members of the Writers' Guild is due to
expire on April 30, 2001. Additionally, the existing collective bargaining
agreement governing contracts and agreements with members of the Screen Actors'
Guild is set to expire on June 30, 2001. In the event that either or both of
these collective bargaining agreements is allowed to expire and a strike or
strikes occur, our ability to deliver programming will be materially affected as
the vast majority of our current programming is subject to both collective
bargaining agreements.
Item 3. 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 six months ended June 30, 2000, the Company
earned interest income of $141,481.
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.
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PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
The 2000 Annual Meeting of Stockholders of the Company was held on
June 14, 2000. The following matters were submitted to stockholders for a vote:
1. Election of Robert Cresci as a Class I director to serve for
three years or until his successor is duly elected.
Shares Voted
For Against Abstentions Unvoted
--- ------- ----------- -------
7,828,572 89,972 0 646,646
2. To approve the amendment and restatement of the 1996 Stock Option
Plan and the 1999 Non-Employee Directors Stock Option Plan into
one, combined plan to be called the 2000 Amended and Restated
Stock Option Plan of Film Roman, Inc.
Shares Voted
For Against Abstentions Unvoted
--- ------- ----------- -------
4,373,196 106,896 9,152 3,429,300
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
On June 28, 2000, the Company filed a Form 8-K reporting (i) the June
15, 2000 appointment of Steven Tisch to serve as director of the Company, and
(ii) the June 27, 2000 transfer of the listing of the common stock of the
Company to the Nasdaq SmallCap Market.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 14, 2000
FILM ROMAN, INC.
By: /s/ John Hyde
-------------------------------------------------
John Hyde
President and Chief Executive Officer and Director
By: /s/ Joan Thompson
--------------------------------------------------
Joan Thompson
Vice President - Finance
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