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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
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)
<TABLE>
<S> <C>
Delaware 95-4585357
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
12020 Chandler Boulevard, Suite 300
North Hollywood, California 91607
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (818) 761-2544
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for at least the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
As of April 30, 2000, 8,565,190 shares of common stock, par value $.01 per
share, were issued and outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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<C> <S> <C>
Item 1. Financial Statements............................................ 3
Consolidated Balance Sheets as of December 31, 1999 and March
31, 2000 (unaudited)........................................... 3
Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 and March 31, 2000 (unaudited).................. 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and March 31, 2000 (unaudited).................. 5
Notes to Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 14
Item 6. Exhibits and Reports on Form 8-K................................ 14
Signatures............................................................... S-1
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FILM ROMAN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents......................... $ 7,557,673 $ 6,114,879
Accounts receivable............................... 480,832 708,762
Film costs, net of accumulated amortization of
$293,461,891 (1999) and $306,071,752 (2000)...... 18,703,495 16,434,389
Property and equipment, net of accumulated
depreciation and amortization of $2,021,674
(1999) and $2,109,563 (2000)..................... 950,651 915,864
Deposits and other assets......................... 457,093 496,662
------------ ------------
Total Assets...................................... $ 28,149,744 $ 24,670,556
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accounts payable.................................. $ 1,714,705 $ 690,776
Accrued expenses.................................. 2,496,581 1,879,675
Deferred revenue.................................. 19,327,253 18,581,945
------------ ------------
Total liabilities................................. 23,538,539 21,152,396
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000
shares authorized, none issued................. -- --
Common stock, $.01 par value, 20,000,000 shares
authorized, 8,524,190 shares issued and
outstanding in 1999 and 8,565,190 shares issued
and outstanding in 2000.......................... 85,243 85,653
Additional paid-in capital........................ 36,311,837 36,370,364
Accumulated deficit............................... (31,785,875) (32,937,857)
------------ ------------
Total stockholders' equity........................ 4,611,205 3,518,160
------------ ------------
Total liabilities and stockholders' equity.... $ 28,149,744 $ 24,670,556
============ ============
</TABLE>
See accompanying notes.
3
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FILM ROMAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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<CAPTION>
Three Months ended
March 31,
--------------------------
1999 2000
------------ ------------
<S> <C> <C>
Revenue........................................... $ 12,289,912 $ 12,695,681
Cost of revenue................................... 11,396,106 12,609,861
Selling, general and administrative expenses ..... 1,536,025 1,307,155
------------ ------------
Operating loss.................................... (642,219) (1,221,335)
Interest income................................... 113,799 70,923
Loss before provision for income taxes............ (528,420) (1,150,412)
Provision for income taxes........................ 5,118 1,570
Net loss.......................................... $ (533,538) $ (1,151,982)
============ ============
Net loss per common share basic & diluted......... $ (0.06) $ (0.13)
============ ============
Weighted average number of shares outstanding
basic and diluted................................ 8,522,190 8,559,124
============ ============
</TABLE>
See accompanying notes.
4
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended
March 31,
--------------------------
1999 2000
------------ ------------
<S> <C> <C>
Operating activities:
Net loss......................................... $ (533,538) $ (1,151,982)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization.................. 99,421 87,889
Amortization of film costs..................... 11,396,106 12,609,861
Changes in operating assets and liabilities:
Accounts receivable............................ 657,922 (227,930)
Film costs..................................... (10,751,940) (10,340,755)
Deposits and other assets...................... (7,256) (39,569)
Accounts payable............................... (13,933) (1,023,929)
Accrued expenses............................... (6,332) (616,906)
Deferred revenue............................... (2,676,326) (745,309)
------------ ------------
Net cash (used in) operating activities........ (1,835,876) (1,448,630)
Investing activities:
Additions to property and equipment.............. (24,809) (53,102)
------------ ------------
Net cash used in investing activities.......... (24,809) (53,102)
Financing activities:
Exercise of Stock Options........................ 58,938
------------
Net cash provided by financing activities...... -- 58,938
Net decrease in cash............................. (1,860,685) (1,442,794)
Cash and cash equivalents at beginning of
period.......................................... 11,287,386 7,557,673
------------ ------------
Cash and cash equivalents at end of period....... $ 9,426,701 $ 6,114,879
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes................................... $ 1,600 $ 8,400
============ ============
</TABLE>
See accompanying notes
5
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FILM ROMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)--Basis of Presentation
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; Film Roman Records, Inc., a Delaware 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 March 31, 2000 and the results of its operations
for the three months ended March 31, 1999 and 2000 and the cash flows for the
three months ended March 31, 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 ended March 31, 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>
March 31,
December 2000
31, 1999 (unaudited)
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<S> <C> <C>
Film productions released, net of amortization..... $ 1,029,946 $ 654,170
Film productions in process........................ 17,174,838 15,059,142
Film productions in development.................... 498,711 721,077
----------- -----------
$18,703,495 $16,434,389
=========== ===========
</TABLE>
(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 owns or controls. The
Company retains the right in the Harvey territory to exploit any distribution
rights generated from newly developed production which are required to raise
financing for those new productions. 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.
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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
first quarter 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 production costs, there can be
no assurance that the Company will be able to cover the balance of its
production costs and overhead
7
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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.
Doomsday. The Company is currently scheduled to produce 13 episodes of
Doomsday, which is intended to be broadcast starting in 2001 on UPN.
Doomsday is a new half-hour, prime time television series, in which the
Company has a proprietary interest.
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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.
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31,
1999
Total revenue increased by 3%, or $0.4 million, to $12.7 million for the
quarter ended March 31, 2000, from $12.3 million for the quarter ended March
31, 1999. Total revenue increased due to an increase in the license fees for
episodes delivered. The Company delivered 18 episodes of programming in both
the first quarter of 2000 and 1999.
The Company delivered 18 "fee-for-services" episodes during the quarter
ended March 31, 2000 and 1999. Fee-for-services revenue increased 4%, or $0.5
million, to $11.8 million for the quarter ended March 31, 2000, from $11.3
million in the comparable period in 1999 as a result of an increase in the
license fee of episodes delivered.
The Company delivered no "proprietary" episodes for the quarters ended
March 31, 2000 and 1999. "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
remained constant at $0.3 million for the quarters ended March 31, 2000 and
1999.
Other revenue decreased to $0.6 million for the quarter ended March 31,
2000 compared to $0.7 million for the quarter ended March 31, 1999.
Total cost of revenue increased by 11%, or $1.2 million, to $12.6 million
for the quarter ended March 31, 2000, from $11.4 million for the quarter ended
March 31, 1999. Total cost of revenue as a percentage of sales increased 6% to
99% for the quarter ended March 31, 2000, from 93% in the comparable period in
1999 due to lower fee-for-service margins.
Total selling, general and administrative expenses for the quarter ended
March 31, 2000 decreased by $0.2 million to $1.3 million from $1.5 million for
the comparable period in 1999, due primarily to decreased development costs
partially offset by one-time costs incurred in connection with the termination
of certain administrative employees.
Operating loss was $1.2 million for the quarter ended March 31, 2000, as
compared to a loss of $0.6 million for the quarter ended March 31, 1999.
Subsequent Events
Resignation from Board of Directors
On April 19, 2000 Leonard J. Grossi resigned from the Board of Directors of
the Company in order to accept the position of President of Columbia Tristar
Television. The Company is currently engaged in efforts to fill this position.
Chief Operating Officer Appointment
On April 18, 2000, the Board of Directors elected Jon F. Vein as the new
Chief Operating Officer to replace William Shpall, who resigned in February
2000.
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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 owns or controls. The
Company retains the right in the Harvey territory to exploit any distribution
rights generated from newly developed production which are required to raise
financing for those new productions. 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 March 31, 2000, the Company had cash and short-term investments of
approximately $6.1 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 will be required to make
additions to personnel and augment its development and production capabilities
in the areas of animated programming, computer generated animated programming,
live action television series, feature films and 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 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 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 three months ended March 31, 2000, net cash used for operating
activities was $1,448,630 due to cash used in connection with film production
activities, and with an increase in accounts receivable offset by a decrease
in deferred revenue. For the three months ended March 31, 2000, net cash used
for investing activities was $53,102 due to additions to property and
equipment. Net cash generated by financing activities for the first three
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 March
31, 2000, the Company had a balance in its deferred revenue account of $18.6
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.
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
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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. 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, 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.
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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;
. 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
12
<PAGE>
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 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.
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 three months ended March 31, 2000, the Company earned
interest income of $70,923.
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.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None. Any previously existing litigation involving the Company has been
resolved without liability on the part of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
March 31, 2000.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 12, 2000
FILM ROMAN, INC.
By: /s/ John Hyde
___________________________________
John Hyde
President and Chief Executive
Officer and Director
By: /s/ Greg Arsenault
___________________________________
Greg Arsenault
Senior Vice President - Finance
and Administration
S-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF FILM ROMAN, INC. AS OF AND FOR THE THREE MONTH
PERIOD ENDED MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,114,879
<SECURITIES> 0
<RECEIVABLES> 708,762
<ALLOWANCES> 0
<INVENTORY> 16,434,389
<CURRENT-ASSETS> 0
<PP&E> 3,025,427
<DEPRECIATION> 2,109,563
<TOTAL-ASSETS> 24,670,556
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 85,653
<OTHER-SE> 3,432,507
<TOTAL-LIABILITY-AND-EQUITY> 24,670,556
<SALES> 12,695,681
<TOTAL-REVENUES> 12,695,681
<CGS> 12,609,861
<TOTAL-COSTS> 12,609,861
<OTHER-EXPENSES> 1,307,155
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,923
<INCOME-PRETAX> (1,150,412)
<INCOME-TAX> 1,570
<INCOME-CONTINUING> (1,151,982)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,151,982)
<EPS-BASIC> (0.13)
<EPS-DILUTED> 0
</TABLE>
