<PAGE>
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, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ___________.
COMMISSION FILE NUMBER 0-25308
OVERSEAS FILMGROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3751702
(State or other (I.R.S. Employer
jurisdiction of incorporation Identification No.)
or organization)
8800 SUNSET BLVD., THIRD FLOOR, LOS ANGELES, CA 90069
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (310) 855-1199
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 the past 90 days. Yes X No
----- -----
The number of shares of Common Stock outstanding as of
August 13, 1997 was 5,732,778.
<PAGE>
OVERSEAS FILMGROUP, INC.
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets --
December 31, 1996 and June 30, 1997 (unaudited) 3
Consolidated Statements of Operations (unaudited)
for the three and six months ended June 30, 1996 and
June 30, 1997 4
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 1996 and June 30, 1997 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
<PAGE>
PART I. FINANCIAL INFORMATION
OVERSEAS FILMGROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 72,676 $ 353,689
Restricted cash 412,482 46,037
Accounts receivable, net of allowance for doubtful
accounts of $1,000,000 11,881,428 10,728,239
Related party receivable 413,000 413,000
Film costs, net of accumulated amortization 31,988,742 28,358,324
Fixed assets, net of accumulated depreciation 482,140 557,127
Other assets 392,099 347,269
------------- -------------
Total assets $ 45,642,567 $ 40,803,685
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued expenses $ 2,188,025 $ 2,623,084
Payable to producers 5,419,997 3,712,812
Note payable to shareholders 1,955,440 2,085,886
Notes payable 22,133,231 16,607,137
Deferred income taxes 2,450,000 3,030,000
Deferred revenue 293,500 553,000
------------- -------------
Total liabilities 34,440,193 28,611,919
------------- -------------
Shareholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares
authorized, 0 shares outstanding
Common stock, $.001 par value, 25,000,000 shares authorized;
5,777,778 issued 5,778 5,778
Additional paid-in capital 10,652,731 10,652,731
Retained earnings 630,599 1,533,257
Treasury stock at cost, 45,000 shares (86,734) -
------------- -------------
Total shareholders' equity 11,202,374 12,191,766
------------- -------------
Total libilities and shareholders' equity $ 45,642,567 $ 40,803,685
------------- -------------
------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATION INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 4,037,514 $ 9,229,284 $ 10,198,709 $ 15,751,970
Expenses:
Film costs 4,808,324 7,311,313 9,682,030 12,506,663
Selling, general and administrative 1,040,426 906,650 1,948,570 1,662,152
------------ ------------ ------------- -------------
Total expenses 5,848,750 8,217,963 11,630,600 14,168,815
------------ ------------ ------------- -------------
(Loss) income from operations (1,811,236) 1,011,321 (1,431,891) 1,583,155
Other income (expense):
Interest income 421 3,564 165,147 8,454
Interest expense (82,893) (56,718) (166,879) (32,838)
Other income 30,801 44,257 48,884 104,291
------------ ------------ ------------- -------------
Total other income (expense) (51,671) (8,897) 47,152 79,907
------------ ------------ ------------- -------------
Income before income taxes (1,862,907) 1,002,424 (1,384,739) 1,663,062
Income tax (benefit) provision (654,217) 86,130 (482,081) 122,638
------------ ------------ ------------- -------------
Net (loss) income $ (1,208,690) $ 916,294 $ (902,658) $ 1,540,424
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
(Loss) per share $ (0.21) $ (0.16)
------------ -------------
------------ -------------
Pro forma data
Income before income taxes and additional
Interest expense 1,002,424 1,663,062
Additional interest expense 34,896 86,987
------------ -------------
Income before income taxes 967,528 1,576,075
Income tax provision 348,311 567,387
------------ -------------
Pro forma net income $ 619,217 $ 1,008,688
------------ -------------
------------ -------------
Pro forma earnings per share $ 0.15 $ 0.24
------------ -------------
------------ -------------
Weighted average number of common
shares outstanding 5,747,778 4,177,778 5,762,778 4,177,778
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss )income $ (902,658) $ 1,540,424
Adjustments to reconcile net (loss) income to net
cash provided by operating activities -
Amortization of film costs 9,360,188 12,283,939
Depreciation of fixed assets 80,211 66,449
Change in assets and liabilities -
(Increase) in accounts receivable (1,153,189) (2,833,371)
(Decrease) in other receivables 0 239,522
(Increase) in other assets (44,830) (331,531)
(Decrease) increase in accounts payable
and accrued expenses (435,059) 1,285,350
Increase (decrease) in payable to producers 1,707,185 (1,269,577)
(Decrease) in deferred income taxes payable (580,000) 0
(Decrease) in deferred revenue (259,500) (301,300)
----------- -----------
Net cash provided by operating activities 7,772,348 10,679,905
----------- -----------
Cash flows from investing activities:
Additions to film costs (12,990,607) (22,262,774)
Purchase of fixed assets (5,224) (105,007)
----------- -----------
Net cash used in investing activities (12,995,831) (22,367,781)
----------- -----------
Cash flows from financing activities:
Net borrowings under credit facilities 5,526,094 9,591,270
Payment on note payable to shareholders (130,446) 0
Purchase of treasury stock (86,734) 0
Distributions to shareholders 0 (344,800)
----------- -----------
Net cash provided by financing activities 5,308,914 9,246,470
----------- -----------
Net increase (decrease) in cash 85,431 (2,441,406)
Cash, cash equivalents and restricted cash
at beginning of period 399,726 2,566,599
----------- -----------
Cash, cash equivalents and restricted cash
at end of period $ 485,157 $ 125,193
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,096,537 $ 786,710
----------- -----------
----------- -----------
Income taxes $ 4,800 $ 55,000
----------- -----------
----------- -----------
Foreign withholding taxes $ 97,919 $ 82,638
----------- -----------
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
OVERSEAS FILMGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
I. The accompanying unaudited consolidated financial statements of
Overseas Filmgroup, Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Rule 10-01 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 adjustments) considered
necessary for a fair presentation have been included. Operating results
for the six months ended June 30, 1997 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1997.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1996 (the "1996 Consolidated
Financial Statements").
Certain reclassifications have been made to amounts reported in prior
periods to conform with the current period presentation.
II. On October 31, 1996, the Company, a publicly-held company then
known as "Entertainment/Media Acquisition Corporation" ("EMAC") which
was formed in December 1993 in order to acquire an operating business
in the entertainment and media industry, succeeded by merger (the
"Merger") to the operations of Overseas Filmgroup, Inc. ("Pre-Merger
Overseas"), a privately-held independent film company, the operations
of which were established in 1980. For accounting and financial
reporting purposes, the Merger was considered a reverse acquisition of
EMAC with Pre-Merger Overseas as the acquirer. Accordingly, the
results of operations and financial position of the Company, for
periods and dates prior to the Merger (including at June 30, 1996 and
for the three and six months then ended), are the historical results
of operations and financial position of Pre-Merger Overseas for such
periods and dates. Until the Merger, Pre-Merger Overseas operated as
an S Corporation for federal (but not state) income tax purposes under
Sub-chapter S of the Internal Revenue Code. As a result of the
Merger, the Company's S Corporation status was terminated effective
October 31, 1996. The Company is liable for both federal and state
income taxes from that date forward.
Pro forma net income reflects pro forma interest expense on a
$2,000,000 promissory note issued in the Merger to the stockholders of
Pre-Merger Overseas, and assumed to be outstanding as of January 1,
1995, and a pro forma income tax provision, using an effective income
tax rate of 36%, to account for the estimated income tax expense of
the Company as if it had been subject to federal as well as state
income taxes at the corporate level for the period. Pro forma net
income per share has been computed using the weighted average common
shares outstanding of 4,177,778 for the quarter and six month period
ended June 30, 1996. Such pro forma shares outstanding have been
computed as the weighted average, as applicable, of 3,177,778 shares
reflecting the recapitalization of common stock as a result of the Merger
and 1,000,000 shares representing the number of new shares that would have
to be issued at the October 30, 1996 market price of $5.20 per share
to pay pro forma distributions of $3,500,000 representing actual
Pre-Merger distributions, $1,500,000 representing cash consideration
received by the stockholders of Pre-Merger Overseas in the Merger and
$200,000 representing accrual of an estimated distribution to
reimburse the stockholders of Pre-Merger Overseas for federal income
taxes payable for S corporation years pursuant to an agreement entered
into in connection with the Merger. Historical earnings per share has
not been presented in view of the prior periods S corporation status.
Pro forma net income and pro forma net income per share are not
necessarily indicative of what actual net income and net income per
share would have been had the Merger occurred as of January 1, 1995.
For additional information regarding the calculation of pro forma net
income and pro forma net income per share as a result of the Merger
see the 1996 Consolidated Financial Statements.
6
<PAGE>
OVERSEAS FILMGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
III. Film costs consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
Films in release, net of accumulated amortization $ 26,737,816 $ 25,838,106
Films not yet available for release 4,901,935 2,520,218
------------- -----------------
$ 31,639,751 $ 28,358,324
============= =================
</TABLE>
IV. The Company and the two-bank syndicate of lenders under the
Company's Credit Facility have amended the Credit Facility to extend
the date of the annual review and the expiration of the commitment to
lend under the Credit Facility, which was originally scheduled to
expire on May 9, 1997, to September 30, 1997. In addition, the Company
is in discussions with the two-bank syndicate to obtain an increase in
availability under the Operating Facility portion of the Credit Facility
of up to approximately $1.8 million and a concurrent reduction in the
availability under the Film Facilities portion of the Credit Facility up
to a like amount, maintaining the total Credit Facility availability at
$27,000,000. In connection with such restructuring of the Credit
Facility, the Company anticipates that Robert Little and Ellen Little,
the majority stockholders of the Company, would agree to defer payments
under the $2,000,000 Note they received in the Merger for a period of
time to be agreed upon by the lenders, the Company, Ms. Little and Mr.
Little (but anticipated to be no earlier than when borrowings under the
Operating Facility return to the original availability limit of
$5,000,000). See Liquidity and Capital Resources under Item 2.
V. As of June 30, 1997, the Company is committed under agreements
with certain sub-distributors to spend an aggregate of $477,339 for
prints and advertising on motion pictures scheduled to be released in
the domestic theatrical market. Additionally, the Company is
committed under various acquisition agreements to pay minimum
guarantees of $6,850,965 contingent upon delivery of the respective
films to the Company. During the quarter ended June 30, 1997, the
Company repurchased 45,000 shares of its outstanding common stock for
a total of $86,734 in connection with a share repurchase program under
which the repurchase, at management's discretion, of up to 75,000 shares
has been authorized. This transaction has been reflected on the
financial statements for the quarter ended June 30, 1997, as treasury
stock.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
SUCH STATEMENTS MAY CONSIST OF ANY STATEMENT OTHER THAN A RECITATION OF
HISTORICAL FACT AND CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "MAY," "EXPECT," "ANTICIPATE," "ESTIMATE" "INTEND" OR
"CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY. THE READER IS CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS ARE
NECESSARILY SPECULATIVE AND THERE ARE CERTAIN RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL EVENTS OR RESULTS TO DIFFER MATERIALLY FROM THOSE REFERRED
TO IN SUCH FORWARD-LOOKING STATEMENTS. THESE RISKS AND UNCERTAINTIES
INCLUDE, AMONG OTHER THINGS, THE HIGHLY SPECULATIVE AND INHERENTLY RISKY AND
COMPETITIVE NATURE OF THE MOTION PICTURE INDUSTRY. THERE CAN BE NO ASSURANCE
OF THE ECONOMIC SUCCESS OF ANY MOTION PICTURE SINCE THE REVENUES DERIVED FROM
THE PRODUCTION AND DISTRIBUTION OF A MOTION PICTURE (WHICH DO NOT NECESSARILY
BEAR A DIRECT CORRELATION TO THE PRODUCTION OR DISTRIBUTION COSTS INCURRED)
DEPEND PRIMARILY UPON ITS ACCEPTANCE BY THE PUBLIC, WHICH CANNOT BE
PREDICTED. THE COMMERCIAL SUCCESS OF A MOTION PICTURE ALSO DEPENDS UPON THE
QUALITY AND ACCEPTANCE OF OTHER COMPETING FILMS RELEASED INTO THE MARKETPLACE
AT OR NEAR THE SAME TIME, THE AVAILABILITY OF ALTERNATIVE FORMS OF
ENTERTAINMENT AND LEISURE TIME ACTIVITIES, GENERAL ECONOMIC CONDITIONS AND
OTHER TANGIBLE AND INTANGIBLE FACTORS, ALL OF WHICH CAN CHANGE AND CANNOT BE
PREDICTED WITH CERTAINTY. THEREFORE, THERE IS A SUBSTANTIAL RISK THAT SOME
OR ALL OF THE MOTION PICTURES RELEASED, DISTRIBUTED, FINANCED OR PRODUCED BY
THE COMPANY WILL NOT BE COMMERCIALLY SUCCESSFUL, RESULTING IN COSTS NOT BEING
RECOUPED OR ANTICIPATED PROFITS NOT BEING REALIZED. THE COMPANY'S RESULTS OF
OPERATIONS FOR THE PERIOD ENDED JUNE 30, 1997 ARE NOT NECESSARILY INDICATIVE
OF THE RESULTS THAT MAY BE EXPECTED IN FUTURE PERIODS (INCLUDING FOR THE YEAR
ENDING DECEMBER 31, 1997). DUE TO QUARTERLY FLUCTUATIONS IN THE NUMBER OF
MOTION PICTURES IN WHICH THE COMPANY CONTROLS THE DISTRIBUTION RIGHTS AND
WHICH BECOME AVAILABLE FOR DISTRIBUTION (AND THUS, FOR WHICH REVENUE CAN
FIRST BE RECOGNIZED) AND THE NUMBER OF MOTION PICTURES DISTRIBUTED BY THE
COMPANY, AS WELL AS THE UNPREDICTABLE NATURE OF AUDIENCE AND SUBDISTRIBUTOR
RESPONSE TO MOTION PICTURES DISTRIBUTED BY THE COMPANY, THE COMPANY'S
REVENUES, EXPENSES AND EARNINGS FLUCTUATE SIGNIFICANTLY FROM QUARTER TO
QUARTER AND FROM YEAR TO YEAR. IN ADDITION, FOR SEVERAL REASONS, INCLUDING
(I) THE LIKELIHOOD OF CONTINUED INDUSTRY-WIDE INCREASES IN ACQUISITION,
PRODUCTION AND MARKETING COSTS AND (II) THE COMPANY'S INTENT, BASED UPON ITS
ONGOING STRATEGY, TO ACQUIRE RIGHTS TO OR PRODUCE FILMS WHICH HAVE GREATER
PRODUCTION VALUES (OFTEN AS A RESULT OF LARGER BUDGETS), THE COMPANY'S COSTS
AND EXPENSES, AND THUS THE CAPITAL REQUIRED BY THE COMPANY IN ITS OPERATIONS
AND THE ASSOCIATED RISKS FACED BY THE COMPANY MAY INCREASE IN THE FUTURE. AS
THE MOTION PICTURE BUSINESS AND THE COMPANY'S OPERATIONS ARE SUBJECT TO
NUMEROUS UNCERTAINTIES, INCLUDING, AMONG OTHER THINGS (IN ADDITION TO THOSE
RISKS DESCRIBED ABOVE), THE FINANCING REQUIREMENTS OF VARIOUS FILM PROJECTS,
THE UNPREDICTABILITY OF AUDIENCE RESPONSE TO COMPLETED FILMS, COMPETITION
FROM COMPANIES WITHIN THE MOTION PICTURE INDUSTRY AND IN OTHER ENTERTAINMENT
MEDIA (MANY OF WHICH HAVE SIGNIFICANTLY GREATER FINANCIAL AND OTHER RESOURCES
THAN THE COMPANY), AND THE RELEASE SCHEDULE OF COMPETING FILMS, NO ASSURANCE
CAN BE GIVEN THAT THE COMPANY'S ACQUISITION, PRODUCTION, FINANCING AND
DISTRIBUTION GOALS AND STRATEGIES AS DESCRIBED HEREIN WILL BE ACHIEVED.
ADDITIONAL RISKS AND UNCERTAINTIES ARE DISCUSSED ELSEWHERE IN APPROPRIATE
SECTIONS OF THIS REPORT AND IN OTHER FILINGS MADE BY THE COMPANY WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE RISKS HIGHLIGHTED ABOVE AND ELSEWHERE
IN THIS REPORT SHOULD NOT BE ASSUMED TO BE THE ONLY THINGS THAT COULD AFFECT
FUTURE PERFORMANCE OF THE COMPANY. THE COMPANY DOES NOT HAVE A POLICY OF
UPDATING OR REVISING FORWARD-LOOKING STATEMENTS AND THUS IT SHOULD NOT BE
ASSUMED THAT SILENCE BY MANAGEMENT OF THE COMPANY OVER TIME MEANS THAT ACTUAL
EVENTS ARE BEARING OUT AS ESTIMATED IN SUCH FORWARD-LOOKING STATEMENTS.
8
<PAGE>
GENERAL
On October 31, 1996, the Company, a publicly-held company then known as
"Entertainment/Media Acquisition Corporation" ("EMAC") which was formed in
December 1993 in order to acquire an operating business in the entertainment
and media industry, succeeded by merger (the "Merger") to the operations of
Overseas Filmgroup, Inc. ("Pre-Merger Overseas"), a privately-held
independent film company, the operations of which were established in 1980.
For accounting and financial reporting purposes, the Merger was considered a
reverse acquisition of EMAC with Pre-Merger Overseas as the acquirer.
Accordingly, the results of operations and financial position of the Company,
for periods and dates prior to the Merger (including at June 30, 1996 and for
the quarter then ended), are the historical results of operations and
financial position of Pre-Merger Overseas for such periods and dates.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1997 COMPARED TO QUARTER ENDED JUNE 30, 1996
Reveunes decreased by $5,191,770 (56.3%) to $4,037,514 for the quarter
ended June 30, 1997 from $9,229,284 for the quarter ended June 30, 1996. The
decrease in revenues was due in part to timing of revenue recognition under
applicable accounting standards and the nature of the films first available
for distribution in the quarter ended June 30, 1997 compared to those films
first available for distribution in the comparable period in 1996. In
situations where the Company licenses distribution rights of a particular
film to sub-distributors, prior to the availability of the motion picture, in
exchange for a minimum guaranteed payment ("pre-sales"), the pre-sales are
not recognized. Instead, the pre-sales are recognized at such time as the
motion picture is available for release by the sub-distributor and revenues
are earned pursuant to the terms of the Company's agreement with the
sub-distributor. For the quarter ended June 30, 1996, of the 6 films first
available for distribution, three films became available with an aggregate of
$6,920,450 in pre-sales. By comparison, for the quarter ended June 30, 1997
one film became available with $270,000 in pre-sales. The decrease in
revenues also resulted from decreased revenues generated by the Company's
domestic theatrical releasing operation, First Look Pictures (approximately
$704,422 for the quarter ended June 30, 1996 compared to approximately
$71,452 for the quarter ended June 30, 1997), and an increasing preference of
retail video stores and video subdistributors in the United States and
internationally for films which have achieved significant theatrical
box-office success.
Film costs as a percentage of revenues increased to 119.1% for the three
months ended June 30, 1997, compared to 79.2% for the three months ended June
30, 1996. The increase is primarily due to the write down in the quarter
ended June 30, 1997, of an aggregate of approximately $1,133,403 to net
realizable value of various films including THE DESIGNATED MOURNER
($718,400), JOHNS ($229,506), and JERUSALEM ($111,696). In addition,
generally lower margins were realized on films generating the greatest share
of revenue during the three months ended June 30, 1997 compared to the three
months ended June 30, 1996. These lower margins were in part the result of
the worldwide weakened video demand for films which have not achieved
significant box office success. Gross margins vary from film to film based
upon many factors including the amount of the Company's investment in a
particular film. In some cases, the Company is entitled to only a
distribution fee based upon a percentage of the film's gross revenues in a
particular territory or territories and media. In other circumstances, the
Company may have a substantial investment in the film (for example, as a
result of minimum guarantee commitments, rights acquisition costs, or print
and advertising commitments) and is dependent upon the film's actual
performance in order to generate a positive gross margin. Other factors that
impact gross margins include market acceptance of a
9
<PAGE>
film, the budget of the film and management's analysis of the motion
picture's prospects (which under the individual film forecast method impacts
the rate of amortization).
Selling, general and administrative expenses, net of amounts capitalized
to film costs, increased by $133,776 (14.8%) to $1,040,426 for the quarter
ended June 30, 1997 from $906,650 for the quarter ended June 30, 1996. The
increase in selling, general and administrative expenses, net of amounts
capitalized to film costs, was primarily due to increased expenses related to
the Company being a publicly held company including increased legal and
accounting expenses, increased state franchise taxes and increased
compensation paid to personnel in the quarter ended June 30, 1997 over that
of the comparable period in the prior year, including the increased salaries
of the Co-Chief Executive Officers compared to their salaries in the
comparable period when the company was a private company taxed as an
"S-Coproration." The increases were partially offset by savings in areas of
bad debt expense and consulting fees. The Company capitalizes certain
overhead costs incurred in connection with its acquisition of rights to a
motion picture and creation of marketing materials for a motion picture by
adding such costs to the capitalized film costs of the motion picture.
As a result of the above, the Company had a loss, before tax benefit, for
the quarter ended June 30, 1997 of $1,862,907 compared to income, before
taxes, of $1,002,424 for the quarter ended June 30, 1996.
The Company recognized a tax benefit of $654,217 for the quarter ended
June 30, 1997 resulting from the expected future tax benefit of recognizing
the reported loss for such period for tax purposes. The tax benefit is
calculated assuming an effective tax rate of 35% and further reflects the
expected benefit of utilizing foreign tax credits in future periods.
Pre-Merger Overseas was an S-Corporation for federal income tax purposes and,
accordingly, was not subject to federal income taxes in 1996 through the date
of the Merger.
As a result of the above, the Company had a net loss for the quarter ended
June 30, 1997 of $1,208,690 compared to pro forma net income for the quarter
ended June 30, 1996 of $619,217. Pro forma income for the quarter ended June
30, 1996 gives effect to the termination of S Corporation status as if it had
occurred on January 1, 1995 and the issuance of a $2,000,000 promissory note
(the "Merger Note") in the Merger to two stockholders of Pre-Merger Overseas
(Ellen Dinerman Little, Co-Chairman of the Board, Co-Chief Executive Officer
and President of the Company, and Robert B. Little, Co-Chairman of the Board
and Co-Chief Executive Officer of the Company, who together also beneficially
own approximately 51.5% of the Company's issued and outstanding common
stock), by giving effect to a pro forma effective tax rate of 35% and to
assumed additional interest expense relating to the Merger Note. See Note II
of the "Notes to Consolidated Financial Statements" contained herein.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenues decreased by $5,553,261 (35.3%) to $10,198,709 for the six months
ended June 30, 1997 from $15,751,970 for the six months ended June 30, 1996.
The decrease in revenues was due in part to timing of revenue recognition
under applicable accounting standards and the nature of films first available
for distribution in the six months ended June 30, 1997 compared to those
films first available for distribution in the comparable period in 1996 (as
more fully described above under the RESULTS OF OPERATIONS - QUARTER ENDED
JUNE 30, 1997 COMPARED TO QUARTER ENDED JUNE 30, 1996). The decrease in
revenues also resulted from decreased revenues generated by the Company's
domestic theatrical releasing operation, First Look Pictures (approximately
$1,110,633 for the six months ended June 30, 1996 compared to approximately
$190,925 for the six months ended June 30, 1997), and an increasing
preference of retail video stores and video subdistributors in the United
States and internationally for films which have achieved significant
theatrical box-office success.
10
<PAGE>
Film costs as a percentage of revenues increased to 94.9% for the six
months ended June 30, 1997, compared to 79.4% for the six months ended June 30,
1996. The increase is primarily due to the write- down in the six months ended
June 30, 1997 of an aggregate of approximately $1,198,964 to net realizable
value of various films including THE DESIGNATED MOURNER ($718,400), JOHNS
($229,506) and JERUSALEM ($111,696). In addition, generally lower margins were
realized on films generating the greatest share of revenue during the six months
ended June 30, 1997 compared to the six months ended June 30, 1996.
Selling, general and administrative expenses, net of amounts capitalized
to film costs, increased by $286,418 (14.8%) to $1,948,570 for the six months
ended June 30, 1997 from $1,662,152 for the six months ended June 30, 1996.
The increase in selling, general and administrative expenses, net of amounts
capitalized to film costs, was primarily due to increased personnel and
expenses related to the Company being a publicly held company including
increased legal and accounting expenses, increased state franchise taxes and
increased compensation paid to personnel in the quarter ended June 30, 1997
over that of the comparable period in the prior year, including the increased
salaries of the Co-Chief Executive Officers compared to their salaries in the
comparable period in the prior year when the company was a private company
taxed as an "S-Corporation." The increases were partially offset by savings
in areas of bad debt expense and consulting fees.
As a result of the above, the Company had a loss, before tax benefit, for
the six months ended June 30, 1997 of $1,384,739 compared to income, before
taxes, of $1,663,062 for the six months ended June 30, 1996.
The Company recognized a tax benefit of $482,081 for the six months ended
June 30, 1997 resulting from the expected future tax benefit of recognizing
the reported loss for such period for tax purposes. The tax benefit is
calculated assuming an effective tax rate of 36% and further reflects the
expected benefit of utilizing foreign tax credits in future periods.
As a result of the above, the Company had a net loss for the six months
ended June 30, 1997 of $902,658 compared to pro forma net income for the six
months ended June 30, 1996 of $1,008,688. Pro forma income for the six months
ended June 30, 1996 gives effect to the termination of S Corporation status
as if it had occurred on January 1, 1995 and the issuance of the Merger Note,
by giving effect to a pro forma effective tax rate of 35% and to assumed
additional interest expense relating to the Merger Note. See Note II of the
"Notes to Consolidated Financial Statements" contained herein.
LIQUIDITY AND CAPITAL RESOURCES
In light of the disappointing results of recent films acquired by the
Company and the loss incurred by the Company in the quarter ended June 30,
1997, the Board of Directors and management are in the process of assessing
the Company's operations, and business goals and strategies and have begun to
implement certain changes in such operations and strategies. As further
described below, such changes include certain changes in the Company's
strategies regarding the acquisition of distribution rights, the financing of
motion picture production, and the distribution of motion pictures. In
addition, to address an anticipated need by the Company for additional
liquidity occasioned by the disappointing worldwide performance of recent
films acquired by the Company and the maturing of various film facilities
under the Company's revolving credit facility (the "Credit Facility"), the
Company is in discussions with the lenders under the Company's revolving
credit facility (the "Credit Facility") to restructure the Credit Facility in
certain respects and such lenders have also agreed in principle, subject to
formal documentation, to extend the maturities of certain film facilities
under the Credit Facility. In addition, as described below, Ms. Little and
Mr. Little have agreed to defer certain payments to them under the Merger
Note.
11
<PAGE>
The Credit Facility is governed by an agreement (the "Syndication
Agreement") with two lenders - Coutts & Co., as an agent and lender, and
Berliner Bank A.G. London Branch, as a lender (collectively, the "Lenders").
The Syndication Agreement, which is secured by substantially all of the
assets of the Company and its subsidiaries, presently provides for total
borrowings of $27,000,000, of which presently up to $5,000,000 may be
borrowed on a revolving basis for the Company's working capital needs (the
"Operating Facility"), up to $1,000,000 (the "Local Facility") is available
to be issued as letters of credit to secure a local bank line of credit (the
"Local Line"), and up to $21,000,000 may be borrowed to fund the acquisition
of motion pictures acquired by the Company (the "Film Facilities"). The
interest rate payable on borrowings under the Syndication Agreement is 3%
above the London Inter-Bank Offered Rate ("LIBOR") in effect from time to
time for one, three or six months, as requested by the Company. In addition
to an annual management fee, there is a commitment fee on the daily unused
portion of the Operating Facility of 1% per annum, and fees with respect to
the Local Facility of 2% of the face amount of issued letters of credit.
Fees on the Film Facilities include 2% of the amount of cash advances or, in
most circumstances, 2% of the face amount of each letter of credit issued
under the Film Facilities, as well as a percentage of gross receipts of the
film acquired or financed payable from the Company's net earnings from the
film.
The Company borrows funds under Film Facilities on a film-by-film basis,
with each such Film Facility treated as a separate loan, generally maturing
12 months after the first drawdown. The Lenders must approve each separate
Film Facility, such approval to be granted in their sole discretion. Amounts
available under the Film Facilities are also available to be issued as
letters of credit or bank guarantees. As of June 30, 1997, an aggregate of
approximately $21,408,231 was outstanding under the Film Facilities and
Operating Facility at an average interest rate on the outstanding amounts of
approximately 8.6875% per annum. $1,000,000 in face amount of letters of
credit have also been issued under the Loan Facility to secure a line of
credit that the Company has received from City National Bank (under which
$725,000 was outstanding at June 30, 1997 bearing interest at 7.25% per
annum). If the letters of credit are drawn upon, the Company must repay the
amounts advanced by the banks upon demand.
Amounts outstanding under the Operating Facility must be repaid on the
date that the commitment to lend under the Syndication Agreement expires.
The commitment to lend under the Syndication Agreement is reviewed by the
Lenders on an annual basis and was scheduled to expire on May 9, 1997, the
date of the annual review. The Company and the Lenders have amended the
Syndication Agreement to extend the date of the annual review and the
expiration of the commitment to lend under the Syndication Agreement to
September 30, 1997.
In addition, the Lenders and the Company are in discussions regarding
extending the commitment to lend from September 30, 1997 to June 30, 1998.
The Company is also in discussions with the Lenders for the Lenders to make
up to an additional approximately $1,800,000 available under the Operating
Facility with a corresponding equivalent reduction (as such additional
availability under the Operating Facility is utilized) of up to $1,800,000 of
availability under the Film Facilities. The Company anticipates that as part
of any such changes to the Credit Facility the Company would agree to
additional covenants and other requirements, including additional
restrictions on use of the Operating Facility and Film Facilities and
additional reporting requirements to the Lenders. The Company also
anticipates that any such restructuring of the Credit Facility would be
subject to various conditions including the execution of a definitive
agreement amending
12
<PAGE>
the Syndication Agreement, the delivery to the Lenders of a library valuation
meeting the requirements of the Syndication Agreement, and the deferral of
monthly payments under the Merger Note for a period of time to be agreed upon
by the Lenders, the Company, Ms. Little and Mr. Little (but anticipated to be
no earlier than when borrowing under the Operating Facility return to the
original availability limit of $5,000,000). The Merger Note is payable
monthly over a five year period beginning on the date of the Merger, bears
interest at the rate of 9% per annum and is secured by substantially all of
the Company's assets (but subordinate to the security interest of Coutts and
Berliner). As of June 30, 1997, an aggregate of $1,823,730 in principal and
accrued interest was outstanding under the Merger Note. The Lenders have not,
as of August 14, 1997, committed to any such restructuring of the Credit
Facility, and no assurances can be given that any such restructuring of the
Credit Facility will be obtained by the Company, or if obtained, will
necessarily be on the terms described above.
As of June 30, 1997, an aggregate of $16,515,919 in principal and interest
was outstanding under Film Facilities, including an aggregate of
approximately $10,663,880 in principal and accrued interest under eight Film
Facilities which have matured or are scheduled to mature prior to June 30,
1998. In addition to the Commitment to amend the Credit Facility, the Company
and the Lenders have agreed in principle, subject to formal documentation, to
extend the maturity of four Film Facilities (under which an aggregate of
$6,427,578 in principal and accrued interest was outstanding as of June 30,
1997) which have matured or would otherwise mature prior to June 30, 1996. As
part of such extensions, the Company will make monthly payments of principal
agreed to by the Lenders.
As further described below, the Company presently intends to alter the
frequency in which it engages in various acquisition and distribution
arrangements. The Company is sometimes appointed as the sales agent for a
particular motion picture to license, on behalf of the rights owner,
distribution rights in the film to various distributors for exploitation on a
territory-by-territory basis, in exchange for a sales agency fee. In such
circumstances, the Company generally advances limited funds toward the
marketing and distribution of the film. In some circumstances, the Company
acts in much the same manner as a sales agent but, rather than licensing or
selling distribution rights to a film to a third party on behalf of the
rights owner, the Company itself licenses distribution rights to the film
from the rights owner for exploitation by the Company for a given term in a
given territory (or territories) and media. In both a sales agency
arrangement and the distribution arrangement described above (referred to by
the Company as "straight distribution"), the amounts payable by the Company
to the rights owner depend upon the success of the Company in distributing
the film and the financial performance of the film itself. In acquiring
distribution rights to a completed or incomplete film, however, the Company
will sometimes agree to pay the rights owner a minimum guaranteed payment
that is independent of the financial performance of the film. The rights
owner may also receive additional payments as a result of the Company's
exploitation of the distribution rights to the film. At times the minimum
guarantee paid by the Company may represent, in amount, all or a substantial
portion of the film's production costs. In those circumstances, the Company
generally receives worldwide distribution rights in all media and generally
will also obtain ownership of the copyright to the film, with the production
company from which the Company acquired the rights receiving a production fee
and generally a participation in net revenues from distribution of the motion
picture. The Company also may produce certain film projects itself through
various production companies controlled by the Company and to which the
Company provides all or substantially all of the production funds through
various financing arrangements such as minimum guarantee commitments and
negative pickups. In addition to licensing motion picture distribution
rights to various subdistributors, the Company also engages directly in
domestic theatrical distribution through First
13
<PAGE>
Look Pictures, and, in connection therewith, sometimes commits to spend a
minimum amount for prints and advertising costs associated with the films
being released.
During the next twelve months, the Company currently intends to acquire
rights to and distribute or act as sales agent with respect to approximately
10 to 12 films exclusive of films where the Company acquires re-issue rights.
The Company intends to increasingly emphasize the acquisition of worldwide
rights. The Company further intends to act as a sales agent or engage in
"straight distribution" more frequently in the next twelve months than in the
past year, including under arrangements known as "gap financing" whereby a
financial institution provides certain financing to the company producing the
film based upon the Company's estimate, as sales agent for the film, of the
value of unsold distribution rights to the film. The Company also presently
intends to reduce the number of films for which it provides minimum
guarantees which represent the majority of the final production costs of a
film or for which the Company otherwise finances all or substantially all of
the film's production costs. Rather, the Company currently plans to
increasingly participate in co-financing arrangements whereby the Company, in
combination with other equity providers (including producers, distributors in
various territories, various international governmental programs designed to
incentivize film production and other equity providers), commits to fund a
portion of a particular film's total production costs. In addition, the
Company plans to emphasize films with more recognizable cast, directors and
producers and greater production values and which may accordingly have
broader appeal in the competitive theatrical market while attempting to limit
the Company's exposure with respect to production costs through gap
financing, co-production arrangements or other arrangements as described
above. The Company also intends to further develop relationships with major
studios (for example, the Company recently concluded an executive producing
arrangement with The Walt Disney Company in conjunction with The
Kennedy/Marshall Company, for development and production of a film based upon
rights acquired by the Company) and to expand its television sales efforts in
order to generate additional revenues from the Company's releases, including
films which have not been theatrically released and for which there is
diminished demand on the part of video retailers and subdistributors. As the
Company's domestic video output agreement with BMG Video was not extended,
the Company is currently licensing domestic video rights to films on a
film-by-film basis. The Company is currently in discussions with other
companies regarding a domestic video output arrangement. As part of the
planned changes in its operational strategy, the Company has also begun to
implement certain reductions in overhead.
As of June 30, 1997, the Company had cash and cash equivalents of $72,676
compared to cash and cash equivalents of $353,689 as of December 31, 1996.
The difference reflects normal fluctuations in the Company's collections.
Additionally, at June 30, 1997, the Company had restricted cash of $412,482
held by the Company's primary lender, to be applied against various Film
Facilities. The restricted cash balance as of December 31, 1996, was $46,037.
In addition to the Company's obligations reflected on the balance sheet as
of June 30, 1997, as of such date the Company had contractual obligations for
advances, minimum guarantee payments, and prints and advertising spending of
$7,328,304 contingent upon completion and delivery of certain motion
pictures. The Company also has guaranteed a $325,000 loan from a bank to Neo
Motion Pictures, the balance of which at June 30, 1997 was approximately
$242,689 in principal and accrued interest. As of June 30, 1997, the Company
also had deferred revenue relating to distribution commitments and guarantees
from sub-distributors of approximately $293,500.
The Company believes that its existing capital, funds from operations, and
borrowings under the Credit Facility (assuming the Lenders and the Company
agree to a restructuring of the Credit Facility as described above) will be
sufficient to enable the Company to fund its presently planned acquisition,
distribution and overhead expenditures for the next twelve months. In the
event that the Credit Facility is not restructured in the manner described
above, or the maturities of the four Film Facilities described above are not
extended, the Company will need to significantly reduce its currently planned
level of acquisition and distribution activities and overhead and will likely
need to obtain additional sources of capital, including a replacement credit
facility. There can be no assurance, however, that such additional capital
will be available or available on terms advantageous to the Company.
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable, as the Securities and Exchange Commission phase-in date
for this Item has not yet occurred.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not, as of August 14, 1997, a party to any litigation.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation. Incorporated by reference
to Exhibit 3.1 to the Company's Current Report on Form 8-K,
dated October 25, 1996, filed with the Securities and
Exchange Commission (the "Commission") on November 12, 1996.
3.2 Bylaws. Incorporated by reference to Exhibit 3.2 to the
Company's Current Report on Form 8-K, dated October 25,
1996, filed with the Commission on November 12, 1996.
27 Financial Data Schedule (Filed electronically only). Filed
herewith.
</TABLE>
(a) No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1997.
16
<PAGE>
SIGNATURE
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.
OVERSEAS FILMGROUP, INC.
August 14, 1997 By: /s/William F. Lischak
------------------------
William F. Lischak
Chief Financial Officer,
Chief Operating Officer and
Secretary, signing both in
his capacity as an
executive officer of the
Registrant duly authorized
to sign on behalf of the
Registrant and as Chief
Financial Officer of the
Registrant.
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
- ------- ----------- ----
<S> <C> <C>
3.1 Restated Certificate of Incorporation. Incorporated by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K, dated
October 25, 1996, filed with the Commission on November 12, 1996.
3.2 Bylaws. Incorporated by reference to Exhibit 3.2 to the Company's
Current Report on Form 8-K, dated October 25, 1996, filed with
the Commission on November 12, 1996.
27 Financial Data Schedule (Filed electronically only). Filed herewith.
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 485,158
<SECURITIES> 0
<RECEIVABLES> 12,294,428
<ALLOWANCES> 1,000,000
<INVENTORY> 31,988,742
<CURRENT-ASSETS> 0
<PP&E> 482,140
<DEPRECIATION> 803,408
<TOTAL-ASSETS> 45,642,568
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 5,778
<OTHER-SE> 11,196,597
<TOTAL-LIABILITY-AND-EQUITY> 45,642,568
<SALES> 4,037,514
<TOTAL-REVENUES> 4,037,514
<CGS> 4,808,324
<TOTAL-COSTS> 1,040,426
<OTHER-EXPENSES> 51,671
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,862,906)
<INCOME-TAX> (654,217)
<INCOME-CONTINUING> (1,208,689)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,208,689)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> 0
</TABLE>
