<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 SEPTEMBER 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 jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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 November 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 September 30, 1997 (unaudited) 3
Consolidated Statements of Operations (unaudited)
for the three and nine months ended September 30, 1996
and September 30, 1997 4
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 1996
and September 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 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
OVERSEAS FILMGROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents............................................ $2,833 $353,689
Restricted cash...................................................... 162,326 46,037
Accounts receivable, net of allowance for doubtful
accounts of $1,000,000............................................. 13,700,298 10,728,239
Related party receivable............................................. 413,000 413,000
Film costs, net of accumulated amortization.......................... 32,175,353 28,358,324
Fixed assets, net of accumulated depreciation........................ 446,817 557,127
Other assets......................................................... 450,728 347,269
----------- -----------
Total assets.................................................... $47,351,355 $40,803,685
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued expenses................................ $2,378,598 $2,623,084
Payable to producers................................................. 4,656,041 3,712,812
Notes payable to related parties..................................... 1,958,709 2,085,886
Notes payable........................................................ 23,603,323 16,607,137
Deferred income taxes................................................ 2,624,246 3,030,000
Deferred revenue..................................................... 493,123 553,000
----------- -----------
Total liabilities............................................... 35,714,040 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.................................................... 1,065,540 1,533,257
Treasury stock at cost, 45,000 shares (86,734) --
----------- -----------
Total shareholders' equity...................................... 11,637,315 12,191,766
----------- -----------
Total liabilities and shareholders' equity.................. $47,351,355 $40,803,685
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE>
OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ---------------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues......................................... $6,089,176 $5,003,263 $16,287,885 $20,755,233
Expenses:
Film costs..................................... 4,472,995 3,573,757 14,155,024 16,080,420
Selling, general and administrative............ 940,254 928,382 2,888,824 2,590,533
---------- ---------- ----------- -----------
Total expenses............................... 5,413,249 4,502,139 17,043,849 18,670,953
---------- ---------- ----------- -----------
Income (loss) from operations.................... 675,927 501,124 (755,964) 2,084,280
Other income (expense):
Interest income................................ 938 38,343 166,086 46,797
Interest expense............................... (89,836) 9,732 (256,716) (31,256)
Other income................................... 92,564 39,487 141,448 153,528
---------- ---------- ----------- -----------
Total other income........................... 3,666 87,562 50,818 169,069
---------- ---------- ----------- -----------
Income before income taxes....................... 679,593 588,686 (705,146) 2,253,348
Income tax provision (benefit)................... 244,653 60,406 (237,428) 183,044
---------- ---------- ----------- -----------
Net income (loss)................................ $434,940 $528,280 $ (467,718) $ 2,020,304
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Net income (loss) per share...................... $0.08 $(0.08)
---------- -----------
---------- -----------
Pro forma data:
Income before income taxes and additional
interest expense............................. 588,686 2,253,348
Additional interest expense.................... 32,864 104,685
---------- -----------
Income before income taxes..................... 555,822 2,148,703
Income tax provision........................... 200,096 773,533
---------- -----------
Pro forma net income............................. $ 355,726 $ 1,375,170
---------- -----------
---------- -----------
Pro forma net income per share................... $ 0.09 $ 0.33
---------- -----------
---------- -----------
Weighted average number of common
shares outstanding............................. 5,732,778 4,177,778 5,752,778 4,177,778
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE>
OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income............................................. $ (467,718) $ 2,020,305
Adjustments to reconcile net (loss) income to net
cash provided by operating activities -
Amortization of film costs.................................. 13,377,759 16,976,232
Depreciation of fixed assets................................ 120,894 39,270
Change in assets and liabilities -
Increase in accounts receivable............................. (2,972,059) (2,438,344)
Decrease in other receivables............................... 0 258,494
Increase in other assets.................................... (103,459) (726,506)
(Decrease) increase in accounts payable
and accrued expenses...................................... (244,486) 896,040
Increase (decrease) in payable to producers................. 943,230 (2,515,975)
(Decrease) increase in deferred income taxes payable........ (405,754) 50,000
Decrease in deferred revenue................................ (59,877) (839,800)
----------- -----------
Net cash provided by operating activities................. 10,188,529 13,719,716
----------- -----------
Cash flows from investing activities:
Additions to film costs....................................... (17,194,786) (27,892,093)
Purchase of fixed assets...................................... (10,584) (208,796)
----------- -----------
Net cash used in investing activities..................... (17,205,370) (28,100,889)
----------- -----------
Cash flows from financing activities:
Net borrowings under credit facilities........................ 6,996,186 15,432,825
Payment on notes payable to related parties................... (127,177) 0
Purchase of treasury stock.................................... (86,734) 0
Distributions to shareholders................................. 0 (4,006,618)
----------- -----------
Net cash provided by financing activities................ 6,782,274 11,426,207
----------- -----------
Net decrease in cash............................................ (234,567) (2,954,966)
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.............................................. $ 165,159 $ (388,366)
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.................................................... $ 1,720,229 $ 1,204,473
----------- -----------
----------- -----------
Income taxes................................................ $ 4,800 $ 55,000
----------- -----------
----------- -----------
Foreign withholding taxes................................... $ 165,126 $ 82,638
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE>
OVERSEAS FILMGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - BASIS OF PRESENTATION
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 nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1997. These financial statements should be read in
conjunction with 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.
NOTE II - MERGER
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 September 30, 1996
and for the three and nine 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
nine month period ended September 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)
NOTE III - FILM COSTS
Film costs consist of the following:
<TABLE>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Films in release, net of
accumulated amortization.................... $27,112,658 $25,838,106
Films not yet available for release............ 5,062,695 2,520,218
----------- -----------
$32,175,353 $28,358,324
----------- -----------
----------- -----------
</TABLE>
NOTE IV - DEBT
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
November 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.
NOTE V - COMMITMENTS AND CONTINGENCIES
As of September 30, 1997, the Company is committed under various acquisition
agreements to pay minimum guarantees of $6,305,875 contingent upon delivery
of the respective films to the Company.
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 SEPTEMBER 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. 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 September 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 SEPTEMBER 30, 1997 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1996
Revenues increased by $1,085,913 (21.7%) to $6,089,176 for the
quarter ended September 30, 1997 from $5,003,263 for the quarter ended
September 30, 1996. The increase in revenues was primarily due to increased
sales of older titles or "library" product, including television and
television re-issue rights, increased U.S. pay television revenues and
the sale of certain sequel and television series rights to a motion picture,
the copyright of which is owned by the Company.
Film costs as a percentage of revenues increased to 73.5% for
the three months ended September 30, 1997, compared to 71.4% for the three
months ended September 30, 1996. 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 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 $11,872 (1.3%) to $940,254 for the
quarter ended September 30, 1997 from $928,382 for the quarter ended
September 30, 1996. Increases in expenses relating to the Company's being a
publicly held company, including in areas of director's and officer's
insurance, legal, investor relations and accounting were offset by
savings in other areas including compensation costs as a result of decreased
personnel. 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 net income for the
quarter ended September 30, 1997 of $434,940 compared to pro forma net income
for the quarter ended September 30, 1996 of $355,726. Pro forma income for
the quarter ended September 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 36%
and to assumed additional interest expense
9
<PAGE>
relating to the Merger Note. See Note II (Merger) of the "Notes to
Consolidated Financial Statements" contained herein.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Revenues decreased by $4,467,348 (21.5%) to $16,287,885 for
the nine months ended September 30, 1997 from $20,755,233 for the nine months
ended September 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 nine months ended
September 30, 1997 compared to those films first available for distribution
in the comparable nine month period in 1996. In situations where the Company
licenses distribution rights of a particular film to subdistributors, 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 nine
months ended September 30, 1996, of the films first available for
distribution, three films had pre-sales in excess of $2,000,000 each. By
comparison, for the nine months ended September 30, 1997 one film became
available with pre-sales in excess of $2,000,000. The decrease in revenues
also resulted from decreased revenues generated by the Company's domestic
theatrical releasing operation, First Look Pictures (approximately $1,265,639
for the nine months ended September 30, 1996 compared to approximately
$326,716 for the nine months ended September 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 86.9% for
the nine months ended September 30, 1997, compared to 77.5% for the nine
months ended September 30, 1996. The increase is primarily due to the
write-down in the nine months ended September 30, 1997 of an aggregate of
approximately $1,310,577 to net realizable value of various films. In
addition, generally lower margins were realized on films generating the
greatest share of revenue during the nine months ended September 30, 1997
compared to the nine months ended September 30, 1996.
Selling, general and administrative expenses, net of amounts
capitalized to film costs, increased by $298,291 (11.5%) to $2,888,824 for
the nine months ended September 30, 1997 from $2,590,533 for the nine months
ended September 30, 1996. The increase in selling, general and administrative
expenses, net of amounts capitalized to film costs, was primarily due to
expenses related to the Company being a publicly held company including
increased insurance, legal, investor relations and accounting expenses and
increased compensation costs paid to personnel in the period ended September
30, 1997 over that of the comparable period in the prior year. The increases
were partially offset by savings in bad debt expense and consulting fees.
As a result of the above, the Company had a net loss for
the nine months ended September 30, 1997 of $467,718 compared to pro forma
net income for the nine months ended September 30, 1996 of $1,375,170. Pro
forma income for the nine months ended September 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 36% and to assumed additional interest expense relating
to the Merger Note. See Note II (Merger) of the "Notes to Consolidated
Financial Statements" contained herein.
LIQUIDITY AND CAPITAL RESOURCES
10
<PAGE>
The Company has a revolving credit facility (the "Credit
Facility) under 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
September 30, 1997, an aggregate of approximately $22,603,323 was outstanding
under the Film Facilities and Operating Facility at an average interest rate
on the outstanding amounts of approximately 8.6875%. $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 $1,000,000 was outstanding at September 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
November 30, 1997.
In addition, the Lenders and the Company are in discussions
regarding extending the commitment to lend from November 30, 1997 to May 9,
1998. 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
the Credit Facility, the Company is continuing its 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
11
<PAGE>
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 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 returns 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 September 30, 1997, an aggregate of $1,863,195.06 in principal and accrued
interest was outstanding under the Merger Note. The Lenders have not, as of
November 13, 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 September 30, 1997, an aggregate of $17,426,831 in
principal and interest was outstanding under Film Facilities, including an
aggregate of approximately $11,198,882 in principal and accrued interest
under ten Film Facilities which have matured or are scheduled to mature prior
to September 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 five Film Facilities (under
which an aggregate of $7,023,311 in principal and accrued interest was
outstanding as of September 30, 1997) which have matured or would otherwise
mature prior to September 30, 1998. As part of such extensions, the Company may
make monthly payments of principal agreed to by the Lenders.
12
<PAGE>
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. As the motion picture business and the Company's operations
are subject to numerous uncertainties, including among other things, 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, financing and distribution goals will be met (or that
such goals will not be exceeded). As part of the planned changes in its
operational strategy, the Company has also begun to implement certain
reductions in overhead. For example, as of September 30, 1996, the Company
had approximately 44 full-time employees. By comparison, as of September 30,
1997, the Company had approximately 36 full-time employees. The Company has
also made reductions in consulting fees and other general overhead items.
As of September 30, 1997, the Company had cash and cash
equivalents of $2,833 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 September 30, 1997, the Company had
restricted cash of $162,326 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 September 30, 1997, as of such date the Company had
contractual obligations for advances and minimum guarantee payments of
$6,305,875 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 September 30, 1997 was
approximately $223,939 in principal and accrued interest. As of September
30, 1997, the Company also had deferred revenue relating to distribution
commitments and guarantees from sub-distributors of approximately $493,123.
13
<PAGE>
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 five 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.
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.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not, as of November 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
The Company's 1997 Annual Meeting of Stockholders was held on
September 25, 1997. At the Annual Meeting, Robert B. Little and Stephen K.
Bannon were re-elected to serve as directors of the Company until the 2000
Annual Meeting of Stockholders and until their successors are elected and
have qualified, in each case by a vote of 4,951,117 votes in favor of such
person's reelection, no votes against such person's reelection and with no
votes withheld.
At the 1997 Annual Meeting of Stockholders, the Company's
stockholders also approved a proposal to ratify the Company's selection of
Price Waterhouse LLP as the Company's independent auditors for the fiscal
year ending December 31, 1997. The number of votes cast with respect to such
proposal were 4,951,117 votes in favor of such proposal and no votes against
such proposal, with no abstentions.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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.
15
<PAGE>
27 Financial Data Schedule (Filed electronically
only). Filed herewith.
(b) No reports on Form 8-K were filed by the Company during
the quarter ended September 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.
November 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
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDING SEPTEMBER 30, 1997 AND IS QUALIFIED INT ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 165,159
<SECURITIES> 0
<RECEIVABLES> 15,113,298
<ALLOWANCES> 1,000,000
<INVENTORY> 32,175,353
<CURRENT-ASSETS> 14,278,457
<PP&E> 1,290,908
<DEPRECIATION> 844,091
<TOTAL-ASSETS> 47,351,355
<CURRENT-LIABILITIES> 7,034,640
<BONDS> 0
0
0
<COMMON> 10,577,776
<OTHER-SE> 1,065,540
<TOTAL-LIABILITY-AND-EQUITY> 47,351,355
<SALES> 6,089,176
<TOTAL-REVENUES> 6,089,176
<CGS> 4,472,995
<TOTAL-COSTS> 5,413,249
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89,836
<INCOME-PRETAX> 679,593
<INCOME-TAX> 244,653
<INCOME-CONTINUING> 434,940
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 434,940
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
