<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, 1998
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 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 14, 1997
was 5,732,778.
<PAGE>
OVERSEAS FILMGROUP, INC.
INDEX
- -------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Balance Sheets --
December 31, 1997, and September 30, 1998 (unaudited) 3
Consolidated Statements of Operations (unaudited)
for the three and nine months ended September 30, 1997 and
September 30, 1998 4
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 1997
and September 30, 1998 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 and Use of Proceeds 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
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PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
OVERSEAS FILMGROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
CASH AND CASH EQUIVALENTS $ 84,067 $ 1,179,133
RESTRICTED CASH 125,410 172,498
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $750,000 26,168,323 14,416,540
RELATED PARTY RECEIVABLE 281,000 281,000
FILM COSTS, NET OF ACCUMULATED AMORTIZATION 30,036,735 29,740,567
FIXED ASSETS, NET OF ACCUMULATED DEPRECIATION 309,761 408,685
OTHER ASSETS 455,316 361,897
------------ -------------
TOTAL ASSETS $ 57,460,612 $ 46,560,320
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 1,865,435 $ 1,939,576
PAYABLE TO PRODUCERS 15,455,872 4,453,021
NOTES PAYABLE TO SHAREHOLDERS 2,372,226 2,161,977
NOTES PAYABLE 22,923,926 23,142,184
DEFERRED INCOME TAXES 2,638,537 2,502,200
DEFERRED REVENUE 186,750 800,250
------------ -------------
TOTAL LIABILITIES 45,442,746 34,999,208
------------ -------------
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, 5,732,778 SHARES OUTSTANDING 5,778 5,778
ADDITIONAL PAID-IN CAPITAL 10,652,731 10,652,731
RETAINED EARNINGS 1,446,091 989,337
TREASURY STOCK AT COST, 45,000 SHARES (86,734) (86,734)
------------ -------------
TOTAL SHAREHOLDERS' EQUITY 12,017,866 11,561,112
------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 57,460,612 $ 46,560,320
------------ -------------
------------ -------------
</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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $ 7,241,713 $ 6,089,176 $ 22,676,652 $ 16,287,885
EXPENSES:
FILM COSTS 5,938,296 4,350,867 18,602,221 13,568,003
SELLING, GENERAL AND ADMINISTRATIVE 779,693 940,254 2,299,804 2,888,824
------------ ------------ ------------ ------------
TOTAL EXPENSES 6,717,989 5,291,121 20,902,025 16,456,827
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 523,724 798,055 1,774,627 (168,942)
OTHER INCOME (EXPENSE):
INTEREST INCOME 1,705 938 3,322 2,590
INTEREST EXPENSE (499,705) (211,964) (1,158,205) (680,242)
OTHER INCOME 31,045 92,564 107,008 141,448
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (466,955) (118,462) (1,047,873) (536,204)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 56,769 679,593 726,754 (705,146)
INCOME TAX PROVISION (BENEFIT) 18,830 244,653 270,000 (237,428)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 37,939 $ 434,940 $ 456,754 $ (467,718)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
BASIC AND DILUTED EARNINGS PER SHARE $ 0.01 $ 0.08 $ 0.08 $ (0.08)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 5,732,778 5,732,778 5,732,778 5,752,778
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
4
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OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET (LOSS) INCOME $ 456,754 $ (467,718)
ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES -
AMORTIZATION OF FILM COSTS 18,602,222 13,377,759
DEPRECIATION OF FIXED ASSETS 108,245 120,894
CHANGE IN ASSETS AND LIABILITIES -
(INCREASE) IN ACCOUNTS RECEIVABLE (11,751,783) (2,972,059)
DECREASE IN OTHER RECEIVABLES 0 0
(INCREASE) IN OTHER ASSETS (93,419) (103,459)
(DECREASE) INCREASE IN ACCOUNTS PAYABLE
AND ACCRUED EXPENSES (74,140) (244,486)
INCREASE IN PAYABLE TO PRODUCERS 11,002,852 943,230
INCREASE (DECREASE) IN DEFERRED INCOME TAXES PAYABLE 136,337 (405,754)
(DECREASE) IN DEFERRED REVENUE (613,500) (59,877)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,773,568 10,188,529
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO FILM COSTS (18,898,391) (17,194,786)
PURCHASE OF FIXED ASSETS (9,321) (10,584)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (18,907,712) (17,205,370)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
NET (REPAYMENTS), BORROWINGS UNDER CREDIT FACILITIES (218,258) 6,996,186
BORROWING (PAYMENT) ON NOTES PAYABLE TO RELATED PARTIES 210,248 (127,177)
PURCHASE OF TREASURY STOCK 0 (86,734)
------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (8,010) 6,782,274
------------ ------------
NET (DECREASE) IN CASH (1,142,154) (234,567)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
AT BEGINNING OF PERIOD 1,351,631 399,726
------------ ------------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
AT END OF PERIOD $ 209,477 $ 165,159
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
INTEREST $ 1,452,139 $ 1,720,229
------------ ------------
------------ ------------
INCOME TAXES $ 13,183 $ 4,800
------------ ------------
------------ ------------
FOREIGN WITHHOLDING TAXES $ 74,623 $ 165,126
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE 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 reflected in these consolidated financial statements. Operating
results for the nine months ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1998. Certain reclassifications have been made in the 1997 consolidated
financial statements to conform to the 1998 presentation. 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, 1997 (the "1997 Consolidated Financial Statements").
II. Film costs consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Films in release net of accumulated amortization 27,838,936 26,781,682
Films not yet available for release 2,197,799 2,958,885
---------- ----------
30,036,735 29,740,567
---------- ----------
---------- ----------
</TABLE>
III. On April 14, 1998 the Company amended the terms of its Credit Facility (see
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS for additional information regarding the Credit Facility) to,
among other provisions, extend the expiration of the commitment to lend
under the Credit Facility to April 9, 1999, provide additional availability
under the Operating Facility portion of the Credit Facility, eliminate
further borrowings under the Film Facility portion of the Credit Facility
(with the exception of one additional film) extend the individual maturity
dates of various Film Facilities, and waive certain debt covenant
violations. See the 1997 Consolidated Financial Statements.
IV. The Company's ability to maintain availability under its Operating Facility
and to pay down the Film Facilities prior to maturity is primarily
dependent upon the timing of collections on existing sales during the next
twelve months and the amount and timing of collections on anticipated sales
of the Company's current library and films which the Company plans to
release or make available to subdistributors over the next twelve months.
Additionally, the Company will need to renew the commitment of its current
lenders under its credit facility or replace its existing credit facility
on or before April 1999, when the current commitment to lend expires.
Management believes that existing capital, cash flow from operations and
availability under the Company's amended Credit Facility and Local Facility
will be sufficient to enable the Company to fund its planned acquisition,
distribution and overhead expenditures for a reasonable period of time. In
the event that the Company's sales and collections during the next twelve
months are less than currently anticipated, the Company will need to either
alter planned acquisition and distribution activities, seek additional
availability under its current Credit Facility or seek alternate sources of
financing.
V. In addition to the liabilities presented on the balance sheet, the Company
is committed under various acquisition agreements to pay minimum guarantees
of $150,000 contingent upon delivery of the respective films to the
Company. In addition, the Company has guaranteed payment by an independent
motion picture production company of a promissory note in the aggregate
principal and accrued interest amount of $149,287 payable on December 8,
1998. The production company is in negotiation with the bank to extend the
term of the promissory note.
6
<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"
INCLUDING THOSE 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 REGISTRANT WILL NOT
BE COMMERCIALLY SUCCESSFUL, RESULTING IN COSTS NOT BEING RECOUPED OR ANTICIPATED
PROFITS NOT BEING REALIZED. THE REGISTRANT'S RESULTS OF OPERATIONS FOR THE
PERIOD ENDED SEPTEMBER 30, 1998 ARE NOT NECESSARILY INDICATIVE OF THE RESULTS
THAT MAY BE EXPECTED IN FUTURE PERIODS (INCLUDING FOR THE YEAR ENDING DECEMBER
31, 1998). DUE TO QUARTERLY FLUCTUATIONS IN THE NUMBER OF MOTION PICTURES IN
WHICH THE REGISTRANT 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 REGISTRANT, AS WELL AS THE
UNPREDICTABLE NATURE OF AUDIENCE AND SUBDISTRIBUTOR RESPONSE TO MOTION PICTURES
DISTRIBUTED BY THE REGISTRANT, THE REGISTRANT'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 REGISTRANT'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 REGISTRANT'S COSTS AND EXPENSES, AND THUS THE CAPITAL
REQUIRED BY THE REGISTRANT IN ITS OPERATIONS AND THE ASSOCIATED RISKS FACED BY
THE REGISTRANT MAY INCREASE IN THE FUTURE. ADDITIONAL RISKS AND UNCERTAINTIES
ARE DISCUSSED ELSEWHERE IN APPROPRIATE SECTIONS OF THIS REPORT (INCLUDING,
WITHOUT LIMITATION, UNDER "IMPACT OF YEAR 2000" BELOW) AND IN OTHER FILINGS MADE
BY THE REGISTRANT WITH THE SECURITIES AND EXCHANGE COMMISSION INCLUDING WITHOUT
LIMITATION THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR ITS FISCAL YEAR ENDED
DECEMBER 31, 1997. 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 REGISTRANT. THE REGISTRANT 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 REGISTRANT OVER TIME MEANS THAT ACTUAL EVENTS ARE BEARING OUT
AS ESTIMATED IN SUCH FORWARD-LOOKING STATEMENTS.
7
<PAGE>
GENERAL
The operations of Overseas Filmgroup, Inc. ("Overseas" or the "Company")
were established on February 11, 1980. The Company operated as a privately held
company through October 30, 1996. On October 31, 1996 the Company was acquired,
through merger, by Entertainment/Media Acquisition Corporation ("EMAC"), a
publicly traded company. Concurrent with the merger, EMAC changed its name to
Overseas Filmgroup, Inc. The Company is principally involved in the acquisition
and worldwide license or sale of distribution rights to independently produced
motion pictures. Certain motion pictures are directly distributed by the Company
in the domestic theatrical market under the name First Look Pictures ("First
Look").
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1997
Revenues increased by $1,152,537 (18.9%) to $7,241,713 for the quarter
ended September 30, 1998 from $6,089,176 for the quarter ended September 30,
1997. The increase in revenues was primarily due to the delivery of two films
where associated pre-sales (sales contracted prior to the availability of the
particular film and which sales are not recognizable until delivery of the
related film) totaling approximately $4,998,000 had been previously made and
were then recognized upon delivery in the quarter. By comparison, for the
quarter ended September 30, 1997, there were two films delivered with associated
pre-sales of $280,000 recognized in the quarter.
Film costs as a percentage of revenues increased to 82.0% for the three
months ended September 30, 1998, compared to 71.5% (after certain
reclassifications) for the three months ended September 30, 1997. The
increase in film costs as a percentage of revenue (and the corresponding
decrease in margin to the Company) is due in part to the contractual
entitlements of the Company under terms of many of the recent films for which
rights have been acquired by the Company. The production costs of many of the
films for which the Company has been acquiring rights now and in recent
periods are being financed entirely by third parties (with no recourse to the
Company), including such arrangements known as "gap" financing, whereby a
financier provides production financing based upon the Company's estimate of
the value of unsold rights to the particular film. In many of these
situations, in order to be competitive, the Company has accepted lower fees
and margins and in some circumstances has been required to defer some or all
of its fee until such time as the financier has recovered its investment in
the particular film. Additionally, the gross margin for a given period will
vary depending upon the gross margins earned on films generating revenue in
the period. 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, decreased by $160,560 (17.1%) to $779,694 for the quarter
ended September 30, 1998 from $940,254 for the quarter ended September 30,
1997. Decreases in payroll related expenses (decreased approximately
$195,982), accounting expenses (decreased approximately $21,645), bad debts
(decreased approximately $23,490) and legal expenses (decreased approximately
$52,739), were partially offset by increases in certain areas including
contract labor (increased approximately $39,561), publicity (increased
approximately $16,111), other expenses relating to the Company's
8
<PAGE>
being a publicly held company (increased approximately $18,698) and rent
(increased approximately $12,236) compared to the comparable quarter in the
prior year. 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.
Other expense increased $348,494 (294.2%) to $466,955 for the three months
ended September 30, 1998 compared to $118,461 (after certain reclassifications)
for the three months ended September 30, 1997 primarily as a result of increased
interest expense of $499,705 for the quarter ended September 30, 1998 compared
to $211,963 for the quarter ended September 30, 1997.
As a result of the above, the Company had income before taxes for the
quarter ended September 30, 1998 of $56,769 compared to income before taxes of
$679,593 for the quarter ended September 30, 1997.
The Company had net income for the quarter ended September 30, 1998 of
$37,939 (reflecting an effective tax rate of 33.2%) compared to net income for
the quarter ended September 30, 1997 of $434,940 (reflecting an effective tax
rate of 36%).
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues increased by $6,388,767 (39.2%) to $22,676,652 for the nine months
ended September 30, 1998 from $16,287,885 for the nine months ended September
30, 1997. The increase in revenues was due in part to the license in May 1998 of
North and Latin American rights to WAKING NED DEVINE for $5,000,000. The
increase was also due to an increase in revenues from the licensing of motion
picture rights to many older films, sometimes known as "library" titles,
(approximately $3,512,721 for the nine months ended September 30, 1998 compared
to approximately $2,349,227 for the nine months ended September 30, 1997) and to
increased U.S. theatrical revenues ($950,275 for the nine months ended September
30, 1998 compared to $326,716 in the comparable period in the prior year)
primarily resulting from the Company's release (through First Look Pictures) of
MRS. DALLOWAY in February 1998.
Film costs as a percentage of revenues decreased to 82.0% for the nine
months ended September 30, 1998, compared to 83.3% for the nine months ended
September 30, 1997. The decrease is primarily due to fewer write-downs to net
realizable value of film costs in the nine months ended September 30, 1998
compared to the nine months ended September 30, 1997 (approximately $285,293 for
the nine months ended September 30, 1998 compared to approximately $1,822,988
for the nine months ended September 30, 1997). The impact of the lower
write-downs in the nine months ended September 30, 1998 was partially offset by
generally lower margins on films generating the greatest share of revenues
recognized for the nine months ended September 30, 1998 compared to films
generating the greatest share of revenues recognized for the nine months ended
September 30, 1997.
Selling, general and administrative expenses, net of amounts capitalized to
film costs, decreased by $589,020 (20.4%) to $2,299,804 for the nine months
ended September 30, 1998 from $2,888,824 for the nine months ended September 30,
1997. Decreases in certain selling, general and administrative expenses over
those of the comparable period in areas including payroll related expenses
(decreased approximately $446,247), accounting expenses (decreased approximately
$62,113), bad debts (approximately $73,893) and legal expenses (decreased
approximately $92,397), were partially offset by increases in certain areas
including contract labor (approximately $58,793), and rent (approximately
$36,707).
Other expense increased $511,670 (95.4%) to $1,047,873 for the nine months
ended September 30, 1998 compared to $536,204 (after certain reclassifications)
for the nine months ended September 30, 1997 primarily as a result of increased
interest expense of $1,158,205 for the nine months ended September 30, 1998
compared to $680,242 for the nine months ended September 30, 1997.
9
<PAGE>
As a result of the above, the Company had net income before income taxes
of $726,754 for the nine months ended September 30, 1998 compared to a loss,
before tax benefit, for the nine months ended September 30, 1997 of $705,146.
The Company made a tax provision of $270,000 for the nine months ended
September 30, 1998 (reflecting a 37.2% tax rate), compared to a tax benefit
of $237,428 for the nine months ended September 30, 1997 resulting from the
expected future tax benefit of recognizing the reported loss for such period
for tax purposes. The tax benefit for such period was calculated assuming an
effective tax rate of 33.7%.
As a result of the above, the Company had net income of $456,754 for the
nine months ended September 30, 1998 compared to a net loss for the nine
months ended September 30, 1997 of $467,718.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires substantial capital for the acquisition of film
rights, the funding of distribution costs and expenses, the payment of
ongoing overhead costs and the repayment of debt. The principal sources of
funds for the Company's operations have been cash flow from operations and
bank borrowings, primarily through the Company's credit facility described
below.
The Company has a credit facility (the "Credit Facility") under an
agreement with Coutts & Co. ("Coutts"), as an agent and lender, and Berliner
Bank A.G. London Branch ("Berliner"), as a lender (collectively, the
"Lenders") most recently amended in April 1998 (as amended, the "Syndication
Agreement"). The Syndication Agreement provides for up to $7,234,000 which
can be borrowed on a revolving basis for the Company's working capital needs
(the "Operating Facility") and up to $1,000,000 (the "Local Facility")
available to be issued as letters of credit to secure a local bank line of
credit (the "Local Line"). Prior to the April 1998 amendments, the
Syndication Agreement also provided for additional borrowing availability to
be used to fund the acquisition of specific motion pictures, including
certain distribution and/or print and advertising costs associated with such
motion pictures (the "Film Facilities"). Pursuant to the April 1998
amendment, the Lenders and the Company agreed that the Film Facilities would
no longer be a revolving credit line and amounts repaid under the Film
Facilities cannot be re-borrowed. Amounts borrowed under Film Facilities are
being repaid out of receipts relating to the licensing of distribution rights
of the specific film financed by the corresponding Film Facility as well as
certain receipts of films originally financed under Film Facilities which
have previously been repaid. 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 (the Company's borrowing rate being approximately
8.625% at November 14, 1998 on one month borrowings). 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.
In addition to amounts outstanding on the Film Facilities as of November
14, 1998 (approximately $12,542,081), an aggregate of approximately
$7,234,340 was outstanding under the Operating Facility, and $1,000,000 in
face amounts of letters of credit had been issued under the Local Facility to
secure the City National Bank credit line (under which approximately $511,000
was then outstanding at an annual interest rate of 6.75%). As part of the
April 1998 amendments to the Syndication Agreement, Ellen Dinerman Little and
Robert B. Little, Co-Chairmen of the Board of Directors and Co-Chief
Executive Officers, personally guaranteed for the benefit of the Lenders all
amounts in excess of $6,000,000 (up to a maximum guarantee amount of
$618,000) drawn under the
10
<PAGE>
Operating Facility. The guarantee will be extinguished when the amounts
outstanding under the Operating Facility are permanently reduced to less than
$6,000,000. Additionally, the Littles agreed to defer payment on a note (the
"Merger Note") issued by the Company in connection with the October 1996
merger (the "Merger") with EMAC until amounts outstanding under the Operating
Facility return to a pre-existing limit of $5,000,000; however, not before
May 1999. At November 14, 1998 an aggregate of approximately $2,016,247 in
principal and accrued interest was outstanding under the Merger Note
(including an aggregate of approximately $768,059 in deferred payments of
principal and interest and approximately $206,093 of additional interest
accrued on the unpaid principal from the date the Littles first deferred
payments under the Merger Note).
The Syndication Agreement requires that amounts outstanding under the
Operating Facility be repaid on the date that the commitment to lend under
the Syndication Agreement expires. The commitment to lend under the
Syndication Agreement expires April 9, 1999. Film facilities outstanding at
September 30, 1998 mature on various dates between December 1998 and October
1999 based on the timing of anticipated sales and collection of receivables
on the related films. Certain other film facilities are subject to review in
October 1999.
In addition to the Merger Note, as of September 30, 1998 certain amounts
payable to the Littles remain unpaid including (i) approximately $427,271 in
principal and accrued interest on a loan to the Company with respect to print
and advertising expenditures relating to the First Look Pictures release of
MRS. DALLOWAY, (ii) approximately $200,000 due under the terms of an
agreement (the "Tax Reimbursement Agreement") entered into in connection with
the October 1996 Merger whereby the Company is obligated to reimburse certain
taxes assessed as a result of audit adjustments of tax returns filed by
Overseas Filmgroup, Inc. prior to the Merger, (iii) approximately $163,854 in
unpaid principal and interest under a promissory note (the "Life Insurance
Note") issued in connection with the Merger, representing the cash value on
the date of the Merger of certain life insurance policies under which the
Company was named as beneficiary, (iv) an aggregate of $100,000 in bonuses
payable to the Littles pursuant to their employment agreements, which bonuses
were earned in 1996 and 1997, and (v) approximately $14,247 of expenses to be
reimbursed pursuant to the terms of their employment agreements with the
Company.
In addition to the Company's obligations reflected on the balance sheet
as of September 30, 1998, as of such date the Company had contractual
obligations for advances and minimum guarantee payments of $150,000
contingent upon completion and delivery of certain motion pictures. As of
September 30, 1998, the Company also had deferred revenue relating to
distribution commitments and guarantees from sub-distributors of
approximately $186,750.
Additionally, the Company has guaranteed a loan from a bank to Neo
Motion Pictures due on December 8, 1998, the principal balance of which at
September 30, 1998 was approximately $149,287 in principal and accrued
interest. Management of Neo Motion Pictures are in negotiation with the bank
to extend the term of the loan.
As of September 30, 1998, the Company had cash and cash equivalents of
$84,067 compared to cash and cash equivalents of $1,179,133 as of December
31, 1997. The difference primarily reflects repayment of borrowings under the
Company's Credit Facility. Additionally, at September 30, 1998, the Company
had restricted cash of $125,410 held by the Company's primary lender, to be
applied against various Film Facilities.
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 primarily acquires
re-issue rights), including up to approximately three First Look Pictures
releases. As the Company's existing credit facility does not provide
available funding for any new rights acquisitions
11
<PAGE>
and requires the consent of the Lenders prior to the Company entering into
any new rights acquisitions or commitments to spend amounts in connection
with distribution expenses and costs for prints and advertising, the ability
of the Company to achieve such goals will depend on the willingness of the
Lenders to permit the Company to enter into new rights acquisitions and
commitments, as well as commitments for distribution expenses and prints and
advertising, and the ability of the Company to obtain other sources of funds
for its acquisition and operational activities, including obtaining pre-sale
commitments, third party equity sources and accessing funds from financial
institutions providing financing to producers based upon the Company's
estimate of the value of unsold distribution rights to a motion picture ("gap
financing"). However, there can be no assurance as to the future availability
of pre-sales, equity and gap financing in amounts sufficient to meet the
Company's acquisition, financing and distribution goals. In addition, the
Company currently anticipates releasing films through First Look Pictures, in
most situations, only if outside sources of funds are available for print and
advertising expenses. As a result of the foregoing, and because the motion
picture business and the Company's operations are subject to numerous
additional uncertainties, including among other things, the specific
financing requirements of various film projects, the 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
schedules 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).
The Company believes that its existing capital, funds from operations,
borrowings under the Credit Facility, and other available sources of capital
will be sufficient to enable the Company to fund its planned acquisition,
distribution and overhead expenditures for the next twelve months. In the
event that (i) the motion pictures released or distributed by the Company
during such period do not meet with sufficiently positive distributor and
audience response, (ii) sales and licensing of distribution rights to films
in the Company's film library and films which the Company plans to release or
make available to subdistributors during such period are less than
anticipated and/or (iii) the Company is not able to exploit various sources
of capital (such as pre-sales and gap financing) to the extent anticipated,
the Company will likely need to significantly reduce its currently planned
level of acquisitions and distribution activities and overhead and will
likely need to obtain additional sources of capital. The Company is currently
exploring obtaining additional sources of capital (including equity and debt
financing). In addition, as the commitment to lend under the Company's
current Credit Facility expires in April 1999, the Company will need to renew
the commitment to lend under the Credit Facility or arrange alternative
financing resources. There can be no assurance, however, that such additional
alternative capital or sources of financing resources will be available or
available on terms advantageous to the Company.
CERTAIN TAX MATTERS
The Company has had its federal income tax return relating to the two
month period following the October 1996 Merger selected for audit by the
Internal Revenue Service. As the audit has only recently commenced, the
Company does not currently have a basis upon which to estimate the impact, if
any, such audit may have on the Company.
IMPACT OF YEAR 2000
Impact of the Year 2000 Issue - Introduction. The term "Year 2000 issue"
is a general term used to describe the various problems that may result from
the improper processing of dates and date-sensitive calculations by computers
and other machinery as the Year 2000 is approached and reached. These
problems generally arise because most of the world's computer hardware and
software have historically
12
<PAGE>
used only two digits to identify the year in a date, often meaning that the
computer will fail to distinguish dates in the 2000's from dates in the
1900's. Year 2000 issues also may arise from other sources as well, such as
the use of special codes and conventions in software that make use of the
date field.
State of Readiness. The Company has assessed its computer systems
(software, hardware, including embedded microprocessors and other technology)
in order to determine whether such systems recognize the year 2000. Based
upon such assessment the Company believes that all of the Company's computer
systems are year 2000 compliant except for the Company's accounting system.
As a result of such assessment, the Company intends to upgrade its accounting
system. The upgrade is intended to both expand the capabilities of the system
and resolve the year 2000 issues associated with the current system. The
Company currently plans to complete the upgrade of the accounting system by
the end of 1998. The Company does not currently anticipate that any
additional material changes will be required or that the Year 2000 issue will
pose significant operational problems for the Company. If any anticipated
problems arise or any necessary changes are not made or completed in a timely
fashion, the Year 2000 issue may take longer for the Company to address and
could have a material adverse effect on the Company's financial condition and
results of operations.
The Company has primarily focused on its own internal systems. The
Company does not currently have a basis upon which to estimate the impact on
the Company of year 2000 non-compliance by the Company's major licensees and
subdistributors. It is possible that non-compliance to year 2000 concerns by
the Company's major licensees and subdistributors could have a material
adverse effect on the Company, by, for example, delaying payments by such
parties. At this time, the Company does not have plans to institute a program
to review year 2000 compliance by its major licensees and subdistributors in
order to determine exposure to year 2000 issues. The Company's accounts
receivable personnel routinely follow-up to verify receivables are timely
paid by the Company's licensees and subdistributors.
The Company currently intends to communicate with the financial
institutions with which it has its primary banking relationships, as well as
with its primary telecommunications providers to ascertain their Year 2000
compliance plans and state of readiness and to attempt to determine the
extent to which the Company may be affected by any failure on their part to
remediate their current Year 20000 issues. The Company does not intend to
independently verify any information received from such parties with respect
to Year 2000 issues. As a result, there can be no assurance that such other
parties will not suffer a Year 2000 business disruption that may adversely
effect the Company's financial condition and results of operations. In
additional, general failures to be Year 2000 compliant nationally or
internationally by banks and other significant companies or economic
infrastructures could have an adverse impact on the Company.
Costs to Address the Year 2000 Issue. The Company estimates that the
cost to the Company of the upgrade of its accounting system, intended to
expand the capabilities of the system and resolve the Year 2000 issues
associated with the current system will be approximately $10,000. The Company
intends to fund such costs from its working capital from operations. The
Company does not believe that the costs of solving the internal Year 2000
issues will have a material adverse effect on its liquidity or financial
condition. However, as the Company progresses with the Year 2000 update of
its accounting system and implements any necessary changes to its systems,
certain additional costs may be identified. There can be no assurance that
such additional costs will not have a material adverse effect on the
Company's financial condition and results of operations.
Risks of Year 2000 Issues. To date, the Company has not identified any
of its computer systems which present a material risk of not being Year 2000
ready in a timely fashion or for which a suitable alternative cannot be
implemented. However, as the Company progresses with the Year 2000 update of
its accounting system, the Company may identify additional Year 2000 issues
which present a material risk of Year 2000 disruption. Such disruption may
include, among other things, the inability to process transactions or
information, record and access data relating to the availability of titles in
the Company's library for licensing and distribution, send invoices or engage
in similar normal business activities. The failure of the Company to identify
systems which require Year 2000 conversion that are important to the
13
<PAGE>
Company's operations or the failure of the Company or others with which the
Company does business to become Year 2000 ready in a timely manner could have
a material adverse effect on the Company's financial condition and results of
operations. In additional, general failures to be Year 2000 compliant
nationally or internationally by banks and other significant companies or
economic infrastructures could have an adverse impact on the Company.
Contingency Plans. Because the update of the Company's accounting system
conversion is expected to be completed prior to any potential disruption to
the Company's business, the Company has not yet completed the development of
a comprehensive Year 2000 specific contingency plan. If the Company
determines that its business or a segment thereof is at material risk of
disruption due to the Year 2000 issue or anticipates that its update of its
accounting system will not be completed in a timely fashion, the Company will
work to enhance its contingency plan.
The discussion above contains certain forward-looking statements. The
costs of the update of the Company's accounting system and other Year 2000
costs, the date which the Company has set to complete such update and
possible risks associated with the Year 2000 issue are based on the Company's
current estimates and are subject to various uncertainties that could cause
the actual results to differ materially from the Company's expectations. Such
uncertainties include, among other things, the success of the Company in
identifying its systems that are not Year 2000 compliant, the nature and
amount of programming required to upgrade or replace such systems, the
availability of qualified personnel, consultants and other resources, and the
success of the Year 2000 conversion efforts of others.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable, as the Securities and Exchange Commission phase-in date
for this Item with respect to the Company has not yet occurred.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company may, from time to time, become a party to various legal
proceedings arising in the ordinary course of its business. In the opinion of
management, none of the current proceedings will have a material adverse
effect on the Company's operations or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1998 Annual Meeting of Stockholders was held on October
14, 1998. See "Item 5. Other Information" below.
ITEM 5. OTHER INFORMATION
At the Company's 1998 Annual Meeting of Shareholders held on October 14,
1998, Ellen Dinerman Little and Scot K. Vorse were re-elected to serve as
directors of the Company until the
14
<PAGE>
Company's 2001 Annual Meeting of Stockholders and until their successors are
elected and have qualified, in each case by a vote of 5,297,600 votes in
favor of such person's reelection, 500 votes against such person's reelection.
At the 1998 Annual Meeting of Stockholders, the Company's stockholders
also approved a proposal to ratify the Company's selection of
PricewaterhouseCoopers LLP as the Company's independent auditors for the
fiscal year ending December 31, 1998. The number of votes cast with respect
to such proposal were 5,297,100 votes in favor of such proposal and 500 votes
against such proposal, with 500 abstentions.
Gary Stein was appointed as a director by the Board of Directors in
September, 1998, to fill a vacancy on the Board of Directors created by the
resignation of Jeffrey Rochlis in July 1998. Mr. Stein will serve as a
director for the remainder of Mr. Rochlis' term (until the 1999 Annual
Meeting). Since January 1997, Mr. Stein has served a general partner of
Britten and Stone Music, a Nashville-based publishing and consulting
business, which he co-founded with his wife. Between March 1990 and October
1996, Mr. Stein served as Executive Vice President - Corporate and Financial
Development for Lancit Media Entertainment, Inc., a leading producer of
quality children's television programming.
On July 28, 1998, prior to Mr. Stein being voted in to replace Mr.
Rochlis on the Board of Directors, the Company entered into a confidentiality
agreement with Mr. Stein ( the "Confidentiality Agreement") wherein Mr. Stein
offered to provide information about the Company to a corporation provided
such information would be kept confidential. The Confidentiality Agreement
also provides for Mr. Stein to receive a fee of 1.5% of the total dollar
amount of any transaction consummated as a result of his introduction in
connection with this certain corporation.
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.
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, 1998.
15
<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 19, 1998 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.
16
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
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.
17
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
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