<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, 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 August 13, 1998
was 5,732,778.
<PAGE>
OVERSEAS FILMGROUP, INC.
INDEX
- ------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets --
December 31, 1997 and June 30, 1998 (unaudited) 3
Consolidated Statements of Operations (unaudited)
for the three and six months ended June 30, 1997 and
June 30, 1998 4
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 1997 and June 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 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 15
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
OVERSEAS FILMGROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 92,018 $ 1,179,133
RESTRICTED CASH 352,766 172,498
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR
ACCOUNTS OF $750,000 23,173,161 14,416,540
RELATED PARTY RECEIVABLE 281,000 281,000
FILM COSTS, NET OF ACCUMULATED AMORTIZATION 29,504,300 29,740,567
FIXED ASSETS, NET OF ACCUMULATED DEPRECIATION 343,276 408,685
OTHER ASSETS 453,422 361,897
------------ ------------
TOTAL ASSETS $ 54,199,943 $ 46,560,320
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 2,006,041 $ 1,939,576
PAYABLE TO PRODUCERS 12,557,911 4,453,021
NOTE PAYABLE TO SHAREHOLDERS 2,368,515 2,161,977
NOTES PAYABLE 21,769,599 23,142,184
DEFERRED INCOME TAXES 2,703,200 2,502,200
DEFERRED REVENUE 814,750 800,250
------------ ------------
TOTAL LIABILITIES 42,220,016 34,999,208
------------ ------------
SHAREHOLDERS' EQUITY:
PREFERRED STOCK, $.001 PAR VALUE, 2,000,000
AUTHORIZED, 0 SHARES OUTSTANDING
COMMON STOCK, $.001 PAR VALUE, 25,000,000 SHARES
5,732,778 SHARES ISSUED 5,778 5,778
ADDITIONAL PAID-IN CAPITAL 10,652,731 10,652,731
RETAINED EARNINGS 1,408,152 989,337
TREASURY STOCK AT COST, 45,000 SHARES (86,734) (86,734)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 11,979,927 11,561,112
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 54,199,943 $ 46,560,320
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -------------------------------
1998 1997 1998 1997
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $8,402,754 $ 4,037,514 $15,434,939 $10,198,709
EXPENSES:
FILM COSTS 7,017,795 4,609,674 12,634,563 9,218,774
SELLING, GENERAL AND ADMINISTRATIVE 725,045 1,040,426 1,520,110 1,948,570
---------- ----------- ----------- -----------
TOTAL EXPENSES 7,814,882 5,650,100 14,154,673 11,167,344
---------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 659,914 (1,612,586) 1,280,266 (968,635)
OTHER INCOME (EXPENSE):
INTEREST INCOME 325 421 1,617 3,288
INTEREST EXPENSE (357,264) (281,543) (687,862) (468,278)
OTHER INCOME 32,685 30,801 75,964 48,884
---------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) (324,254) (250,321) (610,281) (416,106)
---------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 335,660 (1,862,907) 669,985 (1,384,739)
INCOME TAX PROVISION (BENEFIT) 125,031 (654,217) 251,170 (482,081)
---------- ----------- ----------- -----------
NET INCOME (LOSS) $ 210,629 $(1,208,690) $ 418,815 $ (902,658)
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
INCOME (LOSS) PER SHARE $ 0.04 $ (0.21) $ 0.07 $ (0.16)
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 5,732,778 5,747,778 5,732,778 5,777,778
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</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,
-----------------------------
1998 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 418,815 $ (902,658)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET
CASH PROVIDED BY OPERATING ACTIVITIES -
AMORTIZATION OF FILM COSTS 12,543,323 8,891,371
DEPRECIATION OF FIXED ASSETS 73,934 80,211
CHANGE IN ASSETS AND LIABILITIES -
(INCREASE) IN ACCOUNTS RECEIVABLE (8,756,621) (1,153,189)
(INCREASE) IN OTHER ASSETS (91,525) (44,830)
INCREASE (DECREASE) IN ACCOUNTS PAYABLE
AND ACCRUED EXPENSES 66,465 (435,059)
INCREASE IN PAYABLE TO PRODUCERS 8,104,890 1,707,185
INCREASE (DECREASE) IN DEFERRED INCOME
TAXES PAYABLE 201,000 (580,000)
INCREASE (DECREASE) IN DEFERRED REVENUE 14,500 (259,500)
------------ -------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 12,574,781 7,303,531
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO FILM COSTS (12,307,056) (12,521,790)
PURCHASE OF FIXED ASSETS (8,525) (5,224)
------------ -------------
NET CASH USED IN INVESTING ACTIVITIES (12,315,581) (12,527,014)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
NET (PAYDOWN) BORROWINGS UNDER CREDIT
FACILITIES (1,372,585) 5,526,094
NET BORROWING (PAYMENT) ON NOTE PAYABLE TO
SHAREHOLDERS 206,538 (130,446)
PURCHASE OF TREASURY STOCK 0 (86,734)
------------ -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES (1,166,047) 5,308,914
------------ -------------
NET (DECREASE) INCREASE IN CASH (906,847) 85,431
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 $ 444,784 $ 485,157
------------ -------------
------------ -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
CASH PAID DURING THE PERIOD FOR:
INTEREST $ 954,773 $ 1,096,537
------------ -------------
------------ -------------
INCOME TAXES $ 0 $ 4,800
------------ -------------
------------ -------------
FOREIGN WITHHOLDING TAXES $ 50,170 $ 97,919
------------ -------------
------------ -------------
</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
reflected in these consolidated financial statements. Operating
results for the six months ended June 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>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Films in release net of accumulated amortization 26,417,385 26,781,682
Films not yet available for release 3,086,915 2,958,885
---------- ----------
29,504,300 29,740,567
---------- ----------
---------- ----------
</TABLE>
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) and extend the individual maturity
dates of various Film Facilities, and waive certain debt covenant
violations. See the 1997 Consolidated Financial Statements.
III. 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. 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.
IV. In addition to the liabilities presented on the balance sheet, the
Company is committed under various acquisition agreements to pay
minimum guarantees of $5,531,867 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 $167,950, payable on September 8, 1998.
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"
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 JUNE 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
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 JUNE 30, 1998 COMPARED TO QUARTER ENDED JUNE 30, 1997
Revenues increased by $4,365,240 (108.1%) to $8,402,754 for
the three months ended June 30, 1998 from $4,037,514 for the three months
ended June 30, 1997. The increase was primarily due to the license in May
1998 of North and Latin American rights to one film for $5,000,000.
Film costs as a percentage of revenues decreased to 83.5% for
the three months ended June 30, 1998, compared to 114.2% (after certain
reclassifications) for the three months ended June 30, 1997. The decrease
primarily results from there being no significant write downs to net
realizable value of film costs in the quarter ended June 30, 1998, compared
to an aggregate of approximately $1,133,403 of write downs to net realizable
value of various films in the quarter ended June 30, 1997. Additionally, the
gross margin for a given period will vary dependant 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 $315,381 (30.3%) to $725,045 for the
quarter ended June 30, 1998 from $1,040,426 for the quarter ended June 30,
1997. The decrease in selling, general and administrative expenses, net of
amounts capitalized to film costs, was primarily due to decreased personnel
and broad decreases in many areas of selling, general and administrative
expenses for the period ended June 30, 1998 compared to the year earlier
period. 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 29.5% to $324,254 for the three months
ended June 30, 1998 compared to $250,321 (after certain reclassifications)
for the three months ended June 30, 1997 primarily as a result of increased
interest expense of $357,264 for the quarter ended June 30, 1998 compared to
$281,543 for the quarter ended June 30, 1997.
8
<PAGE>
As a result of the above, the Company had income before taxes
for the quarter ended June 30, 1998 of $335,660 compared to a loss before
taxes of $1,862,907 for the quarter ended June 30, 1997.
The Company had net income for the quarter ended June 30, 1998
of $210,629 (reflecting an effective tax rate of 37.2%) compared to a net
loss for the quarter ended June 30, 1997 of $1,208,690 (reflecting an
effective tax benefit of 35.1%).
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues increased by $5,236,230 (51.3%) to $15,434,939 for
the six months ended June 30, 1998 from $10,198,709 for the six months ended
June 30, 1997. The increase in revenues was due in part to an especially
successful sale of North and Latin American rights to one film for
$5,000,000. The increase in revenues also resulted from an increase in
licensing of motion picture rights to many older films (sometimes known as
"library" titles) and to increased U.S. theatrical revenues ($893,204 for the
six months ended June 30, 1998 compared to $190,925 in the comparable period
in the prior year) 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 81.9% for
the six months ended June 30, 1998, compared to 90.4% for the six months
ended June 30, 1997. The decrease is primarily due to there being no
significant write down to net realizable value of film costs for the six
months ended June 30, 1998 compared to an aggregate of approximately
$1,198,964 write down to net realizable value of various films for the six
months ended June 30, 1997.
Selling, general and administrative expenses, net of amounts
capitalized to film costs, decreased by $428,460 (22.0%) to $1,520,110 for
the six months ended June 30, 1998 from $1,948,570 for the six months ended
June 30, 1997. The decrease in selling, general and administrative expenses,
net of amounts capitalized to film costs, was primarily due to decreased
personnel and broad decreases in many areas of selling, general and
administrative expenses in the period ended June 30, 1998 compared to the
year earlier period.
Other expense increased to $610,281 for the six months ended
June 30, 1998 compared to $468,278 (after certain reclassifications) for the
six months ended June 30, 1997 primarily as a result of increased interest
expense of $687,862 for the quarter ended June 30, 1998 compared to $468,278
for the six months ended June 30, 1997.
As a result of the above, the Company had net income before
income taxes of $669,985 for the six months ended June 30, 1998 compared to a
loss, before tax benefit, for the six months ended June 30, 1997 of
$1,384,739.
The Company recognized a tax provision of $251,170 for the six
months ended June 30, 1998 (reflecting a 37.5% tax rate), compared to a tax
benefit of $482,081 for the six months ended June 30,
9
<PAGE>
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 36% and further
reflects the expected benefit of utilizing foreign tax credits in future
periods.
As a result of the above, the Company had net income of
$418,815 for the six months ended June 30, 1998 compared to a net loss for
the six months ended June 30, 1997 of $902,658.
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 has 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"). In addition, prior to the April 1998 amendments,
the Syndication Agreement provided for additional borrowing 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 8.6875% at August 13, 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 August 10, 1998 (approximately $13,947,717), an aggregate of approximately
$7,032,340 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 $720,000
was then outstanding at an annual interest rate of 7.25%). As part of the
April 1998 amendments to the Syndication Agreement, Ms. Little and Mr.
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 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 merger
(the "Merger") with EMAC until amounts outstanding under the Operating
Facility returns to a pre-existing limit of $5,000,000; however, not before
May 1999. At August 10, 1998 an aggregate of approximately $1,991,062 in
principal and accrued
10
<PAGE>
interest was outstanding under the Merger Note (including an aggregate of
approximately $622,750 in deferred payments of principal and interest and
approximately $180,908 of additional interest accrued on unpaid principal
from the date of the Littles first deferred payment 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 June 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.
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, including up to approximately three First Look
Pictures releases (but exclusive of films where the Company acquires
primarily re-issue rights). As the Company's existing credit facility does
not provide available funding for any new rights acquisition 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).
In addition to the Merger Note, certain amounts payable to the
Littles remain unpaid including (i) approximately $421,000 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") whereby the Company is obligated to
reimburse certain taxes assessed as a result of audit adjustments of tax
returns filed by the Company prior to the Merger, (iii) approximately
$159,996 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 $8,318 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 June 30, 1998, as of such date the Company had
contractual obligations for advances and minimum guarantee payments of
$5,531,867 contingent upon completion and delivery of certain motion
pictures. As of June 30, 1998, the Company also had deferred revenue
relating to distribution commitments and guarantees from sub-distributors of
approximately $814,750.
11
<PAGE>
Additionally, the Company has guaranteed a loan from a bank to
Neo Motion Pictures due on September 8, 1998, the principal balance of which
at June 30, 1998 was approximately $167,950 in principal and accrued
interest.
As of June 30, 1998, the Company had cash and cash
equivalents of $92,018 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 June 30,
1998, the Company had restricted cash of $352,766 held by the Company's
primary lender, to be applied against various Film Facilities.
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). 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 with respect to the Company has not yet occurred.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not, as of August 13, 1998, a party to any
litigation.
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
None.
ITEM 5. OTHER INFORMATION
On July 6, 1998, Jeffrey A. Rochlis resigned as a director of
the Company. Pursuant to the Stockholder's Voting Agreement dated as of
October 31, 1996, entered into in connection with the 1996 merger of EMAC and
the Company, the Founders (Stephen K. Bannon, Scot K. Vorse, Gary M. Stein,
Jeffrey A. Rochlis, Barbara Boyle and The Hoberman Family Trust dated
09/18/92) will nominate an individual to be elected by the Board of Directors
to fill the vacancy created by Mr. Rochlis' resignation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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.
3.3 Amendment dated as of April 14, 1998 to Restated and Amended
Syndication Agreement among Coults & Co., Berliner Bank A.G.
London Branch and Overseas Filmgroup, Inc. Incorporated by
reference to Exhibit 10.24 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
13
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule (Filed electronically only). Filed
herewith.
</TABLE>
(b) No reports on Form 8-K were filed by the Company during
the quarter ended June 30, 1998.
14
<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 13, 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.
15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
------- ----------- --------
<C> <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 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.
3.3 Amendment dated as of April 14, 1998 to Restated and Amended
Syndication Agreement among Coults & Co., Berliner Bank A.G.
London Branch and Overseas Filmgroup, Inc. Incorporated by
reference to Exhibit 10.24 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
27 Financial Data Schedule (Filed electronically only). Filed
herewith.
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 444,784
<SECURITIES> 0
<RECEIVABLES> 24,204,161
<ALLOWANCES> (750,000)
<INVENTORY> 29,504,300
<CURRENT-ASSETS> 0
<PP&E> 796,698
<DEPRECIATION> 0
<TOTAL-ASSETS> 54,199,943
<CURRENT-LIABILITIES> 18,081,902
<BONDS> 24,138,114
0
0
<COMMON> 5,778
<OTHER-SE> 11,947,149
<TOTAL-LIABILITY-AND-EQUITY> 54,199,943
<SALES> 15,434,939
<TOTAL-REVENUES> 15,434,939
<CGS> 12,634,563
<TOTAL-COSTS> 12,634,563
<OTHER-EXPENSES> 1,520,110
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (610,281)
<INCOME-PRETAX> 669,985
<INCOME-TAX> 251,170
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 418,815
<EPS-PRIMARY> 0
<EPS-DILUTED> .07
</TABLE>
