<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 MARCH 31, 1999
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 May 14, 1999
was 5,732,778.
<PAGE>
OVERSEAS FILMGROUP, INC.
INDEX
- -------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Balance Sheets --
March 31, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Income (unaudited)
for the three months ended March 31, 1999 and March 31, 1998 4
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 1999 and March 31, 1998 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 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 16
Signature 17
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OVERSEAS FILMGROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------------- ---------------
(UNAUDITED)
ASSETS:
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 552,730 $ 537,652
RESTRICTED CASH 2,385 159,614
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $750,000 21,109,925 19,724,817
RELATED PARTY RECEIVABLE 149,000 149,000
FILM COSTS, NET OF ACCUMULATED AMORTIZATION 29,282,310 29,003,201
FIXED ASSETS, NET OF ACCUMULATED DEPRECIATION 262,208 293,858
OTHER ASSETS 407,337 340,546
---------------- -----------------
TOTAL ASSETS $ 51,765,895 $ 50,208,688
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 919,301 $ 1,271,818
PAYABLE TO RELATED PARTIES 1,096,727 924,921
ACCRUED INTEREST PAYABLE 37,500 470,386
PAYABLE TO PRODUCERS 10,562,607 9,180,186
NOTE PAYABLE TO SHAREHOLDERS 2,199,998 2,262,498
NOTES PAYABLE 21,685,522 22,013,281
DEFERRED INCOME TAXES 2,310,561 2,332,764
DEFERRED REVENUE 1,232,750 132,250
---------------- -----------------
TOTAL LIABILITIES 40,044,966 38,588,104
---------------- -----------------
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 SHARES ISSUED; 5,732,778 SHARES OUTSTANDING 5,778 5,778
ADDITIONAL PAID IN CAPITAL 10,652,731 10,652,731
RETAINED EARNINGS 1,149,154 1,048,809
TREASURY STOCK AT COST, 45,000 SHARES (86,734) (86,734)
---------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 11,720,929 11,620,584
---------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 51,765,895 $ 50,208,688
================ =================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
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OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
----- ----
<S> <C> <C>
REVENUES $ 6,690,364 $ 7,032,185
EXPENSES:
FILM COSTS 5,338,736 5,646,132
SELLING, GENERAL AND ADMINISTRATIVE 745,574 795,066
-------------- --------------
TOTAL EXPENSES 6,084,310 6,441,198
-------------- --------------
INCOME FROM OPERATIONS 606,054 590,987
OTHER INCOME (EXPENSE):
INTEREST INCOME 289 1,292
INTEREST EXPENSE (472,477) (301,234)
OTHER INCOME 25,480 43,279
-------------- --------------
TOTAL OTHER EXPENSE (446,708) (256,663)
-------------- --------------
INCOME BEFORE INCOME TAXES 159,346 334,324
INCOME TAX PROVISION 59,000 126,139
-------------- --------------
NET INCOME $ 100,346 $ 208,185
============== ==============
BASIC AND DILUTED EARNINGS PER SHARE $ .02 $ 0.04
============== =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 5,732,778 5,732,778
============== =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
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OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
----- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 100,346 $ 208,185
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES -
AMORTIZATION OF FILM COSTS 5,223,588 5,584,637
DEPRECIATION OF FIXED ASSETS 33,074 36,540
CHANGE IN ASSETS AND LIABILITIES -
INCREASE IN ACCOUNTS RECEIVABLE (1,385,108) (3,699,798)
INCREASE IN OTHER ASSETS (66,792) (21,790)
(DECREASE)/INCREASE IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES (613,597) 224,017
INCREASE IN PAYABLE TO PRODUCERS 1,382,421 2,369,895
(DECREASE) INCREASE IN DEFERRED INCOME TAXES (22,203) 91,000
INCREASE IN DEFERRED REVENUE 1,100,500 7,500
-------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,752,229 4,800,186
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO FILM COSTS (5,502,697) (4,848,886)
PURCHASE OF FIXED ASSETS (1,425) 0
-------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (5,504,122) (4,848,886)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
NET REPAYMENT UNDER CREDIT FACILITY (327,758) (1,396,993)
(REPAYMENT) ISSUANCE OF NOTE PAYABLE TO RELATED PARTY (62,500) 203,269
------------- ------------
NET CASH USED IN FINANCING ACTIVITIES (390,258) (1,193,724)
------------- -------------
NET DECREASE IN CASH (142,151) (1,242,424)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
AT BEGINNING OF PERIOD 697,266 1,351,631
------------ -------------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
AT END OF PERIOD $ 555,115 $ 109,207
============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE QUARTER FOR:
INTEREST $ 893,682 $ 541,879
============ =============
INCOME TAXES $ 0 $ 0
============ =============
FOREIGN WITHHOLDING TAXES $ 82,203 $ 35,139
============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
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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
three months ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999.
Certain reclassifications have been made in the 1998 consolidated
financial statements to conform to the 1999 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, 1998 (the "1998 Consolidated Financial
Statements").
II. Film costs consist of the following:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Films in release 181,054,740 178,195,727
Less: Accumulated Amortization (155,344,471) (152,026,004)
----------- -----------
Subtotal 25,710,269 26,169,723
Films not yet available for release 3,572,041 2,833,478
----------- -----------
29,282,310 29,003,201
=========== ===========
</TABLE>
III. The Company has a credit facility (the "Credit Facility") with a two-bank
syndicate (the "Banks"). The Credit Facility originally provided for up to
$27,000,000 of credit, however, it was amended and extended on April 14,
1998 (the "1998 Amendment") and subsequently on April 9, 1999 (the "1999
Amendment") (collectively the "Facility Amendment"). Under the 1999
Amendment, the Operating Facility portion of the Credit Facility and all
but two of the individual Film Facilities under the Credit Facility have
been extended until April 9, 2000 (the remaining two film facilities will
mature in 1999, one film facility with a balance owing of $28,970 will
mature on May 31, 1999 and one film facility with a balance owing of
$242,829 will mature on October 31, 1999). No additional funds will be
available under the Operating Facility or the Film Facilities. The Company
maintains a $1,000,000 working capital credit line ("Local Line") with
another bank, which is guaranteed by a letter of credit issued under the
Guarantee Facility portion of the Credit Facility. In addition to the
amounts outstanding under the Company's Credit Facility, the Company has
borrowed $2,000,000 from another lender, the proceeds of such loan being
used to acquire rights to a particular film. The note payable bears
interest at the Prime Rate of 6.5% plus 1.5% at March 31, 1999 and is
collateralized by amounts due under distribution agreements from the
specific film. The note payable matures on May 29, 1999.
The Company's ability to pay down the Credit Facility 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 Local Line 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 or seek
alternate sources of financing. The Company is actively seeking alternate
sources of financing.
IV. The Company has guaranteed payment by an independent motion picture
production company of a promissory note in the aggregate principal
amount of $111,961, maturing on September 11, 2000.
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 MARCH 31, 1999 ARE NOT NECESSARILY INDICATIVE
OF THE RESULTS THAT MAY BE EXPECTED IN FUTURE PERIODS (INCLUDING FOR THE YEAR
ENDING DECEMBER 31, 1999). 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, 1998. 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 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 MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998
Revenues decreased by $341,821 (4.9%) to $6,690,364 for the three
months ended March 31, 1999 from $7,032,185 for the three months ended March
31, 1998. The decrease was primarily due to the decreased licensing of
library titles ($1,185,515 for the quarter ended March 31, 1999 compared to
$2,347,500 for the quarter ended March 31, 1998) and also due to the Company,
through First Look, not having released any films during the quarter ended
March 31, 1999 (compared to revenue of $590,432 resulting from the release of
one film in the quarter ended March 31, 1998 by First Look). The decrease was
partially offset by an increase in revenues from the licensing of newer films
($4,347,228 for the quarter ended March 31, 1999 compared to $3,563,222 for
the quarter ended March 31, 1998).
Film costs as a percentage of revenues was comparable to the prior
year period, being 79.8% for the quarter ended March 31, 1999, compared to
80.3% for the quarter ended March 31, 1998. 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 $49,492 (6.2%) to $745,574 for the
quarter ended March 31, 1999 from $795,066 for the quarter ended March 31,
1998. 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. The decrease in selling, general and
administrative expenses, net of amounts capitalized to film costs, in the
quarter ended March 31, 1999 compared to the quarter ended March 31, 1998 was
primarily due to decreased compensation costs (which decreased approximately
$114,267), decreased corporate expenses related to the company's being a
public corporation (which decreased approximately $46,893), decreased
insurance costs (which decreased approximately $16,645) and decreased
research expenses (which decreased approximately $10,095). Such decreases in
the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998
were partially offset by increased bad debt expense (which increased
approximately $92,096) and increases in contract labor (which increased
approximately $51,110).
Other expense increased 74.0% to $446,708 for the quarter ended
March 31, 1999 compared to $256,663 for the quarter ended March 31, 1998
primarily as a result of increased interest expense of
8
<PAGE>
$472,477 for the quarter ended March 31, 1999 compared to $301,324 for the
quarter ended March 31, 1998 due to less interest costs being capitalized to
film costs in the quarter ended March 31, 1999 compared to the quarter ended
March 31, 1998.
As a result of the above, the Company had income before taxes
for the quarter ended March 31, 1999 of $159,346 compared to income
before taxes of $334,324 for the quarter ended March 31, 1998.
The Company had net income for the quarter ended March 31, 1999 of
$100,346 (reflecting an effective tax rate of 37%) compared to net income for
the quarter ended March 31, 1998 of $208,185 (reflecting an effective tax
rate of 38%).
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 source of
funds for the Company's operations has been cash flow from operations and
prior to the 1998 Amendment of the Syndication Agreement (described below)
bank borrowings, primarily through the Company's credit facility described
below.
The Company has a credit facility (the "Credit Facility") under an
agreement (the "Syndication Agreement") with Coutts & Co. ("Coutts"), as an
agent and lender, and Berliner Bank A.G. London Branch ("Berliner"), as a
lender (collectively, the "Lenders"). Prior to the 1998 amendment of the
Syndication Agreement, described below which among other things, altered
availability under the Credit Facility, the Syndication Agreement provided
for total borrowings of $27,000,000, of which up to $5,000,000 could 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 could be borrowed to fund the
acquisition of motion pictures or to fund distribution costs, including print
and advertising costs, associated with 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 borrowed 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 Syndication Agreement
required Coutts and Berliner to approve each separate Film Facility, such
approval to be granted in their sole discretion. Amounts available under the
Film Facilities were also available to be issued as letters of credit or bank
guarantees. As of March 31, 1999, an aggregate of approximately $11,456,039
was outstanding under the Film Facilities and $7,234,340 was outstanding
under the Operating Facility, at an average interest rate on all such
outstanding amounts of approximately 8.1% per annum. As of March 31, 1999,
$1,000,000 in face amount of letters of credit had also been issued under the
Local Facility to secure a line of credit that the Company has received from
City National Bank (under which $1,000,000 was outstanding as of March 31,
1999 bearing interest at 6.50% per annum). If the letters of credit are drawn
upon, the Company must repay the amounts advanced by the banks upon demand.
9
<PAGE>
The Syndication Agreement which is secured by substantially all of
the assets of the Company and its subsidiaries, contains a number of
covenants and other requirements, including requirements that the Company
maintain a certain consolidated net worth and that 30% of the amount
outstanding under the Film Facilities (including issued but unexercised
letters of credit) be collateralized by cash or receivables acceptable to the
banks; requirements that may substantially restrict the payment of dividends
by the Company. The Syndication Agreement also, among other things, restricts
the creation or incurrence of indebtedness and the issuance of additional
securities and requires aggregate key man life insurance on Ms. Little, Mr.
Little, Co-Chairmen of the Board and Co-Chief Executive Officers, and Mr.
Lischak, Chief Operating Officer and Chief Financial Officer, of $6,750,000.
Events of Default under the Syndication Agreement include, among other
things, a change of control of the Company, the failure, in certain
circumstances, of Ellen Dinerman Little or Robert B. Little to serve as a
director or be employed in the capacity set out in their respective
employment agreements, the failure of the Littles, together with their
director nominees to constitute a majority of the Board of Directors of the
Company, or a decrease in the Little's ownership in the Company below certain
levels.
On April 14, 1998, the Company and the Lenders entered into an
agreement (the "1998 Facility Amendment") pursuant to which they amended the
Syndication Agreement to extend the date of the annual review and the
expiration of the commitment to lend under the Syndication Agreement
(scheduled to expire May 9, 1998) to April 9, 1999, subject to continued
compliance by the Company with the Syndication Agreement and the terms of the
1998 Facility Amendment, and establishment of the guarantee detailed below.
Pursuant to the 1998 Facility Amendment, the Company and the Lenders also
agreed that the Film Facilities would no longer be a revolving credit line
and sums repaid cannot be reborrowed. Additionally, the Company and the
Lenders agreed that net receipts from films financed under repaid Film
Facilities will be used to reduce other Film Facilities after the particular
Film Facility had been repaid. As part of the 1998 Facility Amendment, the
Company also agreed to additional covenants and requirements, including: (i)
providing a series of additional monthly financial reports to the Lenders,
(ii) obtaining written approval of the Lenders prior to entering into any new
rights acquisitions or commitments and (iii) obtaining written approval of
the Lenders prior to committing to spend amounts in connection with
distribution expenses and costs for prints and advertising. As part of the
1998 Facility Amendment, the Lenders reduced the minimum net worth required
to be maintained by the Company to $11,000,000 subject to further review on
April 14, 1999 and waived any prior non-compliance with such covenant.
As part of 1998 Facility Amendment, Ms. Little and Mr. Little agreed
to personally guarantee 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; provided that the guarantee would be extinguished when
the amounts outstanding under the Operating Facility were permanently reduced
to less than $6,000,000.
As part of the 1998 Facility Amendment, Ms. Little and Mr. Little
agreed to continue deferral of payments under the Merger Note which the
Company had begun to defer in May 1997. Payments under the Merger Note accrue
but are being deferred with interest thereon until outstanding borrowings
under the Operating Facility are reduced to at least $5,000,000, the Company
and the Lenders view that such reduction is permanent, and not before May
1999 (the "Deferral Lapse Date"); provided, however, that prior to the
Deferral Lapse Date, pursuant to the recent amendment to the Syndication
Agreement described below, an amount equal to the Littles' aggregate weekly
salary can be paid to the Littles on a weekly basis towards repayment of the
Merger Note so long as the Littles defer such weekly salary payments until
the Deferral Lapse Date. The Littles' salary is currently being deferred and
amounts are currently being applied towards the Merger Note on such basis. As
salary becomes due and payable to the Littles on a weekly basis, such amounts
are accruing, but payment of such salary is being deferred, without interest.
The Merger Note is being extended for
10
<PAGE>
the period of time payments are deferred, the deferred Merger Note payments
continue to bear interest, and the monthly payments will be adjusted to
compensate for additional interest accrued pursuant to the deferral of
payments. The rights of Ms. Little and Mr. Little under the Merger Note and
related security agreement are not otherwise affected. At May 14, 1999, an
aggregate of approximately $2,086,577 in principal and interest was
outstanding under the Merger Note (including an aggregate of approximately
$1,051,976 in previously deferred payments of principal and interest).
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 was scheduled to expire on April 9, 1999, the date of
the annual review, however, on April 9, 1999, the Company and the Lenders
entered into an agreement (the "1999 Facility Amendment") pursuant to which
they amended the Syndication Agreement to extend the date of the annual
review and the expiration of the credit facility under the Syndication
Agreement to April 9, 2000, subject to continued compliance by the Company
with the Syndication Agreement and the terms of the 1999 Facility Amendment.
Additionally, the Lenders agreed to extend the maturity dates on all film
facilities to April 9, 2000 except for two film facilities for which the
maturity dates are May 31, 1999 (as of May 15, 1999 $28,970 was outstanding)
and October 31, 1999 (as of May 15, 1999 $242,829 was outstanding)
respectively. In addition, the terms of the Syndication Agreement, as
amended, provide that the Company can borrow an additional $1,850,000 to pay
a minimum guarantee with respect to the film ILLUMINATA which has been
co-financed by the Company and for which production costs were funded by
Coutts. Pursuant to the 1999 Facility Amendment, the Company has agreed to
provide additional information to the Lenders and to engage in additional
consultation with the Lenders and their advisors. The lenders have indicated
their desire that the Company fully repay amounts outstanding under the
existing credit facility and instead seek an alternate financing source.
Additionally, the Lenders have imposed additional fees of up to an aggregate
of up to $250,000 in additional fees to be paid by the Company if the credit
facility is not refinanced on or prior to April 9, 2000. Additionally, the
Banks waived certain non-compliance with various covenants under the
Syndication Agreement including (i) the continued waiver of the requirement
to maintain a net worth of $12,000,000, reducing such requirement to
$11,000,000; (ii) any non-compliance with certain ordinary course
liabilities; (iii) the Company not having secured letters of credit or bank
guarantees for license agreements with certain sub-distributors; (iv) the
Company's non-compliance with the annual overhead budget established during
the 1998 Amendment; and (v) the Company's non-compliance with a requirement
that 30% of the amount outstanding under the Film Facilities (including
issued but unexercised letters of credit) be collateralized by cash or
receivables acceptable to the banks. Additionally, the Lenders established an
agreement with respect to the Company's overhead levels for the twelve months
beginning April 9, 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
releases (but exclusive of films where the Company acquires primarily
re-issue rights); as of May 14, 1999, the Company had acquired rights to and
distribute or act as sales agent with respect to three films. 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
11
<PAGE>
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, 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).
As of May 14, 1999, the Company currently estimates that $200,000
will be payable to the Littles under the provisions of a tax reimbursement
agreement. Additionally, as of May 14, 1998, the Company owed an aggregate of
$447,600 (including accrued interest) to the Littles in connection with
amounts loaned to the Company by the Littles for print and advertising costs
associated with the domestic theatrical release of MRS. DALLOWAY; $216,610
was owed to the Littles as deferred salary; $126,626 was owed to the Littles
as reimbursement for expenses and $112,500 was owed to the Littles for
deferred bonuses.
The Company has guaranteed a loan from a bank to Neo Motion Pictures
due on September 11, 2000, the principal balance of which at May 14, 1999 was
approximately $105,740 in principal and accrued interest.
As of March 31, 1999, the Company had cash and cash equivalents of
$552,730 compared to cash and cash equivalents of $537,652 as of December 31,
1998. Additionally, at March 31, 1999, the Company had restricted cash of
$2,385 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 the motion pictures released or distributed by the
Company during such period do not meet with sufficiently positive distributor
and audience response, 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 or 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.
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
12
<PAGE>
reached. These problems generally arise because most of the world's
computer hardware and software have historically 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 ascertained that all of the Company's
computer systems were year 2000 compliant except for the Company's accounting
system. As a result of such assessment, the Company has upgraded its
accounting system. The upgrade has both expanded the capabilities of the
system and resolved the year 2000 issues associated with the current system.
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 unanticipated problems arise,
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.
Costs to Address the Year 2000 Issue. The cost to the Company in
connection with the upgrade of its accounting system, was approximately
$10,000. Such amount was funded from the Company's existing capital from
operations. The Company does not believe that the costs of solving the
internal Year 2000 issues has had or will have a material adverse effect on
its liquidity or financial condition. However, if unanticipated problems
arise, 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. The failure of the Company to identify systems which require
Year 2000 conversion that are important to the Company's operations or the
failure of others with which the Company does business to become Year 2000
ready in a timely manner could disrupt the Company's operations and have a
material adverse effect on the Company's financial condition and results of
operations. 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.
There can also be no assurance that other parties will not suffer a Year 2000
business disruption that may adversely effect the Company's financial
condition and results of operations. For example, in the event third parties
experience Year 2000 business disruptions, payments to the Company may be
delayed.
Contingency Plans. Because the update of the Company's accounting
system conversion has been completed prior to any potential disruption to the
Company's business, the Company has not yet developed a comprehensive Year
2000 specific contingency plan. If the Company determines that its
13
<PAGE>
business or a segment thereof is at material risk of disruption due to the
Year 2000 issue, the Company will work to enhance its contingency plans.
The discussion above contains certain forward-looking statements.
The estimated costs of the Year 2000 issues 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 such systems, consultants and other
resources, and the success of the Year 2000 conversion efforts of others.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest
rates. The Company does not use derivative financial instruments. Because
very few of the Company's revenues are denominated in foreign currency, the
Company does not believe there is a significant risk imposed on the Company
due to the fluctuations in foreign currency exchange rates. The table below
provides information about the Company's debt obligations including principal
cash flows and related weighted average interest rates by expected maturity
dates:
<TABLE>
<CAPTION>
Expected Maturity Date
----------------------
(000's)
1999 2000 2001 2002 2003 thereafter
---- ---- ---- ---- ---- ----------
Liabilities
-----------
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate:
Notes payable to related
Party *
Average Interest Rate 9% 9% 9% 9% 9% 9%
Variable Rate:
Notes Payable 2,359 19,655 0 0 0 0
Average Interest Rate 9.13 8.34
</TABLE>
* Amounts payable to related parties represent amounts payable to Ellen and
Robert Little which are currently being deferred pursuant to an agreement
with the Company's lenders and an arrangement between the Company and the
Littles.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not, as of May 14, 1999, a party to any litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
15
<PAGE>
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.
10 Amendment, dated April 9, 1999 among Coutts & Co.,
Berliner Bank A.G. London Branch and Overseas
Filmgroup, Inc. amending that certain Restated and
Amended Syndication Agreement dated as of October 31,
1996 among Coutts & Co., Berliner Bank A.G. London
Branch, Overseas Filmgroup, Inc. and
Entertainment/Media Acquisition Corporation.
Incorporated by reference to Exhibit 10.27 of the
Company's Annual Report filed on Form 10-K for the
fiscal year ended December 31, 1998.
10.1 Security Agreement dated as of April 14, 1998,
between the Company, Ellen Dinerman Little, Robert
B. Little, Coutts & Co. and Berliner Bank A.G.
London Branch. Incorporated by reference to Exhibit
10.33 of the Company's Annual Report filed on Form
10-K for the fiscal year ended December 31, 1998.
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
March 31, 1999.
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.
May 19, 1999 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
-------------
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 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.
10 Amendment, dated April 9, 1999 among Coutts & Co., Berliner Bank
A.G. London Branch and Overseas Filmgroup, Inc. amending that
certain Restated and Amended Syndication Agreement dated as of
October 31, 1996 among Coutts & Co., Berliner Bank A.G. London
Branch, Overseas Filmgroup, Inc. and Entertainment/Media
Acquisition Corporation. Incorporated by reference to Exhibit
10.27 of the Company's Annual Report filed on Form 10-K for the
fiscal year ended December 31, 1998.
10.1 Security Agreement dated as of April 14, 1998, between the Company,
Ellen Dinerman Little, Robert B. Little, Coutts & Co. and Berliner
Bank A.G. London Branch. Incorporated by reference to Exhibit 10.33
of the Company's Annual Report filed on Form 10-K for the fiscal
year ended December 31, 1998.
27 Financial Data Schedule (Filed electronically only). Filed herewith.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 555,115
<SECURITIES> 0
<RECEIVABLES> 21,258,925
<ALLOWANCES> 0
<INVENTORY> 29,282,310
<CURRENT-ASSETS> 0
<PP&E> 669,545
<DEPRECIATION> 0
<TOTAL-ASSETS> 51,765,895
<CURRENT-LIABILITIES> 16,159,446
<BONDS> 23,885,520
0
0
<COMMON> 5,778
<OTHER-SE> 11,715,151
<TOTAL-LIABILITY-AND-EQUITY> 51,765,895
<SALES> 6,690,364
<TOTAL-REVENUES> 6,690,364
<CGS> 5,338,736
<TOTAL-COSTS> 6,084,314
<OTHER-EXPENSES> 446,708
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 59,000
<INCOME-CONTINUING> 100,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100,346
<EPS-PRIMARY> .02
<EPS-DILUTED> 0
</TABLE>
