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, 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 Jurisdiction of (I.R.S. Employer
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
12, 1999 was 6,295,305.
<PAGE>
OVERSEAS FILMGROUP, INC.
INDEX
Part I - Financial Information
<TABLE>
Page
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets - September 30, 1999 (unaudited) and December 31, 1998.......................3
Consolidated Statements of Operations (unaudited) for the three and nine months ended
September 30, 1999 and September 30, 1998................................................................4
Consolidated Statements of Cash Flows (unaudited) for the nine months ended
September 30, 1999 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...............................................16
Part II - Other Information
Item 1. Legal Proceedings.......................................................................................17
Item 2. Changes in Securities and Use of Proceeds...............................................................17
Item 3. Defaults Upon Senior Securities.........................................................................17
Item 4. Submission of Matters to a Vote of Security Holders.....................................................17
Item 5. Other Information.......................................................................................17
Item 6. Exhibits and Reports on Form 8-K........................................................................17
Signature...............................................................................................18
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OVERSEAS FILMGROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
September 30, December 31,
1999 1998
------------ -------------
(Unaudited)
ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 296,007 $ 537,652
Restricted cash 297,873 159,614
Accounts receivable, net of allowance for doubtful accounts of
$750,000 21,416,714 19,724,817
Related party receivable 149,000 149,000
Film costs, net of accumulated amortization 29,517,323 29,003,201
Investment available for sale, at quoted market value 1,516,346 0
Fixed assets, net of accumulated depreciation 212,049 293,858
Other assets 662,614 340,546
------------------ ------------------
Total assets $ 54,067,926 $ 50,208,688
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued expenses $ 1,087,441 $ 1,271,818
Payable to related parties 1,202,141 924,921
Accrued interest payable 219,814 470,386
Payable to producers 14,475,793 9,180,186
Note payable to shareholders 2,074,998 2,262,498
Notes payable 19,426,845 22,013,281
Deferred income taxes 1,921,855 2,332,764
Deferred revenue 912,750 132,250
------------------ ------------------
Total liabilities 41,321,637 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;
6,340,305 shares issued; 6,295,305 shares outstanding 6,340 5,778
Additional paid in capital 12,083,687 10,652,731
Retained earnings 657,606 1,048,809
Cumulative unrealized gain on investment available for sale 85,390 0
Treasury stock at cost, 45,000 shares (86,734) (86,734)
------------------ ------------------
Total shareholders' equity 12,746,289 11,620,584
------------------ ------------------
Total liabilities and shareholders' equity $ 54,067,926 $ 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 OPERATIONS
(Unaudited)
<TABLE>
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues........................... $ 6,726,444 $ 7,241,713 $ 19,957,534 $ 22,676,652
Expenses:
Film costs...................... 6,192,105 5,938,296 16,943,188 18,602,221
Selling, general and administrative 775,945 779,693 2,240,931 2,299,804
---------- --------- ---------- -----------
Total expenses............ 6,968,051 6,717,989 19,184,119 20,902,025
---------- --------- ---------- -----------
(Loss) Income from operations...... (241,607) 523,724 773,415 1,774,627
Other income (expense):
Interest income................. 3,942 1,705 5,752 3,322
Interest expense................ (535,073) (499,705) (1,498,931) (1,158,205)
Other income.................... 67,901 31,045 97,561 107,008
---------- --------- ---------- -----------
Total other expense....... (463,230) (466,955) (1,395,618) (1,047,875)
---------- --------- ---------- -----------
(Loss) Income before income taxes.. (704,837) 56,769 (622,203) 726,752
Income tax (benefit) provision..... (261,000) 18,830 (231,000) 270,000
---------- --------- ---------- -----------
Net (loss) income.................. $ (443,837) $ 37,939 $ (391,203) $ 456,752
============== ================ ================ =================
Other comprehensive income, net
of tax:
Unrealized gains on investment
held for sale...................... 85,390 0 85,390 0
---------- --------- ---------- -----------
Total comprehensive (loss) income $ (358,447) $ 37,939 $ (305,813) $ 456,752
============== ================ ================ =================
Basic (loss) earnings per share.... $ (0.07) $ 0.01 $ (0.07) $ 0.08
============== ================ ================ =================
Weighted average number of basic
and diluted common shares
outstanding........................ 6,191,360 5,732,778 5,887,318 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>
Nine Months Ended September 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (391,203) $ 456,754
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of film costs 10,514,217 9,412,123
Depreciation of fixed assets 92,506 108,245
Change in assets and liabilities:
Increase in accounts receivable (1,691,897) (11,751,783)
Increase in other assets (322,067) (93,419)
Decrease in accounts payable and accrued expenses (157,729) (74,140)
Increase in payable to producers 5,295,607 11,002,852
(Decrease) increase in deferred income taxes payable (410,909) 136,337
Increase (decrease) in deferred revenue 780,500 (613,500)
------------ ----------
Net cash provided in operating activities 13,709,024 8,583,469
------------ ----------
Cash flows from investing activities:
Additions to film costs (11,028,340) (9,708,292)
Purchase of fixed assets (10,134) (9,321)
------------ ----------
Net cash used by investing activities (11,038,474) (9,717,613)
------------ ----------
Cash flows from financing activities:
Net paydown under credit facilities (2,586,436) (218,258)
Net (payment) borrowing on note payable to shareholders (187,500) 210,248
------------ ----------
Net cash used in financing activities (2,773,936) (8,010)
------------ ----------
Net decrease in cash (103,386) (1,142,154)
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 $ 593,880 $ 209,477
================ =================
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 1,885,527 $ 1,452,139
=============== ==============
Income taxes $ 7,200 $ 13,183
================ =================
Foreign withholding taxes 179,414 74,623
================ =================
Non-cash transaction:
Acquisition of investment available for sale 1,430,956 $ 0
================ =================
</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)
1. 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, 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").
2. Film costs consist of the following:
<TABLE>
September 30, 1999 December 31, 1998
------------------ ------------------
<S> <C> <C>
Films in release $ 189,447,944 $ 178,195,727
Less: Accumulated amortization (162,462,319) (152,026,004)
----------------- ------------------
Subtotal 26,985,625 26,169,723
Films not yet available for release 2,531,698 2,833,478
---------------- -------------------
$ 29,517,323 $ 29,003,201
================ ===================
</TABLE>
3. The Company has a credit facility (the "Credit Facility") with a two-bank
syndicate (the "Lenders"). 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"). Under the 1999 Amendment, the Operating Facility portion of
the Credit Facility and all the individual Film Facilities under the Credit
Facility have been extended until April 9, 2000. 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 an
outstanding amount of $1,735,000 from another lender. The proceeds of this
loan were used to acquire rights to a particular film. The note bears
interest at the prime rate of 8.25% plus 1.5% at September 30, 1999 and is
collateralized by amounts due under distribution agreements from the
specific film. The note will mature on November 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 sub-distributors over the
next twelve months. Additionally, the Company will need to refinance or
6
<PAGE>
make renewed arrangements to extend the expiration of the Credit Facility
prior to its current maturity date of April 9, 2000. 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.
4. The Company had guaranteed payment by an independent motion picture
production company of a $324,000 principal amount promissory note payable
to a third party on September 11, 2000. On August 11, 1999, the note was
paid in full.
5. On July 19, 1999, the Company and broadcast.com inc. entered into an
agreement whereby the Company received 11,302 shares of common stock of
broadcast.com in exchange for 562,527 shares of common stock of the
Company. In addition, on July 19, 1999, Yahoo!, Inc. acquired
broadcast.com. As a result, the 11,302 shares of common stock of
broadcast.com that the Company received in the exchange were converted into
8,727 shares of common stock of Yahoo!, Inc.
Under this agreement, the Company is not allowed to sell, transfer, assign,
pledge or otherwise dispose of the broadcast.com shares before July 18,
2000. Additionally, the Company and broadcast.com agreed to an arrangement
which gives broadcast.com the right to exploit on the Internet
approximately fifty titles from the Company's film library on a revenue
sharing basis.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements,
including those within the meaning of the Private Securities Litigation Reform
Act of 1995. Such statements can be identified by the use of forward-looking
terminology such as "may," "expect," "anticipate," "estimate," "intend" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. The reader is cautioned that all forward-looking statements are
necessarily speculative and there are certain risks and uncertainties that could
cause actual events or results to differ materially from those referred to in
such forward-looking statements. These risks and uncertainties include, among
other things, the highly speculative and inherently risky and competitive nature
of the motion picture industry. There can be no assurance of the economic
success of any motion picture since the revenues derived from the production and
distribution of a motion picture (which do not necessarily bear a direct
correlation to the production or distribution costs incurred) depend primarily
upon its acceptance by the public, which cannot be predicted. The commercial
success of a motion picture also depends upon the quality and acceptance of
other competing films released into the marketplace at or near the same time,
the availability of alternative forms of entertainment and leisure time
activities, general economic conditions and other tangible and intangible
factors, all of which can change and cannot be predicted with certainty.
Therefore, there is a substantial risk that some or all of the motion pictures
released, distributed, financed or produced by the Company will not be
commercially successful, resulting in costs not being recouped or anticipated
profits not being realized. The Company's results of operations for the period
ended September 30, 1999 are not necessarily indicative of the results that may
be expected in future periods. Due to quarterly fluctuations in the number of
motion pictures in which the Company controls the distribution rights and which
become available for distribution (and thus, for which revenue can first be
recognized) and the number of motion pictures distributed by the Company, as
well as the unpredictable nature of audience and sub-distributor response to
motion pictures distributed by the Company, the Company's revenues, expenses and
earnings fluctuate significantly from quarter to quarter and from year to year.
In addition, for several reasons, including (1) the likelihood of continued
industry-wide increases in acquisition, production and marketing costs and (2)
the Company's intent, based upon its ongoing strategy, to acquire rights to or
produce films which have greater production values (often as a result of larger
budgets), the Company's costs and expenses, and thus the capital required by the
Company in its operations and the associated risks faced by the Company may
increase in the future. Additional risks and uncertainties are discussed
elsewhere in appropriate sections of this Report and in other filings made by
the Company with the Securities and Exchange Commission 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 Company. The Company does not have a policy of updating or revising
forward-looking statements and thus it should not be assumed that silence by
management of the Company over time means that actual events are bearing out as
estimated in such forward-looking statements.
8
<PAGE>
General
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"). On July 19, 1999, the Company and
broadcast.com inc. entered into an agreement whereby the Company received 11,302
shares of common stock of broadcast.com in exchange for 562,527 shares of common
stock of the Company. Shortly after the exchange, broadcast.com was acquired by
Yahoo!, Inc. resulting in approximately 9% of the Company's issued and
outstanding common stock being owned by Yahoo!, Inc. and the Company owning
8,727 shares of common stock of Yahoo!, Inc. Additionally, the Company and
broadcast.com agreed to an arrangement which gives broadcast.com (now Yahoo!
Broadcast, a division of Yahoo!, Inc.) the right to exploit on the Internet
approximately fifty titles from the Company's film library on a revenue sharing
basis.
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Revenues decreased by $515,269 (7.1%) to $6,726,444 for the three months
ended September 30, 1999 from $7,241,713 for the three months ended September
30, 1998. The decrease in revenues was primarily due to decreased revenue from
films first available for release in the three months ended September 30, 1999
(approximately $3,117,000 from three films) compared to the three months ended
September 30, 1998 (approximately $5,223,000 from two films).
Film costs as a percentage of revenues increased to 92.1% for the three
months ended September 30, 1999, compared to 82.0% for the three months ended
September 30, 1998. The increase was primarily due to lower distribution fee
rates (the Company's gross margin) on films generating the greatest amount of
revenue in the three months ended September 30, 1999 compared to the three
months ended September 30, 1998. 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
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 $3,748 (0.5%) to $775,945 for the quarter ended
September 30, 1999 from $779,693 for the quarter ended September 30, 1998. The
Company capitalizes certain overhead costs incurred in connection with its
acquisition of rights to and creation of marketing materials for a motion
picture by adding such costs to the capitalized film costs of the motion
picture.
Other expense decreased 0.8% to $463,230 for the three months ended
September 30, 1999 compared to $466,955 for the three months ended September 30,
1998. The decrease was primarily due to increased miscellaneous income ($67,901
9
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for the three months ended September 30, 1999 compared to $31,045 for the three
months ended September 30, 1998) which was partially offset by an increase in
interest expense ($535,073 for the three months ended September 30, 1999
compared to $499,705 for the three months ended September 30, 1998).
As a result of the above, the Company reported a loss before income tax
benefit for the three months ended September 30, 1999 of $704,837 compared to
income before taxes of $56,769 for the three months ended September 30, 1998.
The Company reported a net loss of $443,837 for the three months ended
September 30, 1999 (reflecting an effective tax benefit of 37.0%) compared to a
net income of $37,939 for the three months ended September 30, 1998 (reflecting
an effective income tax rate of 33.2%).
The Company also reported an unrealized gain arising during the three
months ended September 30, 1999 resulting from the increased market price in the
shares of Yahoo!, Inc. received by the Company in the share exchange between the
Company and broadcast.com described above.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenues decreased by $2,719,118 (12.0%) to $19,957,534 for the nine months
ended September 30, 1999 from $22,676,652 for the nine months ended September
30, 1998. The decrease in revenues is primarily due to decreased revenue from
films first available for release in the nine months ended September 30, 1999
(approximately $12,587,250 from eight films) compared to the nine months ended
September 30, 1998 (approximately $14,412,619 from eleven films, including
approximately $6,987,500 from one film).
Film costs as a percentage of revenues increased to 84.9% for the nine
months ended September 30, 1999, compared to 82.0% for the nine months ended
September 30, 1998. The increase was primarily due to lower distribution fee
rates (the Company's gross margin) on films generating the greatest amount of
revenue in the nine months ended September 30, 1999 compared to the nine months
ended September 30, 1998.
Selling, general and administrative expenses, net of amounts capitalized to
film costs, decreased by $58,872 (2.6%) to $2,240,931 for the nine months ended
September 30, 1999 from $2,299,804 for the nine months ended September 30, 1998.
This decrease was primarily due to decreased compensation costs (approximately
$87,465), decreased publicity expenses (approximately $34,732), decreased
directors and officers insurance premiums (approximately $17,393), decreased
telephone and fax charges (approximately $17,080), decreased capital leases
(approximately $13,176), and decreased research and development costs
(approximately $12,955). The decreases were partially offset by increases in
contract labor and consulting fees (approximately $60,791), legal and accounting
fees (approximately $27,393) and computer consulting (approximately $35,199).
Other expense increased to $1,395,618 for the nine months ended September
30, 1999 compared to $1,047,875 for the nine months ended September 30, 1998.
The increase was primarily due to increased interest expense of $1,498,931 for
the nine months ended September 30, 1999 compared to $1,158,205 for the nine
months ended September 30, 1998. The increase in interest expense was primarily
the result of less interest costs being capitalized to film costs in the nine
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months ended September 30, 1999 compared to the nine months ended September 30,
1998.
As a result of the above, the Company had a net loss before income tax
benefit of $622,203 for the nine months ended September 30, 1999, compared to
net income before income taxes of $726,752 for the nine months ended September
30, 1998.
The Company had a net loss of $391,203 for the nine months ended September
30, 1999 (reflecting an effective tax benefit of 37.1%) compared to a net income
of $456,752 for the nine months ended September 30, 1998 (reflecting an
effective tax rate of 37.2%).
The Company also reported an unrealized gain arising during the nine months
ended September 30, 1999 resulting from the increased market price in the shares
of Yahoo!, Inc. received by the Company in the share exchange between the
Company and broadcast.com described above.
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
Facility Amendment 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. and Bank Gesellschaft,
formerly Berliner Bank A.G. London Branch (collectively, the "Lenders"). Prior
to the 1998 Facility Amendment, which 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") could 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 nine
months, as the Company requests. 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 Film Facility treated as a separate loan, generally maturing 12 months
after the first draw down. The Syndication Agreement required the Lenders to
approve, in their sole discretion, each separate Film Facility. Amounts
available under the Film Facilities were also available to be issued as letters
of credit or bank guarantees. As of September 30, 1999, an aggregate of
approximately $10,457,090 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 8.0% per annum. As of
September 30,
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1999, $1,000,000 in face amount of letters of credit also had been issued under
the Local Facility to secure a line of credit that the Company received from
City National Bank (under which no balance was outstanding as of September 30,
1999). If the letters of credit are drawn upon, the Company must repay the
amounts advanced by the banks upon demand.
The Syndication Agreement is secured by substantially all of the assets of
the Company and its subsidiaries. This agreement contains a number of covenants
and other requirements, including that the Company maintain a consolidated net
worth of $12,000,000 (which was subsequently waived and reduced to $11,000,000
as part of the 1998 Facility Amendment described below) 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
Lenders. The agreement also contains requirements that may substantially
restrict the payment of dividends by the Company, that restricts the creation or
incurrence of indebtedness and the issuance of additional securities and
requires aggregate key man life insurance of $6,750,000 on Ms. Little and Mr.
Little (the "Littles"), Co-Chairs of the Board and Co-Chief Executive Officers,
and Mr. Lischak, Chief Operating Officer and Chief Financial Officer. Events of
default under the Syndication Agreement include: (1) a change of control of the
Company; (2) 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 forth
in their respective employment agreements; (3) the failure of the Littles,
together with their director nominees, to constitute a majority of the Company's
Board of Directors; or (4) a decrease in the Littles' ownership in the Company
below certain levels.
On April 14, 1998, the Company and the Lenders amended the Syndication
Agreement (the "1998 Facility Amendment") to extend the date of the annual
review and the expiration of the commitment to lend under the Syndication
Agreement from May 9, 1998 to April 9, 1999, subject to the Company's continued
compliance with the Syndication Agreement and 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 could not be re-
borrowed. Additionally, the Company and the Lenders agreed that net receipts
from films financed under repaid Film Facilities would 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: (1) providing a series of additional monthly financial
reports to the Lenders, (2) obtaining written approval of the Lenders prior to
entering into any new rights acquisitions or commitments and (3) 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 and waived any prior
non-compliance with such covenant.
As part of the 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 will be extinguished when the
amounts outstanding under the Operating Facility are permanently reduced to less
than $6,000,000.
As part of the 1998 Facility Amendment, Ms. Little and Mr. Little agreed to
continue to defer payments under the promissory note that they received in
connection with the merger of Overseas Filmgroup, Inc. into the Company in
October 1996 ("Merger Note"), which the Company began deferring in May 1997.
Payments under the Merger Note accrue but are being deferred with interest until
outstanding borrowings under the Operating Facility are reduced to at least
$5,000,000 and the Company and the Lenders view such reduction as permanent (the
"Deferral Lapse Date"); provided, however, that prior to the Deferral Lapse
Date, pursuant to the 1999 Facility Amendment described below, an amount
12
<PAGE>
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, without interest, and applied towards the Merger
Note. The Merger Note has been extended for the period of time payments are
deferred and continues to bear interest, and the monthly payments will be
adjusted to compensate for additional interest accrued pursuant to such
deferral. The rights of Ms. Little and Mr. Little under the Merger Note and
related security agreement are not otherwise affected. At November 12, 1999, an
aggregate of $2,047,385 in principal and interest was outstanding under the
Merger Note (including an aggregate of $1,173,321 in 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 amended the
Syndication Agreement (the "1999 Facility Amendment") to extend the date of the
annual review and the expiration of the Credit Facility to April 9, 2000,
subject to the Company's continued compliance with the Syndication Agreement and
the 1999 Facility Amendment. Additionally, the Lenders agreed to extend the
maturity dates on all film facilities to April 9, 2000 and to permit the Company
to borrow an additional $1,850,000 to pay a minimum guarantee with respect to
the film ILLUMINATA, which the Company co-financed and for which Coutts funded
production costs. Pursuant to the 1999 Facility Amendment, the Company agreed to
provide additional information to and 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. The Lenders also have imposed
additional fees up to an aggregate of $250,000 to be paid by the Company if the
Credit Facility is not refinanced by April 9, 2000. Further, the Lenders waived
non-compliance with various covenants under the Syndication Agreement including
(1) the continued waiver of the requirement to maintain a net worth of
$12,000,000, reducing such requirement to $11,000,000; (2) any non-compliance
with certain ordinary course liabilities; (3) the Company not having secured
letters of credit or bank guarantees for license agreements with certain
sub-distributors; (4) the Company's non-compliance with the annual overhead
budget established in the 1998 Facility Amendment; and (5) the Company's
non-compliance with the 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 Lenders. Additionally,
the Lenders established an agreement with respect to the Company's overhead
levels for the twelve months beginning April 9, 1999.
In addition to the amounts outstanding under the Company's Credit Facility,
the Company has an outstanding amount of $1,735,000 from another lender. The
proceeds of this loan were used to acquire rights to a particular film. The note
bears interest at the prime rate of 8.25% plus 1.5% at September 30, 1999 and is
collateralized by amounts due under distribution agreements from the specific
film. The note will mature on November 29, 1999.
As of November 12, 1999, the Company had acquired rights to distribute or
act as sales agent with respect to eleven films which are expected to first be
available for release in 1999 and with respect to three films which are expected
to first be available for release in 2000. The Company does not intend to
acquire rights to any additional films that are expected to first be available
for release in 1999. However, the Company intends to acquire rights to
distribute or act as sales agent with respect approximately seven to ten
additional films that are expected to first be available for release in 2000. As
the 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
Company's ability to achieve its goals will depend on the Lenders' willingness
to permit the Company to engage in these activities. The Company's ability to
achieve its goals also will depend on it obtaining 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
13
<PAGE>
acquisition, financing and distribution goals. In addition, the Company
currently anticipates releasing films through First Look 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 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 November 12, 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 November 12, 1999, the Company owed the following amounts to
the Littles: (1) an aggregate of $474,600 (including accrued interest) in
connection with amounts loaned to the Company for print and advertising costs
associated with the domestic theatrical release of MRS. DALLOWAY; (2) $331,610
as deferred salary; (3) $114,626 as reimbursement for expenses; and (4) $137,500
for deferred bonuses.
The Company guaranteed payment by Neo Motion Pictures, Inc. of a $324,000
principal amount promissory note payable to a third party due on September 11,
2000. This note was paid in full on August 11, 1999.
As of September 30, 1999, the Company had cash and cash equivalents of
$296,007 compared to cash and cash equivalents of $537,652 as of December 31,
1998. Additionally, at September 30, 1999, the Company had restricted cash of
$297,873 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 (1) the motion pictures released or distributed by the Company during such
period do not meet with sufficiently positive distributor and audience response,
(2) 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
sub-distributors during such period are less than anticipated or (3) the Company
is unable 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 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
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 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
14
<PAGE>
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 its computer systems were year
2000 compliant except for its accounting system. As a result, 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. 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
sub-distributors. It is possible that non-compliance to year 2000 concerns by
the Company's major licensees and sub-distributors 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 sub-distributors in order to
determine exposure to year 2000 issues.
Costs to Address the Year 2000 Issue. The Company spent approximately
$10,000 to upgrade its accounting system, which 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
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 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.
15
<PAGE>
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>
Expected Maturity Date
(000's)
1999 2000 2001 2002 2003 thereafter
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Liabilities
Fixed Rate:
Notes payable to related parties* 9% 9% 9% 9% 9% 9%
Average Interest Rate
Variable Rate: $1,735 $19,766 0 0 0 0
Notes Payable 9.6% 8.0%
Average Interest Rate
</TABLE>
* Represents amounts payable to Ellen Dinerman Little 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.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of November 12, 1999, the Company is not a party to any litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities
During the three months ended September 30, 1999, the Company made the
following sales of unregistered securities:
<TABLE>
Consideration
Received and If Option, Warrant
Description of or Convertible
Underwriting or Other Exemption from Security, Terms of
Discounts to Market Registration Exercise or
Date of Sale Title of Security Number Sold Price Afforded to Claimed Conversion
- ------------ ----------------- ----------- Purchasers ------- ----------
----------
<S> <C> <C> <C> <C> <C>
7/12/99 Options to purchase 10,000 Options granted - no 4(2) Immediately
common stock other consideration exercisable until
received by Company 7/11/09 at an
until exercise exercise price of
$2.4375 per share
- ------------------ ---------------------- ---------------- ----------------------- ------------------- --------------------
</TABLE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 28, 1999, the Company held its annual meeting of stockholders,
at which the Company's stockholders considered the election of directors.
Stockholders voted to elect William F. Lischak, Alessandro Fracassi and Gary M.
Stein to serve as Class I directors for a three-year term until their successors
are elected and qualified. 4,332,838 shares were voted for and 9,150 shares
were withheld in William F. Lischak's election, 4,332,838 shares were voted
for and 9,150 shares were withheld in Alessandro Fracassi's election and
4,332,838 shares were voted for and 9,150 shares were withheld in Gary
M. Stein's election.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (9/30/99)
(b) Reports on Form 8-K
None
17
<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 15, 1999 By: /s/ William F. Lischak
---------------------------
William F. Lischak
Chief Financial Officer,
Chief Operating Officer
and Secretary
18
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- ------------
27 Financial Data Schedule (9/30/99)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-1-1999
<PERIOD-END> Sep-30-1999
<CASH> 593,880
<SECURITIES> 1,516,346
<RECEIVABLES> 22,315,714
<ALLOWANCES> (750,000)
<INVENTORY> 29,517,323
<CURRENT-ASSETS> 53,193,263
<PP&E> 1,970,285
<DEPRECIATION> 1,095,622
<TOTAL-ASSETS> 54,067,926
<CURRENT-LIABILITIES> 19,819,794
<BONDS> 21,501,843
<COMMON> 6,340
0
0
<OTHER-SE> 12,739,949
<TOTAL-LIABILITY-AND-EQUITY> 54,067,926
<SALES> 19,820,034
<TOTAL-REVENUES> 19,957,534
<CGS> 16,943,188
<TOTAL-COSTS> 2,246,931
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,498,931)
<INCOME-PRETAX> (622,203)
<INCOME-TAX> (231,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (391,203)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
