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, 2000
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 20,
2000 was 9,803,906.
<PAGE>
OVERSEAS FILMGROUP, INC.
INDEX
Part I - Financial Information
Page
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2000
(unaudited) and December 31, 1999...........................3
Consolidated Statements of Operations (unaudited) for the
three and nine months ended September 30, 2000
and September 30, 1999......................................4
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2000 and
September 30,1999...........................................5
Consolidated Statements of Comprehensive Income (unaudited)
for the three and nine months ended September 30, 2000
and September 30, 1999......................................6
Notes to Consolidated Financial Statements (unaudited).............7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........15
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.................................................16
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
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
ASSETS:
Cash and cash equivalents $ 893,685 $ 270,031
Restricted cash 21,667 88,176
Accounts receivable, net of allowance
for doubtful accounts of $1,100,000 27,979,027 30,088,951
Related party receivable 0 149,000
Investment available-for-sale 0 2,908,383
Film costs, net of accumulated amortization 15,701,843 28,363,419
Fixed assets, net of accumulated depreciation 239,367 282,856
Other assets 1,564,076 496,078
------------ ------------
Total assets $ 46,399,665 $ 62,646,894
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued expenses $ 1,322,241 $ 1,146,677
Payable to related parties 0 1,334,624
Accrued interest payable 0 272,583
Payable to producers 23,766,018 22,462,179
Note payable to shareholders 0 1,989,229
Notes payable 6,219,218 19,764,175
Deferred income taxes 0 1,458,605
Deferred revenue 795,000 918,500
------------ ------------
Total liabilities 32,102,477 49,346,572
------------ ------------
Shareholders' equity:
Preferred stock, $.001 par value, 2,000,000
shares authorized; 904,971 and 0 shares
outstanding, respectively 905 0
Common stock, $.001 par value, 25,000,000
shares authorized; 9,848,906 shares
issued; 9,803,906 shares outstanding
and 6,340,305 shares issued; 6,295,305
shares outstanding, 9,850 6,340
respectively
Additional paid in capital 30,088,566 12,107,058
Cumulative unrealized gain on investment
available-for-sale, net of taxes 0 1,477,418
Retained deficit (15,715,399) (203,760)
Treasury stock at cost, 45,000 shares (86,734) (86,734)
------------ ------------
Total shareholders' equity 14,297,188 13,300,322
------------ ------------
Total liabilities and shareholders' equity $ 46,399,665 $ 62,646,894
============ ============
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>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues....................... $ 4,767,463 $ 6,726,444 $ 15,227,764 $ 19,957,534
Expenses:
Film costs.................. 3,583,039 6,192,105 11,591,341 16,943,188
Distribution and marketing
costs..................... 630,355 0 2,045,530 0
Selling, general and
administrative........... 1,149,976 775,946 2,913,604 2,240,931
--------------- ------------ --------------- -------------
Total expenses........... 5,363,370 6,968,051 16,550,475 19,184,119
--------------- ------------ --------------- -------------
(Loss) income from operations.. (595,907) (241,607) (1,322,712) 773,415
--------------- ------------ --------------- -------------
Other income (expense):
Interest income............. 13,315 3,942 23,025 5,752
Interest expense............ (251,330) (535,073) (1,228,739) (1,498,931)
Other income................ 682,414 67,901 1,244,570 97,561
--------------- ------------ --------------- -------------
Total other income
(expense)................ 444,399 (463,230) 38,856 (1,395,618)
--------------- ------------ --------------- -------------
Loss before income taxes and
cumulative effect of accounting
changes........................ (151,508) (704,837) (1,283,856) (622,203)
Income tax provision (benefit). 13,031 (261,000) 104,651 (231,000)
--------------- ------------ --------------- -------------
Loss before cumulative effect of
accounting changes ......... (164,539) (443,837) (1,388,506) (391,203)
Cumulative effect of
accounting changes.......... 0 0 (14,123,133) 0
--------------- ------------ --------------- -------------
Net loss.............. $ (164,539) $ (443,837) $ (15,511,639) $ (391,203)
=============== ============ =============== =============
Basic loss per share:
Loss before cumulative
effect of accounting changes.. $ (0.02) $ (0.07) $ (0.18) $ (0.07)
=============== ============ =============== =============
Net loss................. $ (0.02) $ (0.07) $ (2.05) $ (0.07)
=============== ============ =============== =============
Weighted average number of
basic and diluted common
shares outstanding........... 9,803,906 6,191,360 7,563,508 5,887,318
=============== ============ =============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Nine Months Ended September 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (15,511,639) $ (391,203)
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Cumulative effect of accounting changes 14,123,133 0
Amortization of capitalized film costs 1,734,115 10,514,216
Additions to film costs (1,882,656) (11,028,340)
Depreciation of fixed assets 104,812 92,506
Capital gains and other non-cash income (1,298,474) 0
Change in assets and liabilities:
Decrease (increase) in accounts receivable 2,109,924 (1,691,897)
Decrease in related party receivable 149,000 0
Increase in other assets (1,067,998) (322,067)
Decrease in accounts payable and accrued
expenses (1,431,643) (157,729)
Increase in payable to producers 1,303,839 5,295,607
Forgiveness of indebtedness by shareholder (1,339,037) 0
Decrease in deferred income taxes payable (1,458,605) (410,909)
(Decrease) increase in deferred revenue (123,500) 780,500
--------------- --------------
Net cash (used in) provided by operating
activities (4,588,729) 2,680,684
--------------- --------------
Cash flows from investing activities:
Purchase of fixed assets (61,324) (10,134)
Sale of marketable securities 2,055,718 0
--------------- --------------
Net cash used in investing activities 1,994,394 (10,134)
--------------- --------------
Cash flows from financing activities:
Sale of securities, net of expenses 16,696,437 0
Net paydown under credit facility (12,553,388) (2,321,851)
Paydown of note payable (991,569) (264,585)
Net payment on note payable to shareholders 0 (187,500)
Decrease increase in restricted cash position 66,509 (138,259)
--------------- --------------
Net cash provided by (used in) financing
activities 3,217,989 (2,912,195)
--------------- --------------
Net increase (decrease) in cash and cash equivalents 623,654 241,645
Cash and cash equivalents at beginning of period 270,031 537,652
--------------- --------------
Cash and cash equivalents at end of period $ 893,685 $ 296,007
=============== =============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 1,537,883 $ 1,885,527
=============== =============
Income taxes $ 6,400 $ 7,200
=============== =============
Foreign withholding taxes $ 98,251 $ 179,414
=============== =============
Non-cash transaction:
Acquisition of investment available for sale $ 0 $ 1,430,956
=============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net loss $ (164,539) $(443,837) $(15,511,639) $ (391,203)
Unrealized holding
gain (loss) on investment
available-for-sale 0 85,390 (1,016,788) 85,390
Reversal of unrealized
gain on investment
available-for-sale (460,630) 0 (460,630) 0
---------- --------- ------------ ------------
Total comprehensive loss $ (625,169) (358,447) (16,989,057) (305,813)
========== ========= ============ ============
The accompanying notes are an integral part of these financial statements.
6
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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, 2000 are not
necessarily indicative of the results that may be expected for the
year ending December 31, 2000. Certain reclassifications have been
made in the 1999 consolidated financial statements to conform to the
2000 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, 1999 (the
"1999 Consolidated Financial Statements").
2. Film costs consist of the following:
September 30, 2000 December 31, 1999
------------------ ----------------
Films in release $ 97,316,853 $ 192,798,097
Less: Accumulated amortization (82,696,347) (166,365,578)
------------- --------------
Subtotal 14,620,506 26,432,519
Films not yet available for release 1,081,337 1,930,900
------------- ---------------
$ 15,701,843 $ 28,363,419
============= ===============
3. In June 2000, the Company consummated a sale of securities pursuant to
a Securities Purchase Agreement ("Purchase Agreement") with Rosemary
Street Productions, LLC ("Rosemary"), whereby the Company sold to
Rosemary (i) 5,097,413 shares of common stock, (ii) 904,971 shares of
Series A preferred stock, each share of which is convertible into two
shares of common stock and votes with the common stock on an
as-converted basis, and (iii) five-year warrants to purchase up to
2,313,810 shares of common stock of the Company at an exercise price
of $3.40 per share (collectively, the "Securities") for a cash
purchase price of $17,000,000 (the "Securities Purchase"). As a result
of the transaction, Rosemary now owns approximately 59.5% of the
Company's voting securities.
Simultaneous with the consummation of the Securities Purchase, the
Company, as borrower, and certain subsidiaries of the Company, as
guarantors, entered into a $40 million credit facility (of which $33
million has been committed) with The Chase Manhattan Bank and other
commercial banks and financial institutions. The proceeds from the
credit facility were used to refinance outstanding loans and accrued
interest under the Company's previous credit facility with Coutts &
Co. and Bankgesellschaft Berlin A.G. (formerly known as Berliner Bank
A.G. London Branch) and will be used to finance the Company's
production, acquisition, distribution and exploitation of feature
length motion pictures, television programming, video product and
rights; and to fund the Company's working capital and other lawful
corporate purposes.
4. In June 2000, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 00-2, "Accounting by Producers or Distributors of Films"
("SOP 00-2"). SOP 00-2 establishes new film accounting standards,
including changes in revenue recognition and accounting for
advertising, development and overhead costs. Additionally, in June
2000, the Financial Accounting Standards Board ("FASB") issued
Statement 139 ("SFAS 139") which rescinds FASB 53 on financial
7
<PAGE>
reporting by motion picture film producers or distributors. SFAS 139
requires public companies to follow the guidance provided by SOP 00-2.
The Company has elected early adoption of SOP 00-2 and, as a result,
has recorded a one-time, pre-tax non-cash charge of $15,581,738
($14,123,133 after taxes). This charge has been reflected in the
Company's Consolidated Statements of Operations as a cumulative effect
of accounting changes, effective January 1, 2000.
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, 2000 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 (i) the likelihood of continued
industry-wide increases in acquisition, production and marketing costs and (ii)
the Company's intent, based upon its ongoing strategy, to acquire rights to or
produce films which have greater production values (often as a result of larger
budgets), the Company's costs and expenses, and thus the capital required by the
Company in its operations and the associated risks faced by the Company may
increase in the future. Additional risks and uncertainties are discussed
elsewhere in appropriate sections of this Report and in other filings made by
the Company with the Securities and Exchange Commission including without
limitation the Company's Annual Report on Form 10-K for its fiscal year ended
December 31, 1999. 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.
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 and video markets under
the name First Look Pictures ("First Look").
8
<PAGE>
In June 2000, the Company consummated a sale of securities pursuant to
a Purchase Agreement with Rosemary, whereby the Company sold to Rosemary (i)
5,097,413 shares of common stock, (ii) 904,971 shares of Series A preferred
stock, each share of which is convertible into two shares of common stock and
votes with the common stock on an as-converted basis, and (iii) five-year
warrants to purchase up to 2,313,810 shares of common stock of the Company at an
exercise price of $3.40 per share for a cash purchase price of $17,000,000. As a
result of the transaction, Rosemary now owns approximately 59.5% of the
Company's voting securities.
Simultaneous with the consummation of the Securities Purchase, the
Company, as borrower, and certain subsidiaries of the Company, as guarantors,
entered into a $40 million credit facility (of which $33 million has been
committed) with The Chase Manhattan Bank and other commercial banks and
financial institutions. The proceeds from the credit facility were used to
refinance outstanding loans and accrued interest under the Company's previous
credit facility with Coutts & Co. and Bankgesellschaft Berlin A.G. (formerly
known as Berliner Bank A.G. London Branch) and will be used to finance the
Company's production, acquisition, distribution and exploitation of feature
length motion pictures, television programming, video product and rights; and to
fund the Company's working capital and other lawful corporate purposes.
In June 2000, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
00-2, "Accounting by Producers or Distributors of Films" ("SOP 00-2"). SOP 00-2
establishes new film accounting standards, including changes in revenue
recognition and accounting for advertising, development and overhead costs.
Additionally, in June 2000, the Financial Accounting Standards Board ("FASB")
issued Statement 139 ("SFAS 139") which rescinds FASB 53 on financial reporting
by motion picture film producers or distributors. SFAS 139 requires public
companies to follow the guidance provided by SOP 00-2. The Company has elected
early adoption of SOP 00-2 and, as a result, has recorded a one-time, pre-tax
non-cash charge of $15,581,738 ($14,123,133 after taxes). This charge has been
reflected in the Company's Consolidated Statements of Operations as a cumulative
effect of accounting changes, effective January 1, 2000.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which will be effective in the fourth quarter of 2000. SAB 101 clarifies
certain existing accounting principles for the recognition and classification of
revenues in financial statements. While the Company's existing revenue
recognition policies are consistent with the provisions of SAB 101, the new
rules are expected to result in some changes as to how the filmed entertainment
industry classifies its revenues, particularly relating to distribution
arrangements for third-party and co-financed joint venture product. As a result,
the Company's management is in the process of evaluating the overall impact of
SAB 101 on its consolidated financial statements. However, other aspects of SAB
101 are not expected to have a significant effect on the Company's consolidated
financial statements.
Results of Operations
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
Revenues decreased by $1,958,981 (29.1%) to $4,767,463 for the three
months ended September 30, 2000 from $6,726,444 for the three months ended
September 30, 1999. The decrease in revenues was primarily due to decreased
revenues from six films during the three months ended September 30, 2000 of
approximately $3,830,000 compared to revenues from six films during the three
months ended September 30, 1999 of approximately $5,871,000.
In accordance with new accounting standards established pursuant to SOP
00-2, distribution and marketing costs have been expensed in the three months
ended September 30, 2000. For the three months ended September 30, 1999,
distribution and marketing costs were capitalized and amortized as film costs.
Film costs as a percentage of revenues decreased to 75.2% for the three months
ended September 30, 2000, compared to 92.1% for the three months ended September
30, 1999. The decrease was primarily due to application of the new accounting
standards, and to generally higher distribution fee rates (the Company's gross
margin) on films generating the greatest amount of revenue in the three months
ended September 30, 2000 compared to the three months ended September 30, 1999.
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
9
<PAGE>
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, increased by $374,030 (48.2%) to $1,149,976 for the
quarter ended September 30, 2000 from $775,946 for the quarter ended September
30, 1999. The Company capitalizes certain overhead costs incurred in connection
with its production activities, primarily pre-sale and other financing
activities, by adding such costs to the capitalized film costs of the motion
picture. This increase was primarily due to increases in accounting fees
(approximately $31,900), bad debt expense (approximately $12,227), insurance
costs (approximately $27,361), employee benefits (approximately $15,393),
compensation costs (approximately $264,151), research expenses (approximately
$11,007), travel costs (approximately $17,715), office expenses (approximately
$10,886) and telephone charges (approximately $7,984), as well as decreased
capitalized overhead (approximately $97,382), which were partially offset by
decreases in consulting fees and contract labor (approximately $109,558) and
legal fees (approximately $12,210).
Net other income was $444,399 for the three months ended September 30,
2000 compared to net other expense of $463,230 for the three months ended
September 30, 1999. The increase in other income was primarily due to the gain
reported on the Company's sale of common stock of Yahoo!, Inc. ($624,868) as
well as decreased interest expense (approximately $283,744) during the quarter
ended September 30, 2000.
As a result of the above, the Company had a loss before income taxes of
$151,508 for the three months ended September 30, 2000 compared to a loss before
income before taxes of $704,837 for the three months ended September 30, 1999.
The Company had a net loss of $164,539 for the three months ended
September 30, 2000 (reflecting foreign withholding taxes of $13,031) compared to
a net loss of $443,837 for the three months ended September 30, 1999 (reflecting
an effective income tax benefit of 37%).
The Company also reported an unrealized gain during the three months
ended September 30, 1999 resulting from the increased market price in the shares
of common stock of Yahoo!, Inc. received by the Company in July 1999 as part of
a share exchange with broadcast.com inc., a company acquired by Yahoo!, Inc.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
Revenues decreased by $4,729,770 (23.7%) to $15,227,764 for the nine
months ended September 30, 2000 from $19,957,534 for the nine months ended
September 30, 1999. The decrease in revenues was primarily due to decreased
revenues from six films during the nine months ended September 30, 2000 of
approximately $8,435,000 compared to revenues from six films during the nine
months ended September 30, 1999 of approximately $13,246,000.
In accordance with new accounting standards established pursuant to SOP
00-2, distribution and marketing costs have been expensed in the nine months
ended September 30, 2000. For the nine months ended September 30, 1999,
distribution and marketing costs were capitalized and amortized as film costs.
Film costs as a percentage of revenues increased to 76.1% for the nine months
ended September 30, 2000, compared to 84.9% for the nine months ended September
30, 1999. The decrease was primarily due to application of the new accounting
standards, and to generally higher distribution fee rates (the Company's gross
margin) on films generating the greatest amount of revenue in the nine months
ended September 30, 2000 compared to the nine months ended September 30, 1999.
Selling, general and administrative expenses, net of amounts
capitalized to film costs, increased by $672,673 (30.0%) to $2,913,604 for the
nine months ended September 30, 2000 from $2,240,931 for the nine months ended
10
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September 30, 1999. This increase was primarily due to increases in accounting
fees (approximately $27,735), advertising costs (approximately $10,086), bad
debt expense (approximately $88,283), insurance costs (approximately $51,711),
compensation costs (approximately $302,022), research expenses (approximately
$13,331), taxes (approximately $22,179), travel (approximately $17,715), office
expenses (approximately $12,841), telephone and fax charges (approximately
$14,657), depreciation of computer equipment (approximately $13,086) and
decreased capitalized overhead (approximately $276,484), which were partially
offset by decreases in consulting fees and contract labor (approximately
$155,692) and legal fees (approximately $21,348).
Net other income was $38,856 for the nine months ended September 30,
2000 compared to net other expense of $1,395,618 for the nine months ended
September 30, 1999. The increase in net other income was primarily due to the
gain reported on the Company's sale of shares of common stock of Yahoo!, Inc.
($624,868), income related to the forgiveness of accrued interest on notes
payable to related parties (approximately $524,697) and decreased interest
expense (approximately $346,343).
As a result of the above, the Company had a loss before income taxes
and cumulative effect of accounting changes of $1,283,856 for the nine months
ended September 30, 2000, compared to a loss before income taxes and cumulative
effect of accounting changes of $622,203 for the nine months ended September 30,
1999.
The Company had a loss before cumulative effect of accounting changes
of $1,388,506 for the nine months ended September 30, 2000 compared to a loss
before cumulative effect of accounting changes of 391,203 for the nine months
ended September 30, 1999.
The Company reported the cumulative effect of accounting changes of
$14,123,133, net of income tax benefit of $1,458,605 for the nine months ended
September 30, 2000. The Company also reported an unrealized gain during the nine
months ended September 30, 1999 resulting from the increased market price in
shares of common stock of Yahoo!, Inc. received by the Company in July 1999 as
part of a share exchange with broadcast.com inc., a company acquired by Yahoo!,
Inc.
The Company had a net loss of $15,511,639 for the nine months ended
September 30, 2000 (reflecting foreign withholding taxes of $104,651) compared
to a net loss of $391,203 for the nine months ended September 30, 1999
(reflecting an effective income tax benefit of 37.1%).
Liquidity and Capital Resources
The Company requires substantial capital for the acquisition of film
rights, the funding of distribution costs and expenses, the payment of ongoing
overhead costs and the repayment of debt. The principal sources of funds for the
Company's operations has been cash flow from operations, bank borrowings and
equity.
In June 2000, the Company, as borrower, and certain of the Company's
subsidiaries, as guarantors, entered into a $40 million credit facility (of
which $33 million has been committed) with The Chase Manhattan Bank and other
commercial banks and financial institutions. The Company only is permitted to
use the proceeds from the credit facility to:
o refinance outstanding loans and accrued interest under its
previous credit facility with Coutts & Co. and
Bankgesellschaft Berlin A.G.;
o finance its production, acquisition, distribution and
exploitation of feature length motion pictures, television
programming, video product and rights; and
o fund its working capital and other lawful corporate
purposes.
11
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Under the terms of the credit agreement, the Company borrows funds through loans
evidenced by promissory notes. The loans are made available through a revolving
line of credit which may be reduced, partially or in whole, at any time and is
to be fully paid on June 20, 2005. The credit facility also provides for letters
of credit to be issued from time to time upon the Company's request.
The facility bears interest, as the Company may select, at rates based
on either the LIBOR or a rate per annum equal to the greater of (a) the Prime
Rate, (b) the Base CD Rate plus 1% and (c) the Federal Funds Effective Rate plus
1/2% (as these terms are defined in the credit agreement). In addition to an
annual management fee, there is a commitment fee of 1/2 of 1% per year on the
average daily amount by which the lender's commitment, as such commitment may be
reduced in accordance with the credit agreement, exceeds the sum of the
principal balance of such lender's outstanding loans plus a pro rata share of
the total face amount of letters of credit issued to the Company. The Company
also is required to pay certain up-front fees based on the total amount of
commitments made by each lender under the agreement.
Under the credit agreement, which is secured by substantially all of
the assets of the Company and its domestic subsidiaries, the Company is required
to:
o provide quarterly and yearly financial reports to the banks;
o maintain insurance through financially sound and reputable
insurers on all of the pledged assets of the Company and its
domestic subsidiaries that are insurable;
o obtain written approval from the banks prior to making or
incurring any obligation to make capital expenditures during
any fiscal year in excess of $500,000;
o obtain written approval from the banks prior to beginning
production or entering into any agreement to co-finance or
acquire any right to a motion picture, film or video tape
produced for theatrical, non-theatrical or television
release in excess of $3,000,000;
o obtain written approval from the banks prior to entering
into any major distribution agreements; and
o maintain certain consolidated net worth and liquidity
ratios.
The credit agreement also restricts the creation or incurrence of indebtedness
and the issuance of additional securities. Events of default under the credit
agreement include, among other things:
o a change of control;
o the failure, in some situations, of Christopher Cooney,
Robert B. Little or William Lischak to serve as a director
or be employed in the capacity set out in his respective
employment agreement;
o the failure to make a payment of any principal or interest
when due, and the failure is not cured within three days;
and
o any final judgment for the payment of money in excess of
$250,000 that is entered against the Company or its domestic
subsidiaries and that remains outstanding for a period of 30
consecutive days without being discharged, stayed or bonded
in full.
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In connection with the Purchase Agreement with Rosemary discussed
below, the Company entered into a note and debt contribution agreement with
Robert B. Little and Ellen Dinerman Little (collectively, the "Littles").
Pursuant to the agreement, the Littles forgave:
o $1,469,037 of aggregate outstanding principal amount and
$480,709 of accrued but unpaid interest on a note issued to
the Littles as part of the consideration given relating to
the merger of the Company and Overseas Filmgroup, Inc. in
October 1996;
o $78,101 of accrued and unpaid interest on loans in the
aggregate principal amount of $400,000 ("P&A Loans") made by
the Littles to the Company in December 1997 and February
1998, which were used to provide a portion of the funds
required by the Company for the print and advertising costs
associated with the domestic theatrical release of MRS.
DALLOWAY; and
o $125,131 of accrued salaries that the Company owed to them.
The Littles also contributed $130,000 in cash and 1,588,812 of their shares of
the Company's common stock to the Company's capital and the Company repaid the
Littles:
o $135,476 for various reimbursable expenses as provided in
their employment agreements with the Company;
o $130,000 of the remaining principal balance on the note
issued in connection with the October 1996 merger;
o $400,000 representing the aggregate principal amount owed by
the Company to the Littles under the P&A Loans;
o $564,524 of accrued salaries; and
o $200,000 representing the amount owed by the Company to the
Littles under the tax reimbursement agreement between the
Company and the Littles entered into in connection with the
merger in October 1996.
At September 30, 2000, the Company had cash and cash equivalents of
$893,685 compared to cash and cash equivalents of $270,031 as of December 31,
1999. Additionally, at September 30, 2000, the Company had restricted cash of
$21,667 held by its primary lender, to be applied against its credit facility.
The restricted cash balance as of December 31, 1999 was $88,176.
Additionally, as of September 30, 2000, the Company had sold all
17,454 shares of Yahoo!, Inc. common stock that it received as part of a
share-for-share exchange with broadcast.com, which was subsequently acquired by
Yahoo!, Inc. Under the terms of the share-for-share agreement, the Company's
Yahoo!, Inc. shares could not be sold, transferred, assigned, pledged,
hypothecated, or otherwise disposed of on or before July 18, 2000. Similarly,
the 562,527 shares of the Company's common stock issued to broadcast.com, which
is now held by Yahoo!, Inc., are unregistered shares and were restricted for a
similar one year period. On July 19, 2000, the Company sold 8,727 shares of the
Yahoo!, Inc. common stock for approximately $1,164,000 and on September 26,
2000, the Company sold the remaining 8,727 shares of the Yahoo!, Inc. common
stock for approximately $891,800.
As of September 30, 2000, the Company also had deferred revenue
relating to distribution commitments and guarantees from sub-distributors of
approximately $795,000.
In 1999, the Company acquired rights to thirteen films and First Look
Pictures released two films. During the nine months ended September 30, 2000,
the Company acquired rights to eleven films and First Look Pictures broadened
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the release of one picture initially released in December 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 ten to fifteen films,
including two to six First Look Pictures releases. This total is exclusive of
films where the Company acquires primarily re-issue rights. The credit agreement
with Chase requires the consent of the banks prior to the Company entering into
any new rights acquisitions in excess of $3,000,000. Therefore, the Company's
ability to achieve these goals will depend on its ability to find opportunities
that fit within these parameters or the banks' willingness to permit the Company
to enter these types of acquisitions and commitments. There can be no assurance
that pre-sales, co-production funds, gap financing and third party equity will
be available in the future. As a result of the foregoing, and because the motion
picture business and the Company's operations are subject to numerous additional
uncertainties, there can be no assurance that the Company's acquisition,
financing and distribution goals will be achieved.
The Company has actively sought to obtain additional equity capital. In
June 2000, the Company sold to Rosemary:
o 5,097,413 shares of common stock;
o 904,971 shares of Series A preferred stock, each share of
which is convertible into two shares of common stock; and
o warrants to purchase up to 2,313,810 shares of common stock
at an exercise price of $3.40 per share, exercisable until
June 19, 2005.
for a cash purchase price of $17,000,000. The preferred stock votes with the
common stock on an as-converted basis. The Company also issued warrants to
purchase an aggregate of 675,000 shares of common stock to various people and
entities in consideration for their services rendered in connection with the
transactions contemplated by the Securities Purchase. These warrants are
identical to the warrants issued to Rosemary.
The Company believes that its existing capital, funds from operations
and other available sources of capital will be sufficient to enable the Company
to fund its presently planned acquisition, distribution and overhead
expenditures for the next twelve months.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
<TABLE>
Expected Maturity Date
----------------------
(000's)
2000 2001 2002 2003 2004 Thereafter
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Liabilities
Variable Rate:
Notes Payable $75,000 $ 644,218 $ 5,500,000
Average Interest Rate 10.33% 10.33% 0 0 0 10.5%
</TABLE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is engaged in legal proceedings incidental to its normal
business activities. In the opinion of management, none of these proceedings
are material in relation to the Company's financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2000, the Company did not
make any sales of unregistered securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 15, 2000, the Company held its annual meeting of
stockholders, at which the Company's stockholders considered (i) the election of
directors, (ii) the approval of an amendment to the Company's Restated
Certificate of incorporation to change the Company's name to First Look Media,
Inc., (iii) the approval of an amendment to the Company's Restated Certificate
of Incorporation to increase the number of authorized shares of common stock and
preferred stock from 27,000,000 shares of capital stock, consisting of
25,000,000 shares of common stock and 2,000,000 shares of preferred stock, to
60,000,000 shares of capital stock, consisting of 50,000,000 shares of common
stock and 10,000,000 shares of preferred stock and (iv) the approval of the
Company's 2000 Performance Equity Plan ("2000 Plan"). Stockholders voted to
elect Robert B. Little, Stephen K. Bannon and Christopher J. Cooney to serve as
Class II directors for a three-year term until their successors are elected and
qualified. 10,794,973 shares were voted for and 1,600 shares were withheld in
each of Messrs. Little, Bannon and Cooney's election. With respect to approval
of the amendment to the Restated Certificate of Incorporation to change the
Company's name to First Look Media, Inc., 10,794,973 shares were voted for,
1,600 shares were voted against and 0 shares abstained from voting. With respect
to approval of the amendment to the Restated Certificate of Incorporation to
increase the number of authorized shares of common stock and preferred stock,
9,488,471 shares were voted for, 103,900 shares were voted against, 0 shares
abstained from voting and 1,204,202 shares were not voted. With respect to the
approval of the 2000 Plan, 9,488,471 shares were voted for, 6,400 shares were
voted against, 97,500 shares abstained and 1,204,202 shares were not voted.
15
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (9/30/00)
(b) Reports on Form 8-K
None
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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.
November 20, 2000
OVERSEAS FILMGROUP, INC.
By: /s/ William F. Lischak
----------------------
William F. Lischak
Chief Financial Officer,
Chief Operating Officer
and Secretary
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EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule (9/30/00)
18
