SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 18, 2000
was 9,803,906.
<PAGE>
OVERSEAS FILMGROUP, INC.
INDEX
Part I - Financial Information
Page
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2000 (unaudited)
and December 31, 1999.............................................3
Consolidated Statements of Operations (unaudited) for the three
and six months ended June 30, 2000 and June 30, 1999..............4
Consolidated Statements of Cash Flows (unaudited) for the six
months ended June 30, 2000 and June 30, 1999......................5
Consolidated Statements of Comprehensive Income (unaudited) for
the three and six months ended June 30, 2000 and June 30, 1999....6
Notes to Consolidated Financial Statements (unaudited)..............7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........15
Part II - Other Information
Item 1. Legal Proceedings..................................................16
Item 2. Changes in Securities and Use of Proceeds..........................16
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
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
OVERSEAS FILMGROUP, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
2000 December 31,
(Unaudited) 1999
----------- ------------
ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,491,291 $ 270,031
Restricted cash 13,412 88,176
Accounts receivable, net of allowance for doubtful
accounts of $1,100,000 27,045,151 30,088,951
Related party receivable 0 149,000
Investment available-for-sale 1,891,595 2,908,383
Film costs, net of accumulated amortization 15,710,095 28,363,419
Fixed assets, net of accumulated depreciation 231,151 282,856
Other assets 1,889,096 496,078
---------------- ----------------
Total assets $ 48,271,791 $ 62,646,894
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued expenses $ 1,618,492 $ 1,146,677
Payable to related parties 0 1,334,624
Accrued interest payable 0 272,583
Payable to producers 24,058,865 22,462,179
Note payable to shareholders 0 1,989,229
Notes payable 7,028,825 19,764,175
Deferred income taxes 0 1,458,605
Deferred revenue 593,700 918,500
---------------- ----------------
Total liabilities 33,299,882 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,
respectively 9,850 6,340
Additional paid in capital 30,138,118 12,107,058
Cumulative unrealized gain on investment available-for-sale, net of taxes 460,630 1,477,418
Retained deficit (15,550,860) (203,760)
Treasury stock at cost, 45,000 shares (86,734) (86,734)
---------------- ----------------
Total shareholders' equity 14,971,909 13,300,322
---------------- ----------------
Total liabilities and shareholders' equity $ 48,271,791 $ 62,646,894
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues....................... $ 4,411,005 $ 6,540,726 $ 10,460,301 $ 13,231,090
Expenses:
Film costs.................. 3,352,169 5,412,347 8,008,302 10,751,083
Distribution and marketing
costs..................... 795,086 0 1,415,175 0
Selling, general and
administrative........... 970,141 719,412 1,763,628 1,464,986
--------------- ------------ --------------- -------------
Total expenses........... 5,117,396 6,131,759 11,187,105 12,216,069
--------------- ------------ --------------- -------------
(Loss) income from operations. (706,391) 408,967 (726,804) 1,015,021
--------------- ------------ --------------- -------------
Other income (expense):
Interest income............. 9,660 1,520 9,710 1,809
Interest expense............ (458,436) (491,382) (977,409) (963,858)
Other income................ 507,708 4,181 562,156 29,660
--------------- ------------ --------------- -------------
Total other income
(expense)................ 58,932 (485,681) (405,543) (932,389)
--------------- ------------ --------------- -------------
(Loss) income before income
taxes and cumulative effect
of accounting changes........ (647,459) (76,714) (1,132,347) 82,632
Income tax (provision) benefit. (19,246) 29,000 (91,620) (30,000)
--------------- ------------ --------------- -------------
(Loss) income before cumulative
effect of accounting changes.. (666,705) (47,714) (1,223,967) 52,632
Cumulative effect of accounting
changes...................... 0 0 (14,123,133) 0
--------------- ------------ --------------- -------------
Net (loss) income.............. $ (666,705) $ (47,714) $ (15,347,100) $ 52,632
=============== ============ =============== =============
Basic earnings (loss) per share:
(Loss) income before
cumulative effect of
accounting changes......... $ (0.10) $ (0.01) $ (0.19) $ 0.01
=============== ============ =============== =============
Net (loss) income............ $ (0.10) $ (0.01) $ (2.39) $ 0.01
=============== ============ =============== =============
Weighted average number of
basic and diluted common
shares outstanding........... 6,565,197 5,732,778 6,430,997 5,732,778
=============== ============ =============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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<TABLE>
<CAPTION>
OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (15,347,100) $ 52,632
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 906,740 6,360,178
Additions to film costs (1,037,510) (6,757,588)
Depreciation of fixed assets 67,870 67,918
Change in assets and liabilities:
Decrease (increase) in accounts receivable 3,192,800 (2,136,972)
Increase in other assets (1,393,018) (263,456)
Decrease in accounts payable and accrued expenses (1,135,392) (98,590)
Increase in payable to producers 1,596,686 3,440,367
Forgiveness of indebtedness by shareholder (1,339,037) 0
Decrease in deferred income taxes payable (1,458,605) (96,465)
(Decrease) increase in deferred revenue (324,800) 543,000
---------------- ---------------
Net cash (used in) provided by operating activities (2,148,233) 1,111,024
---------------- ---------------
Cash flows from investing activities:
Purchase of fixed assets (16,166) (43,710)
---------------- ---------------
Net cash used in investing activities (16,166) (43,710)
---------------- ---------------
Cash flows from financing activities:
Sale of securities, net of expenses 16,696,437 0
Net paydown under credit facility (12,735,350) (1,518,374)
Net payment on note payable to shareholders (650,192) (125,000)
Decrease in restricted cash position 74,764 158,363
---------------- ---------------
Net cash provided by (used in) financing activities 3,385,659 (1,643,374)
---------------- ---------------
Net increase (decrease) in cash and cash equivalents 1,221,260 (576,060)
Cash and cash equivalents at beginning of period 270,031 697,266
---------------- ---------------
Cash and cash equivalents at end of period $ 1,491,291 $ 121,206
================ ===============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 1,286,554 $ 1,298,770
================ ===============
Income taxes $ 6,400 $ 7,200
================ ===============
Foreign withholding taxes $ 85,220 $ 126,465
================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) income $ (666,705) $ (47,714) $ (15,347,100) $ 52,632
Unrealized holding loss on
investment available-for-sale (487,999) 0 (1,016,788) 0
--------------- -------------- --------------- ---------------
Total comprehensive (loss)income 1,154,704 $ (47,714) $ (16,363,888) $ 52,632
=============== ============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
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 six months ended June 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:
June 30, 2000 December 31, 1999
------------- -----------------
Films in release $ 104,370,921 $ 192,798,097
Less: Accumulated amortization (90,469,781) (166,365,578)
------------- --------------
Subtotal 13,901,140 26,432,519
Films not yet available for release 1,808,955 1,930,900
------------- --------------
$ 15,710,095 $ 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. 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
7
<PAGE>
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.
8
<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 June 30, 2000 are not necessarily indicative of the results that may be
expected in future periods (including for the year ending December 31, 2000).
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 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").
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.
9
<PAGE>
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.
Results of Operations
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Revenues decreased by $2,129,721 (32.6%) to $4,411,005 for the three
months ended June 30, 2000 from $6,540,726 for the three months ended June 30,
1999. The decrease in revenues was primarily due to decreased revenue from films
first available for release in the three months ended June 30, 2000
(approximately $541,000 from four films) compared to the three months ended June
30, 1999 (approximately $3,336,000 from one film).
As a result of the adoption of SOP 00-2, marketing and distribution
costs are treated as period costs and expensed as incurred, rather than
capitalized and amortized as a part of film costs. For the three months ended
June 30, 2000, film costs include amortization of capitalized production and
acquisition costs as well as current period participation cost accruals.
Distribution and marketing costs incurred in the current period are separately
stated. For the three months ended June 30, 1999, film costs include
amortization of distribution and marketing costs capitalized to film costs. For
the three months ended June 30, 2000, film costs as a percentage of revenues
were 76.0% and distribution and marketing costs as a percentage of revenues were
18.0%. For the three months ended June 30, 1999, film costs were 82.7%. The
increase in combined film costs and distribution and marketing costs as a
percentage of revenues for the three months ended June 30, 2000 compared to film
costs for the three months ended June 30, 1999 was primarily due to expensing of
marketing and distribution costs as incurred as well as generally lower margins
for the three months ended June 30, 2000 compared to the three months ended June
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 fees negotiated by the
Company with respect to its sales, licensing and distribution services and the
amount (if any) of the Company's investment in a particular film. In some cases,
the Company is entitled to only a 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 having produced the related film or minimum guarantee commitments or
rights acquisition costs 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.
10
<PAGE>
Selling, general and administrative expenses, net of amounts
capitalized to film costs, increased by $250,729 (34.9%) to $970,141 for the
quarter ended June 30, 2000 from $719,412 for the quarter ended June 30, 1999.
This increase was primarily due to increased bad debt expense (approximately
$144,478), increased franchise tax expense (approximately $36,542) and decreased
capitalized overhead (approximately $153,708). These increases in selling,
general and administrative expenses were partially offset by decreases in
salaries (approximately $82,969). The Company capitalizes certain overhead costs
incurred in connection with the production of films.
Other income (net of other expense) for the three months ended June 30,
2000 increased by $544,613 to $58,932 for the three months ended June 30, 2000
compared to other expense (net of other income) of $485,681 for the three months
ended June 30, 1999 primarily as a result of income related to the forgiveness
of $558,810 of accrued interest on notes payable to related parties.
As a result of the above, the Company had a loss before income taxes of
$647,459 for the three months ended June 30, 2000, compared to a loss before
income taxes of $76,714 for the three months ended June 30, 1999.
The Company had a loss of $666,705 for the three months ended
June 30, 2000 (reflecting a tax expense of $19,246 related to foreign
withholding taxes) compared to a net loss of $47,714 for the three months ended
June 30, 1999 (reflecting an effective tax rate of 37.8%).
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenues decreased by $2,770,789 (20.9%) to $10,460,301 for the six
months ended June 30, 2000 from $13,231,090 for the six months ended June 30,
1999. The decrease in revenues was primarily due to decreased revenue from films
first available for release in the six months ended June 30, 2000 (approximately
$546,000 from five films) compared to the six months ended June 30, 1999
(approximately $3,481,000 from two films).
As a result of the adoption of SOP 00-2, marketing and distribution
costs are treated as period costs and expensed as incurred, rather than
capitalized and amortized as a part of film costs. For the six months ended June
30, 2000, film costs include amortization of capitalized production and
acquisition costs as well as current period participation cost accruals.
Distribution and marketing costs incurred in the current period are separately
stated. For the six months ended June 30, 1999, film costs include amortization
of distribution and marketing costs capitalized to film costs. For the six
months ended June 30, 2000, film costs as a percentage of revenues were 76.6%
and distribution and marketing costs as a percentage of revenues were 13.5%. For
the six months ended June 30, 1999, film costs were 81.3%. The increase in
combined film costs and distribution and marketing costs as a percentage of
revenues for the six months ended June 30, 2000 compared to film costs for the
six months ended June 30, 1999 was primarily due to expensing of marketing and
distribution costs as incurred as well as generally lower margins for the six
months ended June 30, 2000 compared to the six months ended June 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 fees negotiated by the Company
with respect to its sales, licensing and distribution services and the amount
(if any) of the Company's investment in a particular film. In some cases, the
Company is entitled to only a 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 having produced the related film or minimum guarantee commitments or
rights acquisition costs 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 $298,642 (20.4%) to $1,763,628 for the
six months ended June 30, 2000 from $1,464,986 for the six months ended June 30,
1999. This increase was primarily due to increased bad debt expense
(approximately $76,057), increased compensation and compensation related
expenses (approximately $52,310), increased franchise tax expense (approximately
$35,048) and decreased capitalization of overhead (approximately $179,102).
11
<PAGE>
These increases in selling, general and administrative expenses were partially
offset by a decrease in consulting fees (approximately $45,620).
Other expense decreased to $405,543 for the six months ended June 30,
2000 compared to $932,389 for the six months ended June 30, 1999, primarily as a
result of income related to the forgiveness of $558,810 of accrued interest on
notes payable to related parties.
As a result of the above, the Company had a loss before the cumulative
effect of an accounting change and income taxes of $1,132,347 for the six months
ended June 30, 2000, compared to income before income taxes of $82,632 for the
six months ended June 30, 1999.
The Company adopted SOP 00-2 in June 2000. Accordingly, the Company
reported the cumulative effect of accounting changes of $15,581,738 ($14,123,133
after taxes).
The Company had a net loss of $15,347,100 for the six months ended June
30, 2000 (reflecting an a tax provision of $91,620, primarily related to foreign
withholding taxes) compared to net income of $52,632 for the six months ended
June 30, 1999 (reflecting an effective tax rate of 36.3%).
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.
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:
12
<PAGE>
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.
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;
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<PAGE>
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 June 30, 2000, the Company had cash and cash equivalents of
$1,491,291 compared to cash and cash equivalents of $270,031 as of December 31,
1999. Additionally, at June 30, 2000, the Company had restricted cash of $13,412
held by its primary lender, to be applied against various film facilities. The
restricted cash balance as of December 31, 1999 was $88,176.
Additionally, as of June 30, 2000, the Company owned 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.
As of June 30, 2000, the Company also had deferred revenue relating to
distribution commitments and guarantees from sub-distributors of approximately
$593,700.
In 1999, the Company acquired rights to thirteen films and First Look
Pictures released two films. During the six months ended June 30, 2000, the
Company acquired rights to nine films and First Look Pictures broadened 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 or commitments to spend
amounts for capital expenditures during any fiscal year in excess of $500,000.
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. Rosemary also has an option, exercisable
until September 17, 2000, to purchase up to an additional 1,625,260 shares of
common stock for an aggregate purchase price of $4,000,000. 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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<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest
rates. The Company does not use derivative financial instruments. Because very
few of the Company's revenues are denominated in foreign currency, the Company
does not believe there is a significant risk imposed on the Company due to the
fluctuations in foreign currency exchange rates. The table below provides
information about the Company's debt obligations including principal cash flows
and related weighted average interest rates by expected maturity dates:
<TABLE>
<CAPTION>
Expected Maturity Date
(000's)
2000 2001 2002 2003 2004 thereafter
---- ---- ---- ---- ---- ----------
Liabilities
<S> <C> <C> <C> <C> <C> <C>
Variable Rate:
Notes Payable $400,000 $1,128,825 $5,500,000
Average Interest Rate 10.33% 10.33% 0 0 0 10.5%
</TABLE>
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of August 18, 2000, 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 June 30, 2000, the Company made the
following sales of unregistered securities:
<TABLE>
<CAPTION>
Consideration
Received and
Description of If Option,
Underwriting or Warrant or
Other Discounts to Convertible
Market Price Exemption from Security, Terms
Afforded to Registration of Exercise or
Date of Sale Title of Security Number Sold Purchasers Claimed Conversion
------------- ----------------- ------------ ----------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
6/20/00 common stock 5,097,413 (1) 4(2) N/A
6/20/00 Series A preferred 904,971 (1) 4(2) each share of preferred stock
stock is convertible at the of
the holder at any time prior to
October 15,2001 into two shares
of common stock. If on October
15, 2001 any of the preferred
stock is outstanding, each
outstanding share will
automatically convert into two
shares of common stock
6/20/00 common stock 2,313,810 (1) 4(2) exercisable for
purchase warrants five years from
date of grant at
an exercise
price of $3.40
per share
6/20/00 common stock 600,000 services rendered 4(2) exercisable for
purchase warrants in connection with five years from
the transactions date of grant at
contemplated by the an exercise
Purchase Agreement price of $3.40
with Rosemary per share
6/20/00 common stock 75,000 consenting to the 4(2) exercisable for
purchase warrants assignment by five years from
Rosemary to the date of grant at
Company of a an exercise
certain first look price of $3.40
agreement per share
6/20/00 options to purchase 500,000 options granted - 4(2) exercisable for
shares of common no consideration five years from
stock received by Company date of grant at
until exercise an exercise
price of $3.40
per share
6/20/00 options to purchase 75,000 options granted - 4(2) exercisable at
shares of common no consideration an exercise
stock received by Company price of $3.40
until exercise per share; 2,095
options are
immediately
exercisable;
commencing
6/30/00, 2,083
options become
exercisable on
the last day of
each of the next
35 consecutive
months in 35
monthly installments
</TABLE>
----------------------
(1) The Company sold these shares of common stock, Series A preferred stock and
warrants to Rosemary for an aggregate cash purchase price of $17,000,000.
16
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (6/30/00)
(b) Reports on Form 8-K
Current Report on Form 8-K, dated May 3, 2000, filed with the
SEC on May 10, 2000, and amendment thereto on Form 8-K/A filed with the SEC on
June 29, 2000.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OVERSEAS FILMGROUP, INC.
August 21, 2000 By: /s/ William F. Lischak
-------------------------
William F. Lischak
Chief Financial Officer,
Chief Operating Officer
and Secretary
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<PAGE>
EXHIBIT INDEX
Exhibit Number Description
27 Financial Data Schedule (6/30/00)
19
