UNITED STATESE
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 (I.R.S. Employer
Jurisdiction of Incorporation or Organization) Identification No.)
8800 Sunset Blvd., Third Floor, Los Angeles, CA 90069
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (310) 855-1199
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
The number of shares of Common Stock outstanding as of May 12, 2000 was
6,295,305.
<PAGE>
OVERSEAS FILMGROUP, INC.
INDEX
- -------------------------------------------------------------------------------
Part I - Financial Information
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets --
March 31, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 2000 and March 31, 1999 4
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2000 and March 31, 1999 5
Consolidated Statements of Comprehensive Income (unaudited)
for the three months ended March 31, 2000 and March 31, 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 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 18
Signature 19
2
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OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
Three Months Ended March 31,
2000 1999
----- ----
<S> <C> <C>
Revenues $ 6,049,296 $ 6,690,364
Expenses:
Film costs 4,957,587 5,338,736
Selling, general and administrative 793,487 745,574
-------------------- ----------------------
Total expenses 5,751,074 6,084,310
-------------------- ----------------------
Income from operations 298,222 606,054
Other income (expense):
Interest income 50 289
Interest expense (518,974) (472,477)
Other income 54,448 25,480
-------------------- ----------------------
Total other income (expense) (464,476) (446,708)
-------------------- ----------------------
(Loss) income before income taxes (166,254) 159,346
Income tax (benefit) provision (62,000) 59,000
-------------------- ----------------------
Net (loss) income $ (104,254) $ 100,346
==================== ======================
Basic and diluted net (loss) income per share $ (.02) $ .02
=================== =====================
Weighted average number of common shares outstanding 6,295,305 5,732,778
==================== ======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OVERSEAS FILMGROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
March 31, December 31,
2000 1999
-------------------- -------------------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 5,738 $ 270,031
Restricted cash 95,455 88,176
Accounts receivable, net 29,390,505 30,088,951
Related party receivable 149,000 149,000
Investment available-for-sale 2,420,384 2,908,383
Film costs, net of accumulated amortization 27,621,891 28,363,419
Fixed assets, net of accumulated depreciation 248,172 282,856
Other assets 788,895 496,078
------------------------ -----------------------
Total assets $ 60,720,040 $ 62,646,894
======================== =======================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued expenses $ 1,395,994 $ 1,146,677
Payable to related parties 1,460,330 1,334,624
Accrued interest payable 314,541 272,583
Payable to producers 21,734,568 22,462,179
Note payable to related parties 1,926,729 1,989,229
Notes payable 18,912,278 19,764,175
Deferred income taxes 1,325,031 1,458,605
Deferred revenue 942,500 918,500
------------------------ -----------------------
Total liabilities 48,011,971 49,346,572
------------------------ -----------------------
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 6,340
Additional paid in capital 12,107,058 12,107,058
Retained deficit (308,014) (203,760)
Cumulative unrealized gain on investment available-for-sale 989,419 1,477,418
Treasury stock at cost, 45,000 shares (86,734) (86,734)
------------------------ -----------------------
Total shareholders' equity 12,708,069 13,300,322
------------------------ -----------------------
Total liabilities and shareholders' equity $ 60,720,040 $ 62,646,894
======================== =======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
Three Months Ended March 31,
2000 1999
----- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (104,254) $ 100,346
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Amortization of film costs 5,497,105 5,223,588
Depreciation of fixed assets 34,684 33,074
Change in assets and liabilities:
(Increase) decrease in accounts receivable 698,446 (1,385,108)
Increase in other assets (292,817) (66,792)
Increase (decrease) in accounts payable and accrued expenses 416,981 (613,597)
Increase (decrease) in payable to producers (727,611) 1,382,421
(Decrease) in deferred income taxes (133,574) (22,203)
Increase in deferred revenue 24,000 1,100,500
----------------- -----------------
Net cash provided by operating activities 5,412,960 5,752,229
----------------- -----------------
Cash flows from investing activities:
Additions to film costs (4,755,577) (5,502,697)
Purchase of fixed assets - (1,425)
----------------- -----------------
Net cash used in investing activities (4,755,577) (5,504,122)
----------------- -----------------
Cash flows from financing activities:
Net paydown under credit facility (851,897) (327,758)
Increase in restricted cash position (7,279) (2,385)
Net paydown of note payable to related party (62,500) (62,500)
----------------- -----------------
Net cash used in financing activities (921,676) (392,643)
----------------- -----------------
Net decrease in cash and cash equivalents (264,293) (144,536)
Cash and cash equivalents at beginning of period 270,031 697,266
----------------- -----------------
Cash and cash equivalents at end of period $ 5,738 $ 552,730
==================== ====================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 491,679 $ 893,682
==================== ====================
Income taxes $ 5,600 $ -
==================== ====================
Foreign withholding taxes $ 65,974 $ 82,203
==================== ====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
OVERSEAS FILMGROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended March 31,
---------------------------
2000 1999
---- ----
Net (loss) income $(104,254) $100,346
Unrealized holding loss on
investment available-for-sale (487,999) --
--------- --------
Total comprehensive (loss) income $(592,253) $100,346
========= ========
The accompanying notes are an integral part of these 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 three months ended March 31, 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:
March 31, 2000 December 31, 1999
-------------- -----------------
Films in release $ 198,293,299 $ 192,798,097
Less: Accumulated Amortization (171,861,992) (166,365,578)
------------- -----------
Subtotal 26,431,307 26,432,519
Films not yet available for release 1,190,584 1,930,900
-------------- --------------
$ 27,621,891 $ 28,363,419
============ =============
3. The Company has a credit facility (the "Credit Facility") with a two-bank
syndicate (the "Banks"). The Credit Facility originally provided for up to
$27,000,000 of credit, however, it was amended and extended on April 14,
1998 (the "1998 Amendment"), April 9, 1999 (the "1999 Amendment") and April
9, 2000 (the "2000 Amendment," and collectively, the "Facility
Amendments"). Under the 2000 Amendment, the operating line of credit
portion of the Credit Facility ("Operating Facility") and the portion of
the Credit Facility established to finance the production and/or
acquisition of films (the "Film Facilities") have been extended until April
15, 2001. 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 Facility") with another bank, which is
guaranteed by letters of credit issued by the banks. In addition to the
amounts outstanding under the Company's Credit Facility, the Company has
borrowed $2,000,000 from another lender. The proceeds of such loan are
being used to acquire rights to a particular film.
The Company's ability to maintain availability under its Local Facility,
reduce balances of the Operating Facility and the Film Facilities prior to
maturity and to generate sufficient cash flow to fund operations 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. Management believes that existing capital, cash flow
from operations and availability under the Company's amended Credit
Facility and Local Facility will be sufficient to enable the Company to
fund its planned acquisition, distribution and overhead expenditures for a
reasonable period of time. The Company has entered into a commitment letter
with Chase Securities, Inc. ("Chase") whereby Chase has agreed to
structure, arrange and use commercially reasonable efforts to syndicate a
senior five-year revolving credit facility in an aggregate amount of up to
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$30,000,000 (the "Chase Facility"). Additionally, on May 3, 2000, the
Company entered into a Securities Purchase Agreement with Rosemary Street
Productions, LLC ("Purchaser"), which provides for Purchaser to invest
$17,000,000 in exchange for a combination of common stock, preferred stock
and warrants to be issued on closing (the "Securities Purchase"). Both the
Chase Facility and the Securities Purchase are subject to various closing
conditions.
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 may consist of any statement other than a
recitation of historical fact and can be identified by the use of
forward-looking terminology such as "may," "expect," "anticipate," "estimate,"
"intend" or "continue" or the negative thereof or other variations thereon or
comparable terminology. The reader is cautioned that all forward-looking
statements are necessarily speculative and there are certain risks and
uncertainties that could cause actual events or results to differ materially
from those referred to in such forward-looking statements. These risks and
uncertainties include, among other things, the highly speculative and inherently
risky and competitive nature of the motion picture industry. There can be no
assurance of the economic success of any motion picture since the revenues
derived from the production and distribution of a motion picture (which do not
necessarily bear a direct correlation to the production or distribution costs
incurred) depend primarily upon its acceptance by the public, which cannot be
predicted. The commercial success of a motion picture also depends upon the
quality and acceptance of other competing films released into the marketplace at
or near the same time, the availability of alternative forms of entertainment
and leisure time activities, general economic conditions and other tangible and
intangible factors, all of which can change and cannot be predicted with
certainty. Therefore, there is a substantial risk that some or all of the motion
pictures released, distributed, financed or produced by the Registrant will not
be commercially successful, resulting in costs not being recouped or anticipated
profits not being realized. The registrant's results of operations for the
period ended March 31, 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 registrant controls the distribution rights and which become available for
distribution (and thus, for which revenue can first be recognized) and the
number of motion pictures distributed by the registrant, as well as the
unpredictable nature of audience and subdistributor response to motion pictures
distributed by the registrant, the registrant's revenues, expenses and earnings
fluctuate significantly from quarter to quarter and from year to year. In
addition, for several reasons, including (i) the likelihood of continued
industry-wide increases in acquisition, production and marketing costs and (ii)
the registrant's intent, based upon its ongoing strategy, to acquire rights to
or produce films which have greater production values (often as a result of
larger budgets), the registrant's costs and expenses, and thus the capital
required by the registrant in its operations and the associated risks faced by
the registrant may increase in the future. Additional risks and uncertainties
are discussed elsewhere in appropriate sections of this report and in other
filings made by the registrant with the Securities and Exchange Commission,
including 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 registrant. The registrant does not have a policy of updating or revising
forward-looking statements and thus it should not be assumed that silence by
management of the registrant over time means that actual events are bearing out
as estimated in such forward-looking statements.
9
<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 and video markets under
the name First Look Pictures ("First Look").
Results of Operations
Quarter Ended March 31, 2000 Compared to Quarter Ended March 31, 1999
Revenues decreased by $641,068 (9.6%) to $6,049,296 for the three months
ended March 31, 2000 from $6,690,364 for the three months ended March 31, 1999.
The decrease was primarily due to lower ancillary revenues (primarily airline
licensing fees) during the quarter (which decreased by approximately $770,982)
and a decrease in revenue from the sale of film and video materials to
distributors (which decreased by approximately $197,676). The decreased revenue
was partially offset by increased revenue from the direct video release of
various films through First Look Pictures (which increased by approximately
$210,897) and from service fees relating to First Look Pictures theatrical
release of motion pictures on behalf of third parties (which increased by
$100,000).
Film costs as a percentage of revenues increased to 82.0% for the quarter
ended March 31, 2000 compared to 79.8% for the quarter ended March 31, 1999.
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, increased by $47,913 (6.4%) to $793,487 for the quarter ended March
31, 2000 from $745,574 for the quarter ended March 31, 1999. The Company
capitalizes certain overhead costs incurred in connection with its acquisition
of rights to a motion picture and creation of marketing materials for a motion
picture by adding such costs to the capitalized film costs of the motion
picture. The increase in selling, general and administrative expenses, net of
amounts capitalized to film costs, was primarily due to increased compensation
costs (which increased by approximately $98,237) and decreased capitalization of
overhead (which decreased by approximately $25,394). The increase in selling,
general and administrative expenses, net of amounts capitalized to film costs,
was partially offset by decreased bad debt expense (which decreased by
approximately $68,421) and decreased corporate expenses related to the Company
being a public corporation (which decreased by approximately $13,181).
10
<PAGE>
Other expense increased by $17,768 (4.0%) to $464,476 for the quarter ended
March 31, 2000 compared to $446,708 for the quarter ended March 31, 1999
primarily as a result of increased interest expense of $518,974 for the quarter
ended March 31, 2000 compared to $472,477 for the quarter ended March 31, 1999.
Interest expense for the quarter ended March 31, 2000 increased primarily as a
result of less interest costs being capitalized to film costs in the quarter
ended March 31, 2000 compared to the quarter ended March 31, 1999.
As a result of the above, the Company had a loss before income taxes of
$166,254 for the quarter ended March 31, 2000 compared to income before income
taxes of $159,346 for the quarter ended March 31, 1999.
The Company had a net loss of $104,254 for the quarter ended March 31, 2000
(reflecting an effective tax rate of 37.3%) compared to net income for the
quarter ended March 31, 1999 of $100,346 (reflecting an effective tax rate of
37.0%).
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 have been cash flow from operations and bank borrowings,
primarily through the Company's credit facility described below.
Since 1994, the Company has had a credit facility (the "Coutts Facility")
with Coutts & Co. ("Coutts"), as an agent and lender, and Bankgesellschaft
Berlin A.G., formerly Berliner Bank A.G. London Branch, as a lender
(collectively, the "Banks"). The credit facility agreement (the "Syndication
Agreement") provides for (1) borrowings relating to the Company's acquisition of
motion pictures or to fund distribution costs, including print and advertising
costs, associated with the motion pictures acquired by the Company (the "Film
Facilities") (2) borrowings for the Company's working capital needs (the
"Operating Facility") and (3) up to $1,000,000 available to be issued as letters
of credit (the "Local Facility") to secure a local bank line of credit. Under
the terms of the Syndication Agreement, the Company borrowed funds under Film
Facilities' on a film-by-film basis, with each Film Facility treated as a
separate loan, initially maturing 12 months after the first draw down. The
Syndication Agreement required the Banks to approve each separate Film Facility,
such approval to be granted in their sole discretion. Under terms of an
amendment dated April 9, 2000 (the "2000 Amendment"), the Banks have extended
the maturity dates for the Coutts Facility and each outstanding Film Facility
until April 15, 2001. Although the Film Facilities were originally made
available on a revolving basis, the Syndication Agreement was amended on April
14, 1998 (the "1998 Amendment") to provide for no further borrowings.
Additionally, the Company and the Banks agreed that net receipts from films
financed under repaid Film Facilities will be used to reduce other Film
Facilities after the particular Film Facility had been repaid. As of March 31,
2000, an aggregate of approximately $9,730,121, relating to 15 unpaid Film
Facilities, was outstanding.
Under the terms of the 1998 Amendment, the borrowing limit under the
Operating Facility was increased by approximately $1,234,000 to a maximum of
$7,234,000; provided that such increases shall be substantially in line with a
11
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projected cash flow schedule provided to Coutts during its most recent review of
the Company. The balance drawn under the Operating Facility as of March 31, 2000
was approximately $7,234,000 and the most recent cash flow projection provided
by the Company to the Banks project that this amount will continue to be
outstanding through April 15, 2001. The Operating Facility will mature on April
15, 2001.
As of March 31, 2000, $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 has received from City National Bank (under which $343,971 was
outstanding as of March 31, 2000 bearing interest at 7.75% per annum). If the
letters of credit are drawn upon, the Company must repay the amounts advanced by
the Banks upon demand.
The interest rate payable on borrowings under the Syndication Agreement is
3% above the London Inter-Bank Offered Rate ("LIBOR") in effect from time to
time for one, three or six months, as requested by the Company. In addition to
an annual management fee, there is a commitment fee on the daily unused portion
of the Operating Facility of 1% per annum, and fees with respect to the Local
Facility of 2% of the face amount of issued letters of credit. Fees on the Film
Facilities include 2% of the amount of cash advanced, as well as a percentage of
gross receipts of the film acquired or financed payable from the Company's net
earnings from the film. No such fees were generated in the quarter ended March
31, 2000.
Under the Syndication Agreement, as amended, which is secured by
substantially all of the assets of the Company and its subsidiaries, the Company
is required to (1) provide a series of monthly financial reports to the Banks;
(2) obtain written approval of the Banks prior to entering into any new rights
acquisitions or commitments; (3) obtain written approval of the Banks prior to
committing to spend amounts in connection with distribution expenses and costs
for print and advertising requirements; (4) maintain a certain consolidated net
worth; and (5) collateralize by cash or receivables acceptable to the Banks 30%
of the amount outstanding under the Film Facilities. The Syndication Agreement
also 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, Mr. Little and Mr. Lischak. 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 out 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 Little's ownership in the Company below
certain levels.
As part of the 1998 Amendment, Ms. Little and Mr. Little agreed to
personally guarantee for the benefit of the Banks all amounts in excess of
$6,000,000 (up to a maximum guarantee amount of $618,000) drawn under the
Operating Facility; provided that the guarantee would be extinguished when the
amounts outstanding under the Operating Facility were permanently reduced to
less than $6,000,000. Additionally, as part of the 1998 Amendment, Ms. Little
and Mr. Little agreed to defer payments under a promissory note (the "Merger
Note") that they received in connection with the merger of Overseas Filmgroup,
Inc. into the Company in October 1996. Payments under the Merger Note continue
to accrue but are being deferred with interest until (1) outstanding borrowings
under the Operating Facility are reduced to at least $5,000,000 and (2) the
Company and the Banks view that such reduction is permanent. However, pursuant
to a later amendment to the Syndication Agreement, an amount equal to the
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Littles' aggregate weekly salary without interest has been paid to the Littles
on a weekly basis towards repayment of the Merger Note. The Merger Note is being
extended for the periods of time payments are deferred. The deferred Merger Note
payments continue to bear interest, and the monthly payments will be adjusted to
compensate for additional interest accrued pursuant to the deferral of payments.
The rights of Ms. Little and Mr. Little under the Merger Note and related
security agreement are not otherwise affected. At May 12, 2000, an aggregate of
$1,961,344 in principal and interest was outstanding under the Merger Note
(including an aggregate of $956,248 in previously deferred payments of principal
and interest).
Under the terms of the 2000 Amendment, $190,000 in deferred fees relating
to the prior extension of the term of the Coutts Facility are payable upon the
earlier of the date the Company has secured a new credit facility and refinances
the Banks or July 31, 2000. In addition, the Banks have imposed an extension fee
of $20,833 per month or part thereof until further notice by the Banks.
Additionally, the Banks waived certain non-compliance with various covenants
under the Syndication Agreement including (1) any non-compliance by the Company
to provide required financial information; (2) any non-compliance with respect
to 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 previous annual overhead
budgets and (5) the Company's non-compliance with a requirement that 30% of the
amount outstanding under the Film Facilities (including issued but unexercised
letters of credit) be collateralized by cash or receivables acceptable to the
Banks. The Banks also established an agreement with respect to the Company's
overhead levels for the twelve months beginning April 9, 2000 and reinstated a
requirement for the Company to maintain a minimum net worth of $12,000,000
(which had previously been reduced to $11,000,000 under the 1998 Amendment). As
of March 31, 2000, the Company's net worth calculated in accordance with this
provision was $12,708,069.
As of May 12, 2000, an aggregate of $9,519,958 was outstanding under the
Film Facilities, approximately $7,234,340 was outstanding under the Operating
Facility, and $1,000,000 in face amounts of letters of credit had been issued
under the Local Facility to secure the City National Bank credit line (under
which $829,971 was then outstanding).
In addition to the amounts outstanding under the Coutts Facility, the
Company has borrowed $2,000,000 from another lender. The proceeds of such loan
being used to acquire rights to a particular film. The note bears interest at
the Prime Rate (9.0% at March 31, 2000) plus 1.5% and is collateralized by
amounts due under distribution agreements from the specific film. The note
matures on May 29, 2001 and requires a $400,000 principal reduction in
July 2000.
The Company has entered into the Commitment Letter with Chase Securities,
Inc. ("Chase") whereby Chase has agreed to structure, arrange and use
commercially reasonable efforts to syndicate a senior five-year revolving credit
facility in an aggregate amount of up to $30,000,000 (the "Chase Facility").
Under the terms of the Commitment Letter, The Chase Manhattan Bank ("CMB") has
committed to provide up to $10,000,000 toward the total Chase Facility. However,
it is a condition to CMB's commitment that the portion of the Chase Facility not
being provided by CMB shall be provided by other lenders. No assurance can be
given that Chase will secure the additional lenders. In the event the Chase
Facility is concluded, the proceeds of the Chase Facility are anticipated to be
used (1) to refinance indebtedness under the Coutts Facility, (2) to finance the
production and/or acquisition of theatrical, video or television product and (3)
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for working capital and other general corporate purposes. Additionally, under
the terms of the Chase Facility, the Company would be able to borrow, repay and
reborrow for five years after the closing date of the Chase Facility. The
collateral to be provided to Chase would be a first priority security interest
in all assets of the Company. No assurance can be given that the Chase Facility
will ultimately be concluded, or if concluded, will be concluded on terms as
outlined above.
As of March 31, 2000, certain other amounts were due to the Littles,
including an aggregate of $162,500 in bonuses earned by them in 1997, 1998, 1999
and the quarter ended March 31, 2000; reimbursement of approximately $123,562 in
expenses as provided in their employment agreements with the Company and accrued
salaries of approximately $448,629 which salary is being deferred. Additionally,
the Company and the Littles have agreed that an aggregate of $200,000 is due to
the Littles under the provisions of a tax reimbursement agreement, which amount
is currently payable to the Littles.
In December 1997 and February 1998, the Littles loaned the Company an
aggregate of $400,000 to provide a portion of the funds required by the Company
for the print and advertising costs associated with the domestic theatrical
release by the Company of MRS. DALLOWAY as the Banks declined to loan such
funds. The loan is secured by an assignment of domestic revenues of MRS.
DALLOWAY (currently subordinate to the Banks' security interest), bears interest
at the rate of 9% per annum, and is to be repaid when revenues from MRS.
DALLOWAY, and the Company's release, DIFFERENT FOR GIRLS, are received by the
Company (after repayment of a Film Facility related to the acquisition of
domestic rights to both DIFFERENT FOR GIRLS and MRS. DALLOWAY and print and
advertising costs lent by the Banks with respect to DIFFERENT FOR GIRLS or at
such time as the Banks allow repayment from other sources). At May 12, 2000, the
aggregate amount outstanding (including accrued interest) pursuant to such loan
was approximately $483,263. Other than the guarantee provided by the Littles in
connection with the 1998 Amendment and the foregoing loan with respect to MRS.
DALLOWAY, the Littles are not obligated to provide any funds to the Company or
to guarantee or secure the Coutts Facility or any borrowings of the Company in
the future.
As of March 31, 2000, the Company had cash and cash equivalents of $5,738
compared to cash and cash equivalents of $270,031 as of December 31, 1999. The
difference relates primarily to normal fluctuations in the ongoing business of
the Company. Additionally, at March 31, 2000, the Company had restricted cash of
$95,455 held by the Company's primary lender, to be applied against various Film
Facilities. The restricted cash balance as of December 31, 1999 was $88,176.
Additionally, as of March 31, 2000, the Company owns 17,454 shares of
Yahoo! Inc. common stock that it received as part of a share-for-share exchange
with broadcast.com inc., a company that was subsequently acquired by Yahoo! Inc.
Under the terms of the share-for-share agreement, the Yahoo! Inc. shares held by
the Company may not be sold, transferred, assigned, pledged, hypothecated, or
otherwise disposed of on or before July 18, 2000. The 562,527 shares of Common
Stock that the Company issued to broadcast.com, which are now held by Yahoo!
Inc., are unregistered shares and are restricted for a similar one-year period.
As of March 31, 2000, the Company also had deferred revenue relating to
distribution commitments and guarantees from sub-distributors of approximately
$942,500.
14
<PAGE>
In 1999, the Company acquired rights to thirteen films and First Look
Pictures released two films. During the three months ended March 31, 2000, the
Company acquired rights to five films and First Look Pictures did not release
any films. During the next twelve months, the Company currently intends to
acquire rights to and distribute or act as sales agent with respect to
approximately eight to twelve films, including two First Look Pictures releases
(exclusive of films where the Company acquires primarily re-issue rights). As
the amended Syndication Agreement provides that no new Film Facilities will be
established and requires the consent of the Banks 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 these goals will depend on the Banks' willingness to permit
the Company to enter into new rights acquisitions and commitments, as well as
commitments for distribution expenses and prints and advertising, and the
Company's ability to obtain other sources of funds for its operational
activities, including obtaining pre-sale commitments, co-production funds, funds
from gap financing and third party equity sources. However, there can be no
assurance as to the future availability of pre-sales, co-production funds, gap
financing and third party equity. In addition, the Company currently anticipates
releasing films through First Look Pictures 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 or
that such goals will not be exceeded.
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. However, the restrictions and fees imposed by the
Banks have resulted in the Company actively seeking to refinance its current
debt arrangements. Additionally, in the event that the motion pictures released
or distributed by the Company during such period do not meet with sufficiently
positive distributor and audience response, sales and licensing of distribution
rights to films in the Company's film library and films which the Company plans
to release or make available to sub-distributors during such period are less
than anticipated or the Company is not able to exploit various sources of
capital (such as pre-sales, gap financing, insurance backed financing structures
and other equity) to the extent anticipated, the Company will likely need to
significantly reduce its currently planned level of acquisitions and
distribution activities and overhead and will likely need to obtain additional
sources of capital.
The Company also has sought to obtain additional equity capital. On May 3,
2000, the Company entered into a Securities Purchase Agreement with Rosemary
Street Productions, LLC ("Purchaser"), pursuant to which the Company agreed to
sell to Purchaser (1) 5,097,413 shares of Common Stock, (2) 904,971 shares of
Series A Preferred Stock ("Preferred Stock"), each share of which is convertible
into two shares of Common Stock and (3) five-year warrants to purchase up to
2,313,810 shares of Common Stock at an exercise price of $3.40 per share for a
cash purchase price of $17,000,000 (the "Securities Purchase"). Since the
Preferred Stock votes with the Common Stock on an as-converted basis, the
Purchaser will own approximately 59.5% of the Company's voting securities after
15
<PAGE>
consummation of the Securities Purchase. The Securities Purchase is expected to
be consummated in the second quarter of 2000 after the satisfaction of certain
closing conditions, including the closing of the Chase Facility. No assurance
can be given that the Securities Purchase will be consummated. If the Securities
Purchase is not consummated, the Company will need to further exploit other
sources of capital or significantly reduce its currently planned level of
activities and overhead.
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:
Expected Maturity Date
---------------------------
(000's)
2000 2001 2002 2003 2004 thereafter
---- ---- ---- ---- ---- ----------
Liabilities
Fixed rate:
Notes payable to
related party* $187,500 $250,000 $250,000 $250,000 $250,000 $739,229
Average interest
rate 9% 9% 9% 9% 9% 9%
Variable rate:
Notes payable $ 0 $18,912,278 0 0 0 0
Average interest
rate 8.66%
- -----------------------
* Represents amounts payable to Ellen and Robert Little which are currently
being paid in amounts equal to deferred compensation pursuant to an
arrangement with the Banks and an agreement between the Company and the
Littles.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not, as of May 12, 2000, a party to any litigation.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Description
------- --------------
27 Financial Data Schedule (3/31/00).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
March 31, 2000. However, the Company did file a Report on Form 8-K, dated May 3,
2000, with the Securities and Exchange Commission on May 10, 2000 to report the
signing of the Securities Purchase Agreement, dated May 3, 2000, between the
Company and Rosemary Street Productions, LLC.
18
<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.
Dated: May 15, 2000 By: /s/William F. Lischak
------------------------
William F. Lischak
Chief Financial Officer,
Chief Operating Officer and
Secretary
19
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
-------- --------------
27 Financial Data Schedule (3/31/00)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,738
<SECURITIES> 2,420,384
<RECEIVABLES> 29,390,505
<ALLOWANCES> 0
<INVENTORY> 27,621,891
<CURRENT-ASSETS> 0
<PP&E> 248,172
<DEPRECIATION> 0
<TOTAL-ASSETS> 60,720,040
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 6,340
0
0
<OTHER-SE> 12,701,729
<TOTAL-LIABILITY-AND-EQUITY> 60,720,040
<SALES> 6,049,296
<TOTAL-REVENUES> 6,049,296
<CGS> 4,959,587
<TOTAL-COSTS> 5,751,074
<OTHER-EXPENSES> 464,476
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 518,974
<INCOME-PRETAX> (166,254)
<INCOME-TAX> (62,000)
<INCOME-CONTINUING> (104,254)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (104,254)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
