SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURUSANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended December 31, 2002
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-25308
FIRST LOOK MEDIA, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3751702
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8000 Sunset Blvd., Penthouse East,
Los Angeles, CA 90046
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (323) 337-1000
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(title of class)
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 / /
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes / / No /X/
As of June 28, 2002 (the last business day of the registrant's most
recently completed second fiscal quarter), the aggregate market value of the
voting and non-voting common equity held by non-affiliates of the registrant
(based on the closing sale price on such date as reported on the OTC Bulletin
Board) was $4,118,372.
The number of shares of common stock outstanding as of April 11, 2003 was
14,539,573.
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PART I
ITEM 1. BUSINESS
General
First Look Media, Inc. specializes in the acquisition and direct
distribution of, and worldwide license and sale of distribution rights to,
independently produced feature films in a wide variety of genres. These genres
include:
o action;
o art-house;
o comedy;
o drama;
o foreign language;
o science fiction; and
o thrillers.
We have accumulated a library of distribution rights, including sales agency
rights, in various media and markets to more than 330 feature films.
We operate in numerous capacities, including as:
o a distributor or a sales agent. We are appointed as a distributor or
sales agent with respect to distribution rights to films for specified
terms, territories and media from independent producers. In this
capacity, we receive distribution or sales agency fees. In exchange
for being appointed as distributor or sales agent, we may assist in
securing production financing for a film (including arranging or
assisting others in arranging pre-sales, co-productions, "soft" money
sources such as governmental subsidies or tax motivated investments,
bank loans including "gap" financing or third party equity). In
addition, we occasionally commit to pay the independent producer a
minimum guaranteed payment ranging from approximately $100,000 to
$5,000,000 at or after delivery of the completed film. These minimum
guaranteed payments represent varying portions of the films'
production costs, including, on occasion, substantially all of such
costs. These minimum guaranteed payments may enable the independent
producer to obtain financing for the production or completion of the
film. By providing these financing services or minimum guaranteed
payments, we are often able to secure more extensive distribution
rights on more favorable terms. We also distribute pictures directly
in the United States both theatrically through our First Look Pictures
division and on video and DVD through our First Look Home
Entertainment division.
o a producer. We selectively produce motion pictures that we distribute,
generally acquiring fully developed projects ready for pre-production
and contracting out pre-production and production activities.
Historically, we have focused on licensing theatrical, video, pay
television, free television, satellite and other distribution rights to foreign
sub-distributors in major international territories and regions. These
activities accounted for approximately 46.2%, 53.4% and 66.3% of our total
revenues in 2002, 2001 and 2000, respectively.
Recently, we have become more active with distribution activities in the
U.S. where we engage directly in domestic theatrical distribution through our
First Look Pictures division and domestic video and DVD distribution through our
First Look Home Entertainment division. Our theatrical distribution activities
include booking motion pictures for exhibition at movie theaters and promoting
motion pictures with advertising and publicity campaigns. Our home entertainment
distribution activities include the promotion and sale of videocassettes and DVD
units to local, regional and national video/DVD retailers.
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In 2001, we launched a television commercial production division which
generated $1,158,000 of gross revenue in 2002 and $263,000 in 2001. Although we
produced four commercials during 2002 and 2001, we ultimately determined that
the general economic environment was too difficult to sustain this division.
Accordingly, in the third quarter of 2002, we eliminated substantially all
overhead related to this division. In the future, if we produce any television
commercials, we will likely use a company partially owned by Christopher J.
Cooney, our co-chairman and chief executive officer, and Jeffrey Cooney, our
executive vice president and a director, to provide all support services needed
in exchange for a fee.
Corporate Information
Our company was incorporated in Delaware in December 1993 under the name
"Entertainment/Media Acquisition Corporation" in order to acquire an operating
business in the entertainment and media industry. We consummated our initial
public offering in February 1995, and in October 1996, we merged with Overseas
Filmgroup, Inc., a privately-held Delaware corporation ("Overseas Private") that
had been operating since February 1980. Our company was the surviving
corporation in the merger. Upon consummation of the merger, we changed our name
to "Overseas Filmgroup, Inc." We operated under the name "Overseas Filmgroup,
Inc." until January 2001. In January 2001, we changed our name to "First Look
Media, Inc." in order to reflect the broadening of our operations beyond foreign
distribution of independently produced feature films to additional areas such as
theatrical and video distribution in the United States and television commercial
production.
Our principal executive offices are located at 8000 Sunset Boulevard,
Penthouse East, Los Angeles, California 90046, and our telephone number is (323)
337-1000.
Recent Developments
Current Business Environment, Film Performance, Overhead Levels
Over the past year, we have felt the significant impact of the worldwide
economic downturn. Specifically, reduced advertising spending has impacted
broadcasters and has resulted in various bankruptcies (especially in Germany),
reduced program spending, consolidation and uncertainty. Additionally, the
tragedy of September 11th, along with the war with Iraq, has created an
atmosphere of reduced activity. Until recently, much of our product, consisting
of lower budget feature films which typically do not have significant theatrical
distribution, has been supported by the worldwide expansion of television
broadcasters and their programming needs. Current market conditions have
softened demand for our product. The "reality" programming trend further has
impacted the market for lower budget feature films as broadcasters have
gravitated to this lower cost form of programming. Additionally, certain films
we have chosen to produce, invest in or acquire have not performed well. As a
result, these films have generated little margin or have incurred losses, some
of which have been significant. We also have continued to maintain a level of
overhead that anticipated better performance in our sales, licensing and
distribution activities. Consequently, this performance level has not generated
sufficient margin to cover overhead costs. Offsetting these trends to some
extent has been the growth of the DVD market; however, this growth has not been
sufficient to offset lost revenue. As a result, we have reported significantly
less revenue compared to last year, have incurred losses and have experienced
increased bad debts. In light of our situation, we have been analyzing our
current business plan, our alternatives and the need for further capital to
implement an updated business plan.
Credit Agreement
The recent operating losses and negative cash flow we have experienced,
along with the general market conditions for our business, have resulted in
ongoing review and discussions with our primary lender, JPMorgan Securities,
Inc. ("JPMorgan") and participating banks in our credit facility. In February
2003, JPMorgan requested that we voluntarily reduce the amount that we are
permitted to borrow under our credit facility in relation to our library value.
The credit agreement initially provided that we could borrow up to 50% (the
"advance rate") of the valuation of our library, conducted by an independent
third party approved by JPMorgan. JPMorgan requested that this advance rate be
reduced by 5% (to 45%) as of April 1, 2003, an additional 5% (to 40%) as of July
1, 2003, and a final 5% (to 35%) as of October 1, 2003. In February 2003, we
agreed to these reductions, which are reflected in our amended credit agreement
included as an exhibit to this report.
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As of December 31, 2002, our cumulative losses resulted in a breach of the
covenant contained in the credit agreement with JPMorgan that sets forth a
minimum level of net worth that we are required to maintain. We have requested a
waiver of this breach. JPMorgan currently is considering our request and we are
in negotiation with respect to further modifications JPMorgan will require to
the credit agreement in exchange for such waiver. At this point, JPMorgan has
indicated that these modifications will likely include an immediate reduction of
the commitment level under the credit agreement from $40 million to
approximately $20 million, with further reductions so that by January 1, 2004
the commitment level will be $15 million. The minimum net worth requirement
would be waived until December 31, 2003, subject to our maintaining a positive
net worth as calculated pursuant to Generally Accepted Accounting Principles
("GAAP"). These modifications require the agreement of 51% of the voting right
of the participating banks (the percentage based upon the proportionate
commitment of each bank to the total commitment of $40 million). Final
resolution of this matter is expected by April 30, 2003. Until then, we are
precluded from drawing further funds under the credit facility.
Strategic Objectives
We have sought to become a leading independent worldwide film distribution
company. We have aggregated a library of over 330 motion pictures and have
developed the capacity to:
o license motion picture rights worldwide;
o arrange production financing through a wide variety of sources,
including international "soft" money sources such as German tax funds,
UK tax funds and similar funding sources, "gap" financing (bank
financing where the bank providing financing lends against estimated
value of unsold distribution rights), pre-sales (sales of territorial
distribution rights in advance of a film being produced), third party
equity, and other sources;
o distribute films theatrically in the U.S.; and
o distribute films on video and DVD in the U.S.
Historically, most of the films we have acquired have had lower budgets
(between $1,000,000 and $8,000,000) and have had limited, if any, theatrical
distribution. During the 1980s, much of the demand for lower budget films was
fueled by the creation and growth of a home video marketplace. During the 1990s,
the video marketplace matured and the value of video rights declined. At the
same time, there was an expansion of television broadcast channels (including
premium and basic cable service channels) worldwide. Internationally, this
expansion was the result of "privatization" of broadcasters, whereby government
owned and controlled broadcasting was diminished and free enterprise resulted in
an expanding market. This expansion supported lower budget films which had
little, if any, theatrical distribution. Most recently, television values have
softened and, although the DVD market has created some revenue growth, reduced
revenues from television broadcasters throughout the world have impacted our
performance significantly. These shifts in the marketplace have forced us to
review our past operating strategy and develop an updated strategy, which
includes:
Drawing upon our reputation, experience and relationships with foreign
sources to provide sales services and financing for an altered profile of
product. We believe that we enjoy a prominent position in the international
independent film marketplace. In the past, we have utilized our expertise and
relationships to access various forms of financing for the creation of
relatively low budget feature films. We believe we need to capitalize on our
reputation, expertise and relationships for films that have significant
theatrical distribution, generally through third party distributors rather than
through our own distribution division, First Look Pictures. Our preferred
situation will be where a major U.S. studio is handling the U.S. distribution of
the film. This will require us to refocus our sourcing of product and develop
new relationships.
Reducing our risk by limiting our direct investment in acquisition costs
and film production. In light of our difficulties, we recently reduced our
direct investment in films. We generally believe that an investment between
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$50,000 and $200,000 per film will be necessary to continue a pipeline of
product for our home entertainment division. Additionally, we believe there may
be situations that will require limited investment of up to $250,000 to secure
rights to a particular film for our core operation, international sales.
Overall, we expect to reduce our level of investment dramatically and to rely
instead on providing sales agency services for films produced with third party
sources of production funding. Additionally, we plan to assist third parties
with securing financing through third party sources for films having domestic
theatrical distribution through a U.S. distribution company other than our own
and preferably a U.S. major studio.
Expanding our home entertainment division. In 2001, we created a home
entertainment division called "First Look Home Entertainment." This division
directly distributes films on videocassette and DVD. We released 17 films in the
U.S. video/DVD market during 2001 and 28 films in 2002. We plan to release at
least 30 films in the U.S. video/DVD market in 2003. This operating division is
generating positive gross margin with low risk acquisition and marketing costs.
In the past year, this division generated approximately $7.6 million in gross
revenues. We believe there is opportunity to further expand this division.
Currently, many of the films we release through First Look Home Entertainment
have had no theatrical exposure. Additionally, most of our releases are feature
films. We believe that we can expand our revenues if we are able to distribute
more films that have had some level of theatrical distribution in the U.S. and
also distribute other specialized product more suitable for purchase rather than
rental, such as children's programming and other niche programming.
Expanding our domestic theatrical distribution activities. During 2002, we
released three films, with minimal success. However, we continue to believe that
there is significant opportunity in the U.S. theatrical distribution market. Our
strategy has been to create a separate funding source (a "P & A Fund") for the
marketing and distribution costs associated with the U.S. theatrical release of
films. In connection with the June 2002 private placement with Seven Hills
Pictures, LLC ("Seven Hills"), we established a joint venture company, with an
initial $4 million of equity capital, for purposes of funding marketing and
distribution costs of certain pictures to be released theatrically either by us
or Seven Hills. We have had discussions with Seven Hills regarding our interest
in seeking additional equity and debt capital from other sources to enhance the
capacity and ability of this joint venture. Once we expand the P&A Fund, our
strategy for theatrically releasing films will be to: (i) acquire films with
little or no upfront payment for the U.S. distribution rights and instead offer
meaningful (up to $1,000,000) commitments to spend marketing and distribution
funds related to the release of the given film and (ii) release eight to ten
films per year. Until we conclude additional equity and/or debt arrangements
with respect to the P & A Fund, we will continue to release films with resources
that we provide.
The Motion Picture Industry
Generally
The motion picture industry consists of two principal activities:
o production, which encompasses the creation, development and financing
of motion pictures; and
o distribution, which involves the promotion and exploitation of
feature-length motion pictures in a variety of media, including
theatrical exhibition, home video, television and other ancillary
markets, both domestically and internationally.
The United States motion picture industry is dominated by the major
studios, including The Walt Disney Company, Paramount Pictures Corporation,
Warner Brothers Inc., Universal Pictures, Twentieth Century Fox, Sony Pictures
Entertainment, and MGM/UA. The major studios, which historically have produced
and distributed the vast majority of high-grossing theatrical motion pictures
released annually in the United States, are typically large, diversified
corporations that have strong relationships with creative talent, television
broadcasters and channels, Internet service providers, movie theater owners and
others involved in the entertainment industry. The major studios also typically
have extensive national or worldwide distribution organizations and own
extensive motion picture libraries.
Motion picture libraries, consisting of motion picture copyrights and
distribution rights owned or controlled by a film company, can be valuable
assets capable of generating revenues from worldwide commercial exploitation in
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existing media and markets, and potentially in future media and markets
resulting from new technologies and applications. The major studios also may own
or be affiliated with companies that own other entertainment related assets such
as music and merchandising operations and theme parks. The major studios' motion
picture libraries and other entertainment assets may provide a stable source of
earnings which can offset the variations in the financial performance of their
new motion picture releases and other aspects of their motion picture
operations.
During the past 15 years, independent production and distribution
companies, many with financial and other ties to the major studios, have played
an important role in the production and distribution of motion pictures for the
worldwide feature film market. These companies include:
o Miramax Films Corporation, now owned by The Walt Disney Company, which
produced Chicago, The Hours, Gangs of New York, Scary Movie, the
Scream film series, Shakespeare in Love and Chocolat;
o New Line Cinema Corporation/Fine Line Features, now owned by AOL/Time
Warner, which produced the Lord of the Rings series, the Austin Powers
films, The Mask, Teenage Mutant Ninja Turtles and the Nightmare on Elm
Street series;
o USA Films (formerly October Films and now owned by Vivendi/Universal),
which produced Traffic, Secrets & Lies and Breaking the Waves together
with Gramercy Pictures, which produced Dead Man Walking and Fargo, is
part of USA Films and USA Network;
o Artisan Entertainment Inc., which distributed Boat Trip, National
Lampoon's Van Wilder and The Blair Witch Project; and
o Lion's Gate Films, which produced and distributed Narc, Frailty,
Monster's Ball and American Psycho.
As a result of consolidation in the domestic motion picture industry, a
number of previously independent producers and distributors have been acquired
or are otherwise affiliated with major studios. However, there are also a large
number of other production and distribution companies that produce and
distribute motion pictures that have not been acquired or become affiliated with
the major studios. In contrast to the major studios, independent production and
distribution companies generally produce and distribute fewer motion pictures
and do not own production studios, national or worldwide distribution
organizations, associated businesses or extensive film libraries which can
generate gross revenues sufficient to offset overhead, service debt or generate
significant cash flow.
The motion picture industry is a world-wide industry. In addition to the
production and distribution of motion pictures in the United States, motion
picture distributors generate substantial revenues from the exploitation of
motion pictures internationally. In recent years, there has been a substantial
increase in the amount of filmed entertainment revenue generated by U.S. motion
picture distributors from foreign sources. International revenues of motion
picture distributors from filmed entertainment grew from approximately $1.1
billion in 1990 to approximately $2.6 billion in 2000. This growth has been due
to a number of factors, including the general worldwide acceptance of and demand
for motion pictures produced in the United States, the privatization of many
foreign television industries, growth in the number of foreign households with
videocassette players and growth in the number of foreign theater screens.
Many countries and territories, such as Australia, Canada, China, France,
Germany, Hong Kong, India, Italy, Japan, Russia, Spain and the United Kingdom
have substantial indigenous film industries. As in the United States, in a
number of these countries the film industry, and in some cases, the
entertainment industry, in general, is dominated by a small number of companies
that maintain large and diversified production and distribution operations.
However, like in the United States, in most of these countries, there are also
smaller, independent, motion picture production and distribution companies.
Foreign distribution companies not only distribute motion pictures produced in
their countries or regions but also films licensed or sub-licensed from United
States production companies and distributors. In addition, film companies in
many foreign countries produce films not only for local distribution, but also
for export to other countries, including the United States. While some foreign
language films and foreign English-language films appeal to a wide U.S.
audience, most foreign language films distributed in the United States are
released on a limited basis because they draw a specialized audience.
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Motion Picture Production
Motion picture production begins with the screenplay adaptation of a
popular novel or other literary work acquired by the producer or the development
of an original screenplay having its genesis in a story line or scenario
conceived by a writer and acquired by the producer. In the development phase,
the producer typically seeks production financing and tentative commitments from
a director, the principal cast members and other creative personnel. A proposed
production schedule and budget also are prepared during this phase.
Pre-production begins upon completing the screenplay and arranging financing
commitments. In this phase, the producer:
o engages creative personnel to the extent not previously committed;
o finalizes the filming schedule and production budget; obtains
insurance and secures completion guaranties, if necessary; establishes
filming locations and secures any necessary studio facilities and
stages; and
o prepares for the start of actual filming.
Principal photography, which is the actual filming of the screenplay,
generally extends from eight to sixteen weeks for a film produced by a major
studio and for as little as four to eight weeks for low budget films and films
produced by independent production companies. The length of filming depends in
each case upon factors such as budget, location, weather and complications
inherent in the screenplay. Following completion of principal photography, the
film enters the post-production phase. During this phase, the motion picture is
edited, opticals, dialogue, music and any special effects are added, and voice,
effects and music sound tracks and pictures are synchronized. This results in
the production of a negative from which release prints of the motion picture are
made.
Production costs consist primarily of:
o acquiring or developing the screenplay;
o compensating creative and other production personnel;
o film studio and location rentals;
o equipment rentals;
o film stock and other costs incurred in principal photography; and
o post-production costs, including the creation of special effects and
music.
Distribution expenses, which consist primarily of the costs of advertising
and preparing release prints, are not included in direct production costs. The
major studios generally fund production costs from cash flow generated by motion
pictures and related activities or, in some cases, from unrelated businesses or
through off-balance sheet methods. Substantial overhead costs, consisting
largely of salaries and related costs of the production staff and physical
facilities maintained by the major studios, also must be funded. Independent
production companies generally avoid incurring overhead costs as substantial as
those incurred by the major studios by hiring creative and other production
personnel and retaining the other elements required for pre-production,
principal photography and post-production activities on a picture-by-picture
basis. As a result, these companies do not own sound stages and related
production facilities, and, accordingly, do not have the fixed payroll, general
administrative and other expenses resulting from ownership and operation of a
studio. Independent production companies also may finance their production
activities on a picture-by-picture basis. Sources of funds for independent
production companies include bank loans, pre-licensing of distribution rights,
foreign government subsidies, equity offerings and joint ventures. Independent
production companies generally attempt to obtain all or a substantial portion of
their financing of a motion picture prior to commencement of principal
photography, at which point substantial production costs begin to be incurred
and require payment.
As part of obtaining financing for its films, an independent production
company often is required by its lenders and distributors who advance production
funds to obtain a completion bond or production completion insurance from an
acceptable completion guarantor which names the lenders and applicable
distributors as beneficiaries. The guarantor assures the completion of the
particular motion picture on a certain date. If the motion picture cannot be
completed for the agreed upon budgeted cost, the completion guarantor is
obligated to pay the additional costs necessary to complete the picture by the
agreed upon delivery date. If the completion guarantor fails to timely complete
and deliver the motion picture on or before the agreed upon delivery date, the
completion guarantor is required to pay the lenders and distributor, if
applicable, an amount equal to the aggregate amount the lenders and distributor
have loaned or advanced to the independent producer.
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In connection with the production and distribution of a motion picture,
major studios and independent production companies generally grant contractual
rights to actors, directors, screenwriters, owners of rights and other creative
and financial contributors to share in net revenues from a particular motion
picture. Except for the most sought-after talent, these third-party
participations are generally payable after all distribution fees, marketing
expenses, direct production costs and financing costs are recovered in full.
Major studios and independent film companies in the United States typically
incur obligations to pay residuals to various guilds and unions including the
Screen Actors Guild, the Directors Guild of America and the Writers Guild of
America. Residuals are payments required to be made on a picture-by-picture
basis by the motion picture producer to the various guilds and unions arising
from the exploitation of a motion picture in markets other than the primary
intended market. Residuals are calculated as a percentage of the gross revenues
derived from the exploitation of the picture in these ancillary markets. The
guilds and unions typically obtain a security interest in all of the producer's
rights in the motion picture being exploited to ensure satisfaction of the
residuals obligation. This security interest usually is subordinate to the
security interest of the lenders financing the production cost of the motion
picture and the completion bond company guaranteeing completion of the motion
picture. Under a producer's agreement with the guilds and unions, the producer
may transfer the obligation to pay the residuals to a distributor if the
distributor assumes the obligation to make the residual payment. If the
distributor does not assume those obligations, the producer is obligated to pay
those residuals.
Motion Picture Distribution
General
Motion picture distribution involves domestic and international licensing
of the picture for:
o theatrical exhibition;
o videocassettes and digital video discs (DVD);
o presentation on television, including pay-per-view, basic and premium
cable, network, syndication or satellite;
o marketing of the other rights in the picture and underlying literary
property, which may include books, merchandising and soundtracks;
o non-theatrical exhibition, which includes airlines, hotels and armed
forces facilities; and
o exploitation via the Internet, which is still evolving.
Although releases by the major studios typically are licensed and fully
exploited in all of the foregoing media, films produced or distributed by
independent film companies are often not exploited in all of the media. For
example, some films may not receive theatrical exhibition in the United States
or various other territories and instead may be released directly on home video
or as a pay television premiere or otherwise exploited on a pay television
service. In limited circumstances, these films may then be released in theaters.
Production companies with distribution divisions typically distribute their
motion pictures themselves. Production companies without distribution divisions
may retain the services of sales agents or distributors to exploit the motion
pictures produced by them in selected or all media and territories. Distribution
companies may directly exploit distribution rights licensed to, or otherwise
acquired, by them by booking motion pictures with movie theaters or selling
videocassettes to video retailers. Alternatively, they may grant sub-licenses to
domestic or foreign sub-distributors to exploit completed motion pictures in
particular territories or media.
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Acquisition of distribution rights
----------------------------------
A sales agent does not generally acquire distribution rights from the
producer or other owner of rights in the motion picture. Instead, he acts as an
agent for the producer or rights owner, licensing the distribution rights to
distributors on behalf of the producer or rights owner in exchange for a sales
agency fee. This fee typically is computed as a percentage of gross revenues
from licenses obtained by the sales agent. A distributor generally licenses and
takes a grant of distribution rights from the producer or other rights owner of
the motion picture for a specified term in a particular territory or territories
and media, generally in exchange for a distribution fee calculated as a
percentage of gross revenues generated by the distribution of exploitation of
the motion picture. The distributor may agree to pay the producer of the motion
picture an advance or a minimum guarantee upon the delivery of the completed
motion picture. This amount is to be recouped by the distributor out of revenues
generated from the exploitation of the motion picture in particular media or
territories. After receiving its ongoing distribution fee and recouping the
advance or minimum guarantee plus its distribution costs, the distributor
generally pays the remainder of revenues in excess of an ongoing distribution
fee to the producer of the motion picture.
Obtaining license agreements with a distributor or distributors prior to
completion of a motion picture which provide for payment of a minimum guarantee
is often referred to as the pre-licensing or pre-selling of film rights. This
pre-selling may enable the producer to obtain financing for its project by using
the contractual commitment of the distributor to pay the advance or minimum
guarantee as collateral to borrow production funding. In the past, pre-selling
of film rights provided a means for financing film production. However, the
ability to pre-sell film rights in various territories and media, the amount of
pre-sales that can be obtained in certain territories and media and thus, the
percentage of a film's budget that can be covered with pre-sales, fluctuates. In
recent years, independent film companies generally have not been able to
pre-sell as great a percentage of a film's budget as they have in past years.
The producer also may be able to acquire additional production funds
through gap financing. Although gap financing currently is being made available
by multiple lenders, certain banks have ceased providing this type of financing,
and many banks that provide gap financing are becoming more conservative in
their approach to these lending practices. As a result, there can be no
assurance that lenders will continue to make funds available on this basis. In
some circumstances, the distributor is entitled to recover any unrecouped costs
and advances from a film licensed to the distributor from the revenues from
another film or films also licensed to the distributor. This is commonly known
as cross collateralizing.
In addition to obtaining distribution rights in a motion picture for a
limited duration, a distributor also may acquire all or a portion of the
copyright in the motion picture or license certain distribution rights in
perpetuity. Both major studios and independent film companies often acquire
motion pictures for distribution through a customary industry arrangement known
as a negative pickup, under which the studio or independent film company agrees
to pay a specified minimum guaranteed amount to a production company in exchange
for all rights to the film upon completion of production and delivery of the
film. The production company normally finances production of the motion picture
pursuant to financing arrangements with banks and other lenders in which the
lender receives an assignment of the production company's right to payment of
the minimum guarantee and is granted a security interest in the film and in the
production company's rights under its arrangement with the studio or independent
film company. When the major studio or independent film company picks up the
completed motion picture, it pays the minimum guarantee or assumes the
production financing indebtedness incurred by the production company in
connection with the film. In addition, the production company is paid a
production fee and generally is granted a participation in net revenues from
distribution of the motion picture.
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The distribution cycle
----------------------
Concurrently with their release in the United States, motion pictures
typically are released in Canada and also may be released in one or more other
international markets. Generally, a motion picture that is released theatrically
is available for distribution in other media during its initial distribution
cycle as follows:
Number of months following initial
Marketplace (Media) Domestic theatrical release
------------------ ----------------------------------
International theatrical Concurrent
Domestic home video and DVD (initial release) 4-6 months
Domestic pay-per-view 6-9 months
International home video and DVD (initial release) 6-12 months
Domestic pay television 12-15 months
International television (pay or free) 18-24 months
Domestic free television (network, barter syndication, 30-33 months
syndication and basic cable)
Films often remain in distribution for varying periods of time. For
example, major studio motion pictures that are released theatrically can play in
theaters for several weeks following their initial release or, at times,
including in the case of successful art-house films that are released on a
limited basis, for several months. On the other hand, unsuccessful films may
play in theaters for only a short period of time. Once released on
videocassette, a motion picture may remain available on videocassette for many
years. Similarly a motion picture can be licensed to various forms of television
for many years after its first release. The release periods set forth above
represent standard holdback periods. A holdback period represents a stipulated
period of time during which release of the motion picture in other media is
prevented to allow the motion picture to maximize its value in the media in
which it is currently being released. Holdback periods are often specifically
negotiated with various distributors on a media-by-media basis. However, the
periods set forth above represent our estimate of typical current holdback
periods in the motion picture industry.
In general, if a film is not released theatrically in the United States and
is instead first released on domestic home video, television exploitation does
not commence until four to eight months after the video release. Thereafter, the
same general release patterns indicated in the table above typically apply. If a
film premieres on United States pay television, the pay television service is
typically licensed for a four to six week exclusive airing period. The license
generally will provide for limited airings made up of five to eight exhibition
days with multiple airings permitted on each exhibition day. The provisions of
the license also usually provide for the pay television service to receive
subsequent airing periods following a period in which the film can be released
on video or sometimes even theatrically and a period during which the film may
be broadcast on free television.
A substantial portion of a film's ultimate revenues are generated in its
initial distribution cycle. The initial distribution cycle usually consists of
the first five years after the film's initial domestic release and includes
theatrical, video, and pay and free television. Commercially successful motion
pictures, however, may continue to generate revenues after the film's initial
distribution cycle from the re-licensing of distribution rights in certain media
and from the licensing of distribution rights with respect to new media and
technologies and in emerging markets. Although there has been a substantial
increase over the past fifteen years in the revenues generated from the
licensing of rights in ancillary media such as home video, DVD, cable and
pay-per-view, the theatrical success of a motion picture remains a significant
factor in generating revenues in foreign markets and in other media such as
video and television. For example, retail video stores currently purchase fewer
copies of videocassettes of motion pictures that have not been theatrically
released, and purchase more copies of major studio theatrical hits.
Theatrical
------------
The theatrical distribution of a motion picture, whether in the United
States or internationally, involves the licensing and booking of the motion
picture to movie theaters, the promotion of the picture through advertising and
publicity campaigns and the manufacture of release prints from the film
negative. Expenditures on these activities, particularly on promotion and
advertising, are often substantial and may have a significant impact on the
ultimate success of the film's theatrical release. In addition, expenditures can
vary significantly depending upon a number of factors including:
11
o the markets and regions in which the film is distributed;
o the media used to promote the film such as newspaper, television and
radio;
o the number of screens on which the motion picture is to be exhibited;
and
o the ability to exhibit motion pictures during peak exhibition seasons.
With a release by a major studio, the vast majority of these costs, which
primarily consist of advertising costs, are incurred prior to the first weekend
of the film's domestic theatrical release. Accordingly, there is not necessarily
a correlation between these costs and the film's ultimate box office
performance. In addition, the ability to distribute a picture during peak
exhibition seasons, including the summer months and the Christmas holidays, and
in the most popular theaters, may affect the theatrical success of a picture.
Films distributed theatrically by an independent film company are sometimes
released on a more limited basis which allows the distributor to defer marketing
costs until it is able to assess the initial public acceptance of the film.
While arrangements for the exhibition of a film vary greatly, there are
certain economic relationships generally applicable to theatrical distribution.
Theater owners retain a portion of the admissions paid at the box office,
typically referred to as gross box office receipts. The share of the gross box
office receipts retained by a theater owner generally includes a fixed amount
per week, in part to cover overhead, plus a percentage of receipts that usually
increases over time. Although these percentages vary widely, a theater owner's
share of a particular film's revenues will normally be approximately 50% to 65%
of gross box office receipts. The balance of the gross box office receipts,
referred to as gross film rentals, is paid to the distributor. The distributor
then retains a distribution fee, which is typically 25% to 35%, from the gross
film rentals. This percentage is used to recover the costs incurred in
distributing the film, which consist primarily of marketing and advertising
costs and the cost of release prints for exhibition. The balance of gross film
rentals, after deducting distribution fees and distribution costs recouped by
the distributors, is then applied against the recoupment of any advance paid for
the distribution rights plus interest and the balance is paid to the producer or
other rights owner of the film.
Home video and DVD
------------------
A motion picture released theatrically typically will become available for
videocassette and digital video disc ("DVD") distribution within four to six
months after its initial domestic theatrical release. Certain films are not
initially released theatrically but may instead be released directly to home
video and DVD. Given the increasing preference of retail video stores for films
which have achieved successful theatrical releases, it has become increasingly
difficult to generate significant revenues from films first released directly on
video/DVD.
Home video distribution consists of the promotion and sale of
videocassettes to local, regional and national video retailers that rent or sell
videocassettes to consumers primarily for home viewing. Recently, the market for
videocassettes has been supplemented by, and in some ways replaced by, the
market for DVD's. DVD units are typically available both to rental markets and
sell-through markets at the same time and today are priced between $14 to $16
per unit. Impacted by this, per unit pricing on videocassettes has dropped over
the past years quite dramatically as consumers convert from videocassette
players to DVD players. Additionally, revenue sharing arrangements (arrangements
whereby retail stores and chains pay little or nothing for each cassette, but
rather shares the revenue generated from renting such cassette, with the
licensor), have significantly impacted the business. In such arrangements,
revenue related to a particular video release is earned over a period of time
(generally up to one year), rather than on the first day of video release.
Following the initial marketing period, selected films may be remarketed at a
wholesale price of $5.00 to $7.50 or less for sale to consumers. A few major
releases with broad appeal may be initially offered by a film distribution
company at a price designed for sell-through rather than rental when it is
believed that the ownership demand by consumers will result in a sufficient
level of sales to justify the reduced margin on each cassette sold. Today, most
home video distribution contracts in international territories are arranged
similarly to those in domestic territories, although the wholesale prices may
differ.
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Television
----------
Television rights for films initially released theatrically that have broad
appeal generally are licensed:
o first to pay-per-view for an exhibition period within six to nine
months following initial domestic theatrical release;
o then to pay television approximately 12 to 15 months after initial
domestic theatrical release;
o thereafter to basic cable broadcasters or in certain cases to network
television for an exhibition period; and
o then to syndication or "free" television.
Pay-per-view allows subscribers to pay for individual programs. Pay
television allows cable television subscribers to view such services as
HBO/Cinemax, Showtime/The Movie Channel, Encore Media Services or others offered
by their cable system operators for a monthly subscription fee. Pay-per-view and
pay television are now delivered not only by cable, but also by satellite
transmission, and films are usually licensed in both of these media. Films that
are not initially released in the domestic theatrical market may premiere
instead on pay television followed in some limited circumstances by theatrical
release. Groups of motion pictures often are packaged and licensed as a group
for exhibition on television over a period of time and, therefore, revenues from
these television licensing packages may be received over a period that extends
beyond the initial distribution cycle of a particular film. Motion pictures also
are licensed and packaged by producers and distributors for television broadcast
in international markets by government or privately owned television studios and
networks. Pay television is less developed outside the United States, but is
experiencing significant international growth. The prominent foreign pay
television services include Canal+, Premiere, STAR TV, British Sky Broadcasting
and the international operations of several U.S. cable services, including HBO,
the Disney Channel, Turner Broadcasting and DirecTV.
Non-theatrical and other rights
-------------------------------
Films may be licensed for use by airlines, schools, public libraries,
community groups, the military, correctional facilities, ships at sea and
others. Music contained in a film may be licensed for sound recording, public
performance and sheet music publication. Rights in motion pictures may be
licensed to merchandisers for the manufacture of products such as toys,
T-shirts, posters and other merchandise. Rights also may be licensed to create
novels from a screenplay and to generate other related book publications, as
well as interactive games on platforms such as CD-ROM and CD-I.
Our Motion Picture Distribution
International distribution
Our management has considerable expertise in international distribution.
Robert B. Little, our co-chairman of the board and president, and his
international distribution team have substantial experience in licensing motion
pictures for distribution outside the United States and have been active in
international motion picture sales for many years. They have developed
relationships with distributors in most territories through foreign sales
activities and have established extensive relationships with various
international financing sources. In addition, we are a founding member of the
American Film Marketing Association, which sponsors the American Film Market.
The American Film Market, along with the Cannes Film Festival and MIFED, are the
major annual international film markets that are attended by distributors
worldwide. We participate annually with a sales office at all three major film
markets, as well as three major television and two major video markets. We also
attend many film festivals throughout the world including Sundance, the Toronto
Film Festival and others. From time to time, we also may engage independent
representatives to assist us in acquiring and licensing motion picture rights.
13
We license distribution rights internationally in various media such as
theatrical, video/DVD, pay television, free television, satellite and other
rights to foreign sub-distributors on either an individual rights basis or
grouped in combinations of rights. We license these rights to sub-distributors
in international territories either on a picture-by-picture basis or
occasionally pursuant to output arrangements. Currently, our most important
international territories are Australia, the Benelux countries, Canada, France,
Germany, Italy, Japan, Scandinavia, Spain and the United Kingdom.
The terms of our license agreements with foreign sub-distributors vary
depending upon the territory and media involved and whether the agreement
relates to a single or multiple motion pictures. Most of our license agreements
provide that we will receive a minimum guarantee from the foreign
sub-distributor with all or a majority of the minimum guarantee paid prior to,
or upon delivery of, the film to the sub-distributor for release in the
particular territory. The remainder of any unpaid minimum guarantee generally is
payable at specified intervals after delivery of the film to the
sub-distributor. The minimum guarantee is recovered by the sub-distributor out
of the revenues generated from exploitation of the picture in the territory. The
foreign sub-distributor retains a negotiated distribution fee, generally
measured as a percentage of the gross revenues generated from its distribution
of the motion picture, recovers its distribution expenses and the minimum
guarantee and ultimately pays us the remainder of any receipts in excess of the
distributor's ongoing distribution fee. We must rely on the foreign
sub-distributor's ability to successfully exploit the film in order to receive
any proceeds in excess of the minimum guarantee.
We occasionally do not receive a minimum guarantee from the foreign
sub-distributor and instead negotiate terms that usually result in an allocation
of gross revenues between the sub-distributor and us. Typically, the terms of
these types of arrangements provide for the sub-distributor to retain an ongoing
distribution fee, calculated as a percentage of the sub-distributor's gross
receipts in the territory, recover its expenses and pay remaining receipts in
excess of the ongoing distribution fee to us. Alternatively, often with respect
to video rights, the terms may provide for a royalty to be paid to us calculated
as a percentage of the sub-distributor's gross receipts from exploitation of the
video rights without deduction for the sub-distributor's distribution expenses.
At times, we enter into output arrangements with local foreign distributors
whereby the foreign sub-distributor receives the right, typically for a
specified period and number of motion pictures, to distribute motion pictures
that we have released in a particular territory and designated media. In some
circumstances, the foreign sub-distributor pays us a minimum guarantee on a
picture-by-picture basis with each minimum guarantee having been either
pre-negotiated or computed as a stipulated percentage of the production or
acquisition cost of each picture.
Domestic distribution
In addition to obtaining foreign distribution rights, we have been active
in acquiring domestic distribution rights. We exploit our domestic distribution
rights in a variety of ways. In 1993, we established First Look Pictures, our
domestic theatrical releasing operation, and in 1999 we began releasing films
directly on video under First Look Home Entertainment. Some of the films we
license or distribute receive domestic theatrical release by First Look Pictures
or video release by First Look Home Entertainment. We may license films
initially to television broadcasters for release initially on television. We
also license to third party distributors, such as Fox Searchlight, who may
release a picture theatrically and distribute the film in other media as well.
We occasionally license domestic video rights of a film to
sub-distributors, including Blockbuster, Inc., USA Films and Columbia TriStar
Home Video. In addition, we have created First Look Home Entertainment, which
released 28 films on video in 2002, and we expect to release at least 30 films
during 2003.
We license distribution rights directly to pay television services
including HBO, Showtime and Encore, as well as smaller services, pay-per-view
services and basic cable services, including USA, Lifetime, Bravo and the
Independent Film Channel. Although we have not engaged in significant licensing
or syndication of domestic free television rights except as part of a license of
rights in multiple media, we control these rights to a significant portion of
the films in our library and have licensed these rights in certain films to
third parties.
14
In some cases, we will license the right to distribute a film domestically
in multiple media to a major studio, a division of a major studio or an
independent distributor. Although the terms of these licenses vary, we typically
will be paid a minimum guarantee. The sub-distributor then retains a
distribution fee, measured as a percentage of the gross receipts received by the
sub-distributor from exploitation of the film, recovers its distribution costs
and the advance paid to us, and ultimately pays us the remainder of any receipts
in excess of an ongoing distribution fee.
We do not always receive a minimum guarantee from the licensing of
distribution rights to foreign and domestic sub-distributors. This has caused us
to rely more heavily on the actual financial performance of the film being
distributed. In some circumstances, whether we receive a minimum guarantee
depends upon the media. For example, in the case of motion pictures that have
not been theatrically released, we may enter into video/DVD distribution
arrangements with sub-distributors where no minimum guarantee is paid to us or
where the minimum guarantee paid to us is significantly less than those paid to
us for similar films in the past. In addition, even if we do obtain minimum
guarantees from our sub-distributors, the minimum guarantees do not assure the
profitability of our motion pictures or our operations. Additional revenues may
be necessary from distribution of a motion picture to enable us to recover any
investment in the motion picture in excess of the aggregate minimum guarantees
obtained from sub-distributors, pay for distribution costs, pay for ongoing
acquisition and development of other motion pictures by us and cover general
overhead. While the pre-licensing of distribution rights to sub-distributors in
exchange for minimum guarantees may reduce some of our risk from unsuccessful
films, it also may result in us receiving lower revenues with respect to highly
successful films.
First Look Pictures
First Look Pictures directly distributes some of the motion pictures for
which we control domestic rights to theaters throughout the United States.
During 2002, First Look Pictures released three films (A Song for Martin, Elling
and Skins). Although some of First Look Pictures' future releases may appeal to
a wide audience, many of our releases to date have been foreign language or
art-house films intended to appeal primarily to sophisticated audiences.
We believe that we can benefit in several ways by theatrically distributing
films in the United States directly through First Look Pictures. The domestic
theatrical success of a motion picture can be a significant factor in generating
revenues from its distribution in ancillary media and foreign markets. For
example, retail video stores purchase few copies of videocassettes of motion
pictures that have not been theatrically released. In addition, we believe we
are generally able to obtain more favorable distribution terms in our agreements
with foreign and domestic sub-distributors in other media with respect to motion
pictures that have been theatrically released in the United States. We also
believe that, in some cases, First Look Pictures' operations enable us to
achieve domestic theatrical release for films that might not otherwise be
released in U.S. theaters. In addition, we believe that our ability to release a
film theatrically in the U.S. enables us to attract more recognizable talent,
higher profile producers and more promising motion picture projects for both
domestic and foreign distribution and that by theatrically releasing films
ourselves in the United States, we can retain a significantly greater share of
the revenue from domestic media in the event of a highly successful theatrical
release.
Films distributed theatrically in the United States by First Look Pictures
typically have been released on a limited basis to initially less than 100
screens and in selected cities, expanding to new cities or regions based upon
the performance of the film. Some films that are released in new cities as
prints become available from cities where the engagement has closed, reducing
the number of prints needed and the aggregate cost of the prints. We may release
appropriate films with more mass market appeal on a wide release basis either
through First Look Pictures or, more likely, by licensing the film to a domestic
distributor with more significant financial and distribution resources.
The cost to First Look Pictures to distribute a specialized motion picture
or art-house film on a limited-release basis has typically ranged from
approximately $100,000 to $2,000,000. Expenditures for prints, marketing and
advertising represent a substantial portion of the costs of releasing a film. In
connection with the acquisition of domestic theatrical rights to a film, we
occasionally commit to spend no less than a specified minimum amount for prints
and advertising costs. These costs are in addition to the direct production or
acquisition costs and other distribution expenses of the films.
15
Generally, in addition to receiving a distribution fee, we are entitled to
recover our print and advertising expenditures. Although First Look Pictures may
at times utilize standard broadcast television advertising, First Look Pictures
typically supports its limited releases with local newspaper and, in certain
instances, some cable television advertising. First Look Pictures also relies on
local and national publicity, such as reviews or articles in local and national
publications and appearances of a film's principal artists on radio and
television talk shows. In contrast, distributors of national, wide release films
rely primarily on national advertising campaigns, including substantial
television advertising, to attract theatergoers.
The success of a domestic theatrical release by First Look Pictures can be
affected by a number of factors outside our control. These factors include:
o audience and critical acceptance;
o the availability of motion picture screens;
o the success of competing films in release;
o awards won by First Look Pictures' releases or that of its
competition;
o inclement weather; and
o competing televised events such as sporting and news events.
As a result of the foregoing, and depending upon audience acceptance of the
films distributed through First Look Pictures, we expect that in some cases we
may not recover all of our distribution expenses or derive any profit solely
from domestic theatrical distribution revenue of First Look Pictures' releases.
In addition, we cannot assure you that total revenues from any First Look
Pictures' release, including revenues derived from the film in ancillary media
and international markets, will be sufficient to allow us to recover all of our
costs or to realize a profit.
During 2002, First Look Pictures released the following three motion
pictures:
Title Major Creative Elements Storyline Release Date
------------------------ ------------------------------------ ----------------------------------- --------------------
Elling Producer: Dag Alveberg Based on the best selling May 2002
Director: Petter Naess Norwegian novel by Ulla
Cast: Per Christian Ellefsen, Sven Isaksson, Elling, directed by
Nordin and Marit Pia Jacobsen Petter Naess, is a slyly funny and
emotionally affecting odd
couple comedy about two misfits
trying to find their places in
society.
Song for Martin Producer: Bille August, Lars A beautiful and heart wrenching Released in
Kolvig, Michael Lundberg and portrait of a woman's love for December 2001 for
Michael Obel her husband in the face of a a one week Oscar
Director: Bille August terrible and incurable disease. qualifying run and
Cast: Sven Wollter, Viveka Seldahl re-released in
and Reine Brynolfsson June 2002
Skins Producer: Jon Kilik An inspirational tale about the September 2002
Director: Chris Erye relationship between two Sioux
Cast: Eric Schweig, Graham Greene Indian brothers living on the
Pine Ridge Indian reservation.
16
We expect to release the following titles during 2003:
Release Date
------------------------ ------------------------------------ ----------------------------------- --------------------
Lawless Heart Producer: Martin Pope Lust, deception, adultery, February 2003
Director: Tom Hunsinger and Neil jealousy, sex and desire all play
Hunter feature roles as they infiltrate
Cast: Douglas Henshall, Tom the protagonists' lives in
Hollander and Bill Nighy unexpected ways.
Don't Tempt Me Producer: Edmundo Gil Two angels, one from heaven and July 2003
Director: Agustin Diaz Yanes one from hell, come to earth to
Cast: Penelope Cruz, Victoria save the soul of a boxer.
Abril
Dr. Sleep aka Hypnotic Producer: A twisted psychological thriller September 2003
Director: Nick Willing about a hypnotherapist who
Cast: Goran Visnjic, Miranda Otto has the gift of reading people's
and Shirley Henderson minds.
Fellini: I'm a Born Producer: Damian Pettigrew An outstanding portrait of April 2003
Liar Director: Damian Pettigrew Federico Fellini, a member of the
Cast: Roberto Benigni, Federico pantheon of the cinema's greatest
Fellini, Terrence Stamp and Donald directors. Interviews with the
Sutherland maestro and those who worked with
him. Provides illuminating
insight into the world of Fellini.
The Navigators Producer: Rebecca O'Brien The story chronicles the issues June 2003
Director: Ken Loach confronting railway workers
Cast: Joe Duttine, Stee Huison, following the privatization of the
Tom Craig, Dean Andrews British Railroad
Angela Producer: Lierka & Rita Rusic The true story of an attractive August 2003
Director: Roberta Torre Sicilian who participates in her
Cast: Donatella Finocchiaro, drug dealing husband's mafia
Andrea Di Stefano, Mario Puplella linked business.
Autumn Spring Producer: Jaroslav Kucera, Jiri Winner of four Czech Lion Awards, July 2003
Bartoska and Jaroslav Boucek this charming motion picture is a
Director: Vladimir Michalek spirited ode to people of all
Cast: Vlastimil Brodsky, Stella ages. A film of universal appeal
Zazvorkova, Stanislav Zindulka it is a celebration of living
life to the fullest.
17
We cannot assure that the motion pictures scheduled for release by First
Look Pictures in 2003 or any motion pictures thereafter will actually be
released or released in accordance with its anticipated schedule. The motion
picture business is subject to numerous uncertainties, including financing
requirements, personnel availability and the release schedule of competing
films.
Our Acquisition of Rights, Production and Financing
We acquire sales and distribution rights from a wide variety of independent
production companies and producers. We generally acquire rights to single films,
as compared to acquiring films pursuant to multi-picture acquisition agreements
with independent film companies or producers. We commit to acquire rights to
motion pictures at various stages in the completion of a film, from films
completed and ready for release to developed or undeveloped film projects for
which we may arrange financing or production services to complete. In acquiring
rights, we generally seek to obtain rights to commercially appealing motion
pictures with substantially lower direct negative costs than motion pictures
released by the major studios.
In order to fund the acquisition costs of the films for which we acquire
rights, we have primarily relied on:
o our credit facility;
o other lenders willing to finance our contractual minimum guarantee
obligations to the films' producers or rights owners;
o working capital;
o pre-sales;
o gap financing;
o insurance backed financing structures; and
o other third party equity sources such as private investors and
international partnerships receiving tax incentives through film
investment activities.
The films that we sell, license and distribute generally have direct
negative costs ranging from $1,000,000 to $7,000,000. We may acquire rights to
finance or produce motion pictures with direct negative costs and marketing
costs below or substantially in excess of the average direct negative costs and
marketing costs of the films that we have distributed. As part of our overall
business strategy, we intend to emphasize films with more recognizable cast,
directors and producers and greater production values and which may accordingly
have broader appeal in the competitive theatrical market. We also will attempt
to limit our exposure with respect to production and acquisition costs through
accessing third party equity sources such as private investors.
We sometimes acquire limited distribution or sales rights and at other
times acquire worldwide rights, occasionally including the copyright, to films.
The rights we acquire may depend upon whether we agree to pay the producer or
other rights owner a minimum guarantee. Additionally, as part of our acquisition
of theatrical, video and television distribution rights, we may obtain the right
to exploit ancillary rights, such as music or sound track rights, merchandising
rights, or rights to produce CD-ROMs or other interactive media products.
Although we may license these rights to sub-distributors, we historically have
not derived any significant revenues from these ancillary rights.
18
In distribution arrangements where we do not pay a minimum guarantee, the
amounts payable by us to the rights owner will depend upon our success in
licensing the film and the financial performance of the film itself. In
acquiring distribution rights to a completed or incomplete film, however, we may
agree to pay the rights owner a minimum guarantee that is independent of the
financial performance of the film. Historically, the minimum guarantees paid by
us have ranged from approximately $25,000 to $5,000,000, although in some
circumstances they may exceed these amounts. Depending upon the particular
arrangement, a minimum guarantee may be payable in full at the time of delivery
of the completed film or in installments following complete delivery of the
film. The rights owner also may receive additional payments as a result of our
exploitation of the distribution rights to the film. After receiving a
distribution fee and recovering our distribution expenses and minimum guarantee,
we pay the remainder of revenues in excess of an ongoing distribution fee to the
rights owner.
We typically receive a larger share of gross receipts from the license and
distribution of motion pictures for which we have provided a minimum guarantee.
At times, the minimum guarantee paid by us may represent all or a substantial
portion of the film's production costs. In those circumstances, we may receive
worldwide distribution rights in all media and may also obtain ownership of the
copyright to the film with the producer. In 2002, we provided minimum guarantees
for 25 films ranging from $10,000 to $1,865,000, including three which
represented a significant portion of the final production costs of the
respective film. Additionally, with respect to three films, we provided
guarantees that sales, net of our fees and expenses, would achieve specified
levels within a period of three years following commencement of principal
photography of the related film.
Our commitment to pay a minimum guarantee with respect to films that have
not begun production often enables the production company or producer to obtain
financing for its project, if needed. In some cases, our contractual commitment
to pay a minimum guarantee upon delivery of a film serves as sufficient
collateral for a bank or other financing party to lend production funds. The
bank typically will insure delivery of the film to us by requiring the producer
to purchase a completion guaranty. To enable the production company or producer
to borrow production funding, or to borrow at preferential bank fees and
interest rates, we also may have to secure our purchase or acquisition
commitment, which we generally have done by obtaining a letter of credit from
our lenders. In some situations, the production company or producer of a film
initially may obtain funds:
o from other distribution companies that obtain distribution rights in
specified media or territories, for example, the domestic distribution
rights or distribution rights in Germany or the United Kingdom;
o by accessing foreign governmental film industry incentive programs
such as programs offered in the past by the Isle of Man, the United
Kingdom, Canada, Germany, Australia and New Zealand; or
o by using its own resources or other resources available to it, and
subsequently approaching us to supply the remaining funds necessary to
complete or co-finance the film in exchange for our obtaining the
remaining distribution rights to the motion picture.
We also have been actively involved in co-financing arrangements. When we
participate in co-financing arrangements, we will commit to fund a portion of a
particular film's production costs in combination with others.
In June 2000, we entered into a "first look" agreement with The Little Film
Company, Inc. and Ellen Dinerman Little, our former co-chairman, co-chief
executive officer and president. The agreement provides for a three-year term
ending in June 2003. Under this agreement, we have an exclusive "first look" on
any project that The Little Film Company owns or controls or which it has the
right to submit to us or any project that it has the right to acquire or may
wish to acquire for development or production. The agreement also provides for
us to pay The Little Film Company annual overhead for office space and related
expenses, an annual fee and a discretionary revolving development fund. We also
compensate The Little Film Company on a project-by-project basis.
19
In connection with the purchase of certain of our securities by Rosemary
Street Productions, LLC ("Rosemary Street") in June 2000, Rosemary Street
assigned to us a first look agreement with Grandview Pictures LLC and Jon Kilik.
The agreement provided for a three-year term which ended in May 2002. Under the
agreement, we had an exclusive "first look" on any project that Grandview
Pictures wanted to produce and which it owned or controlled or which it had the
right to submit to us under the agreement or which it had the right to acquire
or wished to acquire for development and/or production, or had been authorized
by third parties to submit to us for development and/or production, as a feature
length theatrical motion picture or television production. The agreement also
provided for us to pay to Grandview Pictures annual overhead for its New York
office, including an annual salary for Jon Kilik and fees for Kilik's production
services based on the cash budget of the applicable pictures. We also
compensated Grandview Pictures for each theatrical or television motion picture
produced by Kilik. Skins was the only film to be produced under our "first look"
agreement with Grandview Pictures.
During 2002, we were involved in arranging and/or providing a significant
portion of the production financing for three motion pictures (The Boys From
County Clare, Bone Snatcher, and American Rap Stars), one of which was completed
by the end of 2002 and the other two will be completed in the first half of
2003. We attempt to minimize the risks associated with any development and
production activities that we conduct in a variety of ways. We do not maintain a
substantial staff of creative or technical personnel. We also do not own or
operate sound stage and related production facilities and, accordingly, do not
have the fixed payroll, general and administrative and other expenses resulting
from such ownership. In addition, in those circumstances where we produce a
film, we generally attempt to acquire fully developed projects ready for
pre-production with, when feasible, completed scripts, directors and cast
members who are committed to or are interested in the project. Many projects
also have a producer involved or committed. However, if at the time of our
acquisition of rights in a project, a producer is not formally or informally
committed to a project, we may also engage a production services company or a
producer to supervise and arrange all pre-production, production and
post-production activities in exchange for a production fee and a participation
in net revenues from the film.
The following chart provides information regarding completed motion
pictures first made available to us for distribution during 2002, other than
those films described under "Our Motion Picture Distribution -First Look
Pictures."
Motion Picture Title Genre Territories Acquired Selected Cast
-------------------- ----- -------------------- -------------
24 Hours in London Thriller The U.S. (Video and DVD rights Gary Olsen, John Benfield
only)
American Rap Stars Documentary The universe Snoop Dogg, Jay Z
Attic Expeditions Thriller The U.S. (Video and DVD rights Seth Green, Jeffrey Combs
only)
Avalanche Disaster The U.S. (Video and DVD rights Thomas Ian Griffith, C. Thomas Howell
only)
Ball in the House Dark Comedy Universe excluding the U.S. Johathan Tucker, Jennifer Tilly
and Canada
Between Strangers Drama Universe excluding the Baltic Sophia Loren, Malcolm McDowell
states, Bulgaria, Canada,
Czech, CIS, Italy, Hungary and
Poland
Castle Rock Adventure Universe excluding the U.S. Ernest Borgnine, Pamela Bach
and Canada
20
Motion Picture Title Genre Territories Acquired Selected Cast
-------------------- ----- -------------------- -------------
Dahmer Horror The U.S. (Video and DVD rights Jeremy Renner, Bruce Davison
only)
Dark Summer Thriller The universe Robert Culp, Mia Kirschner
Dead Awake Horror The U.S. (Video and DVD rights Stephen Baldwin, Michael Ironside
only)
Dumb Luck Romantic Comedy The universe excluding the Scott Baio, Todd Bridges
U.S. and Canada
Elling Comedy The U.S. and Canada Per Christian Ellefsen, Sven Nordin
Epicenter Disaster The U.S. (Video and DVD rights Traci Elizabeth Lords, Gary Daniels
only)
Evelyn Drama The universe excluding the Pierce Brosnan, Julianna Margulies
U.S. and Canada
Faithless Drama The U.S. (Video and DVD rights Lena Endre, Erland Josephson
only)
Gabriela Romance The U.S. (Video and DVD rights Jaime Pl Gomez, Seidy Lopez
only)
Gaudi Afternoon Comedy The U.S. (Video and DVD rights Judy Davis, Marcia Gay Harden
only)
Gentlemen's Game Drama The universe Gary Sinise, Mason Gamble
Hired Hand Drama The universe excluding U.K. Peter Fonda, Verna Bloom
I'll Take You There Romantic Comedy The U.S. (Video and DVD rights Ally Sheedy
only)
Jimmy show Drama Universe excluding the U.S. Frank Whaley, Ethan Hawke
and Canada
Julie Walking Home Drama The universe excluding Miranda Otto, William Fichtner
Germany, Poland, Hungary,
Czech, Slovenia, Romania,
India and Canada
Last Run Thriller The U.S. (Video and DVD rights Armande Assante, Ornella Muti
only)
Lawless Heart Romance The universe (excluding pay TV Douglas Hensall, Tom Hollander
in U.K.
Little Red Urban Drama The U.S. (Video and DVD rights Brandon Price, Char Clay
only)
Local Boys Drama The universe Mark Harmon, Jeremy Sumpter
Lone Hero Action The U.S. (Video and DVD rights Lou Diamond Phillips, Sean Patrick
only) Flanery
Lost Voyage Sci-Fi Thriller The U.S. (Video and DVD rights Judd Nelson, Lance Henriksen
only)
21
Motion Picture Title Genre Territories Acquired Selected Cast
-------------------- ----- -------------------- -------------
Lovers Lane Horror The U.S. (Video and DVD rights Anna Faris
only)
Malicious Intent Thriller The U.S. (Video and DVD rights Tom Arnold, William Forsythe
only)
No Place Like Home Family Universe excluding the U.S. Judge Reinhold, Richard Moll
and Canada
Nora Drama The U.S. (Video and DVD rights Ewan McGregor, Susan Lynch
only)
The Operator Thriller The U.S. (Video and DVD rights Michael Laurence, Jacqueline Kim
only)
Pinata Horror The universe Jaime Pressly, Nicholas Brendon
Pressure Thriller The U.S. (Video and DVD rights Kerr Smith, Lochlyn Munro
only)
Retrievers Family Universe excluding the U.S. Robert Hays, Mel Harris
and Canada
The Scoundrel's Wife Drama Universe excluding the U.S. Tatum O'Neal, Julian Sands
and Canada
Skins Drama The universe Graham Greene, Eric Schweig
Snapshots Romance The universe excluding Burt Reynolds, Carmen Chaplin
Belgium, Netherlands and
Luxemburg
Song for Martin Drama The U.S. and Canada Sven Wollter, Viveka Seldahl
The Surge Sci-fi Horror The U.S. (Video and DVD rights Mat Scollon, Melissa R. Martin
only)
Triggerman Comedy The universe Neil Morrissey, Donnie Wahlberg
Our Film Library of Distribution Rights
Our film library consists of rights to a broad range of films, most of
which were produced since 1980. At December 31, 2002, we had various
distribution rights to more than 330 motion pictures, including more than 73
motion pictures in which we own an interest in the copyright. With respect to
these films where we do not own the copyright, the term of our distribution
rights generally range from 12 to 25 years or more from the date of acquisition,
and typically extend to many, if not all, media for exhibition worldwide or in
specified territories.
In addition to exploitation of distribution rights to motion pictures in
our library in the major media, we are able to exploit various ancillary rights
in the films under certain situations. We have arranged for the music in several
motion pictures that we have distributed to be released as soundtrack
recordings, including Waking Ned Devine, A Merry War, Mrs. Dalloway, The Secret
of Roan Inish, Party Girl, The Big Squeeze and Infinity. Although exploitation
of these soundtracks and other ancillary rights have not generated significant
revenues for us to date, our ownership or control of ancillary rights to motion
pictures in our library, including interactive rights, remake rights and
merchandising rights, may provide future sources of additional revenues.
22
Additionally, we have granted to Yahoo! Inc. the right to exploit on the
Internet approximately fifty titles from our film library on a revenue sharing
basis. As of December 31, 2002, we have received no revenues from this
arrangement.
Major Customers
In 2000, USA Network accounted for $3,014,000 or 13.3% of our total
revenues. During the years ended December 31, 2001 and 2002, no single customer
accounted for 10% or more of our revenues.
Employees
As of April 11, 2003, we employed 46 full-time employees and 1 part-time
employee. Some of our subsidiaries are or may become subject to the terms in
effect from time to time of various industry-wide collective bargaining
agreements, including the Writers Guild of America, the Directors Guild of
America, the Screen Actors Guild and the International Alliance of Theatrical
Stage Employees. We may assume a production company's obligation to pay
residuals to these various entertainment guilds and unions. A strike, job action
or labor disturbance by the members of any of these entertainment guilds and
unions could have a material adverse effect on the production of a motion
picture within the United States, and, consequently, on our business, operations
and results of operations. These organizations all have engaged in strikes and
similar activities. We believe that our current relationship with our employees
is satisfactory.
Competition
Motion picture distribution, finance and production are highly competitive
businesses. The competition comes both from companies within the same business
and from companies in other entertainment media that create alternative forms of
leisure entertainment. We compete with major film studios including:
o The Walt Disney Company, including Miramax;
o Paramount Pictures Corporation;
o Universal Pictures;
o Sony Pictures Entertainment;
o Twentieth Century Fox; and
o Warner Brothers Inc., including New Line Cinema.
We also compete with numerous independent and foreign motion picture
production and distribution companies. Many of the organizations with which we
compete have significantly greater financial and other resources than us. Our
ability to compete successfully depends upon the continued availability of
independently produced, domestic and foreign motion pictures and our ability to
identify and acquire distribution rights to, and successfully license and
distribute, motion pictures with commercial potential. A number of formerly
independent motion picture companies have been acquired in recent years by major
entertainment companies. These transactions have significantly increased
competition for the acquisition of distribution rights to independently produced
motion pictures.
Films that we distribute or finance also compete for audience acceptance
and exhibition outlets with motion pictures that other companies distribute and
produce. As a result, the success of any of the films that we distribute or
finance is dependent not only on the quality and acceptance of that particular
film, but also on the quality and acceptance of other competing films released
into the marketplace at or near the same time. With respect to our domestic
theatrical releasing operations, a substantial majority of the motion picture
screens in the United States typically are committed at any one time to films
distributed nationally by the major film studios, which generally buy large
amounts of advertising on television and radio and in newspapers and can command
greater access to available screens. Although some movie theaters specialize in
the exhibition of independent, specialized motion pictures and art-house films,
there is intense competition for screen availability for these films as well.
Given the substantial number of motion pictures released theatrically in the
United States each year, competition for exhibition outlets and audiences is
intense. In addition, there also have been rapid technological changes over the
past fifteen years. Although technological developments have resulted in the
creation of additional revenue sources from the licensing of rights with respect
to new media, these developments also have resulted in increased popularity and
availability of alternative and competing forms of leisure time entertainment
including pay/cable television programming and home entertainment equipment such
as videocassettes, interactive games and computer/Internet use.
23
Regulation
In 1994, the United States was unable to reach an agreement with its major
international trading partners to include audio-visual works, such as television
programs and motion pictures, under the terms of the General Agreement on Trade
and Tariffs Treaty. The failure to include audio-visual works under the treaty
allows many countries to continue enforcing quotas that restrict the amount of
United States-produced television programming which may be aired on television
in those countries. The Council of Europe has adopted a directive requiring all
member states of the European Union to enact laws specifying that broadcasters
must reserve a majority of their transmission time, exclusive of news, sports,
game shows and advertising, for European works. The directive does not itself
constitute law, but must be implemented by appropriate legislation in each
member country. In addition, France requires that original French programming
constitute a required portion of all programming aired on French television.
These quotas generally apply only to television programming and not to
theatrical exhibition of motion pictures, but quotas on the theatrical
exhibition of motion pictures could also be enacted in the future. We cannot
assure you that additional or more restrictive theatrical or television quotas
will not be enacted or that countries with existing quotas will not more
strictly enforce such quotas. Additional or more restrictive quotas or more
stringent enforcement of existing quotas could materially and adversely affect
our business by limiting our ability to fully exploit our rights in motion
pictures internationally and, consequently, to assist or participate in the
financing of these motion pictures.
Distribution rights to motion pictures are granted legal protection under
the copyright laws of the United States and most foreign countries. These laws
provide substantial civil and criminal sanctions for unauthorized duplication
and exhibition of motion pictures. Motion pictures, musical works, sound
recordings, art work, still photography and motion picture properties are
separate works subject to copyright under most copyright laws, including the
United States Copyright Act of 1976, as amended. We are aware of reports of
extensive unauthorized misappropriation of videocassette rights to motion
pictures which may include motion pictures distributed by us. Motion picture
piracy is an industry-wide problem. The Motion Picture Association of America,
an industry trade association, operates a piracy hotline and investigates all
reports of such piracy. Depending upon the results of investigations,
appropriate legal action may be brought by the owner of the rights. Depending
upon the extent of the piracy, the Federal Bureau of Investigation may assist in
these investigations and related criminal prosecutions.
Motion picture piracy is also an international problem. Motion picture
piracy is extensive in many parts of the world, including South America, Asia
including Korea, China and Taiwan, the countries of the former Soviet Union and
other former Eastern bloc countries. In addition to the Motion Picture
Association, the Motion Picture Export Association, the American Film Marketing
Association and the American Film Export Association monitor the progress and
efforts made by various countries to limit or prevent piracy. In the past, these
various trade associations have enacted voluntary embargoes of motion picture
exports to certain countries in order to pressure the governments of those
countries to become more aggressive in preventing motion picture piracy. In
addition, the United States government has publicly considered trade sanctions
against specific countries that do not prevent copyright infringement of United
States produced motion pictures. We cannot assure you that voluntary industry
embargoes or United States government trade sanctions will be enacted. If
enacted, these actions could impact the amount of revenue that we realize from
the international exploitation of motion pictures depending upon the countries
subject to and the duration of such action. If not enacted or if other measures
are not taken, the motion picture industry as a whole, and our business in
particular, may continue to lose an indeterminate amount of revenues as a result
of motion picture piracy.
The Code and Ratings Administration of the Motion Picture Association
assigns ratings indicating age-group suitability for theatrical distribution of
motion pictures. We sometimes, although not always, submit our motion pictures
for these ratings. In certain circumstances, motion pictures that we did not
submit for rating might have received restrictive ratings, including, in some
circumstances, the most restrictive rating which prohibits theatrical attendance
by persons below the age of seventeen. Unrated motion pictures, or motion
pictures receiving the most restrictive rating, may not be exhibited in certain
movie theaters or in certain locales, thereby potentially reducing the total
revenues generated by these films. United States television stations and
networks, as well as foreign governments, impose additional restrictions on the
content of motion pictures which may restrict in whole or in part theatrical or
television exhibition in particular territories. In 1997, the major broadcast
networks and the major television production companies implemented a system to
rate television programs. This television rating system has not had a material
adverse effect on the motion pictures distributed by us. However, the
possibility exists that the sale of theatrical motion pictures for broadcast on
domestic free television may become more difficult because of potential
advertiser unwillingness to purchase advertising time on television programs
that are rated for limited audiences. We cannot assure you that current and
future restrictions on the content of motion pictures may not limit or adversely
affect our ability to exploit certain motion pictures in particular territories
and media.
24
ITEM 2. PROPERTIES
Our principal executive offices are located at 8000 Sunset Boulevard,
Penthouse East, Los Angeles, California 90046 and consist of 15,491 square feet
of office space. Our payments under the lease are approximately $41,000 per
month. The lease expires on May 31, 2007.
From February 2001 to January 2002, we occupied approximately 1,500 square
feet of office space located at 222 East 44th Street, New York, New York 10017,
a building owned by EUE/Screen Gems (a company owned in part by Christopher
Cooney, our co-chairman and chief executive officer, and Jeffrey Cooney, our
executive vice president and a director). EUE/Screen Gems permitted us to use
the space without paying any rent. In February 2002, we relocated our New York
operations to 603 Greenwich Street, New York, New York 10014. This space is
approximately 4,000 square feet and is in a building owned, in part, by
Christopher Cooney. We have not paid any rent since occupying the space in
February 2002 and no formal arrangements have been made regarding any future
rent to be paid with respect to these premises.
In May 2001, we entered into a sublease for 4,000 square feet of office
space located at 2932 Nebraska Avenue, Santa Monica, California for our
television commercial production operations. We have since relocated the
operations to our offices in New York and have further sublet the premises
through the end of the lease term, which expired on March 31, 2003.
ITEM 3. LEGAL PROCEEDINGS
We are engaged in legal proceedings incidental to our normal business
activities. In the opinion of management, none of these proceedings are material
in relation to our financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been quoted on the OTC Bulletin Board under the symbol
"FRST" since January 11, 2002, and our warrants were quoted on the OTC Bulletin
Board under the symbol "FRSTW" from January 11, 2002 until February 16, 2002,
the date the warrants expired. Prior to January 11, 2002, our common stock and
warrants were quoted on the OTC Bulletin Board under the symbols "OSFG" and
"OSFGW," respectively. The following table sets forth the high and low closing
bid quotations for the periods indicated. The quotations represent prices
between dealers and do not include retail markups or markdowns or commissions.
They may not necessarily represent actual transactions.
Common Stock Warrants
------------ --------
2001 High($) Low($) High($) Low($)
---- --- ---- ---
First quarter................................... 1-3/16 3/4 4/64 1/32
Second quarter.................................. 26/32 1/2 3/64 1/64
Third quarter................................... 23/32 17/32 3/32 0.01
Fourth quarter.................................. 1.01 13/32 3/32 0.01
2002
First quarter................................... 5/8 3/8 N/A N/A
Second quarter ................................. 15/16 1/8 N/A N/A
Third quarter 9/16 7/16 N/A N/A
Fourth quarter ................................. 1/2 5/16 N/A N/A
As of April 11, 2003, there were approximately 34 holders of record of our
common stock and there were 14,539,573 shares of common stock issued and
outstanding. We believe that there are more than 250 beneficial owners of our
common stock.
On April 11, 2003, the last reported sale price of our common stock as
reported on the OTC Bulletin Board was $0.26.
Dividends
We have not paid cash dividends on our common stock and we presently intend
to retain future earnings to finance the expansion and development of our
business and not pay dividends on our common stock. Any determination to pay
cash dividends in the future would be at the discretion of the board of
directors and would be dependent upon our results of operations, financial
condition, contractual restrictions and other factors deemed relevant at that
time by the board of directors. In addition, certain covenants in our JPMorgan
facility with JPMorgan substantially restrict payment of cash dividends.
Recent Sales of Unregistered Securities
None.
26
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for each
of the years in the five-year period ended December 31, 2002 are derived from
our consolidated financial statements. The selected consolidated financial data
set forth below should be read in conjunction with our consolidated financial
statements and the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," each included elsewhere in this
report.
Year Ended December 31,
------------------------------------------------------------------
(in thousands, except per share data)
------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------------
Statement of Operations Data:
Revenues.............................................. $26,299 $35,144 $22,625 $33,784 $25,585
Film cost amortization................................ 19,779 24,258 16,850 30,888 21,015
Distribution and marketing costs..................... 7,541 7,101 4,774 - -
Selling, general and administrative................... 7,928 6,947 6,473 2,983 2,960
Income (loss) from operations......................... (8,549) (3,162) (5,472) (87) 1,610
Income (loss) before tax and cumulative effect of
accounting change.................................. (9,287) (3,792) (6,230) (1,989) 112
Income tax provision (benefit)........................ 91 62 137 (736) 53
Income (loss) before cumulative effect of
accounting change.................................. (9,378) (3,854) (6,367) (1,253) 59
Cumulative effect of accounting change(1)............. - - (14,123) - -
Net income (loss) .................................... (9,378) (3,854) (20,490) (1,253) 59
Basic and diluted net income (loss) per share
before cumulative effect........................... (.71) (0.38) (0.78) (0.21) 0.01
Cumulative effect..................................... - - (1.74) - -
Net income (loss) per share after cumulative
effect............................................. (.71) (0.38) (2.52) (0.21) 0.01
Basic and diluted weighted average number of
shares outstanding................................. 13,270 10,191 8,131 5,990 5,732
-----------------------
(1) During the year ended December 31, 2000, we recorded a one-time,
pre-tax non-cash charge of $15,582,000 ($14,123,000 after taxes)
relating to our adoption of new film accounting standards in June 2000
pursuant to SOP 00-2, which is discussed in detail in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Relevant Accounting Provisions."
Year Ended December 31,
---------------------------------------------------------
(in thousands, except per share data)
---------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------
Balance Sheet Data:
Film costs, net of accumulated amortization....................$23,198 $18,304 $13,393 $28,363 $29,003
Total assets....................................................41,922 45,471 42,280 62,647 50,209
Total long-term liabilities.....................................20,254 14,500 6,500 19,764 22,013
Total liabilities...............................................39,263 39,420 32,375 49,348 38,588
Total shareholders' equity.......................................2,659 6,051 9,905 13,299 11,621
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
When used in this Form 10-K and in future filings by our company with the
Securities and Exchange Commission, the words or phrases "will likely result,"
"management expects" or "we expect," "will continue," "is anticipated,"
"estimated" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Readers are cautioned not to place undue reliance on any such
forward-looking statements, each of which speak only as of the date made. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. These risks are included in "Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and in
"Exhibit 99: Risk Factors" included in this Form 10-K. We have no obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statements.
General
The operations of the company were established as a private company in
February 1980 under the name Overseas Filmgroup, Inc. We were formed in December
1993 under the name "Entertainment/Media Acquisition Corporation" for the
purpose of acquiring an operating business in the entertainment and media
industry. We acquired the operations of Overseas Filmgroup, Inc. through a
merger in October 1996 and we were the surviving corporation in the merger.
Immediately following the merger, we changed our name to "Overseas Filmgroup,
Inc." and succeeded to the operations of the private company. In January 2001,
we changed our name to "First Look Media, Inc." in order to reflect the
broadening of our operations beyond foreign distribution of independently
produced feature films to additional areas such as U.S. theatrical and video/DVD
distribution, Internet content development and television commercial production.
Although we initially intended to expand into Internet content development, we
no longer have immediate plans to do so. Additionally, although we expanded into
television commercial production, during 2002 we substantially withdrew from
these activities due to market conditions.
Today, we are principally involved in the acquisition and worldwide license
or sale of distribution rights to independently produced motion pictures. We
directly distribute motion pictures in the domestic theatrical market under the
name "First Look Pictures" and in the domestic video market under the name
"First Look Home Entertainment." Recently, the market for lower budget
independent motion pictures which have not had a significant theatrical release
in the U.S. has experienced significant difficulty, mainly as a result of the
general economic downturn, the tragedy of September 11th, the war with Iraq and
more specifically, the financial difficulties of television broadcasters
worldwide. These difficulties, together with low margins and losses related to
the poor performance of films that we chose to produce, invest in or acquire and
a level of overhead disproportionate to margins generated, impacted our
performance during 2002, resulting in decreased revenues, increased write-offs
of film costs and increased bad debt expenses. In light of our performance and
market conditions, we have been reviewing our current business plan and
considering our alternatives.
Additionally, in February 2003, at the request of our primary lender,
JPMorgan, we agreed to modify our credit agreement to reduce the amount we can
borrow under the agreement as described below. Further, as of December 31, 2002,
the losses we have incurred have resulted in our breach of the net worth
covenant under our credit agreement. We currently are engaged in discussions
with JPMorgan and other participating banks with respect to further
modifications to the credit agreement, which likely will result in further
reductions in our ability to borrow funds under our credit facility.
Relevant Accounting Provisions
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. We elected early adoption
of SOP 00-2 and, as a result, a cumulative charge for the change in accounting
principle of $15,582,000 ($14,123,000 net of income taxes) has been reflected in
our Consolidated Statement of Operations for the year ended December 31, 2000.
28
Critical accounting policies and estimates
The SEC recently issued Financial Reporting Release No. 60, "Cautionary
Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"),
suggesting companies provide additional disclosure and commentary on those
accounting policies considered most critical. FRR 60 considers an accounting
policy to be critical if it is important to our financial condition and results
of operations, and requires significant judgment and estimates on the part of
management in its application. For a summary of our significant accounting
policies, including the critical accounting policies discussed below, see the
accompanying notes to the consolidated financial statements.
Additionally, in 2002, the SEC issued Financial Reporting Release No. 61,
"Commission Statement About Management's Discussion and Analysis of Financial
Condition and Results of Operations: ("FRR 61"). FRR 61 suggests that companies
provide additional information concerning liquidity and capital resources
including; off-balance sheet arrangements; certain trading activities that
include non-exchange traded contracts accounted for at fair value; and effects
of transactions with related and certain other parties. Accordingly, we have
described in detail the off-balance sheet arrangements as they relate to us,
both below under Liquidity and Capital Resources, and in the accompanying
footnotes to the consolidated financial statements.
The preparation of our financial statements in conformity with GAAP
requires management to make estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of
expenses during the reporting period. On an ongoing basis, we evaluate these
estimates, which are based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. The
result of these evaluations forms the basis for making judgments about the
carrying values of assets and liabilities and the reported amount of expenses
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions. The following accounting policies
require significant management judgments and estimates:
Accounting for the production and distribution of motion pictures is in
accordance with SOP 00-2, which requires management's judgment as it relates to
total revenues to be received and costs to be incurred throughout the life of
each film. These judgments are used to determine the amortization of capitalized
film costs associated with revenues earned and any net realizable value
adjustments.
Management is required to make judgments, based on historical experience
and future expectations, as to the collectibility of accounts receivable. The
allowances for doubtful accounts and sales returns represent allowances for
customer trade accounts receivable that are estimated to be partially or
entirely uncollectible. These allowances are used to reduce gross trade
receivables to their net realizable value. We record these allowances based on
estimates related to the following factors: (i) customer specific allowances and
(ii) an estimated amount, based on our historical experience, for issues not yet
identified.
Certain balance sheet liabilities require significant judgments and
estimates by management. We continually evaluate these estimates based on
changes in the relevant facts and circumstances and events that may impact
estimates. While management believes that the current reserves are adequate,
there can be no assurance that these factors will not change in future periods.
We base these estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
There can be no assurance that actual results will not differ from these
estimates.
29
Results of operations
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues decreased by $8,445,000 (24.0%) to $26,699,000 for the year ended
December 31, 2002, compared to $35,144,000 for the year ended December 31, 2001.
The decrease in revenues was primarily due to decreases in revenues related to
the licensing of distribution rights to third party distributors, primarily in
the international markets ($16,597,000 for the year ended December 31, 2002
compared to $27,366,000 for the year ended December 31, 2001). Additionally,
revenues related to the theatrical release of films decreased by approximately
$1,633,000 ($356,000 for the year ended December 31, 2002 compared to $1,989,000
for the year ended December 31, 2001). Partially offsetting these decreases,
revenues from the direct distribution of video and DVD in the U.S. increased by
$3,580,000 ($7,598,000 for the year ended December 31, 2002 compared to
$4,018,000 for the year ended December 31, 2001).
Film costs as a percentage of revenues increased to 74.1% for the year
ended December 31, 2002, compared to 69.0% for the year ended December 31, 2001.
Film costs as a percentage of revenues fluctuate from year to year based upon
the specific components of revenue and their related costs in the specific year.
In accordance with new accounting standards established pursuant to SOP 00-2,
distribution and marketing costs were expensed as incurred during the years
ended December 31, 2002 and 2001. Distribution and marketing costs increased to
$7,541,000 for the year ended December 31, 2002 compared to $7,101,000 for the
year ended December 31, 2001. The increase reflects increased video/DVD
marketing and distribution expenses ($2,392,000 for the year ended December 31,
2002 compared to $2,313,000 for the year ended December 31, 2001) related to the
increased number of video/DVD releases during the year ended December 31, 2002
compared to the year ended December 31, 2001 as well as increased distribution
and marketing costs associated with the licensing of film rights internationally
($3,718,000 for the year ended December 31, 2002 compared to $2,944,000 for the
year ended December 31, 2001).These increase were partially offset by a decrease
in print and advertising expenses for theatrical releases ($1,431,000 for the
year ended December 31, 2002 compared to $1,844,000 for the year ended December
31, 2001). As a percentage of revenues distribution and marketing costs
increased to 28.2% for the year ended December 31, 2002, compared to 20.2% for
the year ended December 31, 2001.
Selling, general and administrative expenses, net of amounts capitalized to
film costs, increased by $981,000 (14.1%) to $7,928,000 for the year ended
December 31, 2002, compared to $6,947,000 for the year ended December 31, 2001.
The largest increase was in the area of bad debt expense ($2,176,000 for the
year ended December 31, 2002 compared to $1,268,000 for the year ended December
31, 2001). Other increases included:
o Accounting fees of $90,000;
o Insurance of $43,000;
o Rent of $143,000;
o Repairs and maintenance of $10,000;
o Storage of $18,000;
o Franchise taxes of $26,000;
o Travel of $14,000; and
o Decreased capitalized overhead of $23,000.
These increases were partially offset by decreases as follows:
o Advertising expenses of $10,000;
o Depreciation expense of $30,000;
o Legal fees of $33,000;
o Publicity of $35,000;
o Compensation expense of $162,000;
o Shipping and messenger costs of $14,000; and
o Telephone expenses of $15,000.
30
Net other expense increased by $108,000 to $738,000 for the year ended
December 31, 2002, compared to $630,000 for the year ended December 31, 2001.
The increase in net other expense was primarily due to a decrease in
miscellaneous income of $195,000, partially offset by a decrease in interest
expense of $19,000 and an increase in interest income of $68,000.
As a result of the above, we had a net loss of $9,378,000 (after income tax
and foreign withholding tax expense of $91,000) for the year ended December 31,
2002 compared to a net loss of $3,854,000 (after income tax and foreign
withholding tax expense of $62,000) for the year ended December 31, 2001.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues increased by $12,519,000 (55.3%) to $35,144,000 for the year ended
December 31, 2001, compared to $22,625,000 for the year ended December 31, 2000.
The increase in revenues was primarily due to the growth of revenue from our
motion pictures segment with respect to direct distribution in the U.S.
($6,007,000 for the year ended December 31, 2001 compared to $1,736,000 for the
year ended December 31, 2000) and increases in ancillary revenue, including
airline revenue and executive producing and other fees ($3,150,000 for the year
ended December 31, 2001 compared to $196,000 for the year ended December 31,
2000). Additionally, the licensing of film rights generated $25,366,000 for the
year ended December 31, 2001 compared to $20,306,000 for the year ended December
31, 2000.
The commercial production segment generated $263,000 for the year ended
December 31, 2001 compared to no income for the year ended December 31, 2000.
In accordance with new accounting standards established pursuant to SOP
00-2, distribution and marketing costs were expensed as incurred during the
years ended December 31, 2001 and 2000. Film costs as a percentage of revenues
decreased to 69.0% for the year ended December 31, 2001, compared to 74.5% for
the year ended December 31, 2000. The decrease was due to generally higher
distribution fee rates (our gross margin) on films generating the greatest
amount of revenue during the year ended December 31, 2001, compared to the year
ended December 31, 2000. Distribution and marketing costs increased to
$7,101,000 for the year ended December 31, 2001 compared to $4,774,000 for the
year ended December 31, 2000. The increase is reflective of increased U.S.
theatrical and video/DVD distribution activities in the year ended December 31,
2001 compared to the year ended December 31, 2000. As a percentage of revenues
distribution and marketing costs decreased to 20.2% for the year ended December
31, 2001, compared to 21.1% for the year ended December 31, 2000.
Selling, general and administrative expenses, net of amounts capitalized to
film costs, increased by $474,000 (7.3%) to $6,947,000 for the year ended
December 31, 2001, compared to $6,473,000 for the year ended December 31, 2000.
The largest increase was in the area of compensation expense ($1,361,000)
related to our expansion of existing and new operational areas, including U.S.
theatrical releasing (First Look Pictures), U.S. video and DVD operations (First
Look Home Entertainment) and the television commercial production operation
(First Look Artists). Other increases included:
o Bank charges of $10,000;
o Dues and subscriptions of $15,000;
o Equipment lease payments of $13,000;
o Insurance of $15,000;
o Employee benefits of $36,000;
o Office overhead relating to commercial directors of $52,000;
o Office and computer supplies of $79,000;
o Parking expenses of $13,000;
o Rent of $33,000;
o Repairs and maintenance of $15,000;
o Screenings and research of $18,000; and
o Shipping and messenger costs of $28,000.
31
These increases were partially offset by decreases as follows:
o Bad debt expense of $608,000;
o Increased capitalized expenses of $310,000;
o Consulting fees of $17,000;
o Legal fees of $195,000;
o Officer's fringe benefits of $25,000;
o Publicity of $12,000; and
o Franchise taxes of $41,000.
Net other expense decreased by $128,000 (16.9%) to $630,000 for the year
ended December 31, 2001, compared to $758,000 for the year ended December 31,
2000. The decrease in net other expense was primarily due to an increase in
interest income of $49,000, a decrease in interest and financing expenses of
$434,000, increased revenue from the sale of software of $242,000 and increase
miscellaneous income of $22,000 partially offset by the decreased revenue from
the sale of securities of $625,000.
As a result of the above, we had a loss before income taxes and cumulative
effect of accounting change of $3,792,000 for the year ended December 31, 2001,
compared to a loss before income tax benefit and cumulative effect of accounting
change of $6,230,000 for the year ended December 31, 2000.
We recorded a one-time charge for the cumulative effect of accounting
change of $14,123,000, net of income tax benefit of $1,459,000 for the year
ended December 31, 2000.
As a result of the above, we had a net loss of $3,854,000 for the year
ended December 31, 2001 (reflecting foreign withholding taxes of $53,000, and
state taxes of $9,000), compared to net loss of $20,490,000 for the year ended
December 31, 2000 (reflecting foreign withholding taxes of $131,000 and states
taxes of $6,000).
Liquidity and Capital Resources
We require 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 our
operations has been cash flow from operations, bank borrowings and equity
financings.
June 2002 Private Placement
In June 2002, we consummated a private placement with Seven Hills, in which
we sold to Seven Hills, for an aggregate cash purchase price of $6,050,000,
2,630,434 shares of our common stock and five-year warrants to purchase up to
1,172,422 shares of our common stock at an exercise price of $3.40 per share.
Warrants to purchase 881,137 shares of common stock are immediately exercisable
and will expire on June 25, 2007. Warrants to purchase 291,285 shares of common
stock ("Note Warrants") only will become exercisable upon conversion of the
convertible promissory note described below, in proportion to the amount of the
note converted if the note is not converted in whole, and will expire on June
25, 2007. If no portion of the note is converted into common stock, then the
Note Warrants will not become exercisable. As of December 31, 2002, Seven Hills
owned approximately 18.1% of our outstanding voting securities.
Additionally, in May 2002, we and Seven Hills formed a joint venture
company that will provide marketing and distribution funds for the theatrical
release of motion pictures that we or Seven Hills select on an alternating
basis. In June 2002, Seven Hills funded our $2,000,000 capital contribution to
the joint venture company pursuant to a convertible promissory note issued by us
and the joint venture company. The investment in the joint venture company is
reported as an asset on the balance sheet under "Investment". The related
liability, discounted by $245,666 for the fair market value of the Note Warrant,
has been reported as a liability on the balance sheet combined with other notes
payable under "Notes payable". The discounted amount will be amortized using the
effective interest rate method over the term of the note through the maturity
date. The note bears interest at a rate of 4% per annum, payable quarterly in
arrears. Principal and unpaid accrued interest on the note are payable on June
25, 2008. The note is recourse against us as to interest only (accrued prior to
the maturity date) and against the joint venture company as to both principal
and interest. Seven Hills also funded its own $2,000,000 capital contribution to
the joint venture company in June 2002.
32
June 2000 Private Placement
In June 2000, we consummated a private placement with Rosemary Street, in
which we sold to Rosemary Street for an aggregate cash purchase price of
$17,000,000:
o 5,097,413 shares of our common stock;
o 904,971 shares of our Series A preferred stock, each share of which
automatically converted into two shares of common stock on October 15,
2001; and
o five-year warrants to purchase up to 2,313,810 shares of our common
stock at an exercise price of $3.40 per share.
As of December 31, 2002, Rosemary Street owned approximately 42.8% of our
voting securities.
JPMorgan Facility
Concurrently with the consummation of the June 2000 private placement with
Rosemary Street, we entered into a $40 million credit facility with JPMorgan
(formerly Chase Securities, Inc. and The Chase Manhattan Bank) and other
commercial banks and financial institutions. A portion of the proceeds from this
credit facility was used to repay outstanding loans and accrued interest under
our previous credit facility with Coutts & Co. and Bankgesellschaft Berlin A.G.
The remaining proceeds have been used to finance our production, acquisition,
distribution and exploitation of feature length motion pictures, television
programming, video product and rights and for working capital and general
corporate purposes. During the years ended December 31, 2002 and 2001, we
borrowed $4,000,000 and $8,000,000, respectively, under the JPMorgan facility.
Under the JPMorgan facility, we borrow 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 JPMorgan facility also provides for letters of
credit to be issued from time to time upon our request. Amounts available for
drawing (referred to as the "borrowing base") under the JPMorgan facility are
calculated each month and cannot exceed the $40 million commitment. The main
components of the borrowing base include a library credit (a percentage, or
"advance rate," of the value of our film library, based upon a third party
valuation of future cash flows, which, under the terms of the credit agreement,
is required to be updated every twelve months) and an accounts receivable credit
(85% of net accounts receivable which are acceptable to JPMorgan). At December
31, 2002, the advance rate was 50%. In connection with the amendment to the
credit facility described below, the advance rate was reduced to 45% on April 1,
2003 and will be further reduced to 40% on July 1, 2003 and 35% on October 1,
2003. At December 31, 2002, we had borrowed an aggregate of $18,500,000 under
the JPMorgan facility and an additional $2,045,000 was available to borrow based
upon borrowing base calculations provided to JPMorgan as of December 31, 2002.
The amounts borrowed under the JPMorgan facility bear interest, as we may
select, at rates based on either LIBOR plus 2% or a rate per annum equal to the
greater of (a) the Prime Rate plus 1%, (b) the Base CD Rate plus 2% and (c) the
Federal Funds Effective Rate plus 1.5% (as these terms are defined in the credit
agreement). In addition to an annual management fee of $125,000, we pay a
commitment fee on the daily average unused portion of the JPMorgan facility at
an annual rate of 0.5%. Upon entering the JPMorgan facility, we paid a one-time
fee of approximately $848,000 as a cost of acquiring the JPMorgan facility. The
JPMorgan facility restricts the creation or incurrence of indebtedness or the
issuance of additional securities. The JPMorgan facility is collateralized by
all of our tangible and intangible assets and future revenues.
33
In February 2003, upon the request of JPMorgan, we entered into an
amendment to the JPMorgan facility, pursuant to which we agreed to reduce the
amounts we are able to borrow in relation to our library value as follows:
o From February 18, 2003 to March 31, 2003 - the lesser of $11,000,000
or 50% of the library value;
o From April 1, 2003 to June 30, 2003 - the lesser of $10,000,000 or 45%
of the library value;
o From July 1, 2003 to September 30, 2003 - the lesser of $9,000,000 or
40% of the library value;
o From October 1, 2003 to the expiration of the term of the JPMorgan
facility (June 20, 2005, unless modified as described below) - the
lesser of $8,000,000 or 35% of the library value.
As of December 31, 2002, our cumulative losses resulted in a breach of the
covenant contained in the credit agreement with JPMorgan that sets forth a
minimum level of net worth that we are required to maintain. We have requested a
waiver of this breach. JPMorgan currently is considering our request and we are
in negotiation with respect to further modifications JPMorgan will require to
the credit agreement in exchange for such waiver. At this point, JPMorgan has
indicated that these modifications will likely include an immediate reduction of
the commitment level under the credit agreement from $40 million to
approximately $20 million, with further reductions so that by January 1, 2004
the commitment level will be $15 million. The minimum net worth requirement
would be waived until December 31, 2003, subject to our maintaining a positive
net worth as calculated pursuant to GAAP. These modifications require the
agreement of 51% of the voting right of the participating banks (the percentage
based upon the proportionate commitment of each bank to the total commitment of
$40 million). Final resolution of this matter is expected by April 30, 2003.
Until then, we are precluded from drawing further funds under the credit
facility.
Off Balance Sheet Commitments
In addition to direct bank borrowings, we occasionally enter into
contractual arrangements whereby we commit to pay certain amounts for the
acquisition of distribution rights of a film at a date in the future. These
contractual commitments are sometimes used by producers or other rights owners
to access production financing with respect to the given film. These commitments
generally are subject to the rights owner meeting certain conditions, including
delivery by the rights owner to us of certain physical materials and legal
documents relating to the film that will enable us to properly exploit the
rights we are acquiring. Once these conditions are met, we become obligated
under our contract to pay the amounts called for in the given contract. We treat
these types of commitments as liabilities, includable in our balance sheet only
upon satisfaction of the conditions to our obligation and disclose these
obligations as commitments. As of December 31, 2002, the total of these
outstanding commitments was $5,386,000, of which $2,453,000 was reflected as a
liability on our balance sheet (Payable to Producers) and $2,933,000 was not
reflected as a liability on our balance sheet, but will be once the various
conditions to our commitment, including delivery of the related film, are
satisfied.
Additionally, we have entered into arrangements with German film financing
partnerships whereby we have guaranteed that within three years from the
commencement of principal photography of the related film, the licensing and
distribution proceeds, net of our fees and expenses, will be no less than sixty
to eighty percent (depending upon the specific arrangement) of the amount funded
toward the production cost of the related film. These guarantees generally are
not recorded as liabilities unless and until we expect that proceeds from the
licensing and distribution of the related film, net of our fees and expenses,
will be insufficient to cover the guarantee within the agreed upon period for
the particular film. As of December 31, 2002, we had three such commitments
outstanding, whereby the total amount committed was $10,238,000. These
guarantees are summarized below.
Term of Guarantee Minimum Potential
--------------- Amount of Future Current Carrying Projected Future
From To Guarantee Payments Amount of Liability Assets Held Contracts
---- -- ------------ ------------ ------------------ ----------- ----------
Film 1 10/04/01 10/04/04 $ 5,240,000 $ 2,598,000 $ - $ 2,675,000 $ 2,200,000
Film 2 12/03/00 12/03/03 3,998,000 3,559,000 2,046,000 1,683,000 1,996,000
Film 3 01/31/02 01/31/05 1,000,000 717,000 371,000 712,000 695,000
--------------------------------------------------------------------------------------------
$ 10,238,000 $ 6,874,000 $ 2,417,000 $ 5,070,000 $ 4,891,000
============================================================================================
34
In the event any of the guarantees are drawn upon, we have the right to retain
proceeds from the collection of accounts receivable in addition to proceeds from
the future contracts of distribution rights in the respective film where the
guarantee had been called (both, net of our fees and expenses) until we have
recovered any guarantee paid. The table above reflects the amount of cash and
accounts receivable held ("Assets Held") along with our estimate of the value of
future licenses of distribution rights ("Projected Future Contracts") to the
respective film as of December 31, 2002. We expect that the possibility of
having to honor our contingent obligations under these agreements is remote and
in the event any of the guarantees are drawn upon, we believe that proceeds from
the liquidation of accounts receivable and further distribution rights will be
sufficient to cover the maximum amount of future payments under each guarantee.
Resources
At December 31, 2002, we had cash and cash equivalents of $713,000,
compared to cash and cash equivalents of $1,673,000 as of December 31, 2001. At
December 31, 2002, $2,045,000 was available for us to draw down under the
JPMorgan facility. As of April 11, 2003, we have reduced the amount outstanding
under the JPMorgan facility by $2,000,000 to $16,500,000 and we have an
unrestricted cash balance of approximately $1,900,000.
For the years ended December 31, 2002 and December 31, 2001, we had
operating losses of $8,549,000 and $3,162,000, respectively. These losses
included certain non-cash items, including bad debt expense and film cost
write-downs. Bad debt expense was $2,176,000 for the year ended December 31,
2002, compared to $1,268,000 for the year ended December 31, 2001. Film cost
write-downs were $3,189,000 for the year ended December 31, 2002 compared to
$1,815,000 for the year ended December 31, 2001.
Operating activities used cash of $10,498,000 and $6,723,000, respectively,
for the years ended December 31, 2002 and December 31, 2001. The increased use
of cash reflects our increased investment in film costs of $17,105,000 for the
year ended December 31, 2002 compared to $9,922,000 for the year ended December
31, 2001.
Our commitments as of December 31, 2002 require the expenditure of
approximately $5,386,000 during 2003. Additionally, under our current plans we
anticipate requiring approximately $2,140,000 in additional funds for the
acquisition of product.
Our significant net losses and negative cash flow along with the most
recent modification and pending modifications under our credit agreement with
JPMorgan raise questions about our ability to continue as a going concern. We
have been reviewing our past business plan, alternative plans and other options.
We have made reductions in overhead, including staff reductions, certain
consulting contracts have not been renewed, and we have not renewed our first
look arrangement with Grandview Pictures. We also are considering further
reductions in overhead. Budgeted film investment has been significantly reduced
from 2002. Additionally, we are actively in discussion with various parties
regarding potential strategic relationships, equity investment and revised
business plans. If we are not successful in generating sufficient future cash
flow from operations in accordance with our current or an altered business plan,
raising additional capital through public or private financings, strategic
relationships or other arrangements will be necessary. This additional funding,
if needed, might not be available on acceptable terms, or at all. Failure to
raise sufficient capital, if and when needed, could have a material adverse
effect on our business, results of operations and financial condition including
our ability to continue to operate as a going concern.
35
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates. We do
not use derivative financial instruments. Because only a small portion of our
revenues are denominated in foreign currency, we do not believe there is a
significant risk imposed on us due to the fluctuations in foreign currency
exchange rates. The table below provides information about our debt obligations
as of December 31, 2002, including principal cash flows and related weighted
average interest rates by expected maturity dates:
Expected Maturity Date
-----------------------
(in thousands)
2003 2004 2005 2006 2007 Thereafter
---- ---- ---- ---- ---- ----------
Borrowings under credit facility - - $18,500 - -
Average interest rate 3.7% 3.7% 3.7% - - -
Subordinated note payable - - - - - $2,000
Average interest rate 4% 4% 4% 4% 4% 4%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent accountants, consolidated financial statements
and notes to our consolidated financial statements appear in a separate section
of this report (beginning on page F-1) following Part IV.
The following table sets forth selected unaudited quarterly financial data
for each of the quarters in the two years ended December 31, 2002 (amounts in
thousands except for per share data):
2002
-----
Quarter Ended
-------------
March 31 June 30 September 30 December 31
--------------- ------------------ ------------------ -----------------
Revenues $ 6,781 $ 5,092 $ 5,759 $ 9,067
Income (loss) from operations (271) (2,437) (3,185) (2,656)
Net income (loss) (526) (2,616) (3,415) (2,821)
Basic and diluted loss per share (.04) (0.22) (0.23) (0.22)
2001
----
Quarter Ended
-------------
March 31 June 30 September 30 December 31
--------------- ------------------ ------------------ -----------------
Revenues $ 10,243 $ 9,759 $ 8,171 $ 6,971
Income (loss) from operations 333 (458) (635) (2,402)
Net income (loss) 129 (673) (835) (2,475)
Basic and diluted income (loss) per share 0.01 (0.07) (0.09) (0.23)
36
The increase in loss from operations during the fourth quarter of 2001
compared to the previous three quarters was due to the expansion of our
operations and increases in:
o write-offs of film costs relating to certain projects under
development;
o marketing and distribution expenses in connection with preparation for
the upcoming film festivals;
o bad debt write-offs; and
o legal and consulting fees relating to valuation of our film library
and capital investment opportunities other than Rosemary Street.
The lower net loss for the quarter ended September 30, 2001 reflected the
capital gain that we recognized on our sale of 17,454 shares of common stock of
Yahoo!, Inc. during the quarter.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our current directors and executive officers are set forth below.
Biographical information concerning each of the directors and executive officers
is presented on the following pages. Information is presented as of the date of
this report.
Name Age Position
-------------------------- --- --------
Christopher J. Cooney 42 Co-Chairman of the Board and
Chief Executive Officer
Robert B. Little 58 Co-Chairman of the Board and President
William F. Lischak 45 Chief Operating Officer, Chief
Financial Officer and Secretary
Jeffrey Cooney 45 Executive Vice President - Creative Affairs
and Director
Stephen K. Bannon 49 Director
Scot K. Vorse 42 Director
Barry R. Minsky 60 Director
Joseph Linehan 41 Director
Patrick Costello 46 Director
Reverge Anselmo 41 Director
Current Officers and Directors
Christopher J. Cooney has served as co-chairman of our board and our chief
executive officer since June 2000. Since August 1999, Mr. Cooney has served as
president of Rosemary Street, a New York-based entertainment holding company.
Since 1986, Mr. Cooney has served in various positions at EUE/Screen Gems, Ltd.
("EUE/Screen Gems"), a New York-based television commercial facility and
production house, including as head of production from 1986 to 1988, as vice
president in charge of all facilities from 1988 to 1992, and as vice president
of physical production from 1992 to 1996. In 1996, Mr. Cooney led EUE/Screen
Gems in the acquisition of DeLaurentis Studios. Since 1996, Mr. Cooney has been
responsible for overseeing all commercial and daytime television production for
the North Carolina operations of EUE/Screen Gems. Mr. Cooney also holds an
ownership interest in EUE/Screen Gems. In 1984, Mr. Cooney formed Total Picture
Company to produce concert films, commercials and videos for record labels and
musical instrument manufacturers. Prior to that, Mr. Cooney was employed by
Independent Artists as an assistant producer of international television
commercials. Mr. Cooney received his B.A. from Boston University. Christopher J.
Cooney is the brother of Jeffrey Cooney, our Executive Vice President Creative
Affairs, and a director of our company.
Robert B. Little has been president of our company since June 2000 and
co-chairman of our board of directors since our merger with Overseas Private in
October 1996. Mr. Little also served as our co-chief executive officer from
October 1996 to June 2000. Mr. Little co-founded Overseas Private in February
1980 and served as chairman of the board of Overseas Private from February 1987
until October 1996 and its chief executive officer from February 1990 until
October 1996. Mr. Little was a founding member of the American Film Marketing
Association, the organization which established the American Film Market, and
served multiple terms on its board of directors. In 1993, Mr. Little served on
the City of Los Angeles Entertainment Industry Task Force, a task force composed
of industry leaders focused on maintaining and enhancing Los Angeles' reputation
as the entertainment capital of the world. Mr. Little is also a founding member
of The Archive Council, an industry support group for the University of
California at Los Angeles Archive Film Preservation Program, and a member of the
board of directors of the Antonio David Blanco Scholarship Fund, an endowment
fund that annually benefits deserving students in the UCLA Department of Film
and Television. Mr. Little was an executive producer of Titus, which was
nominated for an Academy Award(R) in 1999.
38
William F. Lischak has served as our chief operating officer, chief
financial officer and secretary of our company since October 1996. Mr. Lischak
also served as a director of our company from October 1996 until June 2002. Mr.
Lischak served as chief operating officer of Overseas Private from September
1990 until October 1996 and its chief financial officer from September 1988
until October 1996. Mr. Lischak, a certified public accountant, previously had
worked in public accounting, including from 1982 to 1988 with the accounting
firm of Laventhol & Horwath. Mr. Lischak has a masters degree in taxation and
has taught courses in the extension program at UCLA in accounting, finance and
taxation for motion pictures and television. Mr. Lischak attended New York
University's Tisch School of Arts and received a bachelor's degree in business
administration from New York University's Leonard N. Stern School of Business.
Jeffrey Cooney has served as our executive vice president-creative affairs
and a director of our company since June 2000. Since August 1999, Mr. Cooney has
served as creative director of Rosemary Street. Mr. Cooney also holds an
ownership interest in EUE/Screen Gems. In 1990, Mr. Cooney formed Jeffrey Cooney
Films and until August 1999 directed commercials for clients such as Kodak,
Mitsubishi, Procter & Gamble and General Mills. Mr. Cooney received a B.A. in
English from Holy Cross College. Jeffrey Cooney is the brother of Christopher J.
Cooney, the co-chairman of our board and our chief executive officer.
Stephen K. Bannon has been a director of our company and member of our
executive committee since its inception in December 1993. From October 1996 to
June 2000, he served as vice chairman of our board of directors and Chairman of
its executive committee. From December 1993 until October 1996, he served as our
Chairman of the Board. From June 1991 through July 1998, Mr. Bannon served as
the chief executive officer of Bannon & Co., Inc., an investment banking firm
specializing in the entertainment, media and communications industries. Bannon &
Co. formed a joint venture with Societe Generale in 1996 creating Societe
Generale Bannon to undertake media and entertainment investment banking. In July
1998, Societe Gererale purchased the joint venture. Mr. Bannon is currently A
Partner of The Firm, one of the largest talent management companies in the
entertainment business. Mr. Bannon is in charge of The Firm's Strategic Advisory
Services Division.
Scot K. Vorse became a director of our company in January 1995. From
January 1995 until October 1996, he served as our treasurer and secretary, and
from January 1995 until November 1996, he served as our vice president. From
June 1991 through July 1998, Mr. Vorse served as an executive vice president and
the chief financial officer of Bannon & Co., Inc. After the acquisition of
Bannon & Co., Inc. by SG Cowen Securities Corporation in July 1998, Mr. Vorse
served as managing director and co-head of SG Cowen Securities Corporation's
media and entertainment group until March 2000. Since March 2000, Mr. Vorse has
been managing his personal investments and consulting.
Barry R. Minsky has served as a director of our company since June 2000.
Since 1977, Mr. Minsky has served as president of Wharton Capital Corporation
and since 1996 as chief executive officer of Wharton Capital Partners, Ltd., a
New York-based investment banking firm which, along with its partners,
facilitates financing for public companies and institutional clients. Mr. Minsky
has assisted public and private corporations in merger and acquisition
activities, sourcing financing and developing financial strategies. Mr. Minsky
also has experience in music publishing, film libraries, motion picture
production and distribution. Mr. Minsky received a B.S. in economics and
graduated on the dean's list from the Wharton School, University of
Pennsylvania.
Joseph Linehan has served as a director of our company since June 2000. Mr.
Linehan has been employed in various capacities with The Union Labor Life
Insurance Co. since 1984. Since April 2001, Mr. Linehan has served as vice
president-private capital. Mr. Linehan received a B.A. and M.B.A. from the
University of Maryland.
39
Patrick Costello has served as a director of our company since February
2003. Since May 1997, Mr. Costello has served as the Chief Financial Officer of
Northway Management Company, LLC, a private investment company. Since August
1998, he has served as the Chief Financial Officer of Seven Hills. From May 1992
to May 1997, Mr. Costello was the Chief Financial Officer of PanAmSat
International Corporation and was elected a director of PanAmSat International
Corporation in October 1996. Mr. Costello continues to serve as a director of
PanAmSat Corporation. Mr. Costello is a certified public accountant.
Reverge Anselmo has served as a director of our company since May 2002. Mr.
Anselmo formed Seven Hills in 1996 to create and produce independent films and
he currently serves as president of Seven Hills. Most recently, Mr. Anselmo
wrote and directed Stateside, starring Jonathan Tucker, Rachael Leigh Cook,
Agnes Bruckner and Val Kilmer. The romantic drama will be released theatrically
in late 2003. Through Seven Hills Mr. Anselmo, wrote, directed and produced the
feature films The Outfitters which was an official selection of the Sundance
Film Festival and Lover's Prayer which starred Kristen Dunst and was distributed
by our company. Mr. Anselmo also wrote the Harper Collins novel The Cadillac of
Six-Bys. Mr. Anselmo is currently in development on his screenplays Runaway Bay
and Over the Waves. Mr. Anselmo is also the owner and co-founder of the monthly
magazine Magnificat.
Board of Directors
Our board of directors is divided into three classes, each of which
generally serves for a term of three years, with only one class of directors
being elected in each year. The term of the first class of directors, consisting
of Reverge Anselmo, Joseph Linehan and Barry R. Minsky, would have expired at
the annual meeting of our stockholders in 2002 but, as we did not have an annual
meeting that year, will expire on the date of this year's annual meeting and the
new term will expire at the annual meeting of our stockholders in 2005. The term
of the second class of directors, consisting of Robert B. Little, Stephen K.
Bannon and Christopher J. Cooney, will expire at the annual meeting of our
stockholders in 2003. The term of the third class of directors, consisting of
Scot K. Vorse, Patrick Costello and Jeffrey Cooney, would have expired at the
annual meeting of stockholders in 2001 but, as we did not have an annual meeting
that year, will expire on the date of this year's annual meeting and the new
term will expire at the annual meeting of our stockholders in 2004. In each
case, each director serves from the date of his election until the end of his
term and until his successor is elected and qualifies.
Committees
Executive Committee. Christopher J. Cooney, Robert B. Little and Stephen K.
Bannon currently serve on the executive committee. During intervals between the
meetings of the board of directors, the executive committee exercises all powers
of the board of directors (except those powers specifically reserved by Delaware
law or our Bylaws to the full board of directors) in the management and
direction of the business and conduct of our affairs in all cases in which
specific directions have not been given by the board.
Compensation Committee. Joseph Linehan and Stephen K. Bannon currently
serve on the compensation committee. The compensation committee administers our
stock option plans to the extent contemplated thereby and reviews, approves, and
makes recommendations with respect to compensation of officers, consultants and
key employees.
Audit Committee. The audit committee currently consists of Stephen K.
Bannon and Scot K. Vorse. The functions of the Audit Committee are: to review
and approve the selection of, and all services performed by, our independent
auditors; to meet and consult with and to receive reports from, our independent
auditors and our financial and accounting staff; and to review and act with
respect to the scope of audit procedures, accounting practices and internal
accounting and financial controls.
40
Amended and Restated Voting Agreement
We previously were party to a Voting Agreement, dated as of June 20, 2000,
by and among us, Rosemary Street, Robert Little, Ellen Little (together with
Robert Little, referred to as the "Littles"), MRCo., Inc., Christopher J.
Cooney, Jeffrey Cooney and Wharton Capital Partners, Ltd. relating to the voting
of shares of our common stock owned by the parties. In connection with the
closing of the transaction with Seven Hills in June 2002, we and the other
parties to the Voting Agreement entered into an Amended and Restated Voting
Agreement with Seven Hills that supersedes the prior Voting Agreement and which
provides that:
o So long as Robert Little is employed as our president or the Littles
own 5% or more of our Voting Securities (as defined), each of Rosemary
Street, Wharton and Seven Hills will use its best efforts to nominate
and vote for Mr. Little to serve as a member of our board of directors
and will not vote its "Voting Securities" to remove Robert Little as a
director, except for "cause" (as defined).
o So long as Christopher Cooney and Jeffrey Cooney own, in the
aggregate, directly or indirectly, 5% or more of our Voting
Securities, each the Littles, Rosemary Street, Wharton and Seven Hills
will use its best efforts to nominate and vote for Christopher Cooney
and Jeffrey Cooney to serve as members of our board of directors and
will not vote its Voting Securities to remove Christopher Cooney or
Jeffrey Cooney as a director, except for cause.
o So long as MRCo., Inc. owns 5% or more of our Voting Securities, each
of the Littles, Rosemary Street, Wharton and Seven Hills will use its
best efforts to nominate and vote for a designee of MRCo., Inc. to
serve as a member of our board of directors and will not vote its
Voting Securities to remove such designee as a director, except for
cause.
o So long as Seven Hills owns 5% or more of our Voting Securities, each
of the Littles, Rosemary Street and Wharton will use its best efforts
to nominate and vote for two individuals designated by Seven Hills to
serve as members of our board of directors and will not vote its
Voting Securities to remove such designees as directors, except for
cause.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and executive officers and persons who own more than 10% of our
common stock to file with the Securities and Exchange Commission initial reports
of ownership and reports of changes in ownership of our common stock and other
equity securities. Our executive officers, directors and 10% stockholders are
required by SEC regulations to furnish us with copies of Section 16(a) forms
they file. To our knowledge, based solely upon a review of the Forms 3 and 4 and
amendments thereto furnished to us during our most recent fiscal year, the Forms
5 furnished to us with respect to our most recent fiscal year, and written
representations of our directors, executive officers and 10% stockholders,
during the year ended December 31, 2002, all Section 16(a) filing requirements
applicable to our executive officers, directors and 10% stockholders were
complied with.
41
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued
during 2002, 2001 and 2000 to our chief executive officer and our two other
executive officers who earned more than $100,000 during those periods:
Long Term
Compensation
Annual Compensation Awards
-------------------------------------------------------------------------------
Other Annual Securities All
Compen- Underlying Other
Name and Year Salary Bonus sation Options/SARS Compensation
Principal Position ($) ($) ($) (#) ($)
-------------------- ---- ------ ----- ------------ ----------- --------------
Christopher J. Cooney 2002 200,000 0 0 0 660(1)
Co-chairman of the board and 2001 200,000 0 0 0 870(1)
chief executive officer 2000 100,000(2) 0 0 0 0
Robert B. Little 2002 300,000 50,000(3) 40,000(4) 0 6,660(5)
Co-chairman of the board and 2001 300,000 50,000(3) 40,000(4) 0 5,931(6)
president 2000 215,865(7) 37,500(8) 36,371(9) 250,000 38,715(10)
William F. Lischak 2002 225,000 50,000 0(11) 0 10,655(12)
Chief operating officer, chief 2001 212,980 50,000 0(11) 0 12,570(13)
financial officer and secretary 2000 212,980 150,000 0(11) 75,000 12,286(14)
----------------------------------
(1) Represents disability insurance premiums paid by us for the benefit of Mr.
Cooney.
(2) Represents salary earned by Mr. Cooney commencing in June 2000 when he
became co-chairman of the board and chief executive officer in connection
with the closing of the private placement with Rosemary Street.
(3) Represents bonus earned by Mr. Little pursuant to his employment agreement
of which $25,000 has been deferred.
(4) Represents general expenses allowance payable pursuant to Mr. Little's
employment agreement.
(5) Represents $6,000 in contributions we made on behalf of Mr. Little pursuant
to our 401(k) plan and $660 in disability insurance premiums paid by us for
the benefit of Mr. Little.
(6) Represents $3,400 in contributions we made on behalf of Mr. Little pursuant
to our 401(k) plan and $2,531 in disability insurance premiums paid by us
for the benefit of Mr. Little.
(7) Represents salary earned by Mr. Little as our co-chairman of the board and
co-chief executive officer through June 2000. In connection with the
closing of the private placement with Rosemary Street in June 2000, we
amended Mr. Little's existing employment agreement to provide for him to
serve as co-chairman of the board and president.
(8) Represents bonus earned by Mr. Little pursuant to his employment agreement.
(9) Represents $11,852 of auto expense allowance, $3,750 in business management
fees and $20,769 of general expense allowance paid pursuant to Mr. Little's
employment agreement.
(10) Represents $3,115 in contributions we made on behalf of Mr. Little pursuant
to our 401(k) plan, $32,966 in life insurance premiums and $2,634 in
disability insurance premiums paid by us for the benefit of Mr. Little.
42
(11) Prerequisites with respect to the executive officer did not exceed the
lesser of $50,000 or 10% of the executive officer's salary and bonus.
(12) Represents $4,860 in contributions we made on behalf of Mr. Lischak
pursuant to our 401(k) plan, $5,135 in life insurance premiums and $660 in
disability insurance premiums we paid for the benefit of Mr. Lischak.
(13) Represents $4,500 in contributions we made on behalf of Mr. Lischak
pursuant to our 401(k) plan, $5,135 in life insurance premiums and $2,935
in disability insurance premiums we paid for the benefit of Mr. Lischak.
(14) Represents $4,260 in contributions we made on behalf of Mr. Lischak
pursuant to our 401(k) plan, $6,139 in life insurance premiums and $1,887
in disability insurance premiums we paid for the benefit of Mr. Lischak.
There were no options granted to the executive officers named above during
the year ended December 31, 2002.
The following table summarizes the number of exercisable and unexercisable
options held by the executive officers named above at December 31, 2002, and
their value at that date if such options were in-the-money:
AGGREGATED OPTION EXERCISES IN 2002 AND
FISCAL YEAR-END OPTION VALUES
Number of Securities
Underlying Unexercised Value of Unexercised
Options at December 31, In-the-Money Options at
Shares Acquired on 2002 December 31, 2002
Exercise Value Realized Exercisable/ Unexercisable Exercisable/ Unexercisable
Name (#) ($) (#) ($)
-----------------------------------------------------------------------------------------------------------------------------------
Christopher J. Cooney 0/0 0/0
Co-chairman of the board and 0 0
chief executive officer
Robert B. Little
Co-chairman of the board and 0 0
president 250,000/0 0/0
William F. Lischak
Chief operating officer, 0 0
chief financial officer and
secretary 66,668/8,332 0/0
Director Compensation
Pursuant to the automatic option grant program under our 1996 Basic Stock
Option and Stock Appreciation Rights Plan, each individual serving as a
non-employee board member on October 31, 1996 was granted a non-qualified option
to purchase 5,000 shares of common stock. In addition, each member of the board
who is not employed by us receives an automatic grant of a non-qualified option
to purchase 5,000 shares of the common stock (i) upon becoming a board member,
whether through election at a meeting of our stockholders or through appointment
by the board of directors and (ii) on the date of each annual meeting of
stockholders, if such individual is to continue to serve as a board member after
such meeting; provided such individual has served as a non-employee member of
the board of directors for at least six months. Each such automatic option grant
is, among other things, exercisable at the fair market value of the common stock
on the date of the automatic grant and is generally exercisable after completion
of one year of service to the board of directors measured from the automatic
grant date. In addition, we reimburse all directors for travel and related
expenses incurred in connection with their activities on our behalf. Our
directors are not otherwise compensated for serving on the board.
43
Compensation Committee Interlocks And Insider Participation
Our compensation committee was established in October 1996 and currently
consists of Joseph Linehan and Stephen K. Bannon. Mr. Linehan has served as one
of our directors since June 2000. Mr. Bannon was our chairman of the board of
directors during 1996 until consummation of the merger with Overseas Private and
served as vice chairman of the board of directors and chairman of the executive
committee from October 1996 to June 2000. The compensation committee currently
administers both of our stock option plans to the extent contemplated thereby.
Compensation Arrangements For Current Executive Officers
Christopher J. Cooney
In June 2000, we entered into an employment agreement with Christopher J.
Cooney, which provided for Mr. Cooney to serve as our co-chairman of the board
and the chief executive officer for a one-year term that expired in June 2001.
Under the terms of the agreement, Mr. Cooney received a base salary of $200,000
and was entitled to receive an annual $25,000 bonus if our pre-tax profits
exceeded $500,000 in any year during the term. Mr. Cooney also was entitled to
an additional bonus, if any, as established by the board at the beginning of the
employment term based on our achieving certain profit targets. The agreement
contained a non-compete clause whereby Mr. Cooney agreed not to compete with us
for the duration of the agreement. Mr. Cooney has continued to be compensated on
the same terms as set forth in his expired employment agreement.
Robert B. Little
In June 2000, we entered into an amended and restated employment agreement
with Robert B. Little, which provides for Mr. Little to serve as our co-chairman
of the board and the president for a three-year term ending in June 2003. Mr.
Little receives a base salary of $300,000 and a guaranteed bonus of $50,000,
which will be increased by $25,000 on a cumulative basis for each year of the
employment term in which our pre-tax profits exceed $500,000. Mr. Little also
will be entitled to an additional bonus, if any, as may be established by the
board at the beginning of each year of the employment term based on our
achieving certain profit targets. If we achieve these targets, Mr. Little's
employment agreement will be automatically renewed on the same terms for an
additional two-year term. Regardless of whether we achieve the targets, we may
give Mr. Little written notice at least six months prior to the expiration of
the initial employment term that we elect to extend the initial term for an
additional two years. If the initial term is not renewed, Mr. Little will be
entitled to receive $400,000 in cash, payable in six equal monthly installments
of $66,666, with the first payment to be made within 30 days after termination
of the initial term. The agreement contains a non-compete clause whereby Mr.
Little agreed not to compete with us for the duration of the agreement and for
one year after its termination.
William F. Lischak
In June 2000, we entered into an amended and restated employment agreement
with William F. Lischak, which provides for Mr. Lischak to serve as our chief
operating officer and chief financial officer for a three-year term ending in
June 2003. Mr. Lischak receives a base salary of $225,000 and a guaranteed bonus
of $50,000, which will be increased by $15,000 on a cumulative basis for each
year of the employment term in which our pre-tax profits exceed $500,000. Mr.
Lischak also will be entitled to an additional bonus, if any, as may be
established by the board at the beginning of each year of the employment term
based on our achieving certain profit targets. If we achieve these targets, Mr.
Lischak's employment agreement will be automatically renewed on the same terms
for an additional two-year term. Regardless of whether we achieve the targets,
we may give Mr. Lischak written notice at least six months prior to the
expiration of the initial employment term that we elect to extend the initial
term for an additional two years. If the initial term is not renewed, Mr.
Lischak will be entitled to receive $300,000 in cash, payable in six equal
monthly installments of $50,000, with the first payment to be made within 30
days after termination of the initial term. The agreement contains a non-compete
clause whereby Mr. Lischak agreed not to compete with us for the duration of the
agreement and for one year after its termination.
44
In connection with the June 2000 private placement with Rosemary Street, we
granted Mr. Lischak an option under our 1996 Basic Stock Option Plan to purchase
75,000 shares of common stock at an exercise price of $3.40 per share. As of
December 31, 2002, 66,668 options were exercisable. 2,083 options will become
exercisable on the last day of each of the next 4 consecutive months thereafter.
Once exercisable, the options will remain exercisable until April 2005.
Jeffrey Cooney
In June 2000, we entered into an employment agreement with Jeffrey Cooney,
which provides for Mr. Cooney to serve as our executive vice president-creative
affairs for a three-year term ending in June 2003. Mr. Cooney receives a base
salary of $60,000 and will receive a $25,000 bonus for each year of the
employment term in which our pre-tax profits exceed $500,000. Mr. Cooney also
will be entitled to an additional bonus, if any, as may be established by the
board at the beginning of each year of the employment term based on our
achieving certain profit targets. If we achieve these targets, Mr. Cooney's
employment agreement will be automatically renewed on the same terms for an
additional two-year term. Regardless of whether we achieve the targets, we may
give Mr. Cooney written notice at least six months prior to the expiration of
the initial employment term that we elect to extend the initial term for an
additional two years. If the initial term is not renewed, Mr. Cooney will be
entitled to receive $100,000 in cash, payable in six equal monthly installments
of $16,666.67, with the first payment to be made within 30 days after
termination of the initial term. The agreement contains a non-compete clause
whereby Mr. Cooney agreed not to compete with us for the duration of the
agreement and for one year after its termination.
Stock Option Plans
Amended and Restated 1996 Special Stock Option Plan and Agreement
The Amended and Restated 1996 Special Stock Option Plan and Agreement
primarily provides equity incentives to each of Robert B. Little and Ellen
Dinerman Little. Under the special option plan, on October 31, 1996, each of Ms.
Little and Mr. Little was granted two non-qualified options to purchase a total
of 1,100,000 shares of common stock. All 2,200,000 shares of common stock
initially reserved for issuance under the special option plan were subject to
the options granted to the Littles.
In June 2000, we amended the special option plan. Pursuant to this
amendment, we cancelled all of the options outstanding under the special option
plan and granted each of Ms. Little and Mr. Little an option to purchase 250,000
shares of common stock at an exercise price of $3.40 per share. The options are
immediately exercisable and expire in June 2005. As of December 31, 2002,
neither of these options had been exercised.
1996 Basic Stock Option Plan
In October 1996, our stockholders approved the 1996 Basic Stock Option and
Stock Appreciation Rights Plan under which a total of 550,000 shares of common
stock are available for grant to our regular full-time employees, non-employee
members of the board of directors, independent consultants and other persons who
provide services to us on a regular or substantial basis. Awards consist of
stock options (both non-qualified options and options intended to qualify as
incentive stock options under Section 422 of the Internal Revenue Code) and
stock appreciation rights. As of December 31, 2002, options to purchase an
aggregate of 259,500 shares of common stock were outstanding under the basic
option plan, with exercise prices ranging from $1.75 to $5.25 per share.
2000 Performance Equity Plan
In November 2000, our stockholders approved the 2000 Performance Equity
Plan, under which a total of 1,000,000 shares of common stock are available for
grant to our key employees, officers, directors and consultants. Awards consist
of stock options (both non-qualified options and options intended to qualify as
incentive stock options under Section 422 of the Internal Revenue Code),
restricted stock awards, deferred stock awards, stock appreciation rights and
other stock-based awards, as described in the 2000 plan. As of December 31,
2002, options to purchase an aggregate of 10,000 shares of common stock were
outstanding under the 2000 plan at an exercise price of $1.75 per share.
45
Non-Plan Options
In July 1999, we granted options to Gary Stein to purchase 10,000 shares of
our common stock at an exercise price of $2.44 per share in consideration for
rendering consulting services to us. These options are currently exercisable and
will remain exercisable until July 2009.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 11, 2003
with respect to the common stock ownership of:
o those persons or groups known to beneficially own more than 5% of our
voting securities;
o each director;
o each executive officer whose compensation exceeded $100,000 in 2002;
and
o all current directors and executive officers as a group.
Beneficial ownership is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934. The information concerning the stockholders is
based upon information furnished to us by these stockholders. Except as
otherwise indicated, all of the shares of common stock are owned of record and
beneficially and the persons identified have sole voting and investment power
with respect to the shares. Except as otherwise indicated in the table below,
the business address of each of the persons listed is care of First Look Media,
Inc., 8000 Sunset Boulevard, Penthouse East, Los Angeles, California 90046.
Amount and Nature of Percent of Class
Name of Beneficial Owner Beneficial Ownership of Voting Securities
---------------------------------- ----------------------------------- ------------------------------
Christopher J. Cooney 7,830,430(1) (13) 48.5%
c/o First Look Media, Inc.
603 Greenwich Street 2nd Floor
New York, New York 10014
Robert B. Little 1,864,406(2) (13) 12.4%
William F. Lischak 334,560(3) 2.3%
Jeffrey Cooney 7,830,430(1) (13) 48.5%
c/o First Look Media, Inc.
603 Greenwich Street 2nd Floor
New York, New York 10014
Stephen K. Bannon 146,324(4) 1.0%
c/o Jeffries Bannon
Media Fund LLC
11100 Santa Monica Blvd.
Los Angeles, California 90025
46
Amount and Nature of Percent of Class
Name of Beneficial Owner Beneficial Ownership of Voting Securities
---------------------------------- ----------------------------------- ------------------------------
Scot K. Vorse 151,323(5) 1.0%
c/o 1863 Mango Way
Los Angeles, California 90049
Barry R. Minsky 990,735(6) 6.7%
c/o Wharton Capital Partners, Ltd.
545 Madison Avenue
New York, New York 10022
Joseph Linehan 5,000(7) *
c/o The Union Labor Life
Insurance Co.
111 Massachusetts Avenue, N.W.
Washington, DC 20011
Reverge Anselmo 4,672,421(8) 28.2%
c/o Seven Hills Pictures, LLC
1041 North Formosa Avenue
West Hollywood, California 90046
Patrick Costello 0(9) *
c/o Northway Management
164 Mason Street
Greenwich, Connecticut 06830
Rosemary Street Productions, LLC 7,830,430(10) 48.5%
222 East 44th Street
New York, New York 10017
Seven Hills Pictures, LLC 4,672,421(11) 28.2%
1041 North Formosa Avenue
West Hollywood, California 90046
Ellen Dinerman Little 1,864,406(13) 12.4%
c/o Savitsky & Co.
1901 Avenue of the Stars
Suite 1450
Los Angeles, California 90067
Dolphin Offshore Partners, L.P. 1,435,447 9.9%
c/o Dolphin Management
129 East 17th Street
New York, New York 10003
Wharton Capital Partners, Ltd. 690,735(13) 4.8%
545 Madison Avenue
New York, New York 10022
47
---------------------------------- ----------------------------------- ------------------------------
Amount and Nature of Percent of Class
Name of Beneficial Owner Beneficial Ownership of Voting Securities
---------------------------------- ----------------------------------- ------------------------------
Voting Group 15,057,992(12) (13) 80.5%
All current executive officers 15,995,199(14) 83.6%
and directors as a
group (10 persons)
-----------------------
* Less than 1%
(1) Represents shares of common stock beneficially owned by Rosemary Street, of
which Christopher J. Cooney is one of the two designated managers and
president and of which Jeffrey Cooney is one of the two designated managers
and creative director.
(2) Represents (i) 1,364,406 shares of common stock held by the Littles as
community property in a revocable living trust, (ii) 250,000 shares of
common stock issuable upon exercise of immediately exercisable options and
(iii) 250,000 shares of common stock issuable upon exercise of immediately
exercisable options granted to such person's spouse which generally only
may be exercised by such person's spouse. Such person disclaims beneficial
ownership of the shares subject to his or her spouse's options.
(3) Includes (i) 82,917 shares of common stock issuable upon exercise of
immediately exercisable options and (ii) 2,083 shares of common stock
issuable upon exercise of options that become exercisable on April 30,
2003.
(4) Includes 25,000 shares of common stock issuable upon exercise of
immediately exercisable options.
(5) Represents (i) 25,000 shares of common stock issuable upon exercise of
immediately exercisable options and (ii) 126,323 shares of common stock
contributed by Mr. Vorse to a revocable living trust for the benefit of Mr.
Vorse's spouse.
(6) Represents (i) 690,735 shares of common stock owned by Wharton Capital
Partners Ltd., a New York corporation of which Mr. Minsky holds a 50%
interest, (ii) 295,000 shares of common stock issuable upon exercise of
immediately exercisable warrants, 95,000 of which are held by Mr. Minsky's
spouse and (iii) 5,000 shares of common stock issuable upon exercise of
immediately exercisable options.
(7) Represents 5,000 shares of common stock issuable upon exercise of
immediately exercisable options.
(8) Represents shares of common stock beneficially owned by Seven Hills, of
which Reverge Anselmo is the sole member and manager. Excludes 5,000 shares
of common stock issuable upon exercise of options granted in June 2002,
which become exercisable one year from the date of grant.
(9) Excludes 5,000 shares of common stock issuable upon exercise of options
granted in February 2003, which become exercisable one year from the date
of grant.
(10) Includes 1,613,810 shares of common stock issuable upon exercise of
immediately exercisable warrants.
(11) Includes (i) 881,137 shares of common stock issuable upon exercise of
immediately exercisable warrants, (ii) 869,565 shares of common stock
issuable upon the conversion of a $2,000,000 principal amount promissory
note and (iii) 291,285 shares of common stock issuable upon exercise of
warrants that became exercisable upon the conversion of the promissory
note.
48
(12) The Voting Group consists of Rosemary Street, Christopher Cooney, Jeffrey
Cooney, Robert and Ellen Little, Wharton Capital Partners, Ltd. and Seven
Hills, each of whom is a party to, and has agreed to vote their shares in
accordance with, the Amended and Restated Voting Agreement described below.
Each of the members of this group shares voting power with respect to the
shares of common stock held by each of the members. The number of shares
set forth in the table includes the shares held by each member.
(13) Does not include shares held by other members of the Voting Group (see Note
12) with respect to which each member shares voting power with the other
members of such group.
(14) Includes shares referred to as being included in notes 1 through 9.
Excludes shares referred to in such notes as being excluded.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
First Look Agreement with the Little Film Company. Through June 2000, Ellen
Dinerman Little was employed as our co-chairman of the board, co-chief executive
officer and president. In June 2000, our existing employment agreement with Ms.
Little was terminated and we entered into a "first look" agreement with The
Little Film Company and Ms. Little. The agreement provides for a three-year term
ending in June 2003. Pursuant to the first look agreement, the Little Film
Company receives:
o an annual fee of $100,000;
o a discretionary revolving development fund of $100,000 for The Little
Film Company's use in the option/acquisition of literary properties,
engagement of writers and other customary development costs; and
o customary overhead, including office space, staff, telephone and
reasonable travel costs, of up to $150,000 per year.
The Little Film Company also is compensated on a project-by-project basis,
through fixed producer fees equal to 3.5% of the all inclusive budget of each
picture produced with a minimum of $150,000 and maximum of $500,000 per picture.
Additionally, The Little Film Company may earn certain contingent compensation
based upon the performance of the given picture. We have an exclusive "first
look" on any project that The Little Film Company owns or controls or any
project that it has the right to acquire or may wish to acquire for development
or production. The Little Film Company furnishes us with the services of Ms.
Little in connection with the development and possible production of theatrical
motion pictures based upon accepted artist submissions meeting certain criteria.
We did not compensate The Little Film Company relative to the production of any
films during 2002 and 2001.
Consulting Agreement with Wharton Capital Partners, Ltd. In October 2000,
we entered into a consulting agreement with Wharton Capital Partners Ltd. Barry
R. Minsky, one of our directors, is the chief executive officer and a 50%
stockholder of Wharton. Under the agreement, Wharton received a one-time fee of
$100,000 and a monthly fee of $4,166 for 24 months beginning in November 2000.
If Wharton introduces us to a financing source and we consummate any public or
private equity and/or debt financing with the source during the term of the
consulting agreement or during the two-year period following the expiration of
the agreement, then we also will pay Wharton an amount equal to (i) 5% of all
funds received by us from such public or private equity financing and (ii) 3% of
all funds received by us from such public or private debt financing.
Additionally, upon completion of an equity-based financing, we will issue to
Wharton warrants to purchase shares of common stock equal to 5% of the common
stock or common stock equivalents issued in the financing at an exercise price
equal to 120% of the five-day average closing bid price prior to the closing of
such financing. The warrants will be exercisable on a cashless basis and will
have registration rights.
Film Marketing and Distribution Agreement with First Look/Seven Hills, LLC
and Seven Hills. In May 2002, we formed a joint venture company with Seven Hills
to provide marketing and distribution funds for the theatrical release of motion
pictures. Reverge Anselmo, one of our directors, is the sole member and manager
of Seven Hills, and Patrick Costello, one of our directors, is the chief
financial officer of Seven Hills. In June 2002, Seven Hills funded our
$2,000,000 capital contribution to the joint venture company pursuant to a
convertible promissory note issued by the joint venture company and us. The note
bears interest at a rate of 4% per annum, payable quarterly in arrears, and
principal and unpaid accrued interest on the note are payable on June 25, 2008.
The note is recourse against us as to interest only (accrued prior to the
maturity date) and against the joint venture company as to both principal and
interest. Also in June 2002, we entered into a Film Marketing and Distribution
Agreement with Seven Hills and the joint venture company, pursuant to which the
joint venture company will market and distribute motion pictures that Seven
Hills Pictures or we select on an alternating basis. Under the agreement, we
will receive a distribution fee equal to 10% of the Theatrical Gross Receipts
(as defined in the agreement) derived from the U.S. theatrical distribution of
each picture designated by Seven Hills that the joint venture company
distributes. During 2002, the joint venture did not market or distribute any
movies and therefore no fees were earned or received by us.
49
ITEM 14. CONTROLS AND PROCEDURES.
Within the 90-day period prior to the filing of this annual report, an
evaluation of the effectiveness of our disclosure controls and procedures was
made under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer. Based on that
evaluation, the chief executive officer and chief financial officer concluded
that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. Subsequent to the date of their evaluation, there were no
significant changes in our internal controls or in other factors that could
significantly affect these controls, including any corrective actions with
regard to significance deficiencies and material weaknesses.
50
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) INDEX TO FINANCIAL STATEMENTS
Page(s) in
Form 10-K
---------
Report of Independent Accountants F-1
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 2002
and 2001 F-2
Consolidated Statements of Operations - Years Ended
December 31, 2002, 2001 and 2000 F-3
Consolidated Statements of Cash Flows -
Years Ended December 31, 2002, 2001 and 2000 F-4
Consolidated Statements of Shareholders' Equity - Years
Ended December 31, 2002, 2001 and 2000 F-5
Notes to Consolidated Financial Statements F-6
(a)(2) INDEX TO FINANCIAL STATEMENTS SCHEDULES
Schedule II - Valuation and Qualifying Accounts S-1
(a)(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ ----------
3.1 Restated Certificate of Incorporation. Incorporated by reference to Exhibit
3.1 to our Current Report on Form 8-K, dated October 25, 1996, filed with
the SEC on November 12, 1996.
3.2 Bylaws, as amended on June 20, 2000. Incorporated by reference to Exhibit
3.2 to our Amended Current Report on Form 8-K/A filed with the SEC on June
29, 2000.
3.3 Certificate of Designations for Series A Preferred Stock. Incorporated by
reference to Exhibit 3.3 to our Amended Current Report on Form 8-K/A, filed
with the SEC on June 29, 2000.
3.4 Amendment to our Restated Certificate of Incorporation. Incorporated by
reference to Exhibit 3.4 to our Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.
51
4.1 Form of Common Stock Certificate. Incorporated by reference to Exhibit 4.1
to our Current Report on Form 8-K, dated October 25, 1996, filed with the
SEC on November 12, 1996.
4.5 Warrant, dated October 31, 1996, issued to Jefferson Capital Group, Ltd. to
purchase shares of our common stock. Incorporated by reference to Exhibit
4.6 to our current report on Form 8-K, dated October 25, 1996, filed with
the SEC on November 26, 1996.
4.6 Warrant, dated June 20, 2000 issued in connection with the Rosemary Street
transaction. Incorporated by reference to Exhibit 4.8 to our Amended
Current Report on Form 8-K/A filed with the SEC on June 29, 2000.
4.7 Warrant, dated June 25, 2002, to purchase 881,137 shares of common stock
issued to Seven Hills. Incorporated by reference to Exhibit 4.7 to our
Amended Current Report on Form 8-K/A, filed with the SEC on July 2, 2002.
4.8 Warrant, dated June 25, 2002, to purchase 291,285 shares of common stock
issued to Seven Hills. Incorporated by reference to Exhibit 4.8 to our
Amended Current Report on Form 8-K/A, filed with the SEC on July 2, 2002.
10.1 Indemnity Agreement, dated October 31, 1996, between us and Robert B.
Little. Incorporated by reference to Exhibit 10.3 to our Current Report on
Form 8-K, dated October 25, 1996, filed with the SEC on November 12, 1996.
10.2 Indemnity Agreement, dated October 31, 1996, between us and William F.
Lischak. Incorporated by reference to Exhibit 10.4 to our Current Report on
Form 8-K, dated October 25, 1996, filed with the SEC on November 12, 1996.
10.3 Indemnity Agreement, dated October 31, 1996, between us and Stephen K.
Bannon. Incorporated by reference to Exhibit 10.5 to our Current Report on
Form 8-K, dated October 25, 1996, filed with the SEC on November 12, 1996.
10.4 Indemnity Agreement, dated October 31, 1996, between us and Scot K. Vorse.
Incorporated by reference to Exhibit 10.6 to our Current Report on Form
8-K, dated October 25, 1996, filed with the SEC on November 12, 1996.
10.5 1996 Basic Stock Option and Stock Appreciation Rights Plan. Incorporated by
reference to Exhibit 10.20 to our Annual Report on Form 10-K for the year
ended December 31, 1996.
10.6 Lease Agreement dated April 21, 1987, as amended. Incorporated by reference
to Exhibit 10.30 to our Annual Report on Form 10-K for the year ended
December 31, 1996.
10.7 Amendment, dated April 1, 1997 to Lease Agreement, dated April 21, 1987.
Incorporated by reference to Exhibit 10.31 to our Annual Report on Form
10-K for the year ended December 31, 1997.
10.8 Movie and Motion Picture Programming Agreement, dated July 19, 1999,
between broadcast.com inc. and our company. Incorporated by reference to
Exhibit 10.34 to our Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999.*
----------------------------
*Confidential treatment has been granted for portions of such exhibit.
52
10.9 Securities Purchase Agreement, dated May 3, 2000, between our company and
Rosemary Street. Incorporated by reference to Exhibit 10.35 to our Amended
Current Report on Form 8-K/A, filed with the SEC on June 29, 2000.
10.10 Assignment and Assumption Agreement between our company and Rosemary
Street. Incorporated by reference to Exhibit 10.36 to our Amended Current
Report on Form 8-K/A, filed with the SEC on June 29, 2000.
10.11 Amended and Restated 1996 Special Stock Option Plan and Agreement among
the Littles and our company. Incorporated by reference to Exhibit 10.37 to
our Amended Current Report on Form 8-K/A, filed with the SEC on June 29,
2000.
10.12 Stock Option Agreement between us and William Lischak. Incorporated by
reference to Exhibit 10.38 to our Amended Current Report on Form 8-K/A,
filed with the SEC on June 29, 2000.
10.13 Amended and Restated Employment Agreement between Robert Little and us.
Incorporated by reference to Exhibit 10.39 to our Amended Current Report on
Form 8-K/A, filed with the SEC on June 29, 2000.
10.14 Amended and Restated Employment Agreement between William Lischak and us.
Incorporated by reference to Exhibit 10.40 to our Amended Current Report on
Form 8-K/A, filed with the SEC on June 29, 2000.
10.15 Employment Agreement between Christopher Cooney and us. Incorporated by
reference to Exhibit 10.41 to our Amended Current Report on Form 8-K/A,
filed with the SEC on June 29, 2000.
10.16 Employment Agreement between Jeffrey Cooney and us. Incorporated by
reference to Exhibit 10.42 to our Amended Current Report on Form 8-K/A,
filed with the SEC on June 29, 2000.
10.17 First Look Agreement between The Little Film Company, Inc. and us.
Incorporated by reference to Exhibit 10.43 to our Amended Current Report on
Form 8-K/A, filed with the SEC on June 29, 2000.
10.18 Note and Debt Contribution Agreement among the Littles and us.
Incorporated by reference to Exhibit 10.44 to our Amended Current Report on
Form 8-K/A, filed with the SEC on June 29, 2000.
10.19 Form of Management Letter between each of Robert Little and Ellen Little
and us. Incorporated by reference to Exhibit 10.45 to our Amended Current
Report on Form 8-K/A, filed with the SEC on June 29, 2000.
10.20 Voting Agreement among our company, Rosemary Street, the Littles, MRCo.,
Inc., Christopher Cooney and Jeffrey Cooney. Incorporated by reference to
Exhibit 10.46 to our Amended Current Report on Form 8-K/A, filed with the
SEC on June 29, 2000.
10.21 Form of Credit, Security, Guaranty and Pledge Agreement, dated as of June
20, 2000, among our company, as Borrower, the Guarantors named therein and
the Lenders named therein, with The Chase Manhattan Bank, as Administrative
Agent, and The Chase Manhattan Bank, as Issuing Bank (without schedules and
exhibits). Incorporated by reference to Exhibit 10.47 to our Amended
Current Report on Form 8-K/A, filed with the SEC on June 29, 2000.
53
10.22 Copyright Security Agreement, dated as of June 20, 2000 (without schedules
and exhibits). Incorporated by reference to Exhibit 10.48 to our Amended
Current Report on Form 8-K/A, filed with the SEC on June 29, 2000.
10.23 Consulting Agreement, dated October 1, 2000, between us and Wharton
Capital Partners, Ltd. Incorporated by reference to Exhibit 5 to the
Schedule 13D filed by Wharton with the SEC on November 28, 2000.
10.24 2000 Performance Equity Plan. Incorporated by reference to Exhibit 10.27
to our Annual Report on Form 10-K for the fiscal year ended December 31,
2000.
10.25 Amendment No. 1, dated May 16, 2001 to the Credit, Security, Guaranty and
Pledge Agreement, dated as of June 20, 2000, among our company, as
Borrower, the Guarantors named therein and the Lenders named therein, with
The Chase Manhattan Bank, as Administrative Agent, and the Chase Manhattan
Bank, as Issuing Bank. Incorporated by reference to Exhibit 10.28 to our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
10.26 Amendment No. 2, dated as of September 17, 2001 to the Credit, Security,
Guaranty and Pledge Agreement, dated as of June 20, 2000, as amended, among
our company, as Borrower, the Guarantors named therein and the Lenders
named therein, with The Chase Manhattan Bank, as Administrative Agent, and
The Chase Manhattan Bank, as Issuing Bank. Incorporated by reference to
Exhibit 10.26 to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.
10.27 Agreement of Sublease dated November 15, 2001 between Scott Mednick &
Associates, Inc. and First Look Media, Inc. Incorporated by reference to
Exhibit 10.27 to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.
10.28 Securities Purchase Agreement, dated as of May 20, 2002, between our
company and Seven Hills. Incorporated by reference to Exhibit 10.28 to our
Current Report on Form 8-K, filed with the SEC on May 29, 2002.
10.29 First Amendment to Securities Purchase Agreement, dated as of June 25,
2002. Incorporated by reference to Exhibit 10.28(a) to our Amended Current
Report on Form 8-K/A, filed with the SEC on July 2, 2002.
10.30 Secured Convertible Promissory Note in favor of Seven Hills. Incorporated
by reference to Exhibit 10.29 to our Amended Current Report on Form 8-K/A,
filed with the SEC on July 2, 2002.
10.31 Pledge and Security Agreement between our company and Seven Hills.
Incorporated by reference to Exhibit 10.30 to our Amended Current Report on
Form 8-K/A, filed with the SEC on July 2, 2002.
10.32 Investor Rights Agreement between our company and Seven Hills.
Incorporated by reference to Exhibit 10.31 to our Amended Current Report on
Form 8-K/A, filed with the SEC on July 2, 2002.
54
10.33 Limited Liability Company Agreement of F/SLLC. Incorporated by reference
to Exhibit 10.32 to our Amended Current Report on Form 8-K/A, filed with
the SEC on July 2, 2002.
10.34 Film Marketing and Distribution Agreement among our company, Seven Hills
and F/SLLC. Incorporated by reference to Exhibit 10.33 to our Amended
Current Report on Form 8-K/A, filed with the SEC on July 2, 2002.
10.35 Amended and Restated Voting Agreement among our company, Seven Hills,
Rosemary Street, the Littles, MRCo, Inc., Wharton, Christopher Cooney and
Jeffrey Cooney. Incorporated by reference to Exhibit 10.34 to our Amended
Current Report on Form 8-K/A, filed with the SEC on July 2, 2002.
10.36 Amendment No.3, dated as of June 24, 2002, to the Credit, Security,
Guaranty and Pledge Agreement dated as of June 20, 2000, as amended among
our company, as Borrower, the Guarantors named therein, the Lenders
referred to therein, and JPMorgan Chase Bank, as Administrative Bank and as
Issuing Bank. Incorporated by reference to Exhibit 10.35 to our Amended
Current Report on Form 8-K/A, filed with the SEC on July 2, 2002.
10.37 Amendment No. 4, dated as of February 18, 2003, to the Credit, Security,
Guaranty and Pledge Agreement dated as of June 20, 2000, as amended among
our company, as Borrower, the Guarantors named therein, the Lenders
referred to therein, and JPMorgan Chase Bank, as Administrative Bank and as
Issuing Bank. Filed herewith.
21 Subsidiaries of the Registrant. Filed herewith.
23 Consent of PricewaterhouseCoopers LLP. Filed herewith.
99 Risk factors. Filed herewith.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: April 15, 2003 FIRST LOOK MEDIA, INC.
By: /s/ Christopher J. Cooney
----------------------------
Christopher J. Cooney
Co-Chairman of the Board of Directors
and Chief Executive Officer
56
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/Christopher J. Cooney Co-Chairman of the Board April 15, 2003
--------------------------- of Directors and Chief
Christopher J. Cooney Executive Officer
(Principal Executive Officer)
/s/ Robert B. Little Co-Chairman of the Board of April 15, 2003
--------------------------- Directors and President
Robert B. Little
/s/ William F. Lischak Chief Operating Officer, April 15, 2003
-------------------------- Chief Financial Officer and
William F. Lischak Secretary (Principal Financial
and Accounting Officer)
/s/ Jeffrey Cooney Executive Vice President - April 15, 2003
----------------------------- Creative Affairs and Director
Jeffrey Cooney
Director
--------------------------
Stephen K. Bannon
Director
------------------------------
Scot K. Vorse
Director
---------------------------
Barry R. Minsky
/s/ Joseph Linehan Director April 15, 2003
---------------------------
Joseph Linehan
/s/ Reverge Anselmo Director April 15, 2003
---------------------------
Reverge Anselmo
Director
---------------------------
Patrick Costello
57
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of First Look Media, Inc. (the
"Company") on Form 10-K for the year ended December 31, 2002 as filed with the
Securities and Exchange Commission (the "Report"), each of the undersigned, in
the capacities and on the dates indicated below, hereby certifies pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the Company.
April 15, 2003
/s/ Christopher J. Cooney
---------------------------
Christopher J. Cooney
Chief Executive Officer
/s/ William F. Lischak
---------------------------
William F. Lischak
Chief Financial Officer, Chief
Operating Officer and Secretary
58
CERTIFICATION PURSUANT TO
RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Christopher J. Cooney, certify that:
1. I have reviewed this annual report on Form 10-K of First Look Media, Inc.;
2. based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. the registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days of the filing date of this annual report
(the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and to the audit committee
of the registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. the registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: April 15, 2003 /s/ Christopher J. Cooney
-----------------------------------
Christopher J. Cooney
Chief Executive Officer
59
CERTIFICATION
PURSUANT TO RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, William F. Lischak, certify that:
1. I have reviewed this annual report on Form 10-K of First Look Media, Inc.;
2. based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. the registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days of the filing date of this annual report
(the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and to the audit committee
of the registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. the registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: April 15, 2003 /s/ William F. Lischak
--------------------------------------------
William F. Lischak
Chief Financial Officer,
Chief Operating Officer and Secretary
60
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of First Look Media, Inc. (formerly known as
Overseas Filmgroup, Inc.):
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of First Look Media,
Inc. ("the Company") and its subsidiaries at December 31, 2002 and December 31,
2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred operating losses and negative
cash flows from operations for the past three years which raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ PricewaterhouseCoopers LLP
Century City, California
March 28, 2003
F-1
FIRST LOOK MEDIA, INC.
(formerly known as Overseas Filmgroup, Inc.)
CONSOLIDATED BALANCE SHEETS
Year Ended December 31,
-------------------------
2002 2001
----------------------------------
(in thousands)
ASSETS:
Cash and cash equivalents $ 713 $ 1,673
Accounts receivable, net of allowance for doubtful accounts of $2,401,000
and $1,150,000, respectively 14,545 23,668
Investment 2,000 -
Film costs, net of accumulated amortization 23,198 18,304
Other assets 1,466 1,826
----------------------------------
Total assets $ 41,922 $ 45,471
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued expenses $ 1,632 $ 1,777
Accrued interest payable 84 166
Deferred revenue 1,209 810
Payable to producers 16,084 21,987
Notes payable 20,254 14,680
----------------------------------
Total liabilities 39,263 39,420
----------------------------------
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock, $.001 par value, 50,000,000 shares authorized; 14,584,573 and
11,658,848 shares issued at December 31, 2002 and 2001, respectively;
14,539,573 and 11,613,848 shares
outstanding at December 31, 2002 and 2001, respectively 15 12
Additional paid-in capital 36,657 30,674
Accumulated deficit (33,926) (24,548)
Treasury stock at cost, 45,000 shares (87) (87)
----------------------------------
Total shareholders' equity 2,659 6,051
----------------------------------
Total liabilities and shareholders' equity $ 41,922 $ 45,471
==================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
FIRST LOOK MEDIA, INC.
(formerly known as Overseas Filmgroup, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
------------------------
2002 2001 2000
---- ---- ----
(in thousands except per share amounts)
Revenues $ 26,699 $ 35,144 $ 22,625
Expenses:
Film costs 19,779 24,258 16,850
Distribution and marketing 7,541 7,101 4,774
Selling, general and administrative 7,928 6,947 6,473
---------- --------- ---------
Total expenses 35,248 38,306 28,097
---------- --------- ---------
Loss from operations (8,549) (3,162) (5,472)
---------- --------- ---------
Other income (expense):
Interest income 144 76 27
Interest expense (1,118) (1,137) (1,571)
Other income 236 431 786
---------- --------- ---------
Total other expense (738) (630) (758)
---------- --------- ---------
Loss before income taxes and cumulative effect
of accounting change (9,287) (3,792) (6,230)
Income tax provision 91 62 137
---------- --------- ---------
Loss before cumulative effect of accounting change (9,378) (3,854) (6,367)
Cumulative effect of accounting change (net of income taxes) - - (14,123)
---------- --------- ---------
Net loss $ (9,378) $ (3,854) $ (20,490)
========== ========= =========
Basic and diluted loss per share:
Loss before cumulative effect of accounting change $ (0.71) $ (0.38) $ (0.78)
Cumulative effect - - (1.74)
---------- --------- ---------
Net loss $ (0.71) $ (0.38) $ (2.52)
========== ========= =========
Weighted average number of common shares outstanding 13,270 10,191 8,131
========== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
FIRST LOOK MEDIA, INC.
(formerly known as Overseas Filmgroup, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------
2002 2001 2000
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net loss $ (9,378) $ (3,854) $ (20,490)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities
Cumulative effect of accounting change - - 15,582
Film costs 19,779 24,258 16,850
Additions to film costs (17,105) (9,922) (2,865)
Payments to producers (13,472) (20,847) (13,472)
Capital gains and other non-cash income 22 - (625)
Changes in operating assets and liabilities:
Accounts receivable 9,123 2,915 3,506
Related party receivables - - 149
Other assets 360 (354) (693)
Accounts payable and accrued expenses (226) 358 (485)
Deferred income taxes - - (1,459)
Deferred revenue 399 723 (832)
----------- ------------ ------------
Net cash used in operating activities (10,498) (6,723) (4,833)
----------- ------------ ------------
Cash flows from investing activities:
Investment (2,000) - -
Sale of marketable securities - - 2,056
----------- ------------ ------------
Net cash (used in ) provided by investing activities (2,000) - 2,056
----------- ------------ ------------
Cash flows from financing activities:
Issuance of equity instruments, net of expenses 5,718 - 16,420
Investment by significant shareholder - - 130
Net borrowings (pay down) under credit facility 4,000 8,000 (11,554)
Convertible note payable and warrant 2,000 - -
Net pay down of subordinated note payable (180) (436) (1,095)
Net pay down of note payable to shareholders - - (650)
Decrease in restricted cash position - - 88
----------- ------------ ------------
Net cash provided by financing activities 11,538 7,564 3,339
----------- ------------ ------------
Net (decrease) increase in cash and cash equivalents (960) 841 562
Cash and cash equivalents at beginning of year 1,673 832 270
----------- ------------ ------------
Cash and cash equivalents at end of year $ 713 $ 1,673 $ 832
=========== ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 1,097 $ 893 $ 1,875
=========== ============ ============
Income taxes $ 11 $ 9 $ 6
=========== ============ ============
Foreign withholding taxes $ 80 $ 53 $ 131
=========== ============ ============
Non-cash financing activities:
Contribution of capital by significant shareholder $ - $ - $ 2,023
=========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
FIRST LOOK MEDIA, INC.
(formerly known as Overseas Filmgroup, Inc.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Preferred Stock Common Stock Additional
--------------- ----------------- Paid-in Accumulated
Number Amount Number Amount Capital Deficit
------ ------ ------ ------ ---------- -----------
---------------------------------------------------------------------------------
Balance at December 31, 1999 - $ - 6,341 $ 6 $ 12,107 $ (204)
Issuance of common stock, preferred
stock and warrants 905 1 5,097 5 16,414 -
Retirement of common stock - - (1,589) (1) 1 -
Forgiveness of notes payable, accrued
expenses and contribution of capital - - - - 2,153 -
Comprehensive income:
---------------------
Reversal of unrealized holding gain upon
sale of investment available for sale - - - - - -
Net loss - - - - - (20,490)
Total comprehensive income
---------------------------------------------------------------------------------
Balance at December 31, 2000 905 1 9,849 10 30,675 (20,694)
Conversion of preferred stock to common (905) (1) 1,810 2 (1) -
Net loss - - - - - (3,854)
---------------------------------------------------------------------------------
Balance at December 31, 2001 - - 11,659 12 30,674 (24,548)
Issuance of common stock in exchange for
outstanding warrants - - 295 - - -
Issuance of warrants in connection with note - - - - 268 -
Issuance of common stock and warrants - - 2,630 3 5,715 -
Net loss - - - - (9,378)
---------------------------------------------------------------------------------
Balance at December 31, 2002 - $ - 14,584 $ 15 $ 36,657 $ (33,926)
=================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-5(1)
FIRST LOOK MEDIA, INC.
(formerly known as Overseas Filmgroup, Inc.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Cont'd)
(in thousands)
Accumulated
Other Total
Comprehensive Treasury Shareholders'
Income Stock Equity
----------- --------- -----------
----------------------------------------------
Balance at December 31, 1999 $ 1,477 $ (87) $ 13,299
Issuance of common stock, preferred
stock and warrants - - 16,420
Retirement of common stock - - -
Forgiveness of notes payable, accrued
expenses and contribution of capital - - 2,153
Comprehensive income:
---------------------
Reversal of unrealized holding gain upon
sale of investment available for sale (1,477) - (1,477)
Net loss - - (20,490)
------
Total comprehensive income (21,967)
--------------------------------------------
Balance at December 31, 2000 - (87) 9,905
Conversion of preferred stock to common - - -
Net loss - - (3,854)
--------------------------------------------
Balance at December 31, 2001 - (87) 6,051
Issuance of common stock in exchange for
outstanding warrants - - -
Issuance of warrants in connection with note - - 268
Issuance of common stock and warrants - - 5,718
Net loss - - (9,378)
--------------------------------------------
Balance at December 31, 2002 $ - $ (87) $ 2,659
============================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-5(2)
FIRST LOOK MEDIA, INC.
(formerly known as Overseas Filmgroup, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS:
General
First Look Media, Inc. (formerly known as Overseas Filmgroup, Inc.) ("Company")
is principally involved in the acquisition and worldwide license or sale of
distribution rights to independently produced motion pictures. Certain motion
pictures are directly distributed by the Company in the domestic theatrical
market under the name "First Look Pictures", and in the domestic video market
under the name "First Look Home Entertainment. The Company also produces
television commercials under the name "First Look Artists".
Liquidity and Capital Resources
For the two years ended December 31, 2002, the Company had operating losses of
$11,711,000 and its operating activities used $17,221,000 of cash. As of
December 31, 2002, the Company had cash and cash equivalents of $713,000 and,
based on its calculations, approximately $2,045,000 available for borrowing
under its JPMorgan Credit Facility (see Note 6). The recent operating losses and
negative cash flow the Company has experienced, along with the general market
conditions for the Company's business, has resulted in ongoing review and
discussions between the Company and its primary lender, JPMorgan and
participating banks in its credit facility. In February 2003, JPMorgan requested
that the Company voluntarily reduce the amount that it is permitted to borrow
under the credit facility in relation to its library value. The credit agreement
initially provided that the Company could borrow up to 50% (the "advance rate")
of the valuation of its library, conducted by an independent third party
approved by JPMorgan. JPMorgan asked that this advance rate be reduced by 5% (to
45%) as of April 1, 2003, an additional 5% (to 40%) as of July 1, 2003, and a
final 5% (to 35%) as of October 1, 2003. On February 18, 2003 management agreed
to these reductions, which are reflected in an amended credit agreement (see
Note 14).
The Company's significant net losses and negative cash flow along with the most
recent modification and pending modifications under the credit agreement with
JPMorgan raise questions about its ability to continue as a going concern. The
Company has been reviewing its past business plan, alternative plans and other
options. The Company has made reductions in overhead, including staff
reductions, certain consulting contracts have not been renewed, and the Company
has not revnewed its first look arrangement with Grandview Pictures. The Company
also is considering further reductions in overhead. Budgeted film investment has
been significantly reduced from 2002. Additionally, the Company is actively in
discussion with various parties regarding potential strategic relationships,
equity investment and revised business plans. If the Company is not successful
in generating sufficient future cash flow from operations in accordance with its
current or an altered business plan, raising additional capital through public
or private financings, strategic relationships or other arrangements will be
necessary. This additional funding, if needed, might not be available on
acceptable terms, or at all. Failure to raise sufficient capital, if and when
needed, could have a material adverse effect on the business, results of
operations and financial condition of the Company, including the ability of the
Company to continue to operate as a going concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements of the Company include the financial
position, results of operations and cash flows of the Company and its wholly
owned subsidiaries. All significant intercompany balances and transactions have
been eliminated.
Revenues
Revenues from nonrefundable guarantees payable by sub-distributors are
recognized when the film becomes available for release and certain other
conditions are met in accordance with Statement of Position 00-2, "Accounting by
Producers or Distributors of Films" ("SOP 00-2"). Amounts received in advance of
the film being available are recorded as deferred revenue. Revenues from direct
F-6
theatrical distribution of films are recognized on the dates of exhibition.
Revenues from home video market are recognized, net of a reserve for returns,
upon availability of product to retailers.
Film Costs
The Company accounts for film costs in accordance with SOP 00-2. Film costs
include the direct costs of acquiring and producing motion picture product.
Capitalized costs are amortized using the individual film forecast method
whereby expense is recognized in the proportion that current year revenues for
each film bear to management's estimate of ultimate revenues. Film costs are
stated at the lower of net unamortized cost or net realizable value.
In June 2000, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 00-2, which replaces SFAS
No. 53. SOP 00-2 was adopted for the Company's fiscal year beginning January 1,
2000. SOP 00-2 establishes new accounting standards for producers or
distributors of films, including changes in revenue recognition and accounting
for advertising, development and overhead costs. Under the new standard, all
exploitation costs such as advertising and marketing costs for theatrical and
television products will be expensed as incurred, whereas under the previous
standards, these costs were capitalized and amortized over the products'
lifetime revenues. In addition, the new standard requires that development costs
for abandoned projects be charged directly to expense rather than being included
in production overhead and reestablished as film costs. The Company elected
early adoption of SOP 00-2 and, as a result, in 2000, a cumulative charge for
the change in accounting principle of $15,582,000 ($14,123,000 net of income
taxes) has been reflected in the Company's Consolidated Statement of Operations
for the year ended December 31, 2000.
Payables to Producers
The Company accounts for participations due to producers in accordance with SOP
00-2. Management's estimate of ultimate participations is accrued as an expense
using the individual film forecast method whereby expense is recognized in the
proportion that current year revenues for each film bear to management's
estimate of ultimate revenues. In the year ending December 31, 2003, management
expects to make payments of approximately $13,000,000 to settle producer
liabilities outstanding at December 31, 2002.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of
less than three months to be cash equivalents. The carrying value of the
Company's cash and cash equivalents approximate fair value due to their
short-term nature.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation. Depreciation is
provided over the estimated useful lives of assets, which range from 5 to 7
years using the straight line method. Leasehold improvements are amortized over
the shorter of the useful lives of assets or the term of the lease.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of such assets may not be
recoverable. An impairment loss would be recognized when estimated undiscounted
future cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. If such assets are considered
impaired, the amount of the impairment loss recognized is measured as the amount
by which the carrying value of the asset exceeds the fair value of the asset,
fair value being determined based upon discounted cash flows. The Company has
recorded write-downs of film costs amounting to $3,189,000, $1,815,000 and
$494,000 for the years ended December 31, 2002, 2001 and 2000 respectively, as a
result of downward adjustments of projected ultimate revenues. These write-downs
are included in film costs in the Consolidated Statements of Operations.
F-7
Fair Value of Financial Instruments
The recorded value of the Company's cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities and payable to producers
approximate their fair value due to the relative short maturities of these
instruments. The fair value of notes payable approximates the recorded value due
to the stated interest rate on such instruments.
Segment Reporting
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
131, "Disclosures about Segments of an Enterprise and Related Information"
effective January 1, 2000. SFAS No. 131 establishes standards for the way
companies report information about operating segments in interim and annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company's
management has determined that the Company operated within two discrete
reportable business segments for the years ended December 31, 2002 and 2001, and
one discrete reportable business segment for the year ended December 31, 2000.
Income Taxes
The Company records income taxes in accordance with the provisions of SFAS No.
109, "Accounting for Income Taxes". The standard requires, among other
provisions, an asset and liability approach to recognize deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the financial statement carrying amounts and tax basis of
assets and liabilities. Valuation allowances are provided if, based upon the
weight of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
Basic and Diluted Loss per Share
Basic and diluted net loss per share is computed by dividing the net loss
applicable to common stockholders by the weighted average number of shares of
common stock and common equivalent shares outstanding. Common equivalent shares
related to all stock options, warrants and convertible preferred stock during
the three years ended December 31, 2002 have been excluded from the computation
below because their effect is anti-dilutive.
The following table sets forth common stock equivalents (potential common stock)
that are not included in the diluted net loss per share calculations above
because their effect would be anti-dilutive for the years indicated:
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Weighted average common stock equivalents:
Convertible preferred stock - - 904,971
Stock options 749,766 375,076 1,546,377
Warrants 3,658,400 7,551,310 6,118,319
Accounting for Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees," and FASB Interpretation ("FIN") No.
28 "Accounting for Stock Appreciation Rights and Other Variable Stock Option
Award Plans an Interpretation of APB Opinions No. 15 and 25" and complies with
the disclosure requirement of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation cost, if any, is recognized over the respective vesting period
based on the difference, if any, on the date of grant, between the fair value of
the Company's common stock and the grant price. The Company accounts for stock
issued to non-employees in accordance with the provisions of SFAS No. 123 and
EITF 96-18, "Accounting for Equity Instruments that are issued to other than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services."
In March 2000, the Financial Accounting Standards Board issued FIN No. 44,
"Accounting for Certain Transactions involving Stock Compensation." FIN No. 44
F-8
provides guidance for issues arising in applying APB No. 25. FIN No. 44 applies
specifically to new awards, exchanges of awards in a business combination,
modification to outstanding awards, and changes in grantee status that occur on
or after July 1, 2000, except for the provisions related to repricing and the
definition of an employee which apply to awards issued after December 15, 1998.
The Company's financial statements have been prepared under the guidance
provided by FIN No. 44.
The Company applies APB No. 25 and related interpretations to account for stock
options granted to employees and directors. Had compensation cost been
recognized pursuant to the fair value approach of SFAS No. 123, the Company's
pro forma net loss and net loss per share applicable to common stockholders
would have been as follows:
2002 2001 2000
---- ---- ----
Net loss before cumulative effect of accounting change:
As reported $ (9,378) $ (3,854) $ (6,367)
SFAS 123 pro forma (9,378) (3,924) (6,700)
Net loss:
As reported (9,378) (3,854) (20,490)
SFAS 123 pro forma (9,378) (3,924) (20,823)
Basic and diluted net loss per share:
As reported
Net loss before cumulative effect of accounting change (0.71) (0.38) (0.78)
Net loss (0.71) (0.38) (2.52)
SFAS 123 pro forma
Net loss before cumulative effect of accounting change (0.71) (0.39) (0.82)
Net loss (0.71) (0.39) (2.56)
The fair value of each stock option granted has been estimated on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions:
Risk-free interest rate 3.5%
Expected life (in years) 4 years
Dividend yield 0%
Expected volatility 50%
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist primarily of cash and accounts receivable. The Company places its cash
with a financial institution and, at times, such amounts may be in excess of the
FDIC insurance limits. Concentration of credit risk associated with accounts
receivable is limited due to the large number of customers, as well as their
dispersion across geographic areas. The Company performs credit evaluations of
its customers and generally does not require collateral. As of December 31,
2002, two customers had outstanding balances of 14.8% and 11.1% of the Company's
total accounts receivable.
Comprehensive Income
The Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined,
F-9
includes all changes in equity during a period from non-owner sources.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and
reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to amounts reported in prior periods to
conform with the current year presentation.
Recent Accounting Pronouncements
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amends SFAS No. 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of transition to
the fair value method of accounting for stock-based employee compensation. It
also amends the disclosure provisions of and requires prominent disclosure about
the effects on reported net income of a company's accounting policy decisions
with respect to stock-based employee compensation. In addition, this statement
amends APB No. 28, "Interim Financial Reporting," to require disclosure about
those effects in interim financial information. SFAS No. 148 is effective for
financial statements for fiscal years ending after December 15, 2002. The
disclosure requirements for interim financial statements containing condensed
consolidated financial statements are effective for interim periods beginning
after December 15, 2002. The Company does not intend to adopt the fair value
method of accounting for stock-based compensation of SFAS No. 123 and
accordingly SFAS No. 148 is not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
NOTE 3 - EQUITY INVESTMENTS:
June 2002 Securities Purchase Agreement with Seven Hills
In June 2002, the Company consummated a private placement with Seven Hills, in
which the Company sold to Seven Hills, for an aggregate cash purchase price of
$6,050,000, 2,630,434 shares of the Company's common stock and five-year
warrants to purchase up to 1,172,422 shares of the Company's common stock at an
exercise price of $3.40 per share (Note 8). As of December 31, 2002, Seven Hills
owned approximately 18.1% of the Company's outstanding voting securities.
Additionally, in May 2002, the Company and Seven Hills formed a joint venture
company that will provide marketing and distribution funds for the theatrical
release of motion pictures that the Company or Seven Hills selects on an
alternating basis. In June 2002, Seven Hills funded the Company's $2,000,000
capital contribution to the joint venture company pursuant to a convertible
promissory note (Note 6) issued by the Company and the joint venture company.
The investment in the joint venture company is reported as an asset on the
balance sheet under "Investment". Seven Hills also funded its own $2,000,000
capital contribution to the joint venture company in June 2002.
June 2000 Securities Purchase Agreement with Rosemary Street
In June 2000, the Company consummated a Securities Purchase Agreement with
Rosemary Street in which the Company sold to Rosemary Street for an aggregate
cash price of $17,000,000 (i) 5,097,413 shares of common stock, (ii) 904,971
shares of Series A convertible preferred stock (which were converted into
1,809,942 shares of common stock in October 2001) and (iii) five-year warrants
to purchase up to 2,313,810 shares of common stock for an exercise price of
$3.40 per share. Direct expenses associated with the issuance of stock and
warrants amounted to $580,000 through December 31, 2001, which were charged to
equity. As of December 31, 2002, Rosemary Street owned approximately 42.8% of
F-10
the Company's voting securities.
In accordance with the terms of the Securities Purchase Agreement with Rosemary
Street, in June 2000, the Littles, former co-chairs of the Board of Directors,
co-chief executive officers and significant stockholders of the Company, forgave
$2,023,000 in notes and other payables owed to them by the Company. In addition,
the Littles contributed to the Company $130,000 in cash and 1,588,812 shares of
the Company's common stock they owned. In return, in accordance with the terms
of the Securities Purchase Agreement, the Company paid $1,430,000 to the
Littles.
NOTE 4 - MARKETABLE SECURITIES:
In July 1999, the Company and broadcast.com entered into an agreement whereby
broadcast.com was granted the right to exhibit, via the Internet, certain films
owned by the Company. Additionally, broadcast.com received 562,527 shares of the
Company's common stock in consideration for 11,302 shares in broadcast.com. In
July 1999, the Company received 17,454 shares of common stock of Yahoo!, Inc.
("Yahoo!"), reflecting a 2 for 1 stock split, in exchange for its shares of
broadcast.com, following Yahoo!'s acquisition of broadcast.com. The Company
accounted for its investment in Yahoo! under the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". The
investment in Yahoo! was classified as an available-for-sale security and was
carried on the balance sheet at fair value. During 2000, the Company sold all
its shares of Yahoo! common stock for approximately $2,056,000.
NOTE 5 - FILM COSTS:
Film costs consist of the following:
December 31,
------------
2002 2001
---- ----
(in thousands)
Films in release net of accumulated amortization $ 15,601 $ 13,167
Films not yet available for release 7,597 5,137
-------- --------
$ 23,198 $ 18,304
======== ========
Interest costs capitalized to films were $236,000, $191,000 and $186,000 during
the years ended December 31, 2002, 2001 and 2000, respectively. Based on the
Company's estimates of projected gross revenues as of December 31, 2002,
approximately 82% and 90% of unamortized film costs applicable to films in
release and not yet released, are expected to be amortized during the next three
years, respectively.
NOTE 6 - NOTES PAYABLE:
Notes payable consist of the following:
2002 2001
---- ----
(in thousands)
Borrowing under credit facility $ 18,500 $ 14,500
Subordinated note payable 1,754 1,806
-------- --------
$ 20,254 $ 14,680
======== ========
Concurrently with the consummation of the Securities Purchase Agreement with
Rosemary Street (Note 3), in June 2000 the Company entered into a five-year $40
million revolving credit facility (the "JPMorgan Credit Facility") with JPMorgan
(formerly Chase Securities, Inc. and The Chase Manhattan Bank) and other
commercial banks and financial institutions. A portion of the proceeds from this
credit facility was used to refinance outstanding loans and accrued interest
under the Company's previous credit facility with Coutts & Co. and
Bankgesellschaft Berlin A.G. (the "Coutts/Bankgesellschaft Credit Facility").
The remaining proceeds have been used to finance the Company's production,
acquisition, distribution and exploitation of motion pictures, and for working
capital and general corporate purposes (Note 14). During the years ended
F-11
December 31, 2002 and 2001, the Company borrowed $4,000,000 and $8,000,000,
respectively, under the JPMorgan Credit Facility.
The amounts borrowed under the JPMorgan Credit Facility bear interest, as the
Company may select, at rates based on either LIBOR plus 2% or a rate per annum
equal to the greater of (a) the Prime Rate plus 1%, (b) the Base CD Rate plus 2%
and (c) the Federal Funds Effective Rate plus 1.5% (as these terms are defined
in the JPMorgan Credit Facility Agreement). In addition to an annual management
fee of $125,000, the Company pays a commitment fee on the daily average unused
portion of the JPMorgan Credit Facility at an annual rate of 0.5%. Upon entering
the JPMorgan facility, we paid a one-time fee of approximately $848,000 as a
cost of acquiring the JPMorgan facility. Additionally, in 2001 we added one
lender (increasing total commitments to $40,000,000 from $33,000,000) and paid
an additional fee of $42,000. The JPMorgan facility restricts the creation or
incurrence of indebtedness or the issuance of additional securities. The
JPMorgan facility is collateralized by all tangible and intangible assets and
future revenues of the Company.
As of December 31, 2002, the Company's cumulative losses resulted in a breach of
the covenant contained in the credit agreement with JPMorgan that sets forth a
minimum level of net worth that the Company is required to maintain. The Company
has requested a waiver of this breach. JPMorgan currently is considering this
request and the Company is in negotiation with respect to further modifications
JPMorgan will require to the credit agreement in exchange for such waiver (Note
14).
In addition to the amounts outstanding under the JPMorgan Credit Facility
Agreement, during 1998 the Company borrowed $2,000,000 from another lender, the
proceeds of such loan were used to acquire rights to a particular film. This
subordinated note bore interest at the Prime Rate plus 1.5% and was
collateralized by amounts due under distribution agreements from the specific
film. The outstanding remaining obligation of $180,000 was fully repaid in March
2002.
In May 2002, the Company and Seven Hills formed a joint venture company (Note
3). In connection with formation of the joint venture, the Company and the joint
venture issued a $2,000,000 convertible promissory note to Seven Hills. The note
bears interest at a rate of 4% per annum, payable quarterly in arrears, and
principal and unpaid interest on the note are payable on June 25, 2008. The note
is recourse against the Company as to interest only (accrued prior to the
maturity date) and against the joint venture company as to both principal and
interest. The note has been discounted by approximately $268,000, the value of
the 291,285 warrants issued in connection with this note (see Note 8), which
discount will be amortized over the term of the note.
NOTE 7 - INCOME TAXES:
The components of the provision for income taxes on earnings before income taxes
are as follows:
Years ended December 31,
------------------------
2002 2001 2000
---- ---- ----
(in thousands)
Current
State $ 11 $ 9 $ 6
Foreign withholding 80 53 131
---------- --------- ---------
91 62 137
---------- --------- ---------
Deferred
State - - -
Federal - - -
---------- --------- ---------
- - -
---------- --------- ---------
$ 91 $ 62 $ 137
========== ========= =========
The provision for income taxes differs from the amount of income tax determined
by applying the applicable U.S. statutory income tax rates to loss before taxes
and cumulative effect of accounting change, as a result of the following
differences:
F-12
Years ended December 31
-----------------------
2002 2001 2000
---- ---- ----
Federal statutory rate (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit and
income not subject to tax (3.0)% (3.0)% (3.0)%
Deferred tax asset valuation allowance 36.5% 36.5% 37.0%
Other 1.5% 2.1% 2.2 %
------- ------- --------
1.0% 1.6% 2.2 %
======= ======= ========
The deferred taxes relate primarily to differences arising from the amortization
of film costs for book and tax purposes and the benefits associated with tax
loss and foreign withholding tax credit carryforwards. The foreign withholding
taxes are substantially recouped from the producers' share of revenue.
The Company has provided a valuation allowance for the full amount of its net
deferred tax assets since realization of any future benefit from deductible
temporary differences and net operating loss and tax credit carryforwards cannot
be sufficiently assured at December 31, 2002.
At December 31, 2002, the Company had net operating loss carryforwards for both
federal and state income tax purposes of approximately $30,000,000 and
$4,600,000, respectively, which expire at various dates between 2006 and 2022,
respectively. The net operating losses can be carried forward to offset future
taxable income, if any. Utilization of the carryforwards may be subject to
utilization limitations which may inhibit the Company's ability to use
carryforwards in the future.
NOTE 8 - SHAREHOLDERS' EQUITY:
Common Stock
During 2000, the Company increased the number of authorized shares of common
stock, $.001 par value, from 25,000,000 to 50,000,000 shares.
Preferred Stock
During 2000, the Company increased the number of authorized shares of preferred
stock, $.001 par value, from 2,000,000 to 10,000,000 shares.
Series A Preferred Stock
In accordance with the terms of the Securities Purchase Agreement with Rosemary
Street (Note 3), in June 2000, the Company issued 904,971 shares of Series A
Preferred Stock. Pursuant to the agreement, all shares of Series A Preferred
Stock were automatically converted into common stock on a 2:1 basis in October
2001.
Stock Option Plans
In October 1996, the Company's stockholders approved the 1996 Basic Stock Option
and Stock Appreciation Rights Plan ("1996 Plan"), under which incentive and
non-qualified stock options and stock appreciation rights may be granted to
certain employees, directors, independent consultants and certain other persons
who provide services to the Company to purchase up to a maximum of 550,000
shares of common stock. The 1996 Plan calls for annual grants to non-employee
directors of 5,000 shares at an exercise price equal to the fair market value of
the common stock on the date of grant, which is the date of the Annual
Stockholders meeting. These options are exercisable one year after the date of
grant and expire on the earlier of ten years from the date of grant or three
years from the date on which the director ceases to be a director of the
Company.
F-13
As part of the Securities Purchase Agreement with Rosemary Street (Note 3), the
Company cancelled all outstanding stock options granted to the Littles. Under
the terms of the Company's 1996 Special Stock Option Plan, the Littles held
options to purchase up to 2.2 million shares of common stock at exercise prices
ranging from $5.00 to $8.50 per share. These stock options were issued in 1996
and vested over a five-year period. The Company subsequently granted the Littles
fully vested stock options to purchase 500,000 shares of common stock at an
exercise price of $3.40 per share.
In November 2000, the Company's stockholders approved the 2000 Performance
Equity Plan ("2000 Plan"), under which a total of 1,000,000 shares of common
stock are available for grant to the Company's key employees, directors and
independent consultants. Awards consist of stock options, restricted stock
awards, deferred stock awards, stock appreciation rights and other stock-based
awards, as described in the 2000 plan.
The Board of Directors is responsible for administration of the 2000 Plan. The
Board determines the term of each award, including the option exercise price,
the number of shares for which each option is granted and the rate at which each
option is exercisable. Incentive stock options granted pursuant to the Plan
cannot be granted with an exercise price of less than 100% of the fair market
value on the date of grant (110% if the award is issued to a 10% or more
shareholder). The term of the options granted under the Plan cannot be greater
than 10 years; 5 years for certain optionees who have an ownership interest in
the Company or one if its subsidiaries. Options granted under the Plan are
exercisable at times and increments as specified by the Board of Directors.
An aggregate of 1,550,000 shares of common stock were reserved for grant under
the 1996 Plan and the 2000 Plan, of which 1,280,000 shares were available for
future grant at December 31, 2002.
The following table summarizes stock option transactions during the years ended
December 31, 2002, 2001 and 2000:
Weighted
Number of Average Price
Shares Per Share
---------- -------------
Balance at December 31, 1999 2,380,000 $ 6.48
Granted during 2000 650,000 3.20
Cancelled during 2000 2,200,000 6.78
---------- -------------
Balance at December 31, 2000 830,000 $ 3.22
Cancelled during 2001 60,000 1.88
---------- -------------
Balance at December 31, 2001 770,000 $ 3.18
No activity during 2002 - $ -
---------- -------------
Balance at December 31, 2002 770,000 $ 3.18
========== =============
Exercisable at December 31, 2002 761,000 $ 3.18
========== =============
F-14
The following summarizes prices and terms of options outstanding at December 31,
2002:
Stock Options Outstanding
-------------------------
Weighted Average Number
Number Remaining Exercisable at
Outstanding at Contractual Life in December 31,
Exercise Price December 31, 2002 Years 2002
-------------- ----------------- ------------------- ---------
$ 1.75 10,000 7.88 10,000
$ 1.88 20,000 3.15 20,000
$ 2.25 20,000 3.71 20,000
$ 2.38 30,000 5.41 30,000
$ 2.44 100,000 5.90 100,000
$ 3.40 575,000 3.15 566,000
$ 5.25 15,000 3.39 15,000
------- -------
770,000 3.68 761,000
======= =======
Warrants
In June 2002, in accordance with the terms of the Securities Purchase Agreement
with Seven Hills (Note 3), the Company issued Seven Hills warrants to purchase
up to 1,172,422 shares of common stock at an exercise price of $3.40 per share.
Warrants to purchase 881,137 shares of common stock are immediately exercisable
and will expire on June 25, 2007. Warrants to purchase 291,285 shares of common
stock ("Note Warrants") only will become exercisable upon conversion of the
convertible promissory note described in Note 3, in proportion to the amount of
the note converted if the note is not converted in whole, and will expire on
June 25, 2007. If no portion of the note is converted into common stock, then
the Note Warrants will not become exercisable. All of these warrants remain
unexercised at December 31, 2002.
In June 2000, in accordance with the terms of the Securities Purchase Agreement
with Rosemary Street (Note 3) the Company issued Rosemary Street warrants to
purchase 2,313,810 shares of common stock. The Company also issued warrants to
purchase 600,000 shares of common stock to individuals as compensation for
services rendered in connection with closing of the Securities Purchase
Agreement. The Company also issued warrants to purchase 75,000 shares of common
stock to an individual in consideration of his consent to the assignment by
Rosemary Street to the Company of his first look agreement. These warrants have
an exercise price of $3.40 per share, are fully vested, expire in June 2005 and
remain unexercised at December 31, 2002.
In 1996, the Company issued warrants to purchase 62,500 shares of common stock
at an exercise price of $5.00 per share. The warrants are fully vested and
expire in October 2003. At December 31, 2002, these warrants remain unexercised.
In 1995, the company issued warrants to purchase 4,500,000 shares of common
stock were issued at an exercise price of $5.00 per share. In January 2002, the
Company exchanged 4,135,579 of 4,500,000 outstanding warrants for 295,291 shares
of the Company's common stock. The remaining 364,421 warrants expired in
February 2002.
NOTE 9 - RELATED PARTY TRANSACTIONS:
Through June 2000, Ellen Dinerman Little was employed by the Company as its
co-chairman of the board, co-chief executive officer and president. In June
2000, the Company and Ms. Little terminated Ms. Little's existing employment
agreement and the Company entered into a first look agreement with The Little
Film Company, Inc. and Ms. Little. The agreement provides for a three-year term
ending in June 2003. Pursuant to the first look agreement, The Little Film
Company receives (i) an annual fee of $100,000; (ii) a discretionary revolving
development fund of $100,000 for The Little Film Company's use in the
option/acquisition of literary properties, engagement of writers and other
customary development costs; and (iii) customary overhead, including office
space, staff, telephone and reasonable travel costs of up to $150,000 per year.
F-15
The Little Film Company also will be compensated on a project-by-project basis.
The Company will have an exclusive "first look" on any project that The Little
Film Company owns or controls or any project that it has the right to acquire or
may wish to acquire for development or production. The Little Film Company will
furnish the Company with the services of Ms. Little in connection with the
development and possible production of theatrical motion pictures based upon
accepted artist submissions meeting certain criteria. We did not compensate The
Little Film Company relative to the production of any films during 2002 and
2001.
In October 2000, the Company entered into a consulting agreement with Wharton
Capital Partners Ltd. ("Wharton"). Barry Minsky, a director of the Company, is
the chief executive officer and a 50% stockholder of Wharton. Under the
agreement, Wharton received a one-time fee of $100,000, and a monthly fee of
$4,166 for 24 months beginning in November 2000. If Wharton introduces the
Company to a financing source and the Company consummates any public or private
equity and/or debt financing with the source during the term of the consulting
agreement or during the two-year period following the expiration of the
agreement, then the Company also will pay Wharton an amount equal to (i) 5% of
all funds received by the Company from such public or private equity financing
and (ii) 3% of all funds received by the Company from such public or private
debt financing. Additionally, upon completion of an equity-based financing, the
Company will issue to Wharton warrants to purchase shares of the Company's
common stock equal to 5% of the common stock or common stock equivalents issued
in the financing at an exercise price equal to 120% of the five-day average
closing bid price prior to the closing of such financing. The warrants will be
exercisable on a cashless basis and will have registration rights. During the
three years ended December 31, 2002, the Company recorded expenses of $37,500,
$50,000 and $112,500, respectively, related to services rendered by Wharton.
In May 2002, the Company and Seven Hills formed a joint venture company to
provide marketing and distribution funds for the theatrical release of motion
pictures. Reverge Anselmo, a director of the Company, is the sole member and
manager of Seven Hills, and Patrick Costello, a director of the Company, is the
chief financial officer of Seven Hills. In June 2002, Seven Hills funded the
Company's $2,000,000 capital contribution to the joint venture company pursuant
to a convertible promissory note issued by the Company and the joint venture
company (Notes 3 and 6). Also in June 2002, the Company, Seven Hills and the
joint venture company entered into a Film Marketing and Distribution Agreement,
pursuant to which the joint venture company will market and distribute motion
pictures that the Company or Seven Hills selects on an alternating basis. Under
the agreement, the Company will receive a distribution fee equal to 10% of the
Theatrical Gross Receipts (as defined in the agreement) derived from the U.S.
theatrical distribution of each picture designated by Seven Hills that the joint
venture company distributes. During 2002, the joint venture did not market or
distribute any movies and therefore no fees were earned or received by the
Company.
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
The Company leases office space and office equipment under various operating
leases, which expire between 2003 and 2007. Total rental expense under these
leases for the years ended December 31, 2002, 2001 and 2000 amounted to $517,000
$278,000 and $255,000, respectively. Minimum annual rental payments under
non-cancelable leases are as follows:
2003 $ 511,000
2004 508,000
2005 503,000
2006 503,000
2007 205,000
-------------
$ 2,230,000
=============
As of December 31, 2002, the Company was committed to pay minimum guarantees of
approximately $2,933,000 contingent upon delivery of certain films to the
Company.
Additionally, the Company has entered into arrangements with German film
financing partnerships whereby the Company has guaranteed that within three
F-16
years from the commencement of principal photography of the related film, the
licensing and distribution proceeds, net of fees and expenses, will be no less
than sixty to eighty percent (depending upon the specific arrangement) of the
amount funded toward the production cost of the related film. These guarantees
generally are not recorded as liabilities unless and until management expects
that proceeds from the licensing and distribution of the related film, net of
fees and expenses, will be insufficient to cover the guarantee within the agreed
upon period for the particular film. As of December 31, 2002, the Company had
three such commitments outstanding, whereby the total amount committed was
$10,238,000. These guarantees are summarized below.
Term of Guarantee Maximum Potential Current Carrying
-------------------- Amount of Amount of Projected Future
From To Guarantee Future Payments Libaility Assets Held Contracts
------ ------ --------- ---------------- ---------------- ----------- ----------------
Film 1 10/04/01 10/04/04 $ 5,240,000 $ 2,598,000 $ - $ 2,675,000 $ 2,200,000
Film 2 12/03/00 12/03/03 3,998,000 3,559,000 2,046,000 1,683,000 1,996,000
Film 3 01/31/02 01/31/05 1,000,000 717,000 371,000 712,000 695,000
-------------------------------------------------------------------------------------
$10,238,000 $ 6,874,000 $ 2,417,000 $ 5,070,000 $ 4,891,000
=====================================================================================
In the event any of the guarantees are drawn upon, the Company has the right to
retain proceeds from the collection of accounts receivable in addition to
proceeds from the future contracts of distribution rights in the respective film
where the guarantee had been called (both, net of fees and expenses) until we
have recovered any guarantee paid. The table above reflects the amount of cash
and accounts receivable held ("Assets Held") along with management's estimate of
the value of future contracts of distribution rights ("Projected Future
Contracts") to the respective film as of December 31, 2002. Management expects
that the possibility of having to honor its contingent obligations under these
agreements is remote and in the event any of the guarantees are drawn upon,
management believes that proceeds from the liquidation of accounts receivable
and further distribution rights will be sufficient to cover the maximum amount
of future payments under each guarantee.
NOTE 11 - FOREIGN SALES AND SIGNIFICANT CUSTOMERS:
The Company's foreign revenues are summarized as follows:
Years Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
(in thousands)
Western Europe $ 8,478 $ 11,782 $ 9,289
Asia 1,280 2,420 1,999
Latin America 1,676 1,684 1,139
Eastern Europe 600 641 806
Other 306 2,238 1,775
------------ ------------ -----------
$ 12,340 $ 18,765 $ 15,008
============ ============ ===========
No customers accounted for 10% or more of the Company's revenues for the years
ended December 31, 2002 and 2001, one customer accounted for $3,014,000 or 13.3%
of the revenues for the year ended December 31, 2000.
NOTE 12 - 401(K) PLAN
The Company has a 401(K) plan, which covers substantially all employees. Each
participant is permitted to make voluntary contributions not to exceed the
lesser of 15% of his or her respective compensation or the applicable statutory
limitation. The Company matches one-half of the first 4% contributed by the
employee. Amounts contributed by each employee are immediately vested and
amounts contributed by the Company vest over a five-year period at the rate of
20% per year. The Company's contributions to the plan were $48,000, $35,000 and
$24,000 in 2002, 2001 and 2000, respectively.
F-17
NOTE 13 - SEGMENT INFORMATION
The Company has managed its business in two operating segments: Motion Picture
Distribution and Television Commercial Production. The segments were determined
based upon the types of products and services provided and sold by each segment.
The Motion Picture Distribution segment acquires licenses, distributes,
sells and otherwise exploits distribution rights to motion pictures. Activities
include direct theatrical, video and DVD distribution in the U.S. as well as
licensing of rights to other theatrical, video and DVD distributors and to pay,
basic and free television broadcasters throughout the world. The Television
Commercial Production segment produces commercials for manufacturers and service
providers who use the commercial to promote their products and services. There
were no inter-segment transactions during the years reported. The Company
evaluates performance based on income or loss from operations before interest
expense and taxes. The Television Commercial Production segment has become
relatively inactive and the Company has eliminated substantially all overhead
related to this segment. In the future, if the Company produces any television
commercials, it will likely use a company partially owned by Christopher J.
Cooney, the Company's co-chairman and chief executive officer, and Jeffrey
Cooney, the Company's executive vice president and a director, to provide all
support services needed in exchange for a fee.
Financial information by operating segment is set forth below:
Year Ended and as of December 31, 2002 Year Ended and as of December 31, 2001
-------------------------------------- --------------------------------------
Television Television
Motion Commercial Motion Commercial
Pictures Production Total Pictures Production Total
--------------- --------------- --------------- --------------- ----------------- -------------
(in thousands) (in thousands)
Revenues from external
Customers $ 25,541 $ 1,158 $ 26,699 $ 34,881 $ 263 $ 35,144
Loss from operations
before interest and taxes (9,481) 125 (9,356) (2,387) (775) (3,162)
Total assets 41,729 193 41,922 45,264 207 45,471
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED):
As of December 31, 2002, the Company has sustained cumulative losses which
have resulted in a breach of the covenant contained in the credit agreement with
JPMorgan that sets forth a minimum level of net worth that the Company is
required to maintain. The Company has requested a waiver of this breach.
JPMorgan currently is considering this request and the Company is in negotiation
with respect to further modifications JPMorgan will require to the credit
agreement in exchange for such waiver. At this point, JPMorgan has indicated
that these modifications will likely include an immediate reduction of the
commitment level under the credit agreement from $40 million to approximately
$20 million, with further reductions so that by January 1, 2004 the commitment
level will be $15 million. The minimum net worth requirement would be waived
until December 31, 2003, subject to the Company maintaining a positive net worth
as calculated pursuant to GAAP . These modifications require the agreement of
51% of the voting right of the participating banks (the percentage based upon
the proportionate commitment of each bank to the total commitment of $40
million). Final resolution of this matter is expected by April 30, 2003. Until
then, the Company is precluded from drawing further funds under the credit
facility.
F-18
FIRST LOOK MEDIA, INC.
(formerly known as Overseas Filmgroup, Inc.)
Schedule II - Valuation and Qualifying Accounts
Balance at Charged to
Beginning of Costs and Balance at
Allowance for Doubtful Accounts Year Expenses Deductions End of Year
------------------------------- ------------- --------- ---------- -------------
(in thousands)
Year Ended December 31, 2002 $ 1,150 $ 2,175 $ (924) $ 2,401
Year Ended December 31, 2001 1,100 1,268 (1,218) 1,150
Year Ended December 31, 2000 1,100 1,876 (1,876) 1,100
S-1
To the Board of Directors
And shareholders of First Look Media, Inc.
Our audits of the consolidated financial statements referred to in our report
dated March 28, 2003, appearing in this Annual Report on Form 10-K also included
an audit of the financial statement schedule listed in Item 8 of this Form 10-K.
In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Century City, California
March 28, 2003
S-2