FILM ROMAN INC - 10-Q Quarterly Report

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 at least the past 90 days. YES x NO ¨.

	December 31, 2001			June 30, 2002
	(unaudited)
ASSETS
Cash and cash equivalents	$	2,776,757		$	1,225,757
Accounts receivable		259,784			189,079
Film costs, net of accumulated amortization of $50,663,342 (2001) and $62,811,678 (2002)		22,030,027			13,125,652
Property and equipment, net of accumulated depreciation and amortization of $2,797,025 (2001) and $2,987,025 (2002)		493,552			325,181
Deposits and other assets		612,492			611,132

Total Assets	$	26,172,612		$	15,476,801

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Accounts payable	$	1,678,063		$	983,491
Accrued expenses		1,964,982			1,832,544
Deferred revenue		26,312,646			17,429,868

Total liabilities		29,955,691			20,245,903
Stockholders’ deficiency:
Preferred Stock, $.01 par value, 10,000,000 shares authorized, none issued		—			—
Common stock, $.01 par value, 40,000,000 shares authorized, 8,577,690 shares issued and outstanding in 2001 and 2002 and outstanding in 2001		85,777			85,777
Additional paid-in capital		36,379,615			36,379,615
Accumulated deficit		(40,248,471	)		(41,234,494	)

Total stockholders’ deficiency		(3,783,079	)		(4,769,102	)

Total liabilities and stockholders’ deficiency	$	26,172,612		$	15,476,801

	Three Months ended June 30,						Six Months ended June 30,
		2001			2002			2001			2002

Revenue	$	9,401,056		$	11,080,891		$	28,599,635		$	26,890,682
Cost of revenue		9,287,388			10,498,670			27,540,960			26,293,064
Selling, general and administrative expenses		1,416,138			757,920			2,338,980			1,599,868

Operating loss		(1,302,470	)		(175,699	)		(1,280,305	)		(1,002,250	)
Interest income		8,829			5,943			48,471			16,227
Loss before cumulative effect of a change in accounting principle		(1,293,641	)		(169,756	)		(1,231,834	)		(986,023	)
Cumulative effect of a change in accounting principle		—			—			(364,000	)		—

Net loss	$	(1,293,641	)	$	(169,756	)	$	(1,595,834	)	$	(986,023	)

Loss before cumulative effect of a change in accounting principle, per common share basic & diluted	$	(0.15	)	$	(0.02	)	$	(0.14	)	$	(0.11	)

Net loss per common share basic and diluted	$	(0.15	)	$	(0.02	)	$	(0.19	)	$	(0.11	)

Weighted average number of shares outstanding basic and diluted		8,565,465			8,577,690			8,565,328			8,577,690

	Six Months ended June 30,
	2001			2002
Operating activities:
Net loss	$	(1,595,834	)	$	(986,023	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		200,000			190,000
Amortization of film costs		27,540,960			26,293,064
Cumulative effect of a change in accounting principles principle		364,000			—
Changes in operating assets and liabilities:
Accounts receivable		(346,070	)		70,705
Film costs		(19,942,649	)		(17,388,689	)
Deposits and other assets		(360,255	)		1,360
Accounts payable		(703,696	)		(694,572	)
Accrued expenses		(426,825	)		(132,438	)
Deferred revenue		(6,971,482	)		(8,882,778	)

Net cash (used in) operating activities		(2,241,851	)		(1,529,371	)
Investing activities:
Additions to property and equipment		(58,257	)		(21,629	)

Net cash used in investing activities		(58,257	)		(21,629	)
Financing activities:
Exercise of Stock Options		9,375			—

Net cash provided by financing activities		9,375			—

Net decrease in cash		(2,290,733	)		(1,551,000	)
Cash and cash equivalents at beginning of period		4,203,221			2,776,757

Cash and cash equivalents at end of period	$	1,912,488		$	1,225,757

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	6,000		$	5,600

Film Roman, Inc., a Delaware corporation (the “Company”), currently conducts all of its operations through its wholly owned subsidiaries, Film Roman, Inc., a California corporation; Namor Productions, Inc., a California corporation; Chalk Line Productions, Inc., a California corporation; Film Roman Records, Inc., a Delaware Corporation; Diversion Entertainment, Inc., a Delaware corporation; Level 13 Entertainment, Inc., a Delaware corporation and Special Project Films, Inc., a Delaware corporation. The accompanying consolidated unaudited financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments consisting only of normal recurring accruals necessary to present fairly the financial position of the Company as of June 30, 2002 and the results of its operations for the three and six months ended June 30, 2001 and 2002 and the cash flows for the six months ended June 30, 2001 and 2002 have been included. The results of operations for interim periods are not necessarily indicative of the results which may be realized for the full year. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (the “Form 10-K”) and the First Amendment to the Form 10-K (the “Form 10-K/A”) filed with the Securities and Exchange Commission.

In June 2000, Statement of Position 00-2 “Accounting by Producers or Distributors of Films” (“SOP 00-2”) was issued. SOP 00-2 establishes new financial accounting and reporting standards for producers and distributors of films, including changes in accounting for advertising, development and overhead costs. The Company adopted the provisions of SOP 00-2 as of January 1, 2001. SOP 00-2 requires that certain indirect overhead costs and development costs for abandoned projects be charged directly to expense, instead of those costs being capitalized to film costs as was required under the previous accounting model. In connection with the adoption of SOP 00-2, the Company recorded a non-cash charge of $364,000 to reduce the carrying value of its film inventory. Such amount is primarily due to the expensing of certain indirect overhead costs and development costs for abandoned projects, which were previously capitalized. The non-cash charge is reflected as a cumulative effect of a change in accounting principle in the accompanying consolidated statement of operations for the six months ended June 30, 2001.

This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “expect,” “estimate,” “anticipate,” “predict,” “believe,” “plan,” “should,” “may” and “projects” and similar expressions and variations thereof are intended to identify forward-looking statements. Such forward-looking statements relate to, among other things, trends affecting the financial condition or results of operations of the Company; the Company’s future production and delivery schedule (including the number of episodes of programming to be produced and delivered during the 2002-2003 television season); plans to enter into new business areas beyond the Company’s core business of animation television production; the Company’s objectives, planned or expected activities and anticipated financial performance and liquidity. These forward-looking statements are based largely on the Company’s current expectations and are subject to a number of risks and uncertainties, including without limitation, those described under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2001. Actual results could differ from these forward-looking statements. The Company does not make projections of its future operating results and undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Film Roman, Inc. (“Film Roman” or the “Company”) develops, produces and distributes a broad range of television programming for the television network, cable television, first-run domestic syndication and international markets. The Company was founded in 1984 and has grown into one of the leading independent animation studios in the world. Film Roman has produced and is producing some of the world’s best known animated series, including The Simpsons, King of the Hill, X-Men, The Mask, Bobby’s World, The Twisted Tales of Felix the Cat and Garfield & Friends. Over the years, the Company has primarily produced animation for television, both on a fee-for-services and a proprietary basis. While the Company is currently aggressively pursuing both of theses areas, the Company is also continuing expansion of its production capabilities into live action, and expansion of its animation beyond television, including motion pictures, cable, direct-to-video, commercials, and the Internet. As the Company moves into these other areas, it is also responding to the changes that are taking place in the media and entertainment areas.

Production work on a fee-for-services basis has historically accounted for the largest and most reliable portion of the Company’s revenues. Fees paid to the Company for these production services generally range from $300,000 to $800,000 per episode and typically cover all direct production costs plus a profit margin. The Company also produces programming for which it controls some of the proprietary rights (including, for example, international distribution and licensing and merchandising rights). Fees paid to the Company for these production services typically do not cover all direct production costs. Generally, the Company seeks to cover a portion of its production costs prior to production of its proprietary programs and seeks to cover the remaining production costs through the exploitation of the proprietary rights associated with these programs. As a result, the Company may recognize revenue associated with its proprietary programming over a period of years. Revenues from proprietary programming have not been material over the last several years.

The Company produces a limited number of animated television series in any year and is substantially dependent on revenues from licensing these programs to broadcasters and from fees from producing programs for third parties. The Company’s future performance will be affected by issues facing all producers of animated programming, including risks related to the limited number of time slots allocated to children’s and/or animated television programming, the intense competition for those time slots, the limited access to distribution channels (particularly for programs produced by independent studios), the declining license fees paid to producers of programming by broadcasters and the regulations implemented by the Federal Communications Commission (“FCC”) governing program content. While the Company seeks to limit its financial risk associated with its

proprietary programming by obtaining commitments from third parties prior to production to cover a portion of its direct production costs, there can be no assurance that the Company will be able to cover the balance of its production costs and overhead costs relating to production, licensing and distribution through the exploitation of its proprietary rights. As a result of the foregoing risks, there can be no assurance that the Company will be able to generate revenues that exceed its costs.

The Company is also continuing expansion of its production capabilities into live action, and expansion of its intended markets beyond television, including cable, direct-to-video, commercials and the Internet. The Company’s future performance will be affected by unpredictable and changing factors that influence the success of an individual television program or direct-to-video release such as personal taste of the public and critics as well as public awareness of a production and the successful distribution of a production. Although the Company intends to attempt to limit the risks involved with television, film and direct-to-video production, the Company will likely be unable to limit all financial risk, and the level of marketing, promotional and distribution activities and expenses necessary for such production cannot be predicted with certainty. The Company has a limited history of developing, producing or distributing live action television, computer generated animation and there can be no assurance that the Company can compete successfully with more established persons or entities. Live action production involves many of the risks associated with animation production as well as additional risks inherent to live action that are outside of the Company’s control. These risks include, but are not limited to, the risk of strike by actors and film crew, increased union activity, delay in production, weather and other local conditions, inability to obtain proper permitting at a desired site, at desired times and/or under desired terms, and accidents or injury to actors and film crew. No assurance can be given that the Company will produce any live action television, film or direct-to-video productions or that, if produced, such productions will be profitable.

The Company has historically been a major producer of animated prime time, first run syndicated, and Saturday morning programming. The market for these programs is composed of television networks (ABC, CBS, NBC, FOX, UPN and Warner Brothers); syndicators of first run programming that license programming on local stations nationwide (Columbia-Tristar, Universal, Paramount, King, Fox, MGM and Viacom); and cable networks and services (USA, Disney Channel, Fox Family, HBO, Showtime and TNT).

The Simpsons. The Company is scheduled to produce 22 new episodes of The Simpsons for exhibition over the Fox Broadcasting Network. Entering its fourteenth season and still the longest-running prime time animated series in television history, The Simpsons has been honored with a number of awards, including a Peabody Award, Emmy Awards, Annie Awards, Genesis Awards, International Monitor Awards and Environmental Media Awards, among numerous other honors. The Simpsons has transformed the way the television industry and audiences perceive animation and comedy series in general.

King of the Hill. The Company is currently scheduled to produce 22 new episodes of King of the Hill to be exhibited on the Fox Broadcasting Network. King of the Hill is the hit half-hour, animated comedy, voted the Best Television Show of 1997 by TV Guide and Entertainment Weekly, that tells the hilarious stories about Hank Hill, his family and their neighbors in the fictional suburb of Arlen, Texas, the heartland of America.

Delaware		95-4585357
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of December 31, 2001 and June 30, 2002 (unaudited)	3

	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2001 and June 30, 2002 (unaudited)	4

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and June 30, 2002 (unaudited)	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	14

PART II. OTHER INFORMATION

Item 4.	Submission of Matters to a Vote of Security Holders	15

Item 5.	Other Information	15

Item 6.	Exhibits and Reports on Form 8-K	15

Signatures		16

Certifications of Chief Executive Officer and Chief Financial Officer		17

Index to Exhibits		18

	December 31, 2001		June 30, 2002
			(unaudited)
Film productions in process	$	21,844,184	$	12,492,215
Film productions in development		185,843		633,437

	$	22,030,027	$	13,125,652