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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2002
OR
¨ |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] |
For the transition period from
to
Commission file number 000-29642
FILM ROMAN, INC.
(Exact name of registrant as
specified in charter)
| Delaware |
|
95-4585357 |
| (State or other jurisdiction |
|
(I.R.S. Employer |
| of incorporation or organization) |
|
Identification Number) |
12020 Chandler Boulevard, Suite 300
North Hollywood, California 91607
(Address of principal executive offices) (Zip
Code)
(818) 761-2544
(Registrant’s telephone number, including area code)
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 ¨.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
As of October 31, 2002, 8,577,690 shares of common stock, par value $.01 per share, were issued and outstanding.
| PART I. FINANCIAL INFORMATION |
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| Item 1. |
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3 |
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| Item 2. |
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7 |
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| Item 3. |
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14 |
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| Item 4. |
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14 |
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| PART II. OTHER INFORMATION |
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| Item 6. |
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15 |
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16 |
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17 |
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18 |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FILM ROMAN, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
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|
December 31, 2001
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|
September 30, 2002 (Note
1)
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(unaudited) |
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| ASSETS |
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| Cash and cash equivalents |
|
$ |
2,776,757 |
|
|
$ |
1,908,658 |
|
| Accounts receivable |
|
|
259,784 |
|
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|
129,404 |
|
| Film costs, net of accumulated amortization of $50,663,342 (2001) and $67,878,714 (2002) |
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|
22,030,027 |
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|
18,219,432 |
|
| Property and equipment, net of accumulated depreciation and amortization of $2,797,025 (2001) and $3,077,025 (2002)
.. |
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|
493,552 |
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244,224 |
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| Deposits and other assets |
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|
612,492 |
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|
523,479 |
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| |
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| Total Assets |
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$ |
26,172,612 |
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$ |
21,025,197 |
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| LIABILITIES AND STOCKHOLDERS’ DEFICIENCY |
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| Accounts payable |
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$ |
1,678,063 |
|
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$ |
840,580 |
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| Accrued expenses |
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1,964,982 |
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1,902,744 |
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| Deferred revenue |
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26,312,646 |
|
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24,072,315 |
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| Total liabilities |
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29,955,691 |
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26,815,639 |
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| Commitments and Contingencies |
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| Stockholders’ deficiency: |
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| Preferred Stock, $.01 par value, 10,000,000 shares authorized, none issued |
|
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— |
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— |
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| Common stock, $.01 par value, 40,000,000 shares authorized, 8,577,690 shares issued and outstanding in 2001 and
2002 |
|
|
85,777 |
|
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|
85,777 |
|
| Additional paid-in capital |
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|
36,379,615 |
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|
36,379,615 |
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| Accumulated deficit |
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(40,248,471 |
) |
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(42,255,834 |
) |
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| Total stockholders’ deficiency |
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(3,783,079 |
) |
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(5,790,442 |
) |
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| Total liabilities and stockholders’ deficiency |
|
$ |
26,172,612 |
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$ |
21,025,197 |
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See accompanying notes
3
FILM ROMAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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Three Months ended September 30,
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Nine Months ended September 30,
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|
2001
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2002
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2001
|
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2002
|
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| Revenue |
|
$ |
3,715,109 |
|
|
$ |
5,737,843 |
|
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$ |
32,314,745 |
|
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$ |
32,628,525 |
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| Cost of revenue |
|
|
4,457,596 |
|
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|
5,851,168 |
|
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32,424,340 |
|
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32,144,232 |
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| Selling, general and administrative expenses |
|
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1,289,604 |
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910,763 |
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3,202,801 |
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2,510,631 |
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| Operating loss |
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(2,032,091 |
) |
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(1,024,088 |
) |
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(3,312,396 |
) |
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(2,026,338 |
) |
| Interest income |
|
|
18,961 |
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|
2,748 |
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67,432 |
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18,975 |
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| Loss before cumulative effect of a change in accounting principle |
|
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(2,013,130 |
) |
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(1,021,340 |
) |
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(3,244,964 |
) |
|
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(2,007,363 |
) |
| Cumulative effect of a change in accounting principle |
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— |
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— |
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(364,000 |
) |
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— |
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| Net loss |
|
$ |
(2,013,130 |
) |
|
$ |
(1,021,340 |
) |
|
$ |
(3,608,964 |
) |
|
$ |
(2,007,363 |
) |
| |
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| Loss before cumulative effect of a change in accounting principle, per common share basic & diluted
|
|
$ |
(0.23 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.38 |
) |
|
$ |
(0.23 |
) |
| |
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| Net loss per common share basic and diluted |
|
$ |
(0.23 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.42 |
) |
|
$ |
(0.23 |
) |
| |
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| Weighted average number of shares outstanding basic and diluted |
|
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8,577,690 |
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8,577,690 |
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8,569,494 |
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8,577,690 |
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See accompanying notes
4
FILM ROMAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| |
|
Nine Months ended
September 30,
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2001
|
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2002
|
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| Operating activities: |
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| Net loss |
|
$ |
(3,608,964 |
) |
|
$ |
(2,007,363 |
) |
| Adjustments to reconcile net loss to net cash used in operating activities: |
|
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| Depreciation and amortization |
|
|
300,000 |
|
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|
280,000 |
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| Amortization of film costs |
|
|
32,424,340 |
|
|
|
32,144,232 |
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| Cumulative effect of a change in accounting principle |
|
|
364,000 |
|
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|
— |
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| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
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| Accounts receivable |
|
|
(201,452 |
) |
|
|
130,380 |
|
| Film costs |
|
|
(31,467,984 |
) |
|
|
(28,333,637 |
) |
| Deposits and other assets |
|
|
(28,274 |
) |
|
|
89,013 |
|
| Accounts payable |
|
|
(418,860 |
) |
|
|
(837,483 |
) |
| Accrued expenses |
|
|
(342,723 |
) |
|
|
(62,238 |
) |
| Deferred revenue |
|
|
1,802,558 |
|
|
|
(2,240,331 |
) |
| |
|
|
|
|
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|
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| Net cash used in operating activities |
|
|
(1,177,359 |
) |
|
|
(837,427 |
) |
| Investing activities: |
|
|
|
|
|
|
|
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| Additions to property and equipment |
|
|
(91,706 |
) |
|
|
(30,672 |
) |
| |
|
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|
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| Net cash used in investing activities |
|
|
(91,706 |
) |
|
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(30,672 |
) |
| Financing activities: |
|
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| Exercise of Stock Options |
|
|
9,375 |
|
|
|
— |
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| Net cash provided by financing activities |
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|
9,375 |
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|
— |
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| Net decrease in cash |
|
|
(1,259,690 |
) |
|
|
(868,099 |
) |
| Cash and cash equivalents at beginning of period |
|
|
4,203,221 |
|
|
|
2,776,757 |
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| |
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| Cash and cash equivalents at end of period |
|
$ |
2,943,531 |
|
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$ |
1,908,658 |
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| Supplemental disclosure of cash flow information: |
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| Cash paid during the period for: |
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| Income taxes |
|
$ |
6,000 |
|
|
$ |
5,600 |
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See accompanying notes
5
FILM ROMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)—Basis of Presentation
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 unaudited consolidated 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 considered necessary to present fairly the
financial position of the Company as of September 30, 2002 and the results of its operations for the three and nine months ended September 30, 2001 and 2002 and the cash flows for the nine months ended September 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.
(2)—Net Loss per Common Share
For the three and nine months ended September 30, 2001 and 2002, the per share data is based on the weighted average number of common shares outstanding during the periods. Common equivalent shares, consisting of outstanding stock
options, are not included in the calculation because they are antidilutive.
(3)—Film Costs
The components of unamortized film costs consist of the following:
| |
|
December 31, 2001
|
|
September 30, 2002
|
| |
|
|
|
(unaudited) |
| Film productions in process |
|
$ |
21,844,184 |
|
$ |
17,944,568 |
| Film productions in development |
|
|
185,843 |
|
|
274,864 |
| |
|
|
|
|
|
|
| |
|
$ |
22,030,027 |
|
$ |
18,219,432 |
| |
|
|
|
|
|
|
(4)—Conforming Presentation
Certain amounts presented in the September 30, 2001 Consolidated Statements of Operations and Cash Flows have been reclassified to
conform to the September 30, 2002 basis of presentation.
(5)—Change in Accounting Principle
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 nine months
ended September 30, 2001.
6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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); 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.
General
Film
Roman, Inc. (“Film Roman” or the “Company”) develops, produces and licenses 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 to explore ways to expand its production capabilities in 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 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 public acceptance of its programming, 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
7
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 to explore ways to expand its animated production capabilities 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’s 2002 Production Schedule
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
The WB); 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, MTV, Fox Family, HBO,
Showtime and TNT).
The Company is currently scheduled to produce the following programming for the 2002-2003
broadcast season:
The Simpsons. The Company is producing 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 producing 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.
X-Men. The Company is currently producing 13 episodes of X-Men, which airs Saturday
mornings on the WB Network.
Tripping the Rift. The Company has a
firm order from the Sci-Fi Channel for 13 episodes of Tripping the Rift, which will be produced through a Canadian Company, CineGroupe.
John Waters’ Patent Leather Dream House. The Company is developing this late-night half-hour series for MTV to be produced through CineGroupe.
Hairballs. The Company is currently developing this late-night half-hour series.
Projects in Development. The Company is currently developing Rex
Riders for evening viewers and is developing Shlub, Deity and Shawks for the kids’ market.
8
Results of Operations
Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001
Total revenue increased by 54%, or $2.0 million, to $5.7 million for the quarter ended September 30, 2002, from $3.7 million for the quarter ended September 30, 2001. Total
revenue increased due to more fee-for-services episodes delivered in 2002 compared to the same period in 2001.
The Company delivered 9 fee-for-services episodes during the quarter ended September 30, 2002 compared to 6 episodes in the comparable period in 2001. Fee-for-services revenue increased 61%, or $2.0 million, to $5.3 million for
the quarter ended September 30, 2002, from $3.3 million in the comparable period in 2001 as a result of the increase in episo