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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT 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
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)
Registrant's telephone number, including area code: (818) 761-2544
Securities registered pursuant to 12(b) of the Act:
None
Securities registered pursuant to 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Check 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 [ ].
Check if disclosure 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 10-K or any amendment to this Form
10-K. [ ]
As of March 3, 2003, the aggregate market value of Film Roman's common
stock, par value $0.01 per share ("Common Stock") held by nonaffiliates of the
registrant was approximately $212,365 based upon the last reported sales price
of the Common Stock as reported by the National Association of Securities
Dealers Over the Counter Bulletin Board ("NASD OTCBB"). Shares of Common Stock
held by each executive officer, director, holder of greater than 10% of the
outstanding Common Stock of the registrant and persons or entities known to the
registrant to be affiliates of the foregoing have been excluded in that such
persons may be deemed to be affiliates. This assumption regarding affiliate
status is not necessarily a conclusive determination for other purposes.
As of March 15, 2003, 8,577,690 shares of Common Stock were
outstanding.
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TABLE OF CONTENTS
Page
PART I .................................................................................................... 3
Item 1. BUSINESS............................................................................................ 3
Overview............................................................................................ 4
2002 Milestones..................................................................................... 4
Strategy............................................................................................ 4
The Company's 2002 Production Schedule.............................................................. 5
Principal Elements of the Company's Business........................................................ 6
Government Regulations.............................................................................. 9
Trademarks.......................................................................................... 10
Employees........................................................................................... 10
Item 2. PROPERTIES.......................................................................................... 10
Item 3. LEGAL PROCEEDINGS................................................................................... 11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................. 11
PART II .................................................................................................... 12
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................... 12
Item 6. SELECTED FINANCIAL DATA............................................................................. 13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 14
General............................................................................................. 14
Business Activities................................................................................. 15
Industry Accounting Policies........................................................................ 15
Results of Operations............................................................................... 16
Liquidity and Capital Resources..................................................................... 18
Risk Factors........................................................................................ 20
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................... 22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................................... 23
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................ 23
PART III .................................................................................................... 24
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................................. 24
Executive Officers and Directors.................................................................... 24
Item 11. EXECUTIVE COMPENSATION.............................................................................. 28
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................... 33
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................... 35
PART IV .................................................................................................... 35
Item 14. CONTROLS AND PROCEDURES............................................................................. 35
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................................... 35
Item 16. PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................................................. 36
SIGNATURES ....................................................................................................... 37
CERTIFICATION .................................................................................................... 39
INDEX TO EXHIBITS ................................................................................................ 41
2
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION. This Report contains
statements that constitute "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. The words "expect," "estimate,"
"anticipate," "predict," "believe," "plan," "should," "will," "may," "projects"
and similar expressions and variations thereof are intended to identify
forward-looking statements. Such statements appear in a number of places in this
filing and include statements regarding the intent, belief or current
expectations of the Company, its directors or officers with respect to, among
other things, (a) trends affecting the financial condition or results of
operations of the Company, (b) the business and growth strategies of the
Company, and (c) the Company's objectives, planned or expected activities and
anticipated financial performance. The stockholders of the Company are cautioned
not to put undue reliance on such forward-looking statements. Such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in this Report, for the reasons, among others, discussed in the
Section "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Risk Factors." The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date hereof. Readers should carefully review the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q
and any Current Reports on Form 8-K filed by the Company.
PART I
ITEM 1. BUSINESS
OVERVIEW
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 these areas, the Company is
also continuing to explore ways to expand its production capabilities in
animation beyond television, including 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.
Over the past few years there has been a consolidation of media and
entertainment companies. Management believes that this consolidation has created
both an obstacle and an opportunity for content creators and producers such as
Film Roman. On the one hand, consolidation presents an obstacle because the many
delivery channels are concentrated in few hands; on the other hand, it
represents an opportunity because these distribution outlets have a continuing
need for content, and, with the possible exception of the children's television
market, it has become apparent that these outlets cannot supply all of the
content through their vertically integrated affiliated companies. These
distributors all compete for the content that a limited number of creators and
producers can provide. Most major media distributors have a series of strategic
relationships in order to supply their continually growing need for content.
3
As management moves toward creating, selling and producing content for
a wide range of distribution outlets, including television and direct-to-video
productions. In its core business of animation, the Company hopes to use its
relationships developed from these endeavors to forge a series of strategic
relationships with major distributors, who will engage the Company in the future
to produce shows. If Film Roman is successful in establishing one or more of
these types of relationships, management believes the Company will be in a
better position to produce its own proprietary projects as well as produce
fee-for-services projects for its partners.
It is management's goal to more firmly establish Film Roman as a
broadbased developer, packager and producer of programming, whether it is for a
10-second commercial, a television series or direct to video product on both a
fee-for-services and proprietary basis.
2002 MILESTONES
. Continued production and delivery of King of the Hill (23 episodes
delivered for Twentieth Century Fox, airing on the Fox Broadcast
Network) and The Simpsons (23 episodes delivered for Twentieth Century
Fox, airing on the Fox Broadcast Network) and X-MEN (18 episodes
delivered for the Kids WB Network, airing on The WB Network).
. Started fulfilling an order from Sci-Fi Channel for 13 episodes of
Tripping the Rift, which will be produced through a Canadian Company,
CineGroupe.
. Reached an agreement to produce 7 episodes of Free for All for
Showtime.
. Forum's (the Company's visual effect division described below)
accomplishments include Daredevil, Charlie's Angels II and a promotion
film for Matchbox.
STRATEGY
Building on the cornerstone of its reputation as a quality animation
supplier to the U.S. and international broadcast marketplaces, the Company is
currently pursuing animation development, both on a proprietary and on a
fee-for-services basis with a more aggressive approach on fee-for-services
projects.
. Create and Develop Popular Proprietary Productions. The Company
believes that it has the capacity to create successful franchises in
the animated television, computer animation and direct-to-video
industries. The Company further believes that its reputation for
high-quality animation and artistic integrity helps it to attract
premiere creative artists and storytellers whose characters and
concepts, when imaginatively developed and artistically produced, have
the potential of developing into character franchises.
. Continue to Pursue Work-for-Hire Productions. Capitalizing on its
reputation as one of the premiere producers of high quality animation,
the Company believes that it can pursue work-for-hire animated
productions on an opportunistic basis to use its production capability
to increase the Company's revenues and profitability.
. Strategically Expand Digital Capabilities. The Company has formed
Forum Visual Effects, which enabled the Company to consolidate all
digital and computer generated imaging ("CGI") into a new unit with
the abilities in all areas of digital animation and visual effects.
The Company believes that this expansion will enhance its ability to
compete in a broad range of
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animation, special effects and graphics. This will put the Company in
a preferred position in the broad industry that will emerge when
technology, graphics and animation converge.
. Pursue Production Relationships. The Company intends to continue to
pursue and evaluate potential opportunities with domestic and
international co-financing partners, with the goal that risks may be
shared, complementary skills may be exploited and foreign subsidies
may be utilized in the production of new entertainment properties.
. Establish an Internet Presence. In late 1999, the Company established
Level 13.net ("Level 13"). It serves as a site to exhibit the more
than 150 animated shorts the Company has licensed.
. Reduce Overhead and Development Costs. The Company has continued to
realign its management structure and reduce its general overhead on a
go forward basis to streamline operations and substantially reduce
costs. Further, the amount of development money spent on any
individual project has been greatly reduced and the projects being
developed are more deliberately targeted at specific buyers, thereby
reducing the overall costs of development and overhead associated with
that development, while at the same time increasing the likelihood of
selling projects in each area of the Company's production objectives.
The Company believes its reduced overhead, realigned management and
focused development will allow the Company to invest its time and dollars more
successfully in a broad and diverse range of programming. This diverse
production should ultimately lead to strategic distribution relationships that
will generate both proprietary and fee-for-services animated productions. There
can be no assurance that the Company will be successful in implementing any or
all aspects of this strategy. The discussion of the Company's strategy contains
certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Actual
results could differ materially from those projected in these forward-looking
statements as a result of certain risk factors described elsewhere in this
Report or other factors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors."
The Company is a Delaware corporation with its principal executive
offices located at 12020 Chandler Boulevard, Suite 300, North Hollywood,
California 91607, and its telephone number is (818) 761-2544.
THE COMPANY'S 2003 PRODUCTION SCHEDULE
The Company is currently scheduled to produce the following
programming for the 2003-2004 broadcast season:
The Simpsons. The Company is scheduled to produce 22 new episodes of
The Simpsons for exhibition over the Fox Broadcasting Network.
Entering its fifteenth 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.
5
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 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 scheduled to produce 9 episodes of
X-Men, which airs Saturday mornings on the WB Network.
Tripping the Rift. The Company has a begun to fulfill an order from
the Sci-Fi channel for 13 episodes of Tripping the Rift, which will be
produced through a Canadian Company, CineGroupe.
Free for All. The Company is currently scheduled to produce 7 episodes
of Free for All for Showtime.
Projects in Development. The Company is currently developing Schlub,
Deity and Shawks for the kids' market.
PRINCIPAL ELEMENTS OF THE COMPANY'S BUSINESS
The Company's business of developing, producing and distributing a
broad range of animated television programming for the television network, cable
television, direct-to-video, first-run domestic syndication and international
markets is described below.
Fee-for-Services Productions. Production work on a fee-for-services
basis has historically accounted for the largest and most reliable portion of
the Company's revenues. The Company intends to continue to pursue production
work on a fee-for-services basis, primarily for prime-time animated television
programming, as well as in the other new areas of production. During 2002, the
Company was engaged to produce 22 episodes of King of the Hill, 22 episodes of
The Simpsons, and 17 episodes of X-Men. In 2002 the Company delivered 23
episodes of King of the Hill, 23 episodes of The Simpsons, and 18 episodes of
X-Men. In addition, the Company has been marketing its commercial production
services and during 2002 produced commercials for Kellogg's, Suntory, Sabritas
and Burger King. Management believes that the fee-for-services business, with a
particular emphasis on prime-time animation shows, will remain a cornerstone of
the Company's business, and intends to pursue additional work as such shows
become available.
Acquisition, Creation and Development of Proprietary Programming. The
Company pursues ideas and properties it believes contain unique and commercial
story lines and/or characters. These ideas and properties may originate from a
variety of sources. As a result of the Company's reputation and position in the
entertainment industry, many creators, rights holders, writers, broadcasters and
studios bring new concepts to the Company for development and production. The
Company may enter into an option agreement to acquire rights to an existing
property, which the Company may then develop internally into animated program.
The Company will then take the project to the networks or the studios for
further development, financing and/or distribution.
Once the Company has created this new idea or acquired the rights to
the existing property, the Company continues the development process by
preparing a presentation to "pitch" the project to a domestic buyer (and, on
some occasions, to international broadcasters). These presentations generally
consist of treatments, story premises, scripts, artwork, designs and/or
character designs and/or test
6
animation or presentations. With respect to television production, if a "free"
television broadcaster or cable network is interested in developing the idea
further, the broadcaster will generally acquire an exclusive option to order the
production of a certain number of episodes based on the idea and will agree to
reimburse the Company for all or a portion of the development costs if it does
not ultimately order production of any episodes. A broadcaster generally
collaborates in the later stages of development and will have the right to
approve the selection of the writers, directors, artists, and actors, and the
creation of a pilot script. The creation, acquisition and development of a new
program can take three to twelve months, and sometimes longer.
The Company is currently developing a carefully selected small group
of proprietary animated programs including prime-time, Saturday morning, and
teen-oriented projects. These projects will depend, in varying degrees, on the
Company's ability to arrange for U.S. broadcast, worldwide distribution, and/or
international co-production.
Securing Funding for Proprietary Programming. Historically, the
Company produced animated programming almost exclusively on a "fee-for-services"
basis. In 1995 the Company began producing proprietary animated programming. The
Company generally does not commence production on proprietary programming,
unless the Company has obtained commitments to cover a substantial portion of
the Company's direct production costs. The Company generally secures these
commitments in one or both of the following ways: (i) a combination of network,
cable, syndication, or other license fees for exploitation of the program in the
United States, and (ii) pre-sale to distributors and/or co-production partners
in foreign territories. The Company typically funds the balance of the
production costs on a current basis. Since the Company began producing
proprietary programming in 1995, the Company has delivered 96 half-hour episodes
and 12 one-hour episodes of proprietary programming.
While the Company generally seeks to limit its financial risk
associated with its proprietary programming by obtaining commitments from third
parties prior to production to cover a substantial 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 remaining
rights. The Company may not cover its costs for the following reasons: (i) a
proprietary program may be cancelled; (ii) a proprietary program and/or its
related licensed products may not appeal to the Company's targeted audience or
may not appeal to the same audience targeted by a licensee; (iii) the Company
and/or its licensee may not effectively market and distribute the Company's
programming domestically or internationally; or (iv) the actual production costs
may exceed the original budget. Moreover, since certain international
distribution arrangements and other domestic and international licensing
activities are conditioned upon the United States broadcast of a minimum number
of programming episodes on a network or cable channel, no assurance can be given
that any series will be broadcast in the United States for a sufficient period
in order to meet these contractual conditions.
PRODUCTION
Animated Television Production. The Company generally commences
production of animated television programs during the first and second quarters
of any calendar year for delivery commencing during the third quarter, and to a
greater extent, the fourth quarter of that same year. The Company typically has
seven to nine months to produce and deliver an order of thirteen (13) half-hour
episodes (the number of episodes commonly ordered for the first year of a
program). As discussed above, the Company's animation strategy is to continue to
pursue both fee-for-services and proprietary production opportunities. While the
processes involved in producing an animated show are similar for both
7
proprietary and fee-for-services programs, the Company may not be responsible
(especially in the case of fee-for-services work) for the entire production
process as outlined below.
The first step of the Company's production process is generally the
creation of the script. The Company will generally select a story editor to
supervise the preparation of each episode's script by various freelance
scriptwriters. The artists depict the story and action in storyboards, which
provide a blueprint for the animation process. Voices and songs are recorded and
the recordings are analyzed and timed so that the animation can be synchronized
to the voice track. Based on the script and storyboard, the Company's artists
create character designs, as well as key background drawings and paintings.
These essential elements are assembled into a pre-production package for each
episode that is then shipped to an overseas subcontractor. Subcontractors use
the pre-production materials to perform most of the labor-intensive aspects of
production. Most of these subcontractors are located in low-cost labor countries
in the Far East, including South Korea, Taiwan, China and the Philippines. The
subcontractor ships the negative and work print for each episode to the Company.
The film is then taken through a post-production process, which includes editing
the picture and dialogue, transferring the filmed images to videotape, creating
sound effects, composing and producing the musical score and mixing and
synchronizing the sound to the picture. After the postproduction process, an
episode is ready for delivery.
DISTRIBUTION OF PROPRIETARY PROGRAMMING
Domestic Television Distribution. Prior to commencing production of
its proprietary programming, the Company generally licenses broadcast rights to
a United States broadcaster. See "Securing Funding Production for Proprietary
Programming." License fees paid by networks and cable networks for the Company's
proprietary programming can cover as much as 50% of the Company's direct
production costs. In some cases, notably for Saturday morning children's
programs, the license fees can be less than 20% of the Company's direct
production costs. License fees paid by first-run syndicators for the Company's
proprietary programming generally cover less than 50% of the Company's direct
production costs, and, under certain circumstances, first-run syndicators pay no
license fees. The Company may choose to enter into such a no-license-fee
arrangement when it can share in a portion of the revenues generated from the
sale of advertising aired by a syndicator during the broadcast of the Company's
programming and when the Company has obtained financing to cover a portion of
its direct production costs from sources other than the syndicator. If the
Company's program is highly rated in syndication, the Company may earn more in
revenues from advertisers (since those advertisers will often be willing to pay
higher fees to have their commercials aired during the broadcast of the
Company's program) than the Company would have earned in revenues from a license
fee arrangement with a syndicator that does not require the syndicator to share
advertising revenues with the Company. Conversely, if the Company's program is
poorly rated in syndication, the Company will likely earn less in revenues than
if it had negotiated to receive a license fee.
The license agreement typically includes provisions governing the
license fee, the term during which the program will be broadcast, the number of
episodes and the territories in which the episodes will be broadcast. Upon the
expiration of an initial broadcast license, the exhibition rights for the
applicable program revert to the Company and are available for re-licensing.
International Distribution. Recently the international market for
American filmed entertainment has become increasingly fractionalized and
competitive, similar to the changes experienced in the U.S. In the face of an
increasingly difficult international marketplace, the Company believes that
owning and controlling the international distribution rights to its programming
will be necessary to (i) successfully
8
finance projects; (ii) generate significant revenue from the licensing of such
programming; and (iii) support its related international licensing and
merchandising efforts.
Library. The Company owns a library of proprietary entertainment and
hopes to add future product by continuing to produce high quality programming,
including broadcast television, cable and direct-to-video productions, which can
be licensed and re-licensed in the world-wide television, film and video
marketplaces. Programming is typically licensed for five-year cycles. A library
of proprietary programming can provide a future revenue stream, as such programs
are re-licensed for broadcast after the expiration of the initial broadcast
license, but such revenue is typically at reduced rates compared to the initial
broadcast license. Programs in the Company's library can also be licensed to new
channels and outlets in emerging markets around the world. Handling of
distribution of the library by outside distributors is currently being
considered.
The following matrix lists the titles currently in the Company's
library, along with the rights the Company possesses for each such title.
DOMESTIC DISTRIBUTION INTERNATIONAL DISTRIBUTION
-------------------------------- ------------------------------------------------
NUMBER OF
EPISODES HOME HOME LICENSING &
SERIES TITLE PRODUCED TV VIDEO TV VIDEO MERCHANDISING INTERACTIVE
------------- ---- --------- ---- --------- -------------- -------------
The Twisted Tales of Felix the Cat 21 (x1/2 hr.) X X X X *
C-Bear and Jamal 13 (x1/2 hr.) X X X X X X
BRUNO the Kid 36 (x1/2 hr.) X X X X X X
Mortal Kombat 13 (x1/2 hr.) X X X X
The Mr. Potato Head Show 13 (x1/2 hr.) X X X X *
Bobbys World ** 83 (x1/2 hr.) X X
* The Company is entitled to certain licensing, merchandising, and toy
revenue associated with The Twisted Tales of Felix the Cat and The Mr. Potato
Head Show but does not control those rights.
** In conjunction with Alevy Productions.
In addition to the series listed above, the Company owns approximately
149 animated short subjects ("shorts") of various lengths for which the Company
has Internet distribution or exhibition rights. The Company has also obtained
options to acquire all of the underlying proprietary rights on a number of these
shorts. Revenue from such projects has not been significant.
GOVERNMENT REGULATIONS
The Federal Communications Commission ("FCC") repealed its financial
interest and syndication rules, effective as of September 21, 1995. Those FCC
rules, which were adopted in 1970 to limit television network control over
television programming and thereby foster the development of diverse programming
sources, had restricted the ability of the three established, major United
States television networks (ABC, CBS and NBC) to own (or to be owned by) a
syndicated television programmer and to own financial interests in programming
aired on their networks. As a consequence, broadcasters have continued to
increase in-house productions of television programming for the networks' own
use and in the network programs in which a network holds a financial interest.
The Company believes that this
9
change, compounded by the vertical integration discussed above, has had a
significant negative impact on the Company's core animation business to the
extent that the networks target children's programming.
Broadcast customers of the Company are subject to the provisions of
the Children's Television Act of 1990 and the implementing rules issued by the
FCC. These rules, which were amended in August 1996 and became fully effective
in September 1997, require television broadcast station licensees, over the term
of their licenses, to serve the educational and informational needs of children
through their overall programming and programming specifically designed to serve
such needs. The FCC strongly encourages broadcasters (through the license
renewal process) to air between the hours of 7:00 AM and 10:00 PM at least three
hours per week of regularly-scheduled programs each at least 30 minutes in
length that have as a significant purpose serving the educational and
informational needs of children aged 16 and under. Such programming must be
specifically identified as educational or informational programming. While the
Company is not subject to the direct jurisdiction of the FCC, these FCC
requirements may influence the content of the Company's programming in order for
the Company to place programs on FCC-licensed stations.
The Company may be subject to local content and quota requirements in
the international markets, which effectively prohibit or limit access to
particular markets. The Company also seeks to comply with self-regulatory rules
relating to children's programming of the Children's Advertising Review Unit of
The Council of Better Business Bureaus and of the national television networks
by reviewing the proposed content of each property prior to acquisition and
acquiring rights to and distributing only those children's properties for which
there will be no material restrictions on exhibition to children.
TRADEMARKS
The Company has a registered service mark for the Film Roman name and
logo. The Company also has applications pending with the United States Patent
and Trademark Office to register several trademarks and service marks and the
Level 13 name and logo. Pursuant to arrangements with the owners of the programs
it produces, the Company utilizes certain trademarks and copyrighted materials,
including The Simpsons, Bobby's World, Felix the Cat, The Mask, Richie Rich,
Mortal Kombat, and King of the Hill.
EMPLOYEES
As of December 31, 2002, the Company had approximately 268 full-time
employees. The Company also regularly engages numerous freelance creative staff
and other independent contractors on a project-by-project basis. The Company is
subject to the terms in effect from time to time of various industry-wide
collective bargaining agreements, including agreements with the Screen Actors
Guild. The Company believes that its relations with its employees are good.
ITEM 2. PROPERTIES
The Company conducts its operations at its 87,000 square foot studio
and headquarters located in North Hollywood, California. These facilities are
occupied pursuant to a lease that expires in August 2003 (and contains a renewal
option). The Company believes that its current studio and headquarters'
facilities are adequate to meet its needs for the foreseeable future.
10
ITEM 3. LEGAL PROCEEDINGS
Other than claims by participants in revenues from syndication of the
library, the extent of which are currently unknown but not believed to be
significantly adverse, the Company is not a party to any material legal
proceedings and is not aware of any pending or threatened litigation that, if
decided adversely to the Company, would have a material adverse effect upon the
Company's business, results of operations or financial condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 2002.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is quoted under the symbol "ROMN" on the
NASD OTCBB (Over the Counter Bulletin Board). The following table sets forth the
high and low closing sale price per share for the Common Stock for each quarter
since the quarter ended December 31, 2000.
High Low
---------- ----------
2001
1st Quarter $ 1.00 $ 0.31
2nd Quarter $ 1.15 $ 0.50
3rd Quarter $ 1.03 $ 0.50
4th Quarter $ 0.63 $ 0.30
2002
1st Quarter $ 0.36 $ 0.18
2nd Quarter $ 0.30 $ 0.15
3rd Quarter $ 0.18 $ 0.09
4th Quarter $ 0.13 $ 0.06
1st Quarter (through March 15, 2003) $ 0.10 $ 0.05
On March 26, 2003, there were 120 stockholders of record, excluding
the number of beneficial owners whose shares were held in street name. The
Company believes that the number of beneficial holders is significantly in
excess of this amount.
The Company has not paid dividends on the Common Stock since its
inception and does not anticipate paying dividends in the foreseeable future.
Management anticipates that all earnings and other cash resources of the
Company, if any, will be retained by the Company for investment in the business.
12
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the Company's
consolidated financial statements. The selected financial data presented below
and under "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" should be read in conjunction with the Company's
consolidated financial statements, related notes, and other financial
information appearing elsewhere in this Report.
YEAR ENDED DECEMBER 31,
1998 1999 2000 2001 2002
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue ............................................... $ 32,946 $ 48,605 $ 44,552 $ 44,088 $ 43,301
Expenses:
Cost of revenue ..................................... 32,670 48,684 43,106 45,345 41,858
Selling, general and administrative expenses ........ 7,715 7,756 4,308 4,338 3,595
----------- ----------- ----------- ----------- -----------
Operating loss ....................................... (7,439) (7,835) (2,862) (5,595) (2,152)
Interest income, net ................................. 707 359 278 82 41
----------- ----------- ----------- ----------- -----------
Loss before cumulative effect of a change in
accounting principle and provision for income taxes ... (6,732) (7,476) (2,584) (5,513) (2,111)
Cumulative effect of a change in accounting principle . -- -- -- (364) --
Provision for income taxes ............................ (145) (17) (2) -- --
----------- ----------- ----------- ----------- -----------
Net loss .............................................. $ (6,877) $ (7,493) $ (2,586) $ (5,877) $ (2,111)
=========== =========== =========== =========== ===========
Loss before cumulative effect of a change in
accounting principle, per common share basic and
diluted (1) ........................................... $ (0.81) (0.88) (0.30) $ (0.64) $ (0.25)
=========== =========== =========== =========== ===========
Net loss per common share basic and diluted (1) ....... $ (0.81) $ (0.88) $ (0.30) $ (0.69) $ (0.25)
=========== =========== =========== =========== ===========
Weighted average number of shares outstanding basic
and diluted ........................................... 8,507,026 8,523,609 8,523,682 8,571,560 8,577,690
=========== =========== =========== =========== ===========
AS OF DECEMBER 31,
1998 1999 2000 2001 2002
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA: (in thousands)
Cash and cash equivalents ............................. $ 11,287 $ 7,558 $ 4,203 $ 2,777 $ 1,278
Film costs, net of amortization ...................... 20,904 18,703 24,559 22,030 18,142
Total assets .......................................... 34,749 28,150 30,400 26,173 20,074
Stockholders' equity (deficiency) ..................... 12,098 4,611 2,084 (2,084) (5,894)
(1) Common equivalent shares, consisting of outstanding stock options have
not been included since they are antidilutive.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Film Roman was founded in 1984 by renowned animator, Phil Roman, 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 and Friends. Over the
years the Company has primarily produced animation for television, both on a
fee-for-service and a proprietary basis.
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
$650,000 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 associated with such programming (including, for
example, international distribution and licensing and merchandising rights). The
Company currently produces only proprietary programming that has sufficient
distribution licensing income to cover the projected 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. Revenue from
proprietary programming has 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 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 all or a
substantial 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 beyond "free" television, cable, direct-to-video, commercials,
computer graphics 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.
14
BUSINESS ACTIVITIES
Animation - For-Hire. Film Roman is a leading producer of for-hire
animation. Film Roman is continuing to build its for-hire business.
Animation - Proprietary. Film Roman is developing and selling
proprietary animation projects to major studios, television and cable networks,
video companies and Internet sites. Film Roman has substantial ownership in all
the projects it is developing. Film Roman is developing other animated series
projects in both the primetime and daytime areas utilizing its wealth of
animated experience and expertise.
Commercials and Other Special Projects. Film Roman has historically
produced commercials featuring animated characters from for-hire series the
Company is producing. Film Roman continues to expand its commercial division to
bid for and produce commercials for the general commercial market as well as
producing short programming for Internet sites. The Company is currently
producing commercials for Suntory, Sabritas (a Mexican food concern) and
Kellogg. Film Roman has commissioned agents to represent the commercial division
around the United States and expects considerable growth in this area.
International Distribution. With the current schedule of programs in
all areas that need foreign licensing, Film Roman will handle its foreign sales
through an independent sales agent.
CRITICAL ACCOUNTING POLICIES
Revenue and Cost Recognition. Effective January 1, 2001, the Company
recognizes revenue based on Statement of Position 00-2 "Accounting by Producers
and Distributors of Films" ("SOP 00-2").
Revenue earned from fee-for-service productions is the principal
source of revenue earned by the Company. During 2001 and 2002, such revenues
accounted for more than 90% of the Company's total revenues. License fees
received by the Company for its work on fee-for-hire productions are recognized
on an episode-by-episode basis as each episode is completed and delivered to the
customer in accordance with the terms of the existing arrangement.
Revenue earned from proprietary programs is recognized as such
programs are exploited in the markets in which the Company has retained
ownership rights, typically upon the receipt of statements from the Company's
licensees. In the event that a licensee pays the Company a nonrefundable minimum
guarantee at the beginning of a license term, the Company will record this
amount as revenue if all of the criteria for recognition pursuant to SOP 00-2 is
met.
Costs incurred in connection with the acquisition of story rights, the
development of stories, production and allocable overhead are capitalized as
film costs or expensed in accordance with SOP 00-2. Film costs are stated at the
lower of unamortized cost or fair value. The costs of fee-for-service produced
episodes are capitalized and subsequently amortized to cost of revenues at the
time revenue is recognized. If the costs of an episode are expected to exceed
the corresponding license fee, all costs incurred in excess of this license fee
will be expensed to cost of revenues as incurred. The cost of each proprietary
program is capitalized and is amortized in the proportion that revenue realized
relates to management's estimate of the total revenue expected to be realized
from such programs.
The Company's cash flow is not necessarily related to revenue
recognition and amortization of production costs. Cash is received and costs are
incurred (and paid) throughout the year. Historically, in
15
the fourth quarter, and to a lesser extent the third quarter, cash used in
operations typically exceeded cash generated by operations as completed shows
were delivered to broadcasters. The Company expects that cash used in or
provided by operations will fluctuate greatly from quarter to quarter.
Overhead Allocation. Overhead is allocated to particular productions
on the basis of the total allocable overhead times the ratio of direct
production costs incurred on a program to total production costs incurred during
the period. Total allocable overhead is determined on the basis of management's
estimates of the percentage of overhead costs that can be attributed to the
productions in progress during the period.
RESULTS OF OPERATIONS
Year Ended December 31, 2002 Compared with Year Ended December 31,
2001
Total revenue decreased by 2%, or $0.8 million, to $43.3 million for
the year ended December 31, 2002, from $44.1 million for the prior year. Total
revenue decreased because in 2001, the Company delivered a movie-of-the-week and
a live action direct-to-video two-hour film, neither of which repeated in 2002.
This decrease was partially offset by an increase in the delivery of prime time
fee-for-services episodes.
The Company delivered 64 prime time and other fee-for-services
episodes during the year ended December 31, 2002, compared to 71 episodes in the
comparable period in 2001. Fee-for-services revenue increased 16%, or $5.8
million, to $41.6 million for the year ended December 31, 2002, from $35.8
million in 2001 as a result of the increase in prime-time episodes delivered.
The Company delivered no "proprietary" episodes for the years ended
December 31, 2002 and 2001. "Proprietary revenue" consists of revenue derived
from the U.S. license fees paid upon the initial delivery of a new episode of
proprietary programming to a U.S. broadcaster and from the exploitation of the
proprietary rights (e.g., merchandising, licensing and/or international
distribution rights) associated with the proprietary episodes in the Company's
library that were initially delivered in prior periods. "Proprietary" revenue
decreased $0.8 million, to a minimal amount for the year ended December 31,
2002, from $0.8 million in 2001.
Other revenue decreased to $1.7 million for the year ended December
31, 2002 compared to $7.5 million for the prior year. This decrease is primarily
due to the delivery of a movie-of-the-week special and a live action
direct-to-video 2-hour film in 2001.
Total cost of revenue decreased by 8%, or $3.4 million, to $41.9
million from $45.3 million in the prior year. Total cost of revenue as a
percentage of sales decreased by 6%, to 97% for the year ended December 31,
2002, from 103% for the year ended December 31, 2001. Cost of revenue decreased
primarily due to a write-down to fair value of certain of the Company's library
episodic programming of $690,000 as a result of changes in estimated future
revenues and a write-down of development projects of $1.9 million as a result of
management's evaluation of the development slate after the selling season in
2001.
Total selling, general and administrative expenses for the year ended
December 31, 2002 decreased by $0.7 million to $3.6 million from $4.3 million
for the year ended December 31, 2001, due to a one-time costs incurred in
connection with the termination of certain administrative employees along with
costs incurred from the Pentamedia transaction in 2001.
16
Operating loss was $2.2 million for the year ended December 31, 2002
as compared to a loss of $5.6 million for the year ended December 31, 2001.
Year Ended December 31, 2001 Compared with Year Ended December 31,
2000
Total revenue decreased by 1%, or $0.5 million, to $44.1 million for
the year ended December 31, 2001, from $44.6 million for the prior year. Total
revenue decreased because the Company delivered fewer prime-time
fee-for-services episodes offset by more Saturday morning fee-for-services
episodes, a movie-of-the-week and a live action direct-to-video two-hour film.
The Company delivered 71 fee-for-services episodes during the year
ended December 31, 2001, compared to 64 episodes in 2000 as a result of
providing services on more shows in 2001 compared to 2000. Fee-for-services
revenue decreased 16%, or $6.8 million, to $35.8 million for the year ended
December 31, 2001, from $42.6 million in 2000 as a result of the decrease in
prime-time episodes delivered. This decrease in revenue was partially offset by
an increase in Saturday morning episodes delivered.
The Company delivered no "proprietary" episodes for years ended
December 31, 2001 and 2000. "Proprietary revenue" consists of revenue derived
from the U.S. license fees paid upon the initial delivery of a new episode of
proprietary programming to a U.S. broadcaster and from the exploitation of the
proprietary rights (e.g., merchandising, licensing and/or international
distribution rights) associated with the proprietary episodes in the Company's
library that were initially delivered in prior periods. "Proprietary" revenue
increased $0.4 million, to $0.8 million for the year ended December 31, 2001,
from $0.4 million in 2000.
Other revenue increased to $7.5 million for the year ended December
31, 2001 compared to $1.6 million for the prior year. This increase is primarily
due to the delivery of a movie-of-the-week special and a live action
direct-to-video 2-hour film.
Total cost of revenue increased by 5%, or $2.2 million, to $45.3
million from $43.1 million in the prior year. Total cost of revenue as a
percentage of sales increased by 6%, to 103% for the year ended December 31,
2001, from 97% for the year ended December 31, 2000. Cost of revenue increased
primarily due to a write-down to fair value of certain of the Company's library
episodic programming of $690,000 as a result of changes in estimated future
revenues and a write-down of development projects of $1.9 million as a result of
management's evaluation of the development slate after the selling season. The
majority of these development costs were incurred prior to 2000.
Total selling, general and administrative expenses for the year ended
December 31, 2001 remained constant at $4.3 million as compared to 2000. The
Company continued to lower its general and administrative costs, however this
decrease was offset by an increase of expensing excess film overhead costs. Such
costs, which typically are reduced from selling, general and administrative
expenses and allocated to the Company's film inventory, would have overburdened
the inventory due to the slowdown in production activity of the Company.
Taking into account these write-downs, operating loss was $5.6 million
for the year ended December 31, 2001, as compared to a loss of $2.9 million for
the year ended December 31, 2000.
17
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company had cash and short-term investments
of approximately $1.3 million compared to $2.8 million at December 31, 2001. The
Company's cash and short-term investment balances have continued to decline and
the Company would expect cash balances to decline further during fiscal 2003.
The Company may need to secure additional equity or debt financing
during fiscal 2003 in order to fund its operations and/or fulfill its growth
strategies. However, operating losses, the Company's declining cash balances,
trends in the entertainment industry adversely affecting independent production
companies similar to the Company and the Company's historical stock performance
may make it difficult for the Company to attract equity investments on terms
that are deemed to be favorable to the Company. In addition, the Company's
losses may make it more difficult for the Company to attract debt financing. As
a consequence, there can be no assurance that the Company would be successful in
arranging for additional equity or debt financing at levels sufficient to meet
its planned needs, should it be required to do so. The failure to obtain such
financing could have an adverse effect on the implementation of the Company's
growth strategies and its ability to successfully run its operation.
The Company has taken a substantial number of actions in order to
implement significant cost reductions, including reducing expenditures for
development projects and in its corporate infrastructure. These cost reductions
could adversely impact the Company's ability to implement its business plans
resulting in a possible adverse impact on its future operations. Although
management believes that its existing cash balances and cash equivalents,
combined with anticipated cash flows will be sufficient to meet its cash
requirements through at least the next 12 months, all of the above conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
For the fiscal year ended December 31, 2002, net cash used in
operating activities was approximately $1.4 million, principally due to cash
used in connection with film production activities. Cash used in investing
activities for the year ended December 31, 2002 was $53,693 due to additions to
property and equipment. No cash was generated by financing activities for the
year ended December 31, 2002.
Cash collected in advance of revenue recognition is recorded as
deferred revenue. As of December 31, 2002, the Company had a balance in its
deferred revenue account of $22.0 million. There will be a net cost of
approximately $3.8 million to the Company (future receipts less future
expenditures) to finish the programs for which cash has been collected in
advance and included in deferred revenue.
The following table summarizes the contractual obligations and
commitments the Company has over the next 5 years:
2003 2004 2005 2006 2007
------------ ------------ ------------ ------------ ------------
Operating Lease Agreements $ 1,111,688 $ 30,860 $ 25,916 $ 8,020 $ 2,704
Employment Agreements $ 450,975 $ 187,979 $ - $ - $ -
18
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 144 establishes a single accounting model
for the impairment of disposal of long-lived assets, including discontinued
operations. SFAS No. 144 changes the criteria that have to be met to classify an
asset as held-for-sale, extends the reporting of discontinued operations to all
components of an entity, and requires expected future operating losses from
discontinued operations to be recorded in the period in which the losses are
incurred. SFAS No. 144 was effective for the Company on January 1, 2002 and
generally is to be applied prospectively. The adoption of SFAS No. 144 had no
impact on the Company's consolidated results of operations or financial
position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123 (SFAS 123)." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation" to provide alternative methods of transition for a
voluntary change to the fair value-based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
SFAS No. 148 is effective for the year ending December 31, 2002. SFAS No.148 has
no material impact on the Company, as it does not plan to adopt the fair-value
method of accounting for stock options at the current time, and will continue to
apply the disclosure only provision of SFAS 123, as amended by SFAS 148. The
Company has included the required disclosures in Note 9.
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 year ended December 31, 2001.
SUBSEQUENT EVENTS
Resignation from Board of Directors. On February 5, 2003 Mr. Medavoy
and Mr. Villaneuva and on February 6, 2003 Mr. Tisch resigned from the Board of
Directors of the Company due to other commitments. At this time, the Company
does not intend to replace the board members.
19
RISK FACTORS
The Company's business is subject to numerous risk factors, not all of
which can be known or anticipated and any one of which could adversely impact
the Company or its financial condition. Some of those risk factors are as
follows:
Company Has a History of Losses and Declining Cash Balances and There
Can Be No Assurance That It Will Be Able to Execute on Its Business Strategy.
The Company has accumulated losses of approximately $42.4 million through
December 31, 2002. Because substantial portions of the Company's expenses are
fixed and its gross margin is relatively low, achieving profitability and
positive cash flows depends upon the Company's ability to generate and sustain
substantially higher revenues. Although the Company's strategy is to increase
revenues and gross margin, it is not assured that it will be able to do so and
consequently the Company may experience additional losses and a further decline
in its cash balances in 2003.
Dependence on a Limited Number of Television Programs. The Company's
revenue has historically come from the production of a relatively small number
of animated television programs. King of the Hill, The Simpsons and X-MEN
accounted for approximately 40%, 41%, and 15%, respectively, of the Company's
total revenue for the year ended December 31, 2002. Film Roman cannot assure
that broadcasters will continue to broadcast the Company's "proprietary" or
"fee-for-services" programs or that Film Roman will continue to be engaged to
produce such programs.
Failure to Renew Licenses or Production Agreements. There can be no
assurance that any of the programs being produced by the Company will be
relicensed for additional broadcast seasons or renewed for production or, if so
relicensed or renewed, that the terms of the license agreements or production
agreements will be as favorable to the Company as those of existing licenses or
production agreements.
Declining Value of License Fee Agreements and Increasing Control of
Proprietary Rights by Broadcasters. Competition created by the emergence of new
broadcasters (such as UPN, WB, Nickelodeon and the USA Network) has provided
television audiences with more choices, thereby generally reducing the number of
viewers watching any one program. As a result, the market share of, and license
fees paid by, FOX, CBS, NBC and ABC may continue to decrease and make it
difficult for Film Roman to finance certain proprietary programs.
Risks of Vertical Integration. Over the last decade, broadcasters,
distributors and producers of television and motion picture programming have
become increasingly integrated vertically through mergers, acquisitions,
partnerships, joint ventures or other affiliations. Film Roman has not entered
into any of these relationships. As a result, the number of time slots available
for children's and/or animated programming and, specifically, for animated
programming supplied by independent animation studios, may decrease, making it
more difficult to compete successfully for available time slots.
Current Programs May Not Sustain Their Popularity and New Programs May
Not Become Popular. Film Roman derives substantially all of its revenue from the
production and distribution of animated television programs. Each program is an
individual artistic work, and consumer reaction will determine its commercial
success. Film Roman cannot assure that the Company will be able to continue to
create entertaining episodes for its existing programs or that the Company will
be able to create new programs that are appealing to broadcasters.
20
Risks Related to Expansion of Production of Proprietary Programming.
Film Roman intends to expand its production of programming for which the Company
owns or controls certain licensing and/or distribution rights ("proprietary
programming"). These rights may include domestic and international broadcast
distribution, home video distribution, licensing and merchandising, and
interactive/game development ("proprietary rights"). While Film Roman seeks to
limit the financial risk associated with the development of proprietary
programming by obtaining commitments prior to production to cover a portion of
its direct production costs, the Company cannot be sure that it will be able to
recover the balance of the production and overhead costs through the
exploitation of its remaining rights.
Risk of Budget and Cost Overruns. Although Film Roman reviews cost
reports and updates the Company's cost projections regularly and has generally
completed each of the Company's productions within its budget, the Company
cannot assure that the actual production costs for its programming will remain
within budget. Significant cost or budget overruns could negatively impact the
Company's gross margin since the majority of the Company's revenues result from
fixed fee arrangements.
Revenues and Costs Recognized in Certain Periods May Be Overstated or
Understated Due to the Application of Entertainment Accounting Policies. In
2001, Film Roman adopted SOP 00-2 regarding revenue recognition and amortization
of production costs. All costs incurred in connection with an individual program
or film, including acquisition, development, production and allocable production
overhead costs, are capitalized as television and film costs. These costs are
stated at the lower of unamortized cost or fair value. Film Roman amortizes its
estimated total production costs for an individual program or film in the
proportion that revenue realized relates to management's estimate of the total
revenue expected to be received from such program or film. As a result, if
revenue or cost estimates change with respect to a program or film, the Company
may be required to write-down all or a portion of its unamortized costs for the
program or film. The Company cannot make assurances that these write-downs will
not have a significant impact on its results of operations and financial
condition.
Competition. The creation, development, production and distribution of
television programming, together with the exploitation of the proprietary rights
related to such programming, is a highly competitive business. Film Roman
competes with producers, distributors, licensors and merchandisers, many of whom
are larger and have greater financial resources than does the Company. Although
the number of outlets available to producers of animated programming has
increased with the emergence of new broadcasters, the number of time slots
available to independent producers of children's and animated programming
remains limited. Moreover, because license fees in the United States have
dropped substantially recently, companies that do not rely on U.S. broadcast
license fees to finance the production of animation programming, particularly
international animation companies that receive governmental subsidies, have
achieved a competitive advantage. These companies now serve as an additional
source of competition for the limited slots available to independent animation
companies. As a result of these factors, the Company cannot make assurances that
it will be able to remain competitive.
Overseas Subcontractors. Like other producers of animated programming,
Film Roman subcontracts some of the less creative and more labor-intensive
components of its production process to animation studios located in low-cost
labor countries, primarily in the Far East. As the number of animated feature
films and animated television programs increases, the demand for the services of
overseas studios has increased substantially. This increased demand may lead
overseas studios to raise their fees, which may result in increased production
costs, or an inability to contract with the Company's preferred overseas
studios. Further, political considerations, such as acts of war or terrorism,
may affect the Company's ability to obtain services from Far East countries.
21
Technological Changes; Possible Changes in Production of Products. The
proliferation of new production technologies may change the manner in which the
animation industry creates and distributes programming. Recently, certain
animators have begun to use computer-generated animation, including
three-dimensional digital animation, instead of two-dimensional cell animation,
to create their animated programming. Film Roman cannot be sure that the
introduction and proliferation of three-dimensional digital animation or other
technological changes will not cause the Company's historical methods of
producing animation to become less cost competitive or less appealing to its
audiences. In addition, the Company cannot be sure that it will be able to adapt
to such changes in a cost-effective manner.
Dependence upon Key Personnel. Film Roman's success depends to a
significant extent upon the expertise and services of John Hyde, President and
Chief Executive Officer. Although the Company has employment agreements with Mr.
Hyde and certain other key management personnel, the loss of services of Mr.
Hyde and/or other key management personnel could have an adverse effect on the
Company's business, results of operations and financial condition. Film Roman
does not currently carry "key man" life insurance policies on any of the
Company's executives.
Casualty Risks. Substantially all of the Company's operations and
personnel are located in its North Hollywood headquarters, resulting in
vulnerability to fire, flood, power loss, telecommunications failure or other
local conditions, including the risk of seismic activity. If a disaster were to
occur, the Company's disaster recovery plans may not be adequate to protect the
Company and its business interruption insurance may not fully compensate the
Company for its losses.
Volatility of Stock Price. The market price of the Company's Common
Stock, which trades on the NASD OTCBB, could fluctuate significantly in response
to operating results and other factors.
Impact of FCC Regulations. The policies of the current FCC indicate a
potential lessening of government restrictions that may facilitate more vertical
integration of companies than in the past, this could have an adverse effect on
the availability of buyers for the Company's product.
Potential Union Activity. There have been and may be efforts by the
International Alliance of Theatrical State Employees ("I.A.T.S.E") Local Union
839 (Animation Guild) to collect enough signatures from employees to have an
election for representation of the Company's production employees. Union
representation of the production employees could have an adverse effect on the
Company.
Film Roman Does Not Intend to Pay Dividends. Film Roman has never paid
dividends and currently does not intend to declare or pay dividends. The Company
plans to follow a policy of retaining earnings to finance the growth of its
business. Whether or not the Company declares or pays dividends is up to the
Board of Directors and will depend on results of operations, financial
condition, contractual and legal restrictions and other factors the Board of
Directors deems relevant at that time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not utilize market risk sensitive instruments (such
as derivative financial instruments) for trading or other purposes.
The Company has low exposure to interest rate risk. The Company
currently does not have any debt (fixed or floating rate) other than trade
liabilities and invests its cash assets in debt instruments with
22
maturities of less than 90 days. Thus, a decrease (or increase) in future
interest rates will directly and proportionately decrease (or increase,
respectively) the Company's future interest income. For the twelve months ended
December 31, 2002, the Company earned interest income of $41,095.
The Company is not exposed to significant foreign exchange rate risk.
All of the Company's contracts with foreign subcontractors are
dollar-denominated. The Company makes limited international sales in foreign
currencies, the aggregate of which the Company estimates to be less than one
percent of the Company's yearly revenue.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set forth in this
Annual Report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
The following table sets forth certain information with respect to the
directors of the Company as of March 31, 2003:
Year First
Elected or
Appointed
Name Age a Director Principal Occupation and Business Experience
- ----------------------- --- ------------ ----------------------------------------------------------------
John W. Hyde 62 1999 John W. Hyde joined Film Roman as President and CEO in December
1999. Mr. Hyde is CEO and the principal of Producers Sales
Organization, which holds investments in film negatives, film
and television rights, a music library and agricultural real
estate. Mr. Hyde was the Trustee, General Manager and FCC
license holder for KADY-TV from July 1996 through the sale of
the television station in July 1998; since that time, Mr. Hyde
has remained as Trustee to disburse the funds from the sale.
From August 1994 through July 1998, Mr. Hyde was Trustee and CEO
of Cannon Pictures, Inc. and Cannon Television Inc. Mr. Hyde was
CEO of MCEG Sterling, Inc. from December 1990 through December
31, 1995, at which time MCEG was part of a three-way merger with
Orion Pictures, Inc. and Actava Group, Inc. Prior to his term
at MCEG, Mr. Hyde held numerous senior executive positions in
the entertainment industry. Mr. Hyde graduated from New York
University in 1963.
Robert Cresci 59 1995 Mr. Cresci has been a Director of Film Roman since August 1995
and has been a Managing Director of Pecks Management Partners
Ltd., an investment management firm, since September 1990. Mr.
Cresci currently serves on the board of directors of Sepracor,
Inc., Aviva Petroleum, Candlewood Hotel Co., Castle Dental
Centers Inc., j2 Global Communications, Inc., Seracare Inc.,
E-Stamp Corporation and several private companies.
Dixon Q. Dern 74 1995 Mr. Dern has been a director of Film Roman since August 1995.
Mr. Dern has practiced entertainment law for over 40 years and
currently owns and operates his own private practice, which
specializes in entertainment, copyright and communications law.
Mr. Dern also serves as Secretary of the Company.
24
Peter Mainstain 54 1995 Mr. Mainstain has been a director of Film Roman since August
1995. He is a certified public accountant as well as an officer
and shareholder of Tanner, Mainstain, Hoffer & Peyrot, and
accountancy corporation, where he has been employed since 1976.
Phil Roman 72 1996 Mr. Roman served as the Company's Chief Executive Officer, and a
Director, from the founding of the Company until February 5,
1999. Phil Roman began his animation career in 1955 at The Walt
Disney Company as an assistant animator on Sleeping Beauty.
Over the next 30 years, Mr. Roman worked at many of the major
studios, including MGM Animation and Warner Brothers Cartoons.
Mr. Roman has also directed 13 Emmy-nominated Charlie Brown
specials. Since his resignation as Chief Executive Officer, Mr.
Roman has worked at his new company, Phil Roman Entertainment,
and recently joined the Company as an employee/consultant.
IDENTIFICATION OF EXECUTIVE OFFICERS
The names of the executive officers of the Company, and certain information
about them as of March 31, 2003 are set forth below:
Year Began
Employment
With
Name Age Company Position
- ----------------------- --- ------------ ----------------------------------------------------------------
John W. Hyde 62 1999 President and CEO. John W. Hyde joined Film Roman as President
and CEO in December 1999. Mr. Hyde is CEO and the principal of
Producers Sales Organization, which holds investments in film
negatives, film and television rights, a music library and
agricultural real estate. Mr. Hyde was the Trustee, General
Manager and FCC license holder for KADY-TV from July 1996
through the sale of the television station in July 1998; since
that time, Mr. Hyde has remained as Trustee to disburse the
funds from the sale. From August 1994 through July 1998, Mr.
Hyde was Trustee and CEO of Cannon Pictures, Inc. and Cannon
Television Inc. Mr. Hyde was CEO of MCEG Sterling, Inc. from
December 1990 through December 31, 1995, at which time MCEG was
part of a three-way merger with Orion Pictures, Inc. and Actava
Group, Inc. Prior to his term at MCEG, Mr. Hyde held numerous
senior executive positions in the entertainment industry. Mr.
Hyde graduated from New York University in 1963.
25
Sidney Clifton 44 1998 Senior Vice-President, Television Programming and Development.
Sydney Clifton was promoted to Senior Vice President, Television
Programming and Development in November 2002. Ms. Clifton
joined Film in March 1998 as Development Coordinator and in July
of that year she was promoted to Manager of Animation
Development. In September of 1999, Ms. Clifton was again
promoted to Director of TV Development and in July of 2000 rose
to Vice President of Development. Before joining Film Roman in
1998, Ms. Clifton was a member of the Operations Department of
Fox Sports network. Ms. Clifton is also a published writer with
works appearing in multicultural publications including Exodus
Newsmagazine and Essence Magazine.
Brett Coker 40 1991 Senior Vice President of Studio Administration. Brett Coker was
promoted to Senior Vice President in August 2001. He joined
Film Roman in February 2001 as Vice President of Studio
Administration. From 1998 through January 2001, Mr. Coker was
Vice President General Manager for CrownStar, LLC a niche record
label specializing in music distribution. From 1995 to 1998, he
was the Director of Operations for Crossroads V Communications,
a management consulting company. His tenure included large-scale
operations management and consulting services for companies such
as Cannon Pictures, Grove Television, Reeves Entertainment and
KADY Television.
Joan Thompson 44 1992 Chief Accounting Officer. Joan Thompson was promoted to Chief
Accounting Officer in August 2001. Ms. Thompson joined Film
Roman in April 1992 as Accounting Manager. In April 1994, she
was promoted to Assistant Controller and became Controller in
April 1999. Ms. Thompson was promoted to Vice President of
Finance in April 2000.
Mike Wolf 51 1990 Senior Vice President of Animation Production. Mike Wolf has
held the office of Senior Vice President of Animation Production
since March 1999. He joined Film Roman in April 1990 as a
Director for Emmy nominated Bobby's World. In October 1990, Mr.
Wolf became a Producer for the Animated Feature Tom & Jerry: The
Movie. Since August 1992, his producing credits include The
Simpsons, King of the Hill, The Critic, The Family Guy, Mission
Hill and The Oblongs. During his tenure with Film Roman, he has
been honored with Five Emmy Awards for producing The Simpsons
and several Annie Awards.
26
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
beneficially own more than 10% of the Company's Common Stock, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). The SEC has designated specific due dates for such reports and the
Company must identify in this Proxy Statement those persons who did not timely
file such reports.
Based solely upon a review of Forms 3, 4 and 5, the amendments
thereto, and certain written representations furnished to the Company pursuant
to Rule 16a-3(e) of the Exchange Act, the Company believes that, during the
fiscal year ended December 31, 2002, its directors and officers, and persons who
beneficially own more than 10% of its Common Stock, complied with all applicable
filing requirements, with the exception that reports on Form 3 were not filed
for Sidney Clifton, Brett Coker, Joan Thompson, Michael Wolf, Peter Schankowitz
and John O. Francis and that reports on Form 4 were not filed for Dixon Dern and
Peter Mainstain with repect to the vesting of certian options.
27
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth, as to the Chief Executive Officer and
each of the other three most highly compensated officers whose compensation
exceeded $100,000 during the last fiscal year (the "Named Executive Officers"),
information concerning all compensation paid for services to the Company in all
capacities during the last three fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
----------------------------------------- -----------------------------------------------
Number of
Fiscal Year Securities
Ended Underlying Restricted All Other
Name and Principal Position December 31 Salary Bonus Options(1) Stock Compensation
- ----------------------------- ----------- -------------- ---------- -------------- ------------- --------------
John W. Hyde 2002 $ 364,910.24 $ 1,676.05(3)
Chief Executive 2001 $ 327,983.94 25,000 200,000 $ 5,962.74(2)
Officer and President 2000 $ 255,999.00 400,000 $ 8,759.67(2)
Peter Schankowitz 2002 $ 305,250.17 $ 2,500.00(3)
President, Television 2001 $ 240,884.07 $ 2,012.02(3)
Programming & Development 2000 $ 66,500.07 50,000
Mike Wolf 2002 $ 301,981.32 $ 2,500.00(3)
Senior Vice President of 2001 $ 296,334.46 $ 2,125.00(3)
Animation Production 2000 $ 267,587.03 $ 2,125.00(3)
John O. Francis Jr. 2002 $ 117,502.09 $ 1,369.51(3)
Vice President of 2001 $ 125,000.00 $ 1,322.20(3)
Recruiting 2000 $ 125,000.23 $ 1,322.20(3)
(1) The securities underlying the options are shares of Common Stock.
(2) Represents reimbursement of health and disability insurances.
(3) Represents contributions pursuant to the Company's 401(k) profit
sharing plan for each individual listed in the table. Option Grants in
Last Fiscal Year
28
Option Grants in Last Fiscal Year
There were no grants of stock options made to any of the Named
Executive Officers during the year ended December 31, 2002.
Stock Options Held at Fiscal Year End
The following table sets forth, for each of the Named Executive
Officers, certain information regarding the number of shares of Common Stock
underlying stock options held at fiscal year end and the value of options held
at fiscal year end based upon the last reported sales price of the Common Stock
on the over the counter bulletin board market on December 31, 2002 ($0.07 per
share). During fiscal 2002, no options were exercised by any Named Executive
Officer.
AGGREGATED FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised in-the-
Underlying Unexercised Money Options at December
Options at December 31, 2002 31, 2002 (1)
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ------------- -------------- ------------- --------------
John W. Hyde 533,332 166,668 0 0
Peter Schankowitz 50,000 0 0 0
Mike Wolf 85,000 0 0 0
Jay Frances 0 0 0 0
(1) Amounts represent the difference between the aggregated exercise
price of unexercised options and the $0.07 closing sale price of the Common
Stock on the over the counter bulletin board market on December 31, 2002.
401(k) Profit Sharing Plan
The Company has a defined contribution 401(k) Profit Sharing Plan
which covers substantially all of its employees. The plan became effective on
January 1, 1991 and was amended effective January 1, 1992. Under the terms of
the plan, employees can elect to defer up to 15% of their wages, subject to
certain Internal Revenue Service limitations, by making voluntary contributions
to the plan. Additionally, the Company, at the discretion of management, can
elect to match up to 100% of the voluntary contributions made by its employees.
For the years ended December 31, 2000, 2001 and 2002, the Company contributed
$167,881, $155,020 and $165,863, respectively, to the plan on behalf of its
employees.
Compensation of Directors
For fiscal year 2002 all Non-Employee Directors received $4,500 as
compensation for serving on the Board of Directors, $1,000 for attendance at
each meeting of the Board of Directors and $500 for attendance at each meeting
of a committee of the Board of Directors. Under the Company's 2000 Stock Option
Plan, as amended (the "Stock Option Plan"), all the Board of Directors, except
for Phil Roman and John Hyde, also received an option to purchase 5,000 shares
of Common Stock.
29
Employment Contracts
The Company or Film Roman, Inc., a California corporation and a
wholly-owned subsidiary of the Company ("Film Roman California") has entered
into the following employment agreements with the Named Executive Officers:
John W. Hyde. On June 1, 2001 the Company entered into a new agreement
to extend Mr. Hyde's employment as the Company's Chief Executive Officer. Under
the terms of this agreement, Mr. Hyde will serve the Company for three years
from the date of the new agreement, and the Company has an option to extend the
term of his employment for an additional period of two consecutive years. As a
bonus for services rendered under the employment agreement dated December 9,
1999 between Producers Sales Organization ("PSO") and the Company, Mr. Hyde
received $25,000. The compensation payable to Mr. Hyde is $120,000 for the first
year of service under the new employment agreement, $130,000 for the second year
and $140,000 for the third year. If the Company chooses to exercise its option
to extend Mr. Hyde's term, he will receive $150,000 for his fourth year of
service to the Company and $160,000 for the fifth year. Mr. Hyde received
200,000 shares of the Company's common stock with a 10-year term at the exercise
price of $.92 per share. The Company can terminate Mr. Hyde for cause, which
includes: (a) the conviction of a felony or crime involving moral turpitude, (b)
gross negligence or willful malfeasance, (c) the failure to adhere to Board
policies or the Company's business plan and such failure is not cured within
five business days of notice of such failure or (d) any other material breach
not cured within five business days after notice. If the Company terminates Mr.
Hyde for cause, then the Company will no longer have any obligations to pay Mr.
Hyde any compensation, other than compensation accrued but unpaid. If the
Company terminates Mr. Hyde without cause or Mr. Hyde dies, the Company must pay
all remaining compensation and all compensation owing as of the date of death,
respectively.
In addition, on June 18, 2001 the Company concluded an agreement with
PSO to release Mr. Hyde from exclusive employment with PSO so that he may serve
the Company as its Chief Executive Officer. The term of Mr. Hyde's employment
commences on the date of the agreement and continues for up to five years. In
consideration for releasing Mr. Hyde from exclusive employment, PSO will receive
$205,000 for the first contract year of Mr. Hyde's employment, $245,000 for the
second contract year, $285,000 for the third contract year, and if the company
exercises its option to retain Mr. Hyde for the fourth and fifth contract years,
Mr. Hyde will receive $325,000 for the fourth contract year and $365,000 for the
fifth contract year.
Mr. Schankowitz. On September 6, 2000, Film Roman contracted with Mr.
Schankowitz to retain his services as the President of Television Programming
and Development. Under the terms of the agreement, Mr. Schankowitz served in his
capacity as an executive for 18 months from the date of September 6, 2000. On
March 7, 2002, Film Roman exercised its option under the employment agreement to
extend Mr. Schankowitz's employment to March 6, 2003. For compensation, Mr.
Schankowitz earned $17,916.66 per month for the first 18 months of service and
will receive $19,583.33 per month for the extended period of employment. Mr.
Schankowitz will receive a sales bonus for each program he secures a license or
sales agreement and for any television program he co-creates. Mr. Schankowitz
received 50,000 shares of the Company's common stock with a 10-year term and at
the exercise price equal to its fair market value. The option grants, with
respect to 35,000 shares, will vest in equal monthly installments during the
initial 18 months of employment. The remaining 15,000 shares will vest in equal
monthly installments over a period of twelve months during the extension period
of Mr. Schankowitz's employment. If the Company terminates Mr. Schankowitz
without cause, Film Roman will pay Mr. Schankowitz his salary and accrued
bonuses for the remainder of the current term, provided that, salary payments
will be reduced by any payments which Mr. Schankowitz receives from
30
employment elsewhere. If the Company terminates his employment for death,
disability or without cause, the Company will pay Mr. Schankowitz accrued
bonuses for the Company's fiscal year in which termination occurred. The Company
did not extend Mr. Schankowitz's employment once his employment agreement
terminated on March 6, 2003.
Mike Wolf. There is no employment agreement between Film Roman and
Mike Wolf. Mr.Wolf an at will employee.
John O. Francis, Jr. There is no employment agreement between Film
Roman and John Francis. Mr. Francis is an at will employee. The Company and Mr.
Francis agreed that his employment would end on December 31, 2002.
Compensation Committee Interlocks and Insider Participation
No executive officer of the Company either served in 2002 or now
serves as a member of the Board of Directors or the compensation committee of
any entity, which has one or more executive officers who serve on the Board or
are members of the Compensation Committee.
The Compensation Committee of the Board of Directors serves as an
advisory committee to the Board and is responsible for reviewing the
compensation of the senior management team and for making recommendations
regarding compensation.
Compensation Philosophy:
The Compensation Committee's philosophy is to provide sufficient
compensation to attract, motivate and retain skilled management while linking
that compensation to corporate performance and increases in stockholder wealth
where possible. The Compensation Committee determines the compensation of the
executive officers with the assistance of the Chief Executive Officer and
determines the compensation of the Chief Executive Officer independently. The
Compensation Committee determines the compensation of the executive based on its
evaluation of the Company's overall performance, primarily based on the
Company's operating performance compared with the Company's operating plan, and
the current market for executives. The Compensation Committee also considers
various qualitative factors such as the extent to which the executive officer
has contributed to forming a strong management team, the growth and development
of proprietary and fee-for-services programming and other factors, which the
Compensation Committee believes are indicative of the Company's ongoing ability
to achieve its long-term growth and profit objectives. With respect to each
executive, the Compensation Committee focuses on that individual executive's
area of responsibility and his or her contribution toward achieving corporate
objectives.
Compensation Program:
Consistent with achieving the Company's long-term objectives,
executive compensation packages are generally comprised of two components: base
compensation and stock options. The base compensation portion of the
compensation package is determined by considering such factors as breadth of
responsibility, areas of expertise and experience, and comparable compensation
in the industry. As is the custom in the industry, most of the senior management
team is under some form of employment contract with the Company. The stock
option incentive portion of the compensation package has been implemented
through the Stock Option Plan. Each member of the senior management team has
been granted options, which are intended to provide each individual with a
strong economic interest in the
31
appreciation of the stock price. The Stock Option Plan, permits the Board to
grant options to other key employees to provide similar incentives. A number of
key employees have been granted such options. While the Compensation Committee
might consider performance bonuses in the event of exceptional contributions to
enhance corporate performance, no such consideration was made in 2002.
To the extent readily determinable and as one of the factors in its
consideration, the Compensation Committee considers the anticipated tax
treatment to the Company and to its executives of various payments and benefits.
Some types of compensation payments and their deductibility depend upon the
timing of an executive's vesting or exercise of previously granted rights,
qualification of the Compensation Committee and other factors. Further,
interpretations of and changes in the tax laws and other factors beyond the
Compensation Committee's control also affect the deductibility of compensation.
For these and other reasons, the Compensation Committee will not necessarily
limit executive compensation to that amount deductible under section 162(m) of
the Internal Revenue Code of 1986, as amended. The Compensation Committee will
consider various alternatives to preserve the deductibility of compensation
payments and benefits to the extent reasonably practicable and to the extent
consistent with its other compensation objectives.
Date: 3-31-03
PERFORMANCE GRAPH
The following graph sets forth the percentage change in cumulative
total stockholder return of the Company's Common Stock during the last five
fiscal years, compared with (a) the Standard & Poor's 500 Composite Index ("S&P
500 Index") and (b) the Standard & Poor's Entertainment Index ("S&P
Entertainment Index"). The graph assumes that $100 was invested on December 31,
1998 in Film Roman stock or on December 31, 1998 in the indexes and assumes
reinvestment of dividends. The stock price performance on the following graph is
not necessarily indicative of future stock price performance.
S& P
Entertainment
Date S&P 500 Index Index Film Roman, Inc
--------- ---------------- --------------- ------------------
31-Dec-98 100 100 100
31-Dec-99 120 116 100
31-Dec-00 107 99 20
31-Dec-01 93 85 19
31-Dec-02 72 * 4
*The S&P Entertainment Index has changed.
32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance under Equity Compensation Plans
(a) (b) (c)
Number of
Securities Remaining
Number of Available for Future
Securities to Be Issued Weighted- Issuance Under Equity
Upon Exercise of Average Exercise Price Compensation Plans
Outstanding Options, of Outstanding Options, (excluding securities
Plan Category Warrants and Rights Warrants and Rights reflected in Column(a)
- ----------------------------------------------------------------------------------------------------------------------
Equity Compensation
Plans Approved by
Security Holders 1,424,500 $ 1.27 775,500
- ----------------------------------------------------------------------------------------------------------------------
Equity Compensation
Plan Not Approved by
Security Holders NONE NONE NONE
- ----------------------------------------------------------------------------------------------------------------------
Total 1,424,500 $ 1.27 775,500
- ----------------------------------------------------------------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 31, 2003 certain
information relating to the ownership of the Common Stock by (i) each person
known by the Company to be the beneficial owner of more than five percent of the
outstanding shares of the Company's Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers, and (iv) all of the
Company's executive officers and directors as a group. Except as may be
indicated in the footnotes to the table and subject to applicable community
property laws, each such person has the sole voting and investment power with
respect to the shares owned.
Unless otherwise noted, the address of each of the Company's officers
and directors is 12020 Chandler Blvd., Suite 200, North Hollywood, California
91607.
Number of Shares of
Common Stock
Name and Address Beneficially Owned(1) Percent(1)
- ----------------------------------- ---------------------- ----------------
Pecks Management Partners Ltd.(2) 1,198,993 14.0%
John W. Hyde(3) 591,665 6.5%
Peter Schankowitz(4) 50,000 *
Mike Wolf (5) 85,000 1%
33
John O. Francis(6) - *
Robert J. Cresci(7) 1,248,993 14.5%
Dixon Q. Dern(8) 75,100 *
Peter Mainstain(9) 89,200 1%
Phil Roman(10) 3,028,650 35.2%
All Directors and Executive 5,168,608 54.4%
Officers as a group (8 persons)
* Less than one percent.
(1) Under Rule 13d-3 of the Exchange Act, certain shares may be deemed to
be beneficially owned by more than one person (if, for example,
persons share the power to vote or the power to dispose of the
shares). In addition, shares are deemed to be beneficially owned by a
person if the person has the right to acquire the shares (for example,
upon exercise of an option) within 60 days of the date as of which the
information is provided. In computing the percentage ownership of any
person, the amount of shares outstanding is deemed to include the
amount of shares beneficially owned by such person (and only such
person) by reason of these acquisition rights. As a result, the
percentage of outstanding shares of any person as shown in this table
does not necessarily reflect the person's actual ownership or voting
power with respect to the number of shares of Common Stock actually
outstanding at March 15, 2003.
(2) Based on information received from Pecks Management Partners Ltd.,
Pecks Management Partners Ltd. has sole voting power and sole
dispositive power with respect to all 1,198,993 shares. The mailing
address for Pecks Management Partners Ltd. is One Rockefeller Plaza,
New York, New York 10020.
(3) Includes 541,665 shares issuable upon exercise of outstanding options.
(4) Includes 50,000 shares of Common Stock, which may be acquired upon
exercise of employee stock options, which are currently exercisable.
(5) Includes 85,000 shares of Common Stock, which may be acquired upon
exercise of employee stock options, which are currently exercisable.
(6) John O. Francis does not beneficially own shares of the Company's
Common Stock.
(7) Includes 1,198,993 shares held by pension trusts and a pension fund
which are managed by Pecks Management Partners Ltd. and for which Mr.
Cresci disclaims beneficial ownership and 50,000 shares of Common
Stock, which may be acquired upon exercise of stock options, which are
currently exercisable. The mailing address for Mr. Cresci is c/o Pecks
Management Partners Ltd., One Rockefeller Plaza, New York, New York
10020.
(8) Includes 75,000 shares of Common Stock, which may be acquired upon
exercise of stock options, which are currently exercisable. The
mailing address for Mr. Dern is 1901 Avenue of the Stars, Suite 400,
Los Angeles, California 90067.
(9) Includes 75,000 shares of Common Stock, which may be acquired upon
exercise of stock options, which are currently exercisable. The
mailing address for Mr. Mainstain is c/o Tanner, Mainstain, Hoffer &
Peyrot, 10866 Wilshire Boulevard, 10th Floor, Los Angeles, California
90024.
34
(10) Represents 50,000 shares of Common Stock, which may be acquired upon
exercise of stock options, which are currently exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 1, 2001 the Company and Mr. Dern entered into a new agreement
pursuant to which, Mr. Dern would provide legal services to, and manage the
business affairs of the Company. Under the terms of the new agreement, Mr. Dern
will serve the Company for three years from the date of the agreement and will
receive $120,000 per annum for services provided as general counsel and $120,000
per annum for managing the business affairs of the Company. In addition, upon a
sale or merger of the Company, or an agreement whereby the Company secures a
strategic partnership or a strategic investor, Mr. Dern will receive an option
to purchase 100,000 shares of the Company's Common Stock.
On June 18, 2001 the Company concluded an agreement wi