United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2003
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] |
For the transition period from to
Commission file number 000-29642
FILM ROMAN, INC.
(Exact name of registrant as specified in charter)
| Delaware |
95-4585357 | |
| (State or other jurisdiction |
(I.R.S. Employer | |
| of incorporation or organization) |
Identification Number) |
12020 Chandler Boulevard, Suite 300
North Hollywood, California 91607
(Address of principal executive offices) (Zip Code)
(818) 761-2544
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. YES x NO ¨.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
As of April 30, 2003, 8,577,690 shares of common stock, par value $.01 per share, were issued and outstanding.
| PART I. FINANCIAL INFORMATION |
||||
| Item 1. |
3 | |||
| Consolidated Balance Sheets as of December 31, 2002 and March 31, 2003 (unaudited) |
3 | |||
| 4 | ||||
| 5 | ||||
| 6 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
8 | ||
| Item 3. |
14 | |||
| Item 4. |
14 | |||
| PART II. OTHER INFORMATION |
||||
| Item 6. |
15 | |||
| 16 | ||||
| 17 | ||||
| 18 | ||||
2
PART I. FINANCIAL INFORMATION
FILM ROMAN, INC.
(Unaudited)
| December 31, 2002 |
March 31, 2003 (Note 1) |
|||||||
| (unaudited) |
||||||||
| ASSETS |
||||||||
| Cash and cash equivalents |
$ |
1,277,958 |
|
$ |
574,132 |
| ||
| Accounts receivable |
|
114,772 |
|
|
250,364 |
| ||
| Film costs, net of accumulated amortization of $39,927,593 (2002) and $10,488,118 (2003) |
|
18,141,712 |
|
|
13,226,642 |
| ||
| Property and equipment, net of accumulated depreciation and amortization |
|
246,579 |
|
|
200,060 |
| ||
| Deposits and other assets |
|
293,119 |
|
|
303,864 |
| ||
| Total Assets |
$ |
20,074,140 |
|
$ |
14,555,062 |
| ||
| LIABILITIES AND STOCKHOLDERS’ DEFICIENCY |
||||||||
| Accounts payable |
$ |
1,842,904 |
|
$ |
704,158 |
| ||
| Accrued expenses |
|
2,098,354 |
|
|
1,508,062 |
| ||
| Deferred revenue |
|
22,026,710 |
|
|
17,898,220 |
| ||
| Total liabilities |
|
25,967,968 |
|
|
20,110,440 |
| ||
| Commitments and Contingencies |
|
— |
|
|
— |
| ||
| Stockholders’ deficiency: |
||||||||
| Preferred Stock, $.01 par value, 10,000,000 shares authorized, none issued |
|
— |
|
|
— |
| ||
| Common stock, $.01 par value, 40,000,000 shares authorized, 8,577,690 shares issued and outstanding in 2002 and 2003 |
|
85,777 |
|
|
85,777 |
| ||
| Additional paid-in capital |
|
36,379,615 |
|
|
36,379,615 |
| ||
| Accumulated deficit |
|
(42,359,220 |
) |
|
(42,020,770 |
) | ||
| Total stockholders’ deficiency |
|
(5,893,828 |
) |
|
(5,555,378 |
) | ||
| Total liabilities and stockholders’ deficiency |
$ |
20,074,140 |
|
$ |
14,555,062 |
| ||
See accompanying notes
3
FILM ROMAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months ended | |||||||
| 2002 |
2003 | ||||||
| Revenue |
$ |
15,809,791 |
|
$ |
11,684,831 | ||
| Cost of revenue |
|
15,794,394 |
|
|
10,606,844 | ||
| Selling, general and administrative expenses |
|
841,948 |
|
|
742,201 | ||
| Operating income (loss) |
|
(826,551 |
) |
|
335,786 | ||
| Interest income |
|
10,284 |
|
|
2,664 | ||
| Income (loss) before provision for income taxes |
|
(816,267 |
) |
|
338,450 | ||
| Provision for income taxes |
|
— |
|
|
— | ||
| Net income (loss) |
$ |
(816,267 |
) |
$ |
338,450 | ||
| Net income (loss), per common share basic & diluted |
$ |
(0.10 |
) |
$ |
0.04 | ||
| Weighted average number of shares outstanding basic and diluted |
|
8,577,690 |
|
|
8,577,690 | ||
See accompanying notes
4
FILM ROMAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months ended |
||||||||
| 2002 |
2003 |
|||||||
| Operating activities: |
||||||||
| Net income (loss) |
$ |
(816,267 |
) |
$ |
338,450 |
| ||
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: |
||||||||
| Depreciation and amortization |
|
95,000 |
|
|
75,000 |
| ||
| Amortization of film costs |
|
15,794,394 |
|
|
10,606,844 |
| ||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
|
(115,513 |
) |
|
(135,592 |
) | ||
| Film costs |
|
(9,010,176 |
) |
|
(5,691,774 |
) | ||
| Deposits and other assets |
|
(12,474 |
) |
|
(10,745 |
) | ||
| Accounts payable |
|
(583,013 |
) |
|
(1,138,746 |
) | ||
| Accrued expenses |
|
(416,980 |
) |
|
(590,292 |
) | ||
| Deferred revenue |
|
(5,903,141 |
) |
|
(4,128,490 |
) | ||
| Net cash used in operating activities |
|
(968,170 |
) |
|
(675,345 |
) | ||
| Investing activities: |
||||||||
| Additions to property and equipment |
|
(5,259 |
) |
|
(28,481 |
) | ||
| Net cash used in investing activities |
|
(5,259 |
) |
|
(28,481 |
) | ||
| Financing activities: |
||||||||
| Net cash provided by financing activities |
|
— |
|
|
— |
| ||
| Net decrease in cash |
|
(973,429 |
) |
|
(703,826 |
) | ||
| Cash and cash equivalents at beginning of period |
|
2,776,757 |
|
|
1,277,958 |
| ||
| Cash and cash equivalents at end of period |
$ |
1,803,328 |
|
$ |
574,132 |
| ||
| Supplemental disclosure of cash flow information: |
||||||||
| Cash paid during the period for: |
||||||||
| Income taxes |
$ |
— |
|
$ |
— |
| ||
See accompanying notes
5
FILM ROMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)—Basis of Presentation
Film Roman, Inc., a Delaware corporation (the “Company”), currently conducts all of its operations through its wholly owned subsidiaries, Film Roman, Inc., a California corporation; Namor Productions, Inc., a California corporation; Chalk Line Productions, Inc., a California corporation; Diversion Entertainment, Inc., a Delaware corporation and Level 13 Entertainment, Inc., a Delaware corporation, and Special Project Films, Inc., a Delaware corporation. The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments consisting only of normal recurring accruals considered necessary to present fairly the financial position of the Company as of March 31, 2003 and the results of its operations for the three months ended March 31, 2002 and 2003 and the cash flows for the three months ended March 31, 2002 and 2003 have been included. The results of operations for interim periods are not necessarily indicative of the results, which may be realized for the full year. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 (the “Form 10-K”) filed with the Securities and Exchange Commission.
(2)—Net Income (Loss) per Common Share
For the three months ended March 31, 2002 and 2003, the per share data is based on the weighted average number of common shares outstanding during the periods. Common equivalent shares, consisting of outstanding stock options, are not included in the calculation because they are antidilutive.
(3)—Film Costs
The components of unamortized film costs consist of the following:
| December 31 2002 |
March 31 2003 | |||||
| (unaudited) | ||||||
| Film productions in process |
$ |
18,003,446 |
$ |
13,090,597 | ||
| Film productions in development |
|
138,266 |
|
136,045 | ||
| $ |
18,141,712 |
$ |
13,226,642 | |||
(4) —Stock Option Employee Compensation
As allowed under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” we apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees, “and related interpretations to account for our employee stock-based compensation plans and, accordingly, do not recognize compensation expense. Furthermore, no stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.
SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” an amendment of SFAS No. 123, requires that companies provide disclosure regarding the pro forma impact of the provisions of SFAS No. 123 in interim financial statements. The following table illustrates the effect on net income and
6
earnings per share if the Company had applied the fair value recognition provisions of SFAS Statement No. 123 to stock-based employee compensation.
| Three Months ended March 31 |
||||||||
| 2002 |
2003 |
|||||||
| (In thousands, except income/(loss) per share) |
||||||||
| Net Income/(loss), as reported |
$ |
(816 |
) |
$ |
338 |
| ||
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
(102 |
) |
|
(18 |
) | ||
| Pro forma net income/(loss) |
$ |
(918 |
) |
$ |
320 |
| ||
| Income/(loss), per share: |
||||||||
| Basic and diluted—as reported |
$ |
(0.10 |
) |
$ |
0.04 |
| ||
| Basic and diluted—pro forma |
$ |
(0.11 |
) |
$ |
0.04 |
| ||
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “expect,” “estimate,” “anticipate,” “predict,” “believe,” “plan,” “should,” “may” and “projects” and similar expressions and variations thereof are intended to identify forward-looking statements. Such forward-looking statements relate to, among other things, trends affecting the financial condition or results of operations of the Company; the Company’s future production and delivery schedule (including the number of episodes of programming to be produced and delivered during the 2003-2004 television season); plans to enter into new business areas beyond the Company’s core business of animation television production; the Company’s objectives, planned or expected activities and anticipated financial performance and liquidity. These forward-looking statements are based largely on the Company’s current expectations and are subject to a number of risks and uncertainties, including without limitation, those described under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2002. Actual results could differ from these forward-looking statements. The Company does not make projections of its future operating results and undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
General
Film Roman, Inc. (“Film Roman” or the “Company”) develops, produces and distributes a broad range of television programming for the television network, cable television, first-run domestic syndication and international markets. The Company was founded in 1984 and has grown into one of the leading independent animation studios in the world. Film Roman has produced and is producing some of the world’s best known animated series, including The Simpsons, King of the Hill, X-Men, The Mask, Bobby’s World, The Twisted Tales of Felix the Cat and Garfield & Friends. Over the years, the Company has primarily produced animation for television, both on a fee-for-services and a proprietary basis. While the Company is currently aggressively pursuing both of theses areas, the Company is also continuing to explore ways to expand its production capabilities in animation beyond television, direct-to-video, commercials, and the Internet. As the Company moves into these other areas, it is also responding to the changes that are taking place in the media and entertainment areas.
Production work on a fee-for-services basis has historically accounted for the largest and most reliable portion of the Company’s revenues. Fees paid to the Company for these production services generally range from $300,000 to $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 (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. Currently, the Company seeks to cover all of its production costs prior to production of its proprietary programs by licencing the rights to those productions. 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 sub