FIRST LOOK MEDIA INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(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, 2001

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission File Number 0-25308

FIRST LOOK MEDIA, INC.
(Exact name of Registrant as specified in its charter)

Delaware 13-3751702
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

8000 Sunset Blvd., Penthouse East,
Los Angeles, CA 90046
(Address of principal executive offices) (zip code)

Registrant's telephone number, including area code: (323) 337-1000

Securities Registered Pursuant to Section 12(b) of the Act:
None

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(title of class)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark if disclosures of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/

The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of April 12, 2002, (based on the closing sale price on such
date as reported on the OTC Bulletin Board) was $1,193,265.

The number of shares of common stock outstanding as of April 12, 2002
was 11,909,139.

PART I

ITEM 1. BUSINESS

General

First Look Media, Inc. specializes in the acquisition and direct
distribution of, and worldwide license and sale of distribution rights to,
independently produced feature films in a wide variety of genres. These genres
include:

o action;
o art-house;
o comedy;
o drama;
o foreign language;
o science fiction; and
o thrillers.

We have accumulated a library of distribution rights, including sales agency
rights, in various media and markets to more than 310 feature films.

We operate in numerous capacities, including as:

o a distributor. We acquire the distribution rights to films for
specified terms, territories and media from independent
producers. In this capacity, we receive distribution fees. In
exchange for these distribution rights, we may commit to pay
the independent producer a minimum guaranteed payment ranging
from approximately $100,000 to $5,000,000 at or after delivery
of the completed film. These minimum guaranteed payments
represent varying portions of the films' production costs,
including, on occasion, substantially all of such costs. These
minimum guaranteed payments may enable the independent
producer to obtain financing for the production and/or
completion of the film. By providing these minimum guaranteed
payments, we are often able to secure more extensive
distribution rights on more favorable terms. Additionally, we
are able to distribute pictures directly in the United States
both theatrically through our First Look Pictures division and
on video and DVD through our First Look Home Entertainment
division.

o a producer. We selectively produce motion pictures that we
distribute, generally acquiring fully developed projects ready
for pre-production and contracting out pre-production and
production activities. Additionally, we have established a
television commercial production division.

Historically, we have focused on licensing theatrical, video, pay
television, free television, satellite and other distribution rights to foreign
sub-distributors in major international territories and regions. These
activities accounted for approximately 66.3% of our total revenues in 2000 and
approximately 53.4% of our total revenues in 2001.

Recently, we have become more active with distribution activities in
the U.S. where we engage directly in domestic theatrical distribution through
our First Look Pictures division and domestic video distribution through our
First Look Home Entertainment division. Our theatrical distribution activities
include booking motion pictures for exhibition at movie theaters, arranging for
the manufacture of release prints from film negatives, and promoting motion
pictures with advertising and publicity campaigns. Our video distribution
activities include the promotion and sale of videocassettes to local, regional
and national video retailers.

In 2001, we launched a television commercial production division which
generated $263,000 of gross revenue. In connection with this division, we have
hired experienced management and engaged two experienced directors of television
commercial productions. We have begun producing commercials that are broadcast
on domestic television.

Corporate Information

Our company was incorporated in Delaware in December 1993 under the
name "Entertainment/Media Acquisition Corporation" in order to acquire an
operating business in the entertainment and media industry. We consummated our
initial public offering in February 1995, and in October 1996, we merged with
Overseas Filmgroup, Inc., a privately-held Delaware corporation ("Overseas
Private") that had been operating since February 1980. Our company was the
surviving corporation in the merger. Upon consummation of the merger, we changed
our name to "Overseas Filmgroup, Inc." We operated under the name "Overseas
Filmgroup, Inc." until January 2001. In January 2001, we changed our name to
"First Look Media, Inc." in order to reflect the broadening of our operations
beyond foreign distribution of independently produced feature films to
additional areas such as theatrical and video distribution in the United States
and television commercial production.

Our principal executive offices are located at 8000 Sunset Boulevard,
Penthouse East, Los Angeles, California 90046, and our telephone number is (323)
337-1000.

Recent Developments

Warrant Exchange

On November 8, 2001, we commenced a tender offer in which we offered to
exchange .0714 of a share of our common stock for every one of our outstanding
warrants that we issued in our initial public offering in February 1995. The
exchange offer was completed on January 11, 2002. 4,135,579 of our 4,500,000
outstanding warrants were tendered and accepted by us in exchange for 295,291
shares of our common stock. The warrant holders who elected not to participate
in the exchange retained their right to purchase one share of our common stock
for $5.00, for each warrant held. These warrants expired on February 16, 2002.

Strategic Objectives

We seek to become a more significant player in the entertainment
industry, while at the same time managing our risk and cash flow so as to be
able to effectively respond to continuing changes in the entertainment industry.
Our strategy to achieve our objectives includes:

Expanding our domestic theatrical distribution activities. We believe
there is great opportunity in the U.S. theatrical distribution market. In the
past year, we released Bread and Tulips, an Italian language film which won
seven "Donatello" awards (the Italian equivalent of an Oscar). The film
generated approximately $4,500,000 in U.S. box office gross receipts.
Previously, we have had domestic success with films such as John Sayles's The
Secret of Roan Inish and the Academy Award-winning Antonia's Line. Limited
financial resources has kept us from becoming a more active company in this
area, however, we intend to utilize our expanded financial resources, including
our Chase facility, to become increasingly more active in this market.

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Expanding our home entertainment division. In 2000, we created a home
entertainment division called "First Look Home Entertainment." This division
directly distributes films on videocassette and DVD. In 2001, we released
seventeen films in the U.S. video/DVD market. We plan to release approximately
twenty-seven films in the U.S. video/DVD market in 2002.

Expanding our television commercial production division. We have
established a television commercial production division called "First Look
Artists." This division seeks to exploit the current trend in the industry of
utilizing talent not typically associated with advertising, such as high-profile
feature film directors. In this regard, we are assembling a roster of
accomplished feature filmmakers who we believe can successfully cross over to
the medium of television commercials. We also believe that we can attract proven
television commercial directors to our division's projects by offering them
access to potential film projects.

Building upon our reputation and relationships with foreign sources. We
believe that we enjoy a prominent position in the international independent film
marketplace. We intend to capitalize on our reputation and relationships to
exploit opportunities in the areas of production and acquisition financing,
especially through private equity and international sources. These efforts will
enable us to access films at lower cost and risk to us and to access
increasingly higher profile (which generally means higher budget) films with
commercial potential at reduced cost and risk to us.

Reducing our risk by limiting our direct investment in acquisition
costs and film production. As part of this strategy, we:

o act as distributor or license distribution rights for films
that are produced with funds provided by other parties and not
by us; and

o act on behalf of producers to locate and arrange equity
sources, co-production and co-financing sources, pre-sales,
gap financing and other resources for the production of motion
pictures in exchange for sales and distribution rights to the
films and negotiated fees.

Acquiring films that we believe are likely to merit theatrical release,
are suitable for initial release on pay and basic television or are suitable for
initial release on videocassette or DVD. As part of this strategy, we:

o acquire films that have recognizable cast and experienced
directors and producers and which embody greater production
values, which we believe enhances their audience appeal in the
competitive theatrical market. We attempt to accomplish this
by offering more incentives to talent than is offered by major
studios, such as greater creative and financial opportunity
tied to film performance;

o acquire films that are oriented to basic and pay television
programming needs as well as video and DVD markets, such as
films with lower budgets and which target specific genres,
such as horror and "monster" films; and

o develop relationships with major studios and seek to expand
our executive producing role in connection with motion
pictures that other companies produce and/or distribute.

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The Motion Picture Industry

Generally

The motion picture industry consists of two principal activities:

o production, which encompasses the creation, development and
financing of motion pictures; and

o distribution, which involves the promotion and exploitation of
feature-length motion pictures in a variety of media,
including theatrical exhibition, home video, television and
other ancillary markets, both domestically and
internationally.

The United States motion picture industry is dominated by the major
studios, including The Walt Disney Company, Paramount Pictures Corporation,
Warner Brothers Inc., Universal Pictures, Twentieth Century Fox, Sony Pictures
Entertainment, and MGM/UA. The major studios, which historically have produced
and distributed the vast majority of high-grossing theatrical motion pictures
released annually in the United States, are typically large, diversified
corporations that have strong relationships with creative talent, television
broadcasters and channels, Internet service providers, movie theater owners and
others involved in the entertainment industry. The major studios also typically
have extensive national or worldwide distribution organizations and own
extensive motion picture libraries.

Motion picture libraries, consisting of motion picture copyrights and
distribution rights owned or controlled by a film company, can be valuable
assets capable of generating revenues from worldwide commercial exploitation in
existing media and markets, and potentially in future media and markets
resulting from new technologies and applications. The major studios also may own
or be affiliated with companies that own other entertainment related assets such
as music and merchandising operations and theme parks. The major studios' motion
picture libraries and other entertainment assets may provide a stable source of
earnings which can offset the variations in the financial performance of their
new motion picture releases and other aspects of their motion picture
operations.

During the past 15 years, independent production and distribution
companies, many with financial and other ties to the major studios, have played
an important role in the production and distribution of motion pictures for the
worldwide feature film market. These companies include:

o Miramax Films Corporation, now owned by The Walt Disney
Company, which produced Scary Movie, the Scream film series,
Shakespeare in Love and Chocolat;

o New Line Cinema Corporation/Fine Line Features, now owned by
AOL/Time Warner, which produced Lord of the Rings: The
Fellowship of the Ring, the Austin Powers films, The Mask,
Teenage Mutant Ninja Turtles and the Nightmare on Elm Street
series;

o USA Films (formerly October Films and now owned by
Vivendi/Universal), which produced Traffic, Secrets & Lies and
Breaking the Waves together with Gramercy Pictures, which
produced Dead Man Walking and Fargo, is part of USA Films and
USA Network;

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o Orion Pictures, now affiliated with MGM/UA, which produced The
Silence of the Lambs;

o Artisan Entertainment Inc., which distributed The Blair Witch
Project; and

o Lion's Gate Films, which produced and distributed Frailty,
Monster's Ball and American Psycho and which distributed
Dogma, Gods and Monsters and Affliction.

As a result of consolidation in the domestic motion picture industry, a
number of previously independent producers and distributors have been acquired
or are otherwise affiliated with major studios. However, there are also a large
number of other production and distribution companies that produce and
distribute motion pictures that have not been acquired or become affiliated with
the major studios. In contrast to the major studios, independent production and
distribution companies generally produce and distribute fewer motion pictures
and do not own production studios, national or worldwide distribution
organizations, associated businesses or extensive film libraries which can
generate gross revenues sufficient to offset overhead, service debt or generate
significant cash flow.

The motion picture industry is a world-wide industry. In addition to
the production and distribution of motion pictures in the United States, motion
picture distributors generate substantial revenues from the exploitation of
motion pictures internationally. In recent years, there has been a substantial
increase in the amount of filmed entertainment revenue generated by U.S. motion
picture distributors from foreign sources. International revenues of motion
picture distributors from filmed entertainment grew from approximately $1.1
billion in 1990 to approximately $2.6 billion in 2000. This growth has been due
to a number of factors, including the general worldwide acceptance of and demand
for motion pictures produced in the United States, the privatization of many
foreign television industries, growth in the number of foreign households with
videocassette players and growth in the number of foreign theater screens.

Many countries and territories, such as Australia, Canada, China,
France, Germany, Hong Kong, India, Italy, Japan, Russia, Spain and the United
Kingdom have substantial indigenous film industries. As in the United States, in
a number of these countries the film industry, and in some cases, the
entertainment industry, in general, is dominated by a small number of companies
that maintain large and diversified production and distribution operations.
However, like in the United States, in most of these countries, there are also
smaller, independent, motion picture production and distribution companies.
Foreign distribution companies not only distribute motion pictures produced in
their countries or regions but also films licensed or sub-licensed from United
States production companies and distributors. In addition, film companies in
many foreign countries produce films not only for local distribution, but also
for export to other countries, including the United States. While some foreign
language films and foreign English-language films appeal to a wide U.S.
audience, most foreign language films distributed in the United States are
released on a limited basis because they draw a specialized audience.

Motion Picture Production

Motion picture production begins with the screenplay adaptation of a
popular novel or other literary work acquired by the producer or the development
of an original screenplay having its genesis in a story line or scenario
conceived by a writer and acquired by the producer. In the development phase,
the producer typically seeks production financing and tentative commitments from
a director, the principal cast members and other creative personnel. A proposed
production schedule and budget also are prepared during this phase.
Pre-production begins upon completing the screenplay and arranging financing
commitments. In this phase, the producer:

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o engages creative personnel to the extent not previously
committed;
o finalizes the filming schedule and production budget; obtains
insurance and secures completion guaranties, if necessary;
establishes filming locations and secures any necessary studio
facilities and stages; and
o prepares for the start of actual filming.

Principal photography, which is the actual filming of the screenplay,
generally extends from eight to sixteen weeks for a film produced by a major
studio and for as little as four to eight weeks for low budget films and films
produced by independent production companies. The length of filming depends in
each case upon factors such as budget, location, weather and complications
inherent in the screenplay. Following completion of principal photography, the
film enters the post-production phase. During this phase, the motion picture is
edited, opticals, dialogue, music and any special effects are added, and voice,
effects and music sound tracks and pictures are synchronized. This results in
the production of a negative from which release prints of the motion picture are
made.

Production costs consist primarily of:

o acquiring or developing the screenplay;
o compensating creative and other production personnel;
o film studio and location rentals;
o equipment rentals;
o film stock and other costs incurred in principal photography;
and
o post-production costs, including the creation of special
effects and music.

Distribution expenses, which consist primarily of the costs of
advertising and preparing release prints, are not included in direct production
costs. The major studios generally fund production costs from cash flow
generated by motion pictures and related activities or, in some cases, from
unrelated businesses or through off-balance sheet methods. Substantial overhead
costs, consisting largely of salaries and related costs of the production staff
and physical facilities maintained by the major studios, also must be funded.
Independent production companies generally avoid incurring overhead costs as
substantial as those incurred by the major studios by hiring creative and other
production personnel and retaining the other elements required for
pre-production, principal photography and post-production activities on a
picture-by-picture basis. As a result, these companies do not own sound stages
and related production facilities, and, accordingly, do not have the fixed
payroll, general administrative and other expenses resulting from ownership and
operation of a studio. Independent production companies also may finance their
production activities on a picture-by-picture basis. Sources of funds for
independent production companies include bank loans, pre-licensing of
distribution rights, foreign government subsidies, equity offerings and joint
ventures. Independent production companies generally attempt to obtain all or a
substantial portion of their financing of a motion picture prior to commencement
of principal photography, at which point substantial production costs begin to
be incurred and require payment.

As part of obtaining financing for its films, an independent production
company often is required by its lenders and distributors who advance production
funds to obtain a completion bond or production completion insurance from an
acceptable completion guarantor which names the lenders and applicable
distributors as beneficiaries. The guarantor assures the completion of the
particular motion picture on a certain date. If the motion picture cannot be
completed for the agreed upon budgeted cost, the completion guarantor is
obligated to pay the additional costs necessary to complete the picture by the
agreed upon delivery date. If the completion guarantor fails to timely complete
and deliver the motion picture on or before the agreed upon delivery date, the
completion guarantor is required to pay the lenders and distributor, if
applicable, an amount equal to the aggregate amount the lenders and distributor
have loaned or advanced to the independent producer.

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In connection with the production and distribution of a motion picture,
major studios and independent production companies generally grant contractual
rights to actors, directors, screenwriters, owners of rights and other creative
and financial contributors to share in net revenues from a particular motion
picture. Except for the most sought-after talent, these third-party
participations are generally payable after all distribution fees, marketing
expenses, direct production costs and financing costs are recovered in full.

Major studios and independent film companies in the United States
typically incur obligations to pay residuals to various guilds and unions
including the Screen Actors Guild, the Directors Guild of America and the
Writers Guild of America. Residuals are payments required to be made on a
picture-by-picture basis by the motion picture producer to the various guilds
and unions arising from the exploitation of a motion picture in markets other
than the primary intended market. Residuals are calculated as a percentage of
the gross revenues derived from the exploitation of the picture in these
ancillary markets. The guilds and unions typically obtain a security interest in
all of the producer's rights in the motion picture being exploited to ensure
satisfaction of the residuals obligation. This security interest usually is
subordinate to the security interest of the lenders financing the production
cost of the motion picture and the completion bond company guaranteeing
completion of the motion picture. Under a producer's agreement with the guilds
and unions, the producer may transfer the obligation to pay the residuals to a
distributor if the distributor assumes the obligation to make the residual
payment. If the distributor does not assume those obligations, the producer is
obligated to pay those residuals.

Motion Picture Distribution

General

Motion picture distribution involves domestic and international
licensing of the picture for:

o theatrical exhibition;

o videocassettes and digital video discs (DVD);

o presentation on television, including pay-per-view, basic and
premium cable, network, syndication or satellite; o marketing
of the other rights in the picture and underlying literary
property, which may include books, merchandising and
soundtracks;

o non-theatrical exhibition, which includes airlines, hotels and
armed forces facilities; and

o exploitation via the Internet, which is still evolving.

Although releases by the major studios typically are licensed and fully
exploited in all of the foregoing media, films produced or distributed by
independent film companies are often not exploited in all of the media. For
example, some films may not receive theatrical exhibition in the United States
or various other territories and instead may be released directly on home video
or as a pay television premiere or otherwise exploited on a pay television
service. In limited circumstances, these films may then be released in theaters.

Production companies with distribution divisions typically distribute
their motion pictures themselves. Production companies without distribution
divisions may retain the services of sales agents or distributors to exploit the
motion pictures produced by them in selected or all media and territories.
Distribution companies may directly exploit distribution rights licensed to, or
otherwise acquired, by them by booking motion pictures with movie theaters or
selling videocassettes to video retailers. Alternatively, they may grant
sub-licenses to domestic or foreign sub-distributors to exploit completed motion
pictures in particular territories or media.

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Acquisition of distribution rights

A sales agent does not generally acquire distribution rights from the
producer or other owner of rights in the motion picture. Instead, he acts as an
agent for the producer or rights owner, licensing the distribution rights to
distributors on behalf of the producer or rights owner in exchange for a sales
agency fee. This fee typically is computed as a percentage of gross revenues
from licenses obtained by the sales agent. A distributor generally licenses and
takes a grant of distribution rights from the producer or other rights owner of
the motion picture for a specified term in a particular territory or territories
and media, generally in exchange for a distribution fee calculated as a
percentage of gross revenues generated by the distribution of exploitation of
the motion picture. The distributor may agree to pay the producer of the motion
picture an advance or a minimum guarantee upon the delivery of the completed
motion picture. This amount is to be recouped by the distributor out of revenues
generated from the exploitation of the motion picture in particular media or
territories. After receiving its ongoing distribution fee and recouping the
advance or minimum guarantee plus its distribution costs, the distributor
generally pays the remainder of revenues in excess of an ongoing distribution
fee to the producer of the motion picture.

Obtaining license agreements with a distributor or distributors prior
to completion of a motion picture which provide for payment of a minimum
guarantee is often referred to as the pre-licensing or pre-selling of film
rights. This pre-selling may enable the producer to obtain financing for its
project by using the contractual commitment of the distributor to pay the
advance or minimum guarantee as collateral to borrow production funding. In the
past, pre-selling of film rights provided a means for financing film production.
However, the ability to pre-sell film rights in various territories and media,
the amount of pre-sales that can be obtained in certain territories and media
and thus, the percentage of a film's budget that can be covered with pre-sales,
fluctuates. In recent years, independent film companies generally have not been
able to pre-sell as great a percentage of a film's budget as they have in past
years.

The producer also may be able to acquire additional production funds
through gap financing. Although gap financing currently is being made available
by multiple lenders, certain banks have ceased providing this type of financing,
and many banks that provide gap financing are becoming more conservative in
their approach to these lending practices. As a result, there can be no
assurance that lenders will continue to make funds available on this basis. In
some circumstances, the distributor is entitled to recover any unrecouped costs
and advances from a film licensed to the distributor from the revenues from
another film or films also licensed to the distributor. This is commonly known
as cross collateralizing.

In addition to obtaining distribution rights in a motion picture for a
limited duration, a distributor also may acquire all or a portion of the
copyright in the motion picture or license certain distribution rights in
perpetuity. Both major studios and independent film companies often acquire
motion pictures for distribution through a customary industry arrangement known
as a negative pickup, under which the studio or independent film company agrees
to pay a specified minimum guaranteed amount to a production company in exchange
for all rights to the film upon completion of production and delivery of the
film. The production company normally finances production of the motion picture
pursuant to financing arrangements with banks and other lenders in which the
lender receives an assignment of the production company's right to payment of
the minimum guarantee and is granted a security interest in the film and in the
production company's rights under its arrangement with the studio or independent
film company. When the major studio or independent film company picks up the
completed motion picture, it pays the minimum guarantee or assumes the
production financing indebtedness incurred by the production company in
connection with the film. In addition, the production company is paid a
production fee and generally is granted a participation in net revenues from
distribution of the motion picture.

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The distribution cycle

Concurrently with their release in the United States, motion pictures
typically are released in Canada and also may be released in one or more other
international markets. Generally, a motion picture that is released theatrically
is available for distribution in other media during its initial distribution
cycle as follows:
Number of months following
initial Domestic
Marketplace (Media) theatrical release
- ------------------------ --------------------------
International theatrical Concurrent
Domestic home video and DVD (initial release) 4-6 months
Domestic pay-per-view 6-9 months
International home video and DVD (initial release) 6-12 months
Domestic pay television 12-15 months
International television (pay or free) 18-24 months
Domestic free television (network, barter syndication,
syndication and basic cable) 30-33 months

Films often remain in distribution for varying periods of time. For
example, major studio motion pictures that are released theatrically can play in
theaters for several weeks following their initial release or, at times,
including in the case of successful art-house films that are released on a
limited basis, for several months. On the other hand, unsuccessful films may
play in theaters for only a short period of time. Once released on
videocassette, a motion picture may remain available on videocassette for many
years. Similarly a motion picture can be licensed to various forms of television
for many years after its first release. The release periods set forth above
represent standard holdback periods. A holdback period represents a stipulated
period of time during which release of the motion picture in other media is
prevented to allow the motion picture to maximize its value in the media in
which it is currently being released. Holdback periods are often specifically
negotiated with various distributors on a media-by-media basis. However, the
periods set forth above represent our estimate of typical current holdback
periods in the motion picture industry.

In general, if a film is not released theatrically in the United States
and is instead first released on domestic home video, television exploitation
does not commence until four to eight months after the video release.
Thereafter, the same general release patterns indicated in the table above
typically apply. If a film premieres on United States pay television, the pay
television service is typically licensed for a four to six week exclusive airing
period. The license generally will provide for limited airings made up of five
to eight exhibition days with multiple airings permitted on each exhibition day.
The provisions of the license also usually provide for the pay television
service to receive subsequent airing periods following a period in which the
film can be released on video or sometimes even theatrically and a period during
which the film may be broadcast on free television.

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A substantial portion of a film's ultimate revenues are generated in
its initial distribution cycle. The initial distribution cycle usually consists
of the first five years after the film's initial domestic release and includes
theatrical, video, and pay and free television. Commercially successful motion
pictures, however, may continue to generate revenues after the film's initial
distribution cycle from the re-licensing of distribution rights in certain media
and from the licensing of distribution rights with respect to new media and
technologies and in emerging markets. Although there has been a substantial
increase over the past fifteen years in the revenues generated from the
licensing of rights in ancillary media such as home video, DVD, cable and
pay-per-view, the theatrical success of a motion picture remains a significant
factor in generating revenues in foreign markets and in other media such as
video and television. For example, retail video stores currently purchase fewer
copies of videocassettes of motion pictures that have not been theatrically
released, and purchase more copies of major studio theatrical hits.

Theatrical

The theatrical distribution of a motion picture, whether in the United
States or internationally, involves the licensing and booking of the motion
picture to movie theaters, the promotion of the picture through advertising and
publicity campaigns and the manufacture of release prints from the film
negative. Expenditures on these activities, particularly on promotion and
advertising, are often substantial and may have a significant impact on the
ultimate success of the film's theatrical release. In addition, expenditures can
vary significantly depending upon a number of factors including:

o the markets and regions in which the film is distributed;

o the media used to promote the film such as newspaper,
television and radio;

o the number of screens on which the motion picture is to be
exhibited; and

o the ability to exhibit motion pictures during peak exhibition
seasons.

With a release by a major studio, the vast majority of these costs,
which primarily consist of advertising costs, are incurred prior to the first
weekend of the film's domestic theatrical release. Accordingly, there is not
necessarily a correlation between these costs and the film's ultimate box office
performance. In addition, the ability to distribute a picture during peak
exhibition seasons, including the summer months and the Christmas holidays, and
in the most popular theaters, may affect the theatrical success of a picture.
Films distributed theatrically by an independent film company are sometimes
released on a more limited basis which allows the distributor to defer marketing
costs until it is able to assess the initial public acceptance of the film.

While arrangements for the exhibition of a film vary greatly, there are
certain economic relationships generally applicable to theatrical distribution.
Theater owners retain a portion of the admissions paid at the box office,
typically referred to as gross box office receipts. The share of the gross box
office receipts retained by a theater owner generally includes a fixed amount
per week, in part to cover overhead, plus a percentage of receipts that usually
increases over time. Although these percentages vary widely, a theater owner's
share of a particular film's revenues will normally be approximately 50% to 65%
of gross box office receipts. The balance of the gross box office receipts (50%
to 35%), referred to as gross film rentals, is paid to the distributor. The
distributor then retains a distribution fee, which is typically 25% to 35%, from
the gross film rentals. This percentage is used to recover the costs incurred in
distributing the film, which consist primarily of marketing and advertising
costs and the cost of release prints for exhibition. The balance of gross film
rentals, after deducting distribution fees and distribution costs recouped by
the distributors, is then applied against the recoupment of any advance paid for
the distribution rights plus interest and the balance is paid to the producer or
other rights owner of the film.

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Home video, DVD

A motion picture released theatrically typically will become available
for videocassette and digital video disc ("DVD") distribution within four to six
months after its initial domestic theatrical release. Certain films are not
initially released theatrically but may instead be released directly to home
video and DVD. Given the increasing preference of retail video stores for films
which have achieved successful theatrical releases, it has become increasingly
difficult to generate significant revenues from films first released directly on
video/DVD.

Home video distribution consists of the promotion and sale of
videocassettes to local, regional and national video retailers that rent or sell
videocassettes to consumers primarily for home viewing. Recently, the market for
videocassettes has been supplemented by, and in some ways replaced by, the
market for DVD's. DVD units are typically available both to rental markets and
sell-through markets at the same time and today are priced between $14 to $20
per unit. Impacted by this, per unit pricing on videocassettes has dropped over
the past years quite dramatically as consumers convert from videocassette
players to DVD players. Additionally, revenue sharing arrangements (arrangements
whereby retail stores and chains pay little or nothing for each cassette, but
rather shares the revenue generated from renting such cassette, with the
licensor), have significantly impacted the business. In such arrangements,
revenue related to a particular video release is earned over a period of time
(generally up to one year), rather than on the first day of video release.
Following the initial marketing period, selected films may be remarketed at a
wholesale price of $10 to $15 or less for sale to consumers. A few major
releases with broad appeal may be initially offered by a film distribution
company at a price designed for sell-through rather than rental when it is
believed that the ownership demand by consumers will result in a sufficient
level of sales to justify the reduced margin on each cassette sold. Today, most
home video distribution contracts in international territories are arranged
similarly to those in domestic territories, although the wholesale prices may
differ.

Television

Television rights for films initially released theatrically that have
broad appeal generally are licensed:

o first to pay-per-view for an exhibition period within six to
nine months following initial domestic theatrical release;

o then to pay television approximately 12 to 15 months after
initial domestic theatrical release;

o thereafter to basic cable broadcasters or in certain cases to
network television for an exhibition period; and

o then to syndication or "free" television.

Pay-per-view allows subscribers to pay for individual programs. Pay
television allows cable television subscribers to view such services as
HBO/Cinemax, Showtime/The Movie Channel, Encore Media Services or others offered
by their cable system operators for a monthly subscription fee. Pay-per-view and
pay television are now delivered not only by cable, but also by satellite
transmission, and films are usually licensed in both of these media. Films that
are not initially released in the domestic theatrical market may premiere
instead on pay television followed in some limited circumstances by theatrical
release. Groups of motion pictures often are packaged and licensed as a group
for exhibition on television over a period of time and, therefore, revenues from
these television licensing packages may be received over a period that extends
beyond the initial distribution cycle of a particular film. Motion pictures also
are licensed and packaged by producers and distributors for television broadcast
in international markets by government or privately owned television studios and
networks. Pay television is less developed outside the United States, but is
experiencing significant international growth. The prominent foreign pay
television services include Canal+, Premiere, STAR TV, British Sky Broadcasting
and the international operations of several U.S. cable services, including HBO,
the Disney Channel, Turner Broadcasting and DirecTV.

11

Non-theatrical and other rights

Films may be licensed for use by airlines, schools, public libraries,
community groups, the military, correctional facilities, ships at sea and
others. Music contained in a film may be licensed for sound recording, public
performance and sheet music publication. Rights in motion pictures may be
licensed to merchandisers for the manufacture of products such as toys,
T-shirts, posters and other merchandise. Rights also may be licensed to create
novels from a screenplay and to generate other related book publications, as
well as interactive games on platforms such as CD-ROM and CD-I.

Our Motion Picture Distribution

International distribution

Our management has considerable expertise in international
distribution. Robert B. Little, our co-chairman of the board and president, has
substantial experience in licensing motion pictures for distribution outside the
United States and has been active in international motion picture sales since
1975. Over the past 25 years, he has developed relationships with distributors
in most territories through his foreign sales activities. In addition, we are a
founding member of the American Film Marketing Association, which sponsors the
American Film Market. The American Film Market, along with the Cannes Film
Festival and MIFED, are the major annual international film markets that are
attended by distributors worldwide. We participate annually with a sales office
at all three major film markets, as well as three major television and two major
video markets. We also attend many film festivals throughout the world including
Sundance, the Toronto Film Festival and others. From time to time, we also may
engage independent representatives to assist us in acquiring and licensing
motion picture rights.

We license distribution rights internationally in various media such as
theatrical, video/DVD, pay television, free television, satellite and other
rights to foreign sub-distributors on either an individual rights basis or
grouped in combinations of rights. We license these rights to sub-distributors
in international territories either on a picture-by-picture basis or
occasionally pursuant to output arrangements. Currently, our most important
international territories are Australia, the Benelux countries, Canada, France,
Germany, Italy, Japan, Scandinavia, Spain and the United Kingdom.

The terms of our license agreements with foreign sub-distributors vary
depending upon the territory and media involved and whether the agreement
relates to a single or multiple motion pictures. Most of our license agreements
provide that we will receive a minimum guarantee from the foreign
sub-distributor with all or a majority of the minimum guarantee paid prior to,
or upon delivery of, the film to the sub-distributor for release in the
particular territory. The remainder of any unpaid minimum guarantee generally is
payable at specified intervals after delivery of the film to the
sub-distributor. The minimum guarantee is recovered by the sub-distributor out
of the revenues generated from exploitation of the picture in the territory. The
foreign sub-distributor retains a negotiated distribution fee, generally
measured as a percentage of the gross revenues generated from its distribution
of the motion picture, recovers its distribution expenses and the minimum
guarantee and ultimately pays us the remainder of any receipts in excess of the
distributor's ongoing distribution fee. We must rely on the foreign
sub-distributor's ability to successfully exploit the film in order to receive
any proceeds in excess of the minimum guarantee.

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We occasionally do not receive a minimum guarantee from the foreign
sub-distributor and instead negotiate terms that usually result in an allocation
of gross revenues between the sub-distributor and us. Typically, the terms of
these types of arrangements provide for the sub-distributor to retain an ongoing
distribution fee, calculated as a percentage of the sub-distributor's gross
receipts in the territory, recover its expenses and pay remaining receipts in
excess of the ongoing distribution fee to us. Alternatively, often with respect
to video rights, the terms may provide for a royalty to be paid to us calculated
as a percentage of the sub-distributor's gross receipts from exploitation of the
video rights without deduction for the sub-distributor's distribution expenses.

At times, we enter into output arrangements with local foreign
distributors whereby the foreign sub-distributor receives the right, typically
for a specified period and number of motion pictures, to distribute motion
pictures that we have released in a particular territory and designated media.
In some circumstances, the foreign sub-distributor pays us a minimum guarantee
on a picture-by-picture basis with each minimum guarantee having been either
pre-negotiated or computed as a stipulated percentage of the production or
acquisition cost of each picture.

Domestic distribution

In addition to obtaining foreign distribution rights, we have been
active in acquiring domestic distribution rights. We exploit our domestic
distribution rights in a variety of ways. In 1993, we established First Look
Pictures, our domestic theatrical releasing operation, and in 1999 we began
releasing films directly on video under First Look Home Entertainment. Some of
the films we license or distribute receive domestic theatrical release by First
Look Pictures or video release by First Look Home Entertainment. We may license
films initially to television broadcasters for release initially on television.
We also license to third party distributors, such as Fox Searchlight, who may
release a picture theatrically and distribute the film in other media as well.

We occasionally license domestic video rights of a film to
sub-distributors, including Blockbuster, Inc., USA Films and Columbia TriStar
Home Video. In addition, we have created First Look Home Entertainment, which
released seventeen films on video in 2001, and we expect to release
approximately twenty-seven films during 2002.

We license distribution rights directly to pay television services
including HBO, Showtime and Encore, as well as smaller services, pay-per-view
services and basic cable services, including USA, Lifetime, Bravo and the
Independent Film Channel. Although we have not engaged in significant licensing
or syndication of domestic free television rights except as part of a license of
rights in multiple media, we control these rights to a significant portion of
the films in our library and have licensed these rights in certain films to
third parties.

In some cases, we will license the right to distribute a film
domestically in multiple media to a major studio, a division of a major studio
or an independent distributor. Although the terms of these licenses vary, we
typically will be paid a minimum guarantee. The sub-distributor then retains a
distribution fee, measured as a percentage of the gross receipts received by the
sub-distributor from exploitation of the film, recovers its distribution costs
and the advance paid to us, and ultimately pays us the remainder of any receipts
in excess of an ongoing distribution fee.

We do not always receive a minimum guarantee from the licensing of
distribution rights to foreign and domestic sub-distributors. This has caused us
to rely more heavily on the actual financial performance of the film being
distributed. In some circumstances, whether we receive a minimum guarantee
depends upon the media. For example, in the case of motion pictures that have
not been theatrically released, we may enter into video/DVD distribution
arrangements with sub-distributors where no minimum guarantee is paid to us or
where the minimum guarantee paid to us is significantly less than those paid to
us for similar films in the past. In addition, even if we do obtain minimum
guarantees from our sub-distributors, the minimum guarantees do not assure the
profitability of our motion pictures or our operations. Additional revenues may
be necessary from distribution of a motion picture to enable us to recover any
investment in the motion picture in excess of the aggregate minimum guarantees
obtained from sub-distributors, pay for distribution costs, pay for ongoing
acquisition and development of other motion pictures by us and cover general
overhead. While the pre-licensing of distribution rights to sub-distributors in
exchange for minimum guarantees may reduce some of our risk from unsuccessful
films, it also may result in us receiving lower revenues with respect to highly
successful films.

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First Look Pictures

Some of the motion pictures for which we control domestic rights are
directly distributed to theaters throughout the United States through First Look
Pictures. During 2001, First Look Pictures released seven films (Chopper, Ed
Gein, Question of Faith, Bread and Tulips, Lisa Picard is Famous, Bangkok
Dangerous and Asoka). Although some of First Look Pictures' future releases may
appeal to a wide audience, many of our releases to date have been foreign
language and art-house films intended to appeal primarily to sophisticated
audiences.

We believe that we can benefit in several ways by theatrically
distributing films in the United States directly through First Look Pictures.
The domestic theatrical success of a motion picture can be a significant factor
in generating revenues from its distribution in ancillary media and foreign
markets. For example, retail video stores purchase few copies of videocassettes
of motion pictures that have not been theatrically released. In addition, we
believe we are generally able to obtain more favorable distribution terms in our
agreements with foreign and domestic sub-distributors in other media with
respect to motion pictures that have been theatrically released in the United
States. We also believe that, in some cases, First Look Pictures' operations
enable us to achieve domestic theatrical release for films that might not
otherwise be released in U.S. theaters. In addition, we believe that our ability
to release a film theatrically in the U.S. enables us to attract more
recognizable talent, higher profile producers and more promising motion picture
projects for both domestic and foreign distribution and that by theatrically
releasing films ourselves in the United States, we can retain a significantly
greater share of the revenue from domestic media in the event of a highly
successful theatrical release.

Films distributed theatrically in the United States by First Look
Pictures typically have been released on a limited basis to initially less than
100 screens and in selected cities, expanding to new cities or regions based
upon the performance of the film. Some films that are released in new cities as
prints become available from cities where the engagement has closed, reducing
the number of prints needed and the aggregate cost of the prints. We may release
appropriate films with more mass market appeal on a wide release basis either
through First Look Pictures or, more likely, by licensing the film to a domestic
distributor with more significant financial and distribution resources.

The cost to First Look Pictures to distribute a specialized motion
picture or art-house film on a limited-release basis has typically ranged from
approximately $100,000 to $2,000,000. Expenditures for prints, marketing and
advertising represent a substantial portion of the costs of releasing a film. In
connection with the acquisition of domestic theatrical rights to a film, we
occasionally commit to spend no less than a specified minimum amount for prints
and advertising costs. These costs are in addition to the direct production or
acquisition costs and other distribution expenses of the films.

Generally, in addition to receiving a distribution fee, we are entitled
to recover our print and advertising expenditures. Although First Look Pictures
may at times utilize standard broadcast television advertising, First Look
Pictures typically supports its limited releases with local newspaper and, in
certain instances, some cable television advertising. First Look Pictures also
relies on local and national publicity, such as reviews or articles in local and
national publications and appearances of a film's principal artists on radio and
television talk shows. In contrast, distributors of national, wide release films
rely primarily on national advertising campaigns, including substantial
television advertising, to attract theatergoers.

14

The success of a domestic theatrical release by First Look Pictures can
be affected by a number of factors outside our control. These factors include:

o audience and critical acceptance;

o the availability of motion picture screens;

o the success of competing films in release;

o awards won by First Look Pictures' releases or that of its
competition;

o inclement weather; and

o competing televised events such as sporting and news events.

As a result of the foregoing, and depending upon audience acceptance of
the films distributed through First Look Pictures, we expect that in some cases
we may not recover all of our distribution expenses or derive any profit solely
from domestic theatrical distribution revenue of First Look Pictures' releases.
In addition, we cannot assure you that total revenues from any First Look
Pictures' release, including revenues derived from the film in ancillary media
and international markets, will be sufficient to allow us to recover all of our
costs or to realize a profit.

During 2001, First Look Pictures released the following seven motion
pictures:

We anticipate the release of the following films by First Look Pictures
in 2002:

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We cannot assure that the motion pictures scheduled for release by
First Look Pictures in 2002 or any motion pictures thereafter will actually be
released or released in accordance with its anticipated schedule. The motion
picture business is subject to numerous uncertainties, including financing
requirements, personnel availability and the release schedule of competing
films.

Our Acquisition of Rights, Production and Financing

We acquire sales and distribution rights from a wide variety of
independent production companies and producers. We generally acquire rights to
single films, as compared to acquiring films pursuant to multi-picture
acquisition agreements with independent film companies or producers. We commit
to acquire rights to motion pictures at various stages in the completion of a
film, from films completed and ready for release to developed or undeveloped
film projects for which we may arrange financing or production services to
complete. In acquiring rights, we generally seek to obtain rights to
commercially appealing motion pictures with substantially lower direct negative
costs than motion pictures released by the major studios.

In order to fund the acquisition costs of the films for which we
acquire rights, we have primarily relied on:

o our credit facility;
o other lenders willing to finance our contractual minimum
guarantee obligations to the films' producers or rights
owners;
o working capital;
o pre-sales;
o gap financing;
o insurance backed financing structures; and
o other third party equity sources such as private investors and
international partnerships receiving tax incentives through
film investment activities.

The films that we sell, license and distribute generally have direct
negative costs ranging from $1,000,000 to $7,000,000. We may acquire rights to
finance or produce motion pictures with direct negative costs and marketing
costs below or substantially in excess of the average direct negative costs and
marketing costs of the films that we have distributed. As part of our overall
business strategy, we intend to emphasize films with more recognizable cast,
directors and producers and greater production values and which may accordingly
have broader appeal in the competitive theatrical market. We also will attempt
to limit our exposure with respect to production and acquisition costs through
accessing third party equity sources such as private investors.

We sometimes acquire limited distribution or sales rights and at other
times acquire worldwide rights, occasionally including the copyright, to films.
The rights we acquire may depend upon whether we agree to pay the producer or
other rights owner a minimum guarantee. Additionally, as part of our acquisition
of theatrical, video and television distribution rights, we may obtain the right
to exploit ancillary rights, such as music or sound track rights, merchandising
rights, or rights to produce CD-ROMs or other interactive media products.
Although we may license these rights to sub-distributors, we historically have
not derived any significant revenues from these ancillary rights.

In distribution arrangements where we do not pay a minimum guarantee,
the amounts payable by us to the rights owner will depend upon our success in
licensing the film and the financial performance of the film itself. In
acquiring distribution rights to a completed or incomplete film, however, we may
agree to pay the rights owner a minimum guarantee that is independent of the
financial performance of the film. Historically, the minimum guarantees paid by
us have ranged from approximately $25,000 to $5,000,000, although in some
circumstances they may exceed these amounts. Depending upon the particular
arrangement, a minimum guarantee may be payable in full at the time of delivery
of the completed film or in installments following complete delivery of the
film. The rights owner also may receive additional payments as a result of our
exploitation of the distribution rights to the film. After receiving a
distribution fee and recovering our distribution expenses and minimum guarantee,
we pay the remainder of revenues in excess of an ongoing distribution fee to the
rights owner.

17

We typically receive a larger share of gross receipts from the license
and distribution of motion pictures for which we have provided a minimum
guarantee. At times, the minimum guarantee paid by us may represent all or a
substantial portion of the film's production costs. In those circumstances, we
may receive worldwide distribution rights in all media and may also obtain
ownership of the copyright to the film with the producer. In 2001, we provided
minimum guarantees for twelve films ranging from $25,000 to $1,000,000,
including one which represented a majority of the final production costs of the
film. Additionally, with respect to three films, we provided guarantees that
sales, net of our fees and expenses, would achieve specified levels within a
period of three years following commencement of principal photography of the
related film.

Our commitment to pay a minimum guarantee with respect to films that
have not begun production often enables the production company or producer to
obtain financing for its project, if needed. In some cases, our contractual
commitment to pay a minimum guarantee upon delivery of a film serves as
sufficient collateral for a bank to lend production funds. The bank typically
will insure delivery of the film to us by requiring the producer to purchase a
completion guaranty. To enable the production company or producer to borrow
production funding, or to borrow at preferential bank fees and interest rates,
we also may have to secure our purchase or acquisition commitment, which we
generally have done by obtaining a letter of credit from our lenders. In some
situations, the production company or producer of a film initially may obtain
funds:

o from other distribution companies that obtain distribution
rights in specified media or territories, for example, the
domestic distribution rights or distribution rights in Germany
or the United Kingdom;

o by accessing foreign governmental film industry incentive
programs such as programs offered in the past by the Isle of
Man, the United Kingdom, Canada, Germany, Australia and New
Zealand; or

o by using its own resources or other resources available to it,
and subsequently approaching us to supply the remaining funds
necessary to complete or co-finance the film in exchange for
our obtaining the remaining distribution rights to the motion
picture.

We also have been actively involved in co-financing arrangements. When
we participate in co-financing arrangements, we will commit to fund a portion of
a particular film's production costs in combination with others.

In June 2000, we entered into a "first look" agreement with The Little
Film Company, Inc. and Ellen Dinerman Little, our former co-chairman, co-chief
executive officer and president. The agreement provides for a three-year term
ending in June 2003. Under this agreement, we will have an exclusive "first
look" on any project that The Little Film Company owns or controls or which it
has the right to submit to us or any project that it has the right to acquire or
may wish to acquire for development or production. The agreement also provides
for us to pay The Little Film Company annual overhead for office space and
related expenses, an annual fee and a discretionary revolving development fund.
We also will compensate The Little Film Company on a project-by-project basis.

In connection with the purchase of certain of our securities by
Rosemary Street in June 2000, Rosemary Street assigned to us a first look
agreement with Grandview Pictures LLC and Jon Kilik. The agreement provides for
a three-year term ending in May 2002, which we may renew for an additional
two-year term. Under the agreement, we will have an exclusive "first look" on
any project that Grandview Pictures wants to produce and which it owns or
controls or which it has the right to submit to us under the agreement or which
it has the right to acquire or may wish to acquire for development and/or
production, or has been authorized by third parties to submit to us for
development and/or production, as a feature length theatrical motion picture or
television production. The agreement also provides for us to pay to Grandview
Pictures annual overhead for its New York office, including an annual salary for
Jon Kilik and fees for Kilik's production services based on the cash budget of
the applicable pictures. We also will compensate Grandview Pictures for each
theatrical or television motion picture produced by Kilik. Skins is the first
film to be produced under our "first look" agreement with Grandview Pictures.

18

During 2001, we were involved in arranging and/or providing a
significant portion of the production financing for ten motion pictures (Bark,
Quicksand, My Kingdom, Bundy, Between Strangers, Evelyn, Julie Walking Home,
Skins, Snapshots and Triggermen) four of which were completed by the end of 2001
and six of which were in post-production. We attempt to minimize the risks
associated with any development and production activities that we conduct in a
variety of ways. We do not maintain a substantial staff of creative or technical
personnel. We also do not own or operate sound stage and related production
facilities and, accordingly, do not have the fixed payroll, general and
administrative and other expenses resulting from such ownership. In addition, in
those circumstances where we produce a film, we generally attempt to acquire
fully developed projects ready for pre-production with, when feasible, completed
scripts, directors and cast members who are committed to or are interested in
the project. Many projects also have a producer involved or committed. However,
if at the time of our acquisition of rights in a project, a producer is not
formally or informally committed to a project, we may also engage a production
services company or a producer to supervise and arrange all pre-production,
production and post-production activities in exchange for a production fee and a
participation in net revenues from the film.

The following chart provides information regarding completed motion
pictures first made available to us for distribution during 2001, other than
those films described under "Our Motion Picture Distribution -First Look
Pictures."

Our Film Library of Distribution Rights

Our film library consists of rights to a broad range of films, most of
which were produced since 1980. At December 31, 2001, we had various
distribution rights to more than 310 motion pictures, including more than 73
motion pictures in which we own an interest in the copyright. With respect to
these films where we do not own the copyright, the term of our distribution
rights generally range from 12 to 25 years or more from the date of acquisition,
and typically extend to many, if not all, media for exhibition worldwide or in
specified territories.

In addition to exploitation of distribution rights to motion pictures
in our library in the major media, we are able to exploit various ancillary
rights in the films under certain situations. We have arranged for the music in
several motion pictures that we have distributed to be released as soundtrack
recordings, including Waking Ned Devine, A Merry War, Mrs. Dalloway, The Secret
of Roan Inish, Party Girl, The Big Squeeze and Infinity. Although exploitation
of these soundtracks and other ancillary rights have not generated significant
revenues for us to date, our ownership or control of ancillary rights to motion
pictures in our library, including interactive rights, remake rights and
merchandising rights, may provide future sources of additional revenues.

Additionally, we have granted to Yahoo! Inc. the right to exploit on
the Internet approximately fifty titles from our film library on a revenue
sharing basis.

Major Customers

In 1999, Buena Vista accounted for $3,500,000 or 10.4% of our revenues.
In 2000, USA Network accounted for $3,014,000 or 13.3% of our total revenues.
During the year ended December 31, 2001, no single customer accounted for more
than 10% of our revenues.

Employees

As of April 12, 2002, we employed 51 full-time employees and 3
part-time employees. Some of our subsidiaries are or may become subject to the
terms in effect from time to time of various industry-wide collective bargaining
agreements, including the Writers Guild of America, the Directors Guild of
America, the Screen Actors Guild and the International Alliance of Theatrical
Stage Employees. We may assume a production company's obligation to pay
residuals to these various entertainment guilds and unions. A strike, job action
or labor disturbance by the members of any of these entertainment guilds and
unions could have a material adverse effect on the production of a motion
picture within the United States, and, consequently, on our business, operations
and results of operations. These organizations all have engaged in strikes and
similar activities. We believe that our current relationship with our employees
is satisfactory.

21

Competition

Motion picture distribution, finance and production are highly
competitive businesses. The competition comes both from companies within the
same business and from companies in other entertainment media that create
alternative forms of leisure entertainment. We compete with major film studios
including:

o The Walt Disney Company including Miramax;
o Paramount Pictures Corporation;
o Universal Pictures;
o Sony Pictures Entertainment;
o Twentieth Century Fox; and
o Warner Brothers Inc. including New Line Cinema.

We also compete with numerous independent and foreign motion picture
production and distribution companies. Many of the organizations with which we
compete have significantly greater financial and other resources than us. Our
ability to compete successfully depends upon the continued availability of
independently produced, domestic and foreign motion pictures and our ability to
identify and acquire distribution rights to, and successfully license and
distribute, motion pictures with commercial potential. A number of formerly
independent motion picture companies have been acquired in recent years by major
entertainment companies. These transactions have significantly increased
competition for the acquisition of distribution rights to independently produced
motion pictures.

Films that we distribute or finance also compete for audience
acceptance and exhibition outlets with motion pictures that other companies
distribute and produce. As a result, the success of any of the films that we
distribute or finance is dependent not only on the quality and acceptance of
that particular film, but also on the quality and acceptance of other competing
films released into the marketplace at or near the same time. With respect to
our domestic theatrical releasing operations, a substantial majority of the
motion picture screens in the United States typically are committed at any one
time to films distributed nationally by the major film studios, which generally
buy large amounts of advertising on television and radio and in newspapers and
can command greater access to available screens. Although some movie theaters
specialize in the exhibition of independent, specialized motion pictures and
art-house films, there is intense competition for screen availability for these
films as well. Given the substantial number of motion pictures released
theatrically in the United States each year, competition for exhibition outlets
and audiences is intense. In addition, there also have been rapid technological
changes over the past fifteen years. Although technological developments have
resulted in the creation of additional revenue sources from the licensing of
rights with respect to new media, these developments also have resulted in
increased popularity and availability of alternative and competing forms of
leisure time entertainment including pay/cable television programming and home
entertainment equipment such as videocassettes, interactive games and
computer/Internet use.

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Regulation

In 1994, the United States was unable to reach an agreement with its
major international trading partners to include audio-visual works, such as
television programs and motion pictures, under the terms of the General
Agreement on Trade and Tariffs Treaty. The failure to include audio-visual works
under the treaty allows many countries to continue enforcing quotas that
restrict the amount of United States-produced television programming which may
be aired on television in those countries. The Council of Europe has adopted a
directive requiring all member states of the European Union to enact laws
specifying that broadcasters must reserve a majority of their transmission time,
exclusive of news, sports, game shows and advertising, for European works. The
directive does not itself constitute law, but must be implemented by appropriate
legislation in each member country. In addition, France requires that original
French programming constitute a required portion of all programming aired on
French television. These quotas generally apply only to television programming
and not to theatrical exhibition of motion pictures, but quotas on the
theatrical exhibition of motion pictures could also be enacted in the future. We
cannot assure you that additional or more restrictive theatrical or television
quotas will not be enacted or that countries with existing quotas will not more
strictly enforce such quotas. Additional or more restrictive quotas or more
stringent enforcement of existing quotas could materially and adversely affect
our business by limiting our ability to fully exploit our rights in motion
pictures internationally and, consequently, to assist or participate in the
financing of these motion pictures.

Distribution rights to motion pictures are granted legal protection
under the copyright laws of the United States and most foreign countries. These
laws provide substantial civil and criminal sanctions for unauthorized
duplication and exhibition of motion pictures. Motion pictures, musical works,
sound recordings, art work, still photography and motion picture properties are
separate works subject to copyright under most copyright laws, including the
United States Copyright Act of 1976, as amended. We are aware of reports of
extensive unauthorized misappropriation of videocassette rights to motion
pictures which may include motion pictures distributed by us. Motion picture
piracy is an industry-wide problem. The Motion Picture Association of America,
an industry trade association, operates a piracy hotline and investigates all
reports of such piracy. Depending upon the results of investigations,
appropriate legal action may be brought by the owner of the rights. Depending
upon the extent of the piracy, the Federal Bureau of Investigation may assist in
these investigations and related criminal prosecutions.

Motion picture piracy is also an international problem. Motion picture
piracy is extensive in many parts of the world, including South America, Asia
including Korea, China and Taiwan, the countries of the former Soviet Union and
other former Eastern bloc countries. In addition to the Motion Picture
Association, the Motion Picture Export Association, the American Film Marketing
Association and the American Film Export Association monitor the progress and
efforts made by various countries to limit or prevent piracy. In the past, these
various trade associations have enacted voluntary embargoes of motion picture
exports to certain countries in order to pressure the governments of those
countries to become more aggressive in preventing motion picture piracy. In
addition, the United States government has publicly considered trade sanctions
against specific countries that do not prevent copyright infringement of United
States produced motion pictures. We cannot assure you that voluntary industry
embargoes or United States government trade sanctions will be enacted. If
enacted, these actions could impact the amount of revenue that we realize from
the international exploitation of motion pictures depending upon the countries
subject to and the duration of such action. If not enacted or if other measures
are not taken, the motion picture industry as a whole, and our business in
particular, may continue to lose an indeterminate amount of revenues as a result
of motion picture piracy.

23

The Code and Ratings Administration of the Motion Picture Association
assigns ratings indicating age-group suitability for theatrical distribution of
motion pictures. We sometimes, although not always, submit our motion pictures
for these ratings. In certain circumstances, motion pictures that we did not
submit for rating might have received restrictive ratings, including, in some
circumstances, the most restrictive rating which prohibits theatrical attendance
by persons below the age of seventeen. Unrated motion pictures, or motion
pictures receiving the most restrictive rating, may not be exhibited in certain
movie theaters or in certain locales, thereby potentially reducing the total
revenues generated by these films. United States television stations and
networks, as well as foreign governments, impose additional restrictions on the
content of motion pictures which may restrict in whole or in part theatrical or
television exhibition in particular territories. In 1997, the major broadcast
networks and the major television production companies implemented a system to
rate television programs. This television rating system has not had a material
adverse effect on the motion pictures distributed by us. However, the
possibility exists that the sale of theatrical motion pictures for broadcast on
domestic free television may become more difficult because of potential
advertiser unwillingness to purchase advertising time on television programs
that are rated for limited audiences. We cannot assure you that current and
future restrictions on the content of motion pictures may not limit or adversely
affect our ability to exploit certain motion pictures in particular territories
and media.

ITEM 2. PROPERTIES

Our principal executive offices are located at 8000 Sunset Boulevard,
Penthouse East, Los Angeles, California 90046 and consist of 15,491 square feet
of office space. Our payments under the lease are approximately $34,000 per
month. The lease expires on May 31, 2007.

During 2001, we also occupied approximately 1,500 square feet of office
space in New York City, which space was located at 222 East 44th Street, New
York, New York 10017. This space was in a building owned by EUE/Screen Gems (a
company owned in part by Christopher Cooney, our CEO). We have agreed with
EUE/Screen Gems that no rent will be paid for the use of this space. In February
2002, our New York operations were relocated to 603 Greenwich Street, New York,
New York 10014. This space is approximately 4,000 square feet and is in a
building owned, in part, by Christopher Cooney. As of April 12, 2002, no formal
arrangements have been made regarding any rent to be paid with respect to these
premises, however, we anticipate entering into a formal arrangement whereby
approximately $15,000 per month would be payable as rent. As a part of such
arrangement it is anticipated that we would share the space with people and
companies that are synergestic with our own operations and which would bear some
or all of the rental costs.

In May 2001, we entered into a sublease for 4,000 square feet of office
space located at 2932 Nebraska Avenue, Santa Monica, California for our
television commercial production operations. We have since relocated the
operations to our offices in New York and have further sublet the premises. The
lease expires on March 31, 2003 and we have subleased the location through the
end of the lease.

ITEM 3. LEGAL PROCEEDINGS

We are engaged in legal proceedings incidental to our normal business
activities. In the opinion of management, none of these proceedings are material
in relation to our financial position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

24

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock has been quoted on the OTC Bulletin Board under the
symbol "FRST" since January 11, 2001, and our warrants were quoted on the OTC
Bulletin Board under the symbol "FRSTW" from January 11, 2001 until February 16,
2002, the date the warrants expired. Prior to January 11, 2001, our common stock
and warrants were quoted on the OTC Bulletin Board under the symbols "OSFG" and
"OSFGW," respectively. The following table sets forth the high and low closing
bid quotations for the periods indicated. The quotations represent prices
between dealers and do not include retail markups or markdowns or commissions.
They may not necessarily represent actual transactions.

As of April 12, 2002, there were approximately 26 holders of record of
the Company's common stock and there were 11,909,139 shares of common stock
issued and outstanding. We believe that there are more than 250 beneficial
owners of our common stock. Our warrant exchange offer, which was completed on
January 11, 2002, is described in this report under the caption "Business -
Recent Developments."

On April 12, 2002, the last reported sale price of our common stock as
reported on the OTC Bulletin Board was $0.38.

Dividends

We have not paid cash dividends on our common stock and we presently
intend to retain future earnings to finance the expansion and development of our
business and not pay dividends on our common stock. Any determination to pay
cash dividends in the future would be at the discretion of the board of
directors and would be dependent upon our results of operations, financial
condition, contractual restrictions and other factors deemed relevant at that
time by the board of directors. In addition, certain covenants in our credit
facility with The Chase Manhattan Bank substantially restrict payment of cash
dividends.

25

Recent Sales of Unregistered Securities

Preferred Stock Conversion

Pursuant to the terms of the securities purchase agreement related to
the Rosemary Street transaction dated May 3, 2000, Rosemary Street Productions,
LLC, Rosemary Street purchased from the Company 904,971 shares of Series A
Preferred Stock, each share of which automatically converted into two shares of
our common stock on October 15, 2001. The shares of common stock were issued
pursuant to an exemption from registration under Section 4(2) of the Securities
Act of 1933.

Warrant Exchange

On November 8, 2001, we commenced a tender offer in which we offered to
exchange .0714 of a share of our common stock for every one of our outstanding
warrants that we issued in our initial public offering in February 1995. The
exchange offer was completed on January 11, 2002. 4,135,579 of our 4,500,000
outstanding warrants were tendered and accepted by us in exchange for 295,291
shares of our common stock. The warrant holders who elected not to participate
in the exchange retained their right to purchase one share of our common stock
for $5.00, for each warrant held. These warrants expired on February 16, 2002.
The shares of our common stock issued upon exchange of the warrants were issued
pursuant to an exemption from registration under Section 3(a)(9) of the
Securities Act of 1933.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data as of and for each
of the years in the five-year period ended December 31, 2001 are derived from
our consolidated financial statements. The selected consolidated financial data
set forth below should be read in conjunction with our consolidated financial
statements and the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," each included elsewhere in this
report.

(1) During the year ended December 31, 2000, we recorded a one-time,
pre-tax non-cash charge of $15,582,000 ($14,123,000 after taxes)
relating to our adoption of new film accounting standards in June 2000
pursuant to SOP 00-2, which is discussed in detail in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Relevant Accounting Provisions."

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Forward-Looking Statements

When used in this Form 10-K and in future filings by our company with
the Securities and Exchange Commission, the words or phrases "will likely
result," "management expects" or "we expect," "will continue," "is anticipated,"
"estimated" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Readers are cautioned not to place undue reliance on any such
forward-looking statements, each of which speak only as of the date made. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. These risks are included in "Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and in
"Exhibit 99: Risk Factors" included in this Form 10-K. We have no obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statements.

General

The operations of the company were established as a private company in
February 1980 under the name Overseas Filmgroup, Inc. We were formed in December
1993 under the name "Entertainment/Media Acquisition Corporation" for the
purpose of acquiring an operating business in the entertainment and media
industry. We acquired the operations of Overseas Filmgroup, Inc. through a
merger in October 1996 and we were the surviving corporation in the merger.
Immediately following the merger, we changed our name to "Overseas Filmgroup,
Inc." and succeeded to the operations of the private company. In January 2001,
we changed our name to "First Look Media, Inc." in order to reflect the
broadening of our operations beyond foreign distribution of independently
produced feature films to additional areas such as theatrical and video
distribution in the United States, as well as television commercial production.
Although we initially intended to also expand into Internet content development,
we no longer have immediate plans to expand operations into this area.

Today, we are principally involved in the acquisition and worldwide
license or sale of distribution rights to independently produced motion
pictures. We directly distribute certain motion pictures in the domestic
theatrical market under the name "First Look Pictures" and in the domestic video
market under the name "First Look Home Entertainment." Additionally, we have
established a television commercial production operation which operates under
the name "First Look Artists."

27

Relevant Accounting Provisions

In June 2000, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
00-2, "Accounting by Producers or Distributors of Films" ("SOP 00-2"). SOP 00-2
establishes new film accounting standards, including changes in revenue
recognition and accounting for advertising, development and overhead costs.
Additionally, in June 2000, the Financial Accounting Standards Board ("FASB")
issued Statement 139 ("SFAS 139") which rescinds FASB 53 on financial reporting
by motion picture film producers or distributors. SFAS 139 requires public
companies to follow the guidance provided by SOP 00-2. We elected early adoption
of SOP 00-2 and, as a result, in 2000, a cumulative charge for the change in
accounting principle of $15,582,000 ($14,123,000 net of income taxes) has been
reflected in our Consolidated Statement of Operations for the year ended
December 31, 2000.

Critical accounting policies and estimates

The SEC recently issued Financial Reporting Release No. 60, "Cautionary
Advice Regarding Disclosure About Critical Accounting Policies" ("FRR60"),
suggesting companies provide additional disclosure and commentary on those
accounting policies considered most critical. FRR 60 considers an accounting
policy to be critical if it is important to our financial condition and
results of operations, and requires significant judgment and estimates on the
part of management in its application. For a summary of our significant
accounting policies, including the critical accounting policies discussed below,
see the accompanying notes to the consolidated financial statements.

The preparation of our financial statements in conformity with GAAP
requires management to make estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of
expenses during the reporting period. On an ongoing basis, we evaluate these
estimates, which are based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. The
result of these evaluations forms the basis for making judgments about the
carrying values of assets and liabilities and the reported amount of expenses
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions. The following accounting policies
require significant management judgments and estimates:

Accounting for the production and distribution of motion pictures is in
accordance with SOP 00-2, which requires management's judgment as it relates to
total revenues to be received and costs to be incurred throughout the life of
each film. These judgments are used to determine the amortization of capitalized
film costs associated with revenues earned and any net realizable value
adjustments.

Management is required to make judgments, based on historical
experience and future expectations, as to the collectibility of accounts
receivable. The allowances for doubtful accounts and sales returns represent
allowances for customer trade accounts receivable that are estimated to be
partially or entirely uncollectible. These allowances are used to reduce gross
trade receivables to their net realizable value. We record these allowances
based on estimates related to the following factors: (i) customer specific
allowances; and (ii) an estimated amount, based on our historical experience,
for issues not yet identified.

We assess potential impairment of long-lived assets under the guidance
of SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The Company will adopt SFAS 142 in the
first quarter of 2002.

Certain balance sheet liabilities require significant judgments and
estimates by management. We continually evaluate these estimates based on
changes in the relevant facts and circumstances and events that may impact
estimates. While management believes that the current reserves are adequate,
there can be no assurance that these factors will not change in future periods.

We base these estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
There can be no assurance that actual results will not differ from these
estimates.

28

Results of operations

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Revenues increased by $12,519,000 (55.3%) to $35,144,000 for the year
ended December 31, 2001, compared to $22,625,000 for the year ended December 31,
2000. The increase in revenues was primarily due to the growth of revenue from
our motion pictures segment with respect to direct distribution in the U.S.
($6,007,000 for the year ended December 31, 2001 compared to $1,736,000 for the
year ended December 31, 2000) and increases in ancillary revenue, including
airline revenue and executive producing and other fees ($3,150,000 for the year
ended December 31, 2001 compared to $196,000 for the year ended December 31,
2000). Additionally, the licensing of film rights generated $25,366,000 for the
year ended December 31, 2001 compared to $20,306,000 for the year ended December
31, 2000.

The commercial production segment generated $263,000 for the year ended
December 31, 2001 compared