Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURUSANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended December 31, 2002
/ / 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/
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes / / No /X/
As of June 28, 2002 (the last business day of the registrant's most
recently completed second fiscal quarter), the aggregate market value of the
voting and non-voting common equity held by non-affiliates of the registrant
(based on the closing sale price on such date as reported on the OTC Bulletin
Board) was $4,118,372.
The number of shares of common stock outstanding as of April 11, 2003 was
14,539,573.
2
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 330 feature films.
We operate in numerous capacities, including as:
o a distributor or a sales agent. We are appointed as a distributor or
sales agent with respect to distribution rights to films for specified
terms, territories and media from independent producers. In this
capacity, we receive distribution or sales agency fees. In exchange
for being appointed as distributor or sales agent, we may assist in
securing production financing for a film (including arranging or
assisting others in arranging pre-sales, co-productions, "soft" money
sources such as governmental subsidies or tax motivated investments,
bank loans including "gap" financing or third party equity). In
addition, we occasionally 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 or completion of the
film. By providing these financing services or minimum guaranteed
payments, we are often able to secure more extensive distribution
rights on more favorable terms. We also 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.
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 46.2%, 53.4% and 66.3% of our total
revenues in 2002, 2001 and 2000, respectively.
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 and DVD distribution through our
First Look Home Entertainment division. Our theatrical distribution activities
include booking motion pictures for exhibition at movie theaters and promoting
motion pictures with advertising and publicity campaigns. Our home entertainment
distribution activities include the promotion and sale of videocassettes and DVD
units to local, regional and national video/DVD retailers.
3
In 2001, we launched a television commercial production division which
generated $1,158,000 of gross revenue in 2002 and $263,000 in 2001. Although we
produced four commercials during 2002 and 2001, we ultimately determined that
the general economic environment was too difficult to sustain this division.
Accordingly, in the third quarter of 2002, we eliminated substantially all
overhead related to this division. In the future, if we produce any television
commercials, we will likely use a company partially owned by Christopher J.
Cooney, our co-chairman and chief executive officer, and Jeffrey Cooney, our
executive vice president and a director, to provide all support services needed
in exchange for a fee.
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
Current Business Environment, Film Performance, Overhead Levels
Over the past year, we have felt the significant impact of the worldwide
economic downturn. Specifically, reduced advertising spending has impacted
broadcasters and has resulted in various bankruptcies (especially in Germany),
reduced program spending, consolidation and uncertainty. Additionally, the
tragedy of September 11th, along with the war with Iraq, has created an
atmosphere of reduced activity. Until recently, much of our product, consisting
of lower budget feature films which typically do not have significant theatrical
distribution, has been supported by the worldwide expansion of television
broadcasters and their programming needs. Current market conditions have
softened demand for our product. The "reality" programming trend further has
impacted the market for lower budget feature films as broadcasters have
gravitated to this lower cost form of programming. Additionally, certain films
we have chosen to produce, invest in or acquire have not performed well. As a
result, these films have generated little margin or have incurred losses, some
of which have been significant. We also have continued to maintain a level of
overhead that anticipated better performance in our sales, licensing and
distribution activities. Consequently, this performance level has not generated
sufficient margin to cover overhead costs. Offsetting these trends to some
extent has been the growth of the DVD market; however, this growth has not been
sufficient to offset lost revenue. As a result, we have reported significantly
less revenue compared to last year, have incurred losses and have experienced
increased bad debts. In light of our situation, we have been analyzing our
current business plan, our alternatives and the need for further capital to
implement an updated business plan.
Credit Agreement
The recent operating losses and negative cash flow we have experienced,
along with the general market conditions for our business, have resulted in
ongoing review and discussions with our primary lender, JPMorgan Securities,
Inc. ("JPMorgan") and participating banks in our credit facility. In February
2003, JPMorgan requested that we voluntarily reduce the amount that we are
permitted to borrow under our credit facility in relation to our library value.
The credit agreement initially provided that we could borrow up to 50% (the
"advance rate") of the valuation of our library, conducted by an independent
third party approved by JPMorgan. JPMorgan requested that this advance rate be
reduced by 5% (to 45%) as of April 1, 2003, an additional 5% (to 40%) as of July
1, 2003, and a final 5% (to 35%) as of October 1, 2003. In February 2003, we
agreed to these reductions, which are reflected in our amended credit agreement
included as an exhibit to this report.
4
As of December 31, 2002, our cumulative losses resulted in a breach of the
covenant contained in the credit agreement with JPMorgan that sets forth a
minimum level of net worth that we are required to maintain. We have requested a
waiver of this breach. JPMorgan currently is considering our request and we are
in negotiation with respect to further modifications JPMorgan will require to
the credit agreement in exchange for such waiver. At this point, JPMorgan has
indicated that these modifications will likely include an immediate reduction of
the commitment level under the credit agreement from $40 million to
approximately $20 million, with further reductions so that by January 1, 2004
the commitment level will be $15 million. The minimum net worth requirement
would be waived until December 31, 2003, subject to our maintaining a positive
net worth as calculated pursuant to Generally Accepted Accounting Principles
("GAAP"). These modifications require the agreement of 51% of the voting right
of the participating banks (the percentage based upon the proportionate
commitment of each bank to the total commitment of $40 million). Final
resolution of this matter is expected by April 30, 2003. Until then, we are
precluded from drawing further funds under the credit facility.
Strategic Objectives
We have sought to become a leading independent worldwide film distribution
company. We have aggregated a library of over 330 motion pictures and have
developed the capacity to:
o license motion picture rights worldwide;
o arrange production financing through a wide variety of sources,
including international "soft" money sources such as German tax funds,
UK tax funds and similar funding sources, "gap" financing (bank
financing where the bank providing financing lends against estimated
value of unsold distribution rights), pre-sales (sales of territorial
distribution rights in advance of a film being produced), third party
equity, and other sources;
o distribute films theatrically in the U.S.; and
o distribute films on video and DVD in the U.S.
Historically, most of the films we have acquired have had lower budgets
(between $1,000,000 and $8,000,000) and have had limited, if any, theatrical
distribution. During the 1980s, much of the demand for lower budget films was
fueled by the creation and growth of a home video marketplace. During the 1990s,
the video marketplace matured and the value of video rights declined. At the
same time, there was an expansion of television broadcast channels (including
premium and basic cable service channels) worldwide. Internationally, this
expansion was the result of "privatization" of broadcasters, whereby government
owned and controlled broadcasting was diminished and free enterprise resulted in
an expanding market. This expansion supported lower budget films which had
little, if any, theatrical distribution. Most recently, television values have
softened and, although the DVD market has created some revenue growth, reduced
revenues from television broadcasters throughout the world have impacted our
performance significantly. These shifts in the marketplace have forced us to
review our past operating strategy and develop an updated strategy, which
includes:
Drawing upon our reputation, experience and relationships with foreign
sources to provide sales services and financing for an altered profile of
product. We believe that we enjoy a prominent position in the international
independent film marketplace. In the past, we have utilized our expertise and
relationships to access various forms of financing for the creation of
relatively low budget feature films. We believe we need to capitalize on our
reputation, expertise and relationships for films that have significant
theatrical distribution, generally through third party distributors rather than
through our own distribution division, First Look Pictures. Our preferred
situation will be where a major U.S. studio is handling the U.S. distribution of
the film. This will require us to refocus our sourcing of product and develop
new relationships.
Reducing our risk by limiting our direct investment in acquisition costs
and film production. In light of our difficulties, we recently reduced our
direct investment in films. We generally believe that an investment between
5
$50,000 and $200,000 per film will be necessary to continue a pipeline of
product for our home entertainment division. Additionally, we believe there may
be situations that will require limited investment of up to $250,000 to secure
rights to a particular film for our core operation, international sales.
Overall, we expect to reduce our level of investment dramatically and to rely
instead on providing sales agency services for films produced with third party
sources of production funding. Additionally, we plan to assist third parties
with securing financing through third party sources for films having domestic
theatrical distribution through a U.S. distribution company other than our own
and preferably a U.S. major studio.
Expanding our home entertainment division. In 2001, we created a home
entertainment division called "First Look Home Entertainment." This division
directly distributes films on videocassette and DVD. We released 17 films in the
U.S. video/DVD market during 2001 and 28 films in 2002. We plan to release at
least 30 films in the U.S. video/DVD market in 2003. This operating division is
generating positive gross margin with low risk acquisition and marketing costs.
In the past year, this division generated approximately $7.6 million in gross
revenues. We believe there is opportunity to further expand this division.
Currently, many of the films we release through First Look Home Entertainment
have had no theatrical exposure. Additionally, most of our releases are feature
films. We believe that we can expand our revenues if we are able to distribute
more films that have had some level of theatrical distribution in the U.S. and
also distribute other specialized product more suitable for purchase rather than
rental, such as children's programming and other niche programming.
Expanding our domestic theatrical distribution activities. During 2002, we
released three films, with minimal success. However, we continue to believe that
there is significant opportunity in the U.S. theatrical distribution market. Our
strategy has been to create a separate funding source (a "P & A Fund") for the
marketing and distribution costs associated with the U.S. theatrical release of
films. In connection with the June 2002 private placement with Seven Hills
Pictures, LLC ("Seven Hills"), we established a joint venture company, with an
initial $4 million of equity capital, for purposes of funding marketing and
distribution costs of certain pictures to be released theatrically either by us
or Seven Hills. We have had discussions with Seven Hills regarding our interest
in seeking additional equity and debt capital from other sources to enhance the
capacity and ability of this joint venture. Once we expand the P&A Fund, our
strategy for theatrically releasing films will be to: (i) acquire films with
little or no upfront payment for the U.S. distribution rights and instead offer
meaningful (up to $1,000,000) commitments to spend marketing and distribution
funds related to the release of the given film and (ii) release eight to ten
films per year. Until we conclude additional equity and/or debt arrangements
with respect to the P & A Fund, we will continue to release films with resources
that we provide.
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
6
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 Chicago, The Hours, Gangs of New York, 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 the Lord of the Rings series, 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;
o Artisan Entertainment Inc., which distributed Boat Trip, National
Lampoon's Van Wilder and The Blair Witch Project; and
o Lion's Gate Films, which produced and distributed Narc, Frailty,
Monster's Ball and American Psycho.
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.
7
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:
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.
8
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.
9
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.
10
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
Marketplace (Media) Domestic 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, 30-33 months
syndication and basic cable)
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.
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:
11
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,
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.
Home video and 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 $16
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 $5.00 to $7.50 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.
12
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.
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, and his
international distribution team have substantial experience in licensing motion
pictures for distribution outside the United States and have been active in
international motion picture sales for many years. They have developed
relationships with distributors in most territories through foreign sales
activities and have established extensive relationships with various
international financing sources. 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.
13
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.
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 28 films on video in 2002, and we expect to release at least 30 films
during 2003.
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.
14
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.
First Look Pictures
First Look Pictures directly distributes some of the motion pictures for
which we control domestic rights to theaters throughout the United States.
During 2002, First Look Pictures released three films (A Song for Martin, Elling
and Skins). Although some of First Look Pictures' future releases may appeal to
a wide audience, many of our releases to date have been foreign language or
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.
15
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.
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 2002, First Look Pictures released the following three motion
pictures:
Title Major Creative Elements Storyline Release Date
- ------------------------ ------------------------------------ ----------------------------------- --------------------
Elling Producer: Dag Alveberg Based on the best selling May 2002
Director: Petter Naess Norwegian novel by Ulla
Cast: Per Christian Ellefsen, Sven Isaksson, Elling, directed by
Nordin and Marit Pia Jacobsen Petter Naess, is a slyly funny and
emotionally affecting odd
couple comedy about two misfits
trying to find their places in
society.
Song for Martin Producer: Bille August, Lars A beautiful and heart wrenching Released in
Kolvig, Michael Lundberg and portrait of a woman's love for December 2001 for
Michael Obel her husband in the face of a a one week Oscar
Director: Bille August terrible and incurable disease. qualifying run and
Cast: Sven Wollter, Viveka Seldahl re-released in
and Reine Brynolfsson June 2002
Skins Producer: Jon Kilik An inspirational tale about the September 2002
Director: Chris Erye relationship between two Sioux
Cast: Eric Schweig, Graham Greene Indian brothers living on the
Pine Ridge Indian reservation.
16
We expect to release the following titles during 2003:
Release Date
- ------------------------ ------------------------------------ ----------------------------------- --------------------
Lawless Heart Producer: Martin Pope Lust, deception, adultery, February 2003
Director: Tom Hunsinger and Neil jealousy, sex and desire all play
Hunter feature roles as they infiltrate
Cast: Douglas Henshall, Tom the protagonists' lives in
Hollander and Bill Nighy unexpected ways.
Don't Tempt Me Producer: Edmundo Gil Two angels, one from heaven and July 2003
Director: Agustin Diaz Yanes one from hell, come to earth to
Cast: Penelope Cruz, Victoria save the soul of a boxer.
Abril
Dr. Sleep aka Hypnotic Producer: A twisted psychological thriller September 2003
Director: Nick Willing about a hypnotherapist who
Cast: Goran Visnjic, Miranda Otto has the gift of reading people's
and Shirley Henderson minds.
Fellini: I'm a Born Producer: Damian Pettigrew An outstanding portrait of April 2003
Liar Director: Damian Pettigrew Federico Fellini, a member of the
Cast: Roberto Benigni, Federico pantheon of the cinema's greatest
Fellini, Terrence Stamp and Donald directors. Interviews with the
Sutherland maestro and those who worked with
him. Provides illuminating
insight into the world of Fellini.
The Navigators Producer: Rebecca O'Brien The story chronicles the issues June 2003
Director: Ken Loach confronting railway workers
Cast: Joe Duttine, Stee Huison, following the privatization of the
Tom Craig, Dean Andrews British Railroad
Angela Producer: Lierka & Rita Rusic The true story of an attractive August 2003
Director: Roberta Torre Sicilian who participates in her
Cast: Donatella Finocchiaro, drug dealing husband's mafia
Andrea Di Stefano, Mario Puplella linked business.
Autumn Spring Producer: Jaroslav Kucera, Jiri Winner of four Czech Lion Awards, July 2003
Bartoska and Jaroslav Boucek this charming motion picture is a
Director: Vladimir Michalek spirited ode to people of all
Cast: Vlastimil Brodsky, Stella ages. A film of universal appeal
Zazvorkova, Stanislav Zindulka it is a celebration of living
life to the fullest.
17
We cannot assure that the motion pictures scheduled for release by First
Look Pictures in 2003 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.
18
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.
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 2002, we provided minimum guarantees
for 25 films ranging from $10,000 to $1,865,000, including three which
represented a significant portion of the final production costs of the
respective 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 or other financing party 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 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
compensate The Little Film Company on a project-by-project basis.
19
In connection with the purchase of certain of our securities by Rosemary
Street Productions, LLC ("Rosemary Street") in June 2000, Rosemary Street
assigned to us a first look agreement with Grandview Pictures LLC and Jon Kilik.
The agreement provided for a three-year term which ended in May 2002. Under the
agreement, we had an exclusive "first look" on any project that Grandview
Pictures wanted to produce and which it owned or controlled or which it had the
right to submit to us under the agreement or which it had the right to acquire
or wished to acquire for development and/or production, or had 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
provided 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
compensated Grandview Pictures for each theatrical or television motion picture
produced by Kilik. Skins was the only film to be produced under our "first look"
agreement with Grandview Pictures.
During 2002, we were involved in arranging and/or providing a significant
portion of the production financing for three motion pictures (The Boys From
County Clare, Bone Snatcher, and American Rap Stars), one of which was completed
by the end of 2002 and the other two will be completed in the first half of
2003. 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 2002, other than
those films described under "Our Motion Picture Distribution -First Look
Pictures."
Motion Picture Title Genre Territories Acquired Selected Cast
- -------------------- ----- -------------------- -------------
24 Hours in London Thriller The U.S. (Video and DVD rights Gary Olsen, John Benfield
only)
American Rap Stars Documentary The universe Snoop Dogg, Jay Z
Attic Expeditions Thriller The U.S. (Video and DVD rights Seth Green, Jeffrey Combs
only)
Avalanche Disaster The U.S. (Video and DVD rights Thomas Ian Griffith, C. Thomas Howell
only)
Ball in the House Dark Comedy Universe excluding the U.S. Johathan Tucker, Jennifer Tilly
and Canada
Between Strangers Drama Universe excluding the Baltic Sophia Loren, Malcolm McDowell
states, Bulgaria, Canada,
Czech, CIS, Italy, Hungary and
Poland
Castle Rock Adventure Universe excluding the U.S. Ernest Borgnine, Pamela Bach
and Canada
20
Motion Picture Title Genre Territories Acquired Selected Cast
- -------------------- ----- -------------------- -------------
Dahmer Horror The U.S. (Video and DVD rights Jeremy Renner, Bruce Davison
only)
Dark Summer Thriller The universe Robert Culp, Mia Kirschner
Dead Awake Horror The U.S. (Video and DVD rights Stephen Baldwin, Michael Ironside
only)
Dumb Luck Romantic Comedy The universe excluding the Scott Baio, Todd Bridges
U.S. and Canada
Elling Comedy The U.S. and Canada Per Christian Ellefsen, Sven Nordin
Epicenter Disaster The U.S. (Video and DVD rights Traci Elizabeth Lords, Gary Daniels
only)
Evelyn Drama The universe excluding the Pierce Brosnan, Julianna Margulies
U.S. and Canada
Faithless Drama The U.S. (Video and DVD rights Lena Endre, Erland Josephson
only)
Gabriela Romance The U.S. (Video and DVD rights Jaime Pl Gomez, Seidy Lopez
only)
Gaudi Afternoon Comedy The U.S. (Video and DVD rights Judy Davis, Marcia Gay Harden
only)
Gentlemen's Game Drama The universe Gary Sinise, Mason Gamble
Hired Hand Drama The universe excluding U.K. Peter Fonda, Verna Bloom
I'll Take You There Romantic Comedy The U.S. (Video and DVD rights Ally Sheedy
only)
Jimmy show Drama Universe excluding the U.S. Frank Whaley, Ethan Hawke
and Canada
Julie Walking Home Drama The universe excluding Miranda Otto, William Fichtner
Germany, Poland, Hungary,
Czech, Slovenia, Romania,
India and Canada
Last Run Thriller The U.S. (Video and DVD rights Armande Assante, Ornella Muti
only)
Lawless Heart Romance The universe (excluding pay TV Douglas Hensall, Tom Hollander
in U.K.
Little Red Urban Drama The U.S. (Video and DVD rights Brandon Price, Char Clay
only)
Local Boys Drama The universe Mark Harmon, Jeremy Sumpter
Lone Hero Action The U.S. (Video and DVD rights Lou Diamond Phillips, Sean Patrick
only) Flanery
Lost Voyage Sci-Fi Thriller The U.S. (Video and DVD rights Judd Nelson, Lance Henriksen
only)
21
Motion Picture Title Genre Territories Acquired Selected Cast
- -------------------- ----- -------------------- -------------
Lovers Lane Horror The U.S. (Video and DVD rights Anna Faris
only)
Malicious Intent Thriller The U.S. (Video and DVD rights Tom Arnold, William Forsythe
only)
No Place Like Home Family Universe excluding the U.S. Judge Reinhold, Richard Moll
and Canada
Nora Drama The U.S. (Video and DVD rights Ewan McGregor, Susan Lynch
only)
The Operator Thriller The U.S. (Video and DVD rights Michael Laurence, Jacqueline Kim
only)
Pinata Horror The universe Jaime Pressly, Nicholas Brendon
Pressure Thriller The U.S. (Video and DVD rights Kerr Smith, Lochlyn Munro
only)
Retrievers Family Universe excluding the U.S. Robert Hays, Mel Harris
and Canada
The Scoundrel's Wife Drama Universe excluding the U.S. Tatum O'Neal, Julian Sands
and Canada
Skins Drama The universe Graham Greene, Eric Schweig
Snapshots Romance The universe excluding Burt Reynolds, Carmen Chaplin
Belgium, Netherlands and
Luxemburg
Song for Martin Drama The U.S. and Canada Sven Wollter, Viveka Seldahl
The Surge Sci-fi Horror The U.S. (Video and DVD rights Mat Scollon, Melissa R. Martin
only)
Triggerman Comedy The universe Neil Morrissey, Donnie Wahlberg
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, 2002, we had various
distribution rights to more than 330 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.
22
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. As of December 31, 2002, we have received no revenues from this
arrangement.
Major Customers
In 2000, USA Network accounted for $3,014,000 or 13.3% of our total
revenues. During the years ended December 31, 2001 and 2002, no single customer
accounted for 10% or more of our revenues.
Employees
As of April 11, 2003, we employed 46 full-time employees and 1 part-time
employee. 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.
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.
23
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.
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.
24
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 $41,000 per
month. The lease expires on May 31, 2007.
From February 2001 to January 2002, we occupied approximately 1,500 square
feet of office space located at 222 East 44th Street, New York, New York 10017,
a building owned by EUE/Screen Gems (a company owned in part by Christopher
Cooney, our co-chairman and chief executive officer, and Jeffrey Cooney, our
executive vice president and a director). EUE/Screen Gems permitted us to use
the space without paying any rent. In February 2002, we relocated our New York
operations 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. We have not paid any rent since occupying the space in
February 2002 and no formal arrangements have been made regarding any future
rent to be paid with respect to these premises.
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
through the end of the lease term, which expired on March 31, 2003.
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.
25
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, 2002, and our warrants were quoted on the OTC Bulletin
Board under the symbol "FRSTW" from January 11, 2002 until February 16, 2002,
the date the warrants expired. Prior to January 11, 2002, 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.
Common Stock Warrants
------------ --------
2001 High($) Low($) High($) Low($)
---- --- ---- ---
First quarter................................... 1-3/16 3/4 4/64 1/32
Second quarter.................................. 26/32 1/2 3/64 1/64
Third quarter................................... 23/32 17/32 3/32 0.01
Fourth quarter.................................. 1.01 13/32 3/32 0.01
2002
First quarter................................... 5/8 3/8 N/A N/A
Second quarter ................................. 15/16 1/8 N/A N/A
Third quarter 9/16 7/16 N/A N/A
Fourth quarter ................................. 1/2 5/16 N/A N/A
As of April 11, 2003, there were approximately 34 holders of record of our
common stock and there were 14,539,573 shares of common stock issued and
outstanding. We believe that there are more than 250 beneficial owners of our
common stock.
On April 11, 2003, the last reported sale price of our common stock as
reported on the OTC Bulletin Board was $0.26.
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 JPMorgan
facility with JPMorgan substantially restrict payment of cash dividends.
Recent Sales of Unregistered Securities
None.
26
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, 2002 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.
Year Ended December 31,
------------------------------------------------------------------
(in thousands, except per share data)
------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------------
Statement of Operations Data:
Revenues.............................................. $26,299 $35,144 $22,625 $33,784 $25,585
Film cost amortization................................ 19,779 24,258 16,850 30,888 21,015
Distribution and marketing costs..................... 7,541 7,101 4,774 - -
Selling, general and administrative................... 7,928 6,947 6,473 2,983 2,960
Income (loss) from operations......................... (8,549) (3,162) (5,472) (87) 1,610
Income (loss) before tax and cumulative effect of
accounting change.................................. (9,287) (3,792) (6,230) (1,989) 112
Income tax provision (benefit)........................ 91 62 137 (736) 53
Income (loss) before cumulative effect of
accounting change.................................. (9,378) (3,854) (6,367) (1,253) 59
Cumulative effect of accounting change(1)............. - - (14,123) - -
Net income (loss) .................................... (9,378) (3,854) (20,490) (1,253) 59
Basic and diluted net income (loss) per share
before cumulative effect........................... (.71) (0.38) (0.78) (0.21) 0.01
Cumulative effect..................................... - - (1.74) - -
Net income (loss) per share after cumulative
effect............................................. (.71) (0.38) (2.52) (0.21) 0.01
Basic and diluted weighted average number of
shares outstanding................................. 13,270 10,191 8,131 5,990 5,732
- -----------------------
(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."
Year Ended December 31,
---------------------------------------------------------
(in thousands, except per share data)
---------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------
Balance Sheet Data:
Film costs, net of accumulated amortization....................$23,198 $18,304 $13,393 $28,363 $29,003
Total assets....................................................41,922 45,471 42,280 62,647 50,209
Total long-term liabilities.....................................20,254 14,500 6,500 19,764 22,013
Total liabilities...............................................39,263 39,420 32,375 49,348 38,588
Total shareholders' equity.......................................2,659 6,051 9,905 13,299 11,621
27
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 U.S. theatrical and video/DVD
distribution, Internet content development and television commercial production.
Although we initially intended to expand into Internet content development, we
no longer have immediate plans to do so. Additionally, although we expanded into
television commercial production, during 2002 we substantially withdrew from
these activities due to market conditions.
Today, we are principally involved in the acquisition and worldwide license
or sale of distribution rights to independently produced motion pictures. We
directly distribute 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." Recently, the market for lower budget
independent motion pictures which have not had a significant theatrical release
in the U.S. has experienced significant difficulty, mainly as a result of the
general economic downturn, the tragedy of September 11th, the war with Iraq and
more specifically, the financial difficulties of television broadcasters
worldwide. These difficulties, together with low margins and losses related to
the poor performance of films that we chose to produce, invest in or acquire and
a level of overhead disproportionate to margins generated, impacted our
performance during 2002, resulting in decreased revenues, increased write-offs
of film costs and increased bad debt expenses. In light of our performance and
market conditions, we have been reviewing our current business plan and
considering our alternatives.
Additionally, in February 2003, at the request of our primary lender,
JPMorgan, we agreed to modify our credit agreement to reduce the amount we can
borrow under the agreement as described below. Further, as of December 31, 2002,
the losses we have incurred have resulted in our breach of the net worth
covenant under our credit agreement. We currently are engaged in discussions
with JPMorgan and other participating banks with respect to further
modifications to the credit agreement, which likely will result in further
reductions in our ability to borrow funds under our credit facility.
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