SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ___________.
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
Incorporation or Organization) Identification No.)
8000 Sunset Blvd., East Penthouse, Los Angeles, CA 90046
(Address of principal executive offices) (zip code)
Registrant's Telephone Number, Including Area Code: (323) 337-1000
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
--- ---
The number of shares of common stock outstanding as of August 14, 2002
was 14,539,573.
FIRST LOOK MEDIA, INC.
INDEX
Part I - Financial Information
Page
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2002 (unaudited) and December 31, 2001.....................3
Consolidated Statements of Operations (unaudited) for the three months and six months ended
June 30, 2002 and June 30, 2001..........................................................4
Consolidated Statements of Cash Flows (unaudited) for the six months ended
June 30, 2002 and June 30, 2001..........................................................5
Notes to Consolidated Financial Statements (unaudited)............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................13
Part II - Other Information
Item 1. Legal Proceedings................................................................................14
Item 2. Changes in Securities and Use of Proceeds........................................................14
Item 3. Defaults Upon Senior Securities..................................................................14
Item 4. Submission of Matters to a Vote of Security Holders..............................................14
Item 5. Other Information................................................................................14
Item 6. Exhibits and Reports on Form 8-K.................................................................15
Signature...............................................................................16
Certification Pursuant to 18 U.S.C. Section 1350........................................17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST LOOK MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
---- ----
(Unaudited)
(in thousands)
ASSETS:
Cash and cash equivalents $ 5,762 $ 1,673
Accounts receivable, net of allowance for doubtful accounts of $2,918,000 and
$1,150,000 at June 30, 2002 and December 31, 2001, respectively 17,412 23,668
Investment 2,000 -
Film costs, net of accumulated amortization 22,638 18,304
Other assets 1,717 1,826
------------------ ------------------
Total assets $ 49,529 $ 45,471
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued expenses $ 1,964 $ 1,777
Deferred revenue 883 810
Accrued interest payable 151 166
Payable to producers 18,901 21,987
Notes payable 18,732 14,680
------------------ ------------------
Total liabilities 40,631 39,420
------------------ ------------------
Shareholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized; no shares
issued or outstanding at June 30, 2002 and December 31, 2001 - -
Common stock, $.001 par value, 50,000,000 shares authorized; 14,584,573 and
11,658,848 shares issued; 14,539,573 and 11,613,848 shares outstanding at June
30, 2002 and December 31, 2001, respectively 14 12
Additional paid in capital 36,661 30,674
Accumulated deficit (27,690) (24,548)
Treasury stock at cost, 45,000 shares (87) (87)
------------------ ------------------
Total shareholders' equity 8,898 6,051
------------------ ------------------
Total liabilities and shareholders' equity $ 49,529 $ 45,471
================== ==================
The accompanying notes are an integral part
of these consolidated financial statements.
3
FIRST LOOK MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ----- ----
(in thousands except per share data)
Revenues $ 5,092 $ 9,759 $ 11,873 $ 20,001
Expenses:
Film costs 2,148 7,219 5,849 14,580
Distribution and marketing 2,046 1,261 3,542 2,151
General and administrative 3,334 1,737 5,190 3,394
----------------- ----------------- -------------- ----------------
Total expenses 7,528 10,217 14,581 20,125
----------------- ----------------- -------------- ----------------
Loss from operations (2,436) (458) (2,708) (124)
----------------- ----------------- -------------- ----------------
Other income (expense):
Interest income 16 6 17 8
Interest expense (269) (259) (531) (516)
Other income 86 41 112 107
----------------- ----------------- -------------- ----------------
Net other expense (167) (212) (402) (401)
Loss before income taxes (2,603) (670) (3,110) (525)
----------------- ----------------- -------------- ----------------
Income tax provision 13 3 32 19
----------------- ----------------- -------------- ----------------
Net loss $ (2,616) $ (673) $ (3,142) $ (544)
================= ================= ============== ================
Basic and diluted loss per share $ (0.22) $ (0.07) $ (0.26) $ (0.06)
================= ================= ============== ================
Weighted average number of common
shares outstanding 12,083 9,804 11,980 9,804
================= ================= ============== ================
The accompanying notes are an integral part
of these consolidated financial statements.
4
FIRST LOOK MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2002 2001
---- ----
(in thousands)
Cash flows from operating activities:
Net loss $ (3,142) $ (544)
Adjustments to reconcile net loss to net
cash used in operating activities:
Film costs 5,849 14,580
Additions to film costs (6,725) (4,101)
Payments to producers (6,544) (11,657)
Changes in operating assets and liabilities:
Accounts receivable 6,256 (2,840)
Other assets 109 (150)
Accounts payable and accrued expenses 172 81
Deferred revenue 73 304
-------------------- ---------------------
Net cash used in operating activities (3,952) (4,327)
-------------------- ---------------------
Cash flows from investing activities:
Investment (2,000) -
-------------------- ---------------------
Net cash used in investment activities (2,000) -
-------------------- ---------------------
Cash flows from financing activities:
Net borrowings under credit facility 2,500 4,500
Net pay down of subordinated note payable (180) (166)
Capital investment, net of fees 5,916 -
Equity financing costs (195) -
Convertible note payable 2,000 -
-------------------- ---------------------
Net cash provided by financing activities 10,041 4,334
-------------------- ---------------------
Net increase in cash and cash equivalents 4,089 7
Cash and cash equivalents at beginning of period 1,673 832
-------------------- ---------------------
Cash and cash equivalents at end of period $ 5,762 $ 839
==================== =====================
Supplemental disclosure of cash flow information: Cash
paid during the period for:
Interest $ 618 $ 567
==================== =====================
Income taxes $ 11 $ 6
==================== =====================
Foreign withholding taxes $ 20 $ 13
==================== =====================
The accompanying notes are an integral part
of these consolidated financial statements.
5
FIRST LOOK MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The accompanying unaudited consolidated financial statements
of First Look Media, Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been reflected in
these consolidated financial statements. Operating results for the six
months ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002.
Certain reclassifications have been made in the 2001 consolidated
financial statements to conform to the 2002 presentation. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001.
For the two years ended December 31, 2001, we had operating losses of
$8,634,000 and our operating activities used $11,556,000 of cash.
During the first half of 2002, operating losses totaled $2,708,000 and
net cash used in operating activities totaled $3,952,000. As of June
30, 2002, we had cash and cash equivalents of $5,762,000 (compared to
$1,673,000 as of December 31, 2001) and, based on our calculations,
approximately $1,827,000 available for borrowing under our Chase
facility. In management's opinion, existing cash and available
borrowings, totaling approximately $7,589,000, along with future cash
anticipated to be generated from operations, will provide us with
sufficient resources to fund operations and execute our current
business plan through at least July 1, 2003. If the Company is not
successful in generating sufficient future cash flow from operations in
accordance with its current business plan, raising additional capital
through public or private financings, strategic relationships or other
arrangements will be necessary. This additional funding, if needed,
might not be available on acceptable terms, or at all. Failure to raise
sufficient capital, if and when needed, could have a material adverse
effect on the business, results of operations and financial condition
of the Company.
Film costs consist of the following:
June 30, 2002 December 31, 2001
------------- -----------------
(in thousands)
Films in release net of accumulated amortization $ 19,577 $ 13,167
Films not yet available for release 3,061 5,137
------------------- ---------------------
$ 22,638 $ 18,304
=================== =====================
6
2. Segment Information
The Company manages its business in two operating segments: Motion
Picture Distribution and Television Commercial Production. The segments
were determined based upon the types of products and services provided
and sold by each segment.
The Motion Picture Distribution segment licenses, distributes, sells
and otherwise exploits distribution rights to motion pictures.
Activities include direct theatrical, video and DVD distribution in the
U.S. as well as licensing of rights to other theatrical, video and DVD
distributors and to pay, basic and free television broadcasters
throughout the world. The Television Commercial Production segment
produces commercials for manufacturers and service providers who use
the commercials to promote their products and services. There have been
no inter-segment transactions during the reported periods. The Company
evaluates performance based on income or loss from operations before
interest expense and taxes.
Financial information by operating segment is set forth below:
Three Months Ended June 30, 2002 Three Months Ended June 30, 2001
-------------------------------- --------------------------------
Television Television
Motion Commercial Motion Commercial
Pictures Production Totals Pictures Production Totals
-------- ---------- ---------- ----------- ---------- --------
(in thousands) (in thousands)
Revenues from external customers $ 4,805 $ 287 $ 5,092 $ 9,759 $ - $ 9,759
Loss from operations
before interest, taxes and
other income $ (2,429) $ (7) $ (2,436) $ (186) $ (272) $ (458)
Six Months Ended and Six Months Ended and
as of June 30, 2002 as of June 30, 2001
-------------------------------- --------------------------------
Television Television
Motion Commercial Motion Commercial
Pictures Production Totals Pictures Production Totals
-------- ---------- ---------- ----------- ---------- --------
(in thousands) (in thousands)
Revenues from external customers $ 10,976 $ 897 $ 11,873 $ 20,001 $ - $ 20,001
(Loss) income from operations
before interest, taxes and
other income $ (2,714) $ 6 $ (2,708) $ 148 $ (272) $ (124)
Total assets $ 49,068 $ 461 $ 49,529 $ 46,900 $ 132 $ 47,032
3 June 2002 Private Placement
In June 2002, the Company consummated a private placement with Seven
Hills Pictures, LLC, in which the Company sold to Seven Hills, for an
aggregate cash purchase price of $6,050,000, 2,630,434 shares of the
Company's common stock and five-year warrants to purchase up to
1,172,422 shares of the Company's common stock at an exercise price of
$3.40 per share. Warrants to purchase 881,137 shares of common stock
are immediately exercisable and will expire on June 25, 2007. Warrants
to purchase 291,285 shares of common stock ("Note Warrants") only will
become exercisable upon conversion of the convertible promissory note
described below, in proportion to the amount of the note converted if
the note is not converted in whole, and will expire on June 25, 2007.
If no portion of the note is converted into common stock, then the Note
Warrants will not become exercisable. As of June 30, 2002, Seven Hills
owned approximately 18.1% of the Company's outstanding voting
securities.
7
In May 2002, the Company and Seven Hills Pictures, LLC formed a joint
venture company that will provide marketing and distribution funds for
the theatrical release of motion pictures that the Company or Seven
Hills selects on an alternating basis. In June 2002, Seven Hills funded
the Company's $2,000,000 capital contribution to the joint venture
company pursuant to a convertible promissory note issued by the Company
and the joint venture company. The investment in the joint venture
company is reported as an asset on the balance sheet under
"Investment". The related liability, discounted by $268,000 for the
fair market value of the Note Warrant, has been reported as a
liability on the balance sheet with other notes payable under "Notes
payable". The discounted amount will be amortized using the effective
interest rate method over the term of the note through the maturity
date. The principal amount of the note is payable on June 25, 2008 and
interest is payable quarterly at 4% per annum. The note is recourse
against the Company as to interest only (accrued prior to the maturity
date) and against the joint venture company as to both principal and
interest. Seven Hills also funded its own $2,000,000 capital
contribution to the joint venture company in June 2002.
4 Off Balance Sheet Commitments
As of June 30, 2002, the Company was committed to pay minimum
guarantees of approximately $5,191,000 contingent upon delivery of
certain films to the Company.
Additionally, the Company has entered into certain arrangements with
German film financing partnerships whereby the Company has guaranteed
that within three years from the commencement of principal photography
of the related film, the licensing and distribution proceeds, net of
the Company's fees and expenses, will be no less than sixty to eighty
percent (depending upon the specific arrangement) of the amount funded
toward the production cost of the related film. These commitments are
not recorded as liabilities unless and until management expects that
proceeds from the licensing and distribution of the related film, net
of the Company's fees and expenses, will be insufficient to cover the
guarantee within the agreed upon period for the particular film. As of
June 30, 2002, the Company had three such commitments outstanding,
whereby the total amount committed was $10,238,000 and the expected
uncovered portion of these commitments (amounts not covered by
licensing agreements or pending licensing agreements with minimum
guaranteed payments due to the Company), was approximately $4,132,000.
The commitments become due, if at all, between September 2003 and
September 2004. Management currently believes that none of these
guarantees will be called upon because the existing and projected
licensing and distribution proceeds of each film are expected to be
sufficient to fully cover each commitment.
5 Recent Accounting Pronouncement
In October 2001, the Financial Accounting Standards Board ("FASB")
issued FAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", which is applicable to financial statements issued
for fiscal years beginning after December 15, 2001. The FASB's new
rules on asset impairment supersede FAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of", and portions of APB Opinion No. 30, "Reporting the
Results of Operations". FAS 144 provides a single accounting model for
long-lived assets to be disposed of and significantly changes the
criteria that would have to be met to classify an asset as
held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the
lower of fair value and carrying amount. FAS No. 144 also requires
expected future operating losses from discontinued operations to be
displayed in the period(s) in which the losses are incurred, rather
than as of the measurement date as presently required. The Company
adopted SFAS No. 144 during the first quarter of fiscal year 2002.
There was no material impact on the consolidated financial statements
resulting from its adoption.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Form 10-Q and in future filings by First Look Media,
Inc. 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 "Item 1:
Business," "Item 6: Management's Discussion and Analysis of Financial Condition
and Results of Operations" and in Exhibit 99: Risk Factors" included in our Form
10-K for the year ended December 31, 2001. We have no obligation to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect anticipated or unanticipated events or circumstances
occurring after the date of such statements.
General
The operations of the Company were established as a private company in
February 1980 under the name "Overseas Filmgroup, Inc." We were formed in
December 1993 under the name "Entertainment/ Media Acquisition Corporation" for
the purpose of acquiring an operating business in the entertainment and media
industry. We acquired the operations of Overseas Filmgroup, Inc. through a
merger in October 1996 and we were the surviving corporation in the merger.
Immediately following the merger, we changed our name to "Overseas Filmgroup,
Inc." and succeeded to the operations of the private company. In January 2001,
we changed our name to "First Look Media, Inc." in order to reflect the
broadening of our operations beyond foreign distribution of independently
produced feature films to additional areas such as theatrical, video and DVD
distribution in the United States, as well as television commercial production.
Today, we are principally involved in the acquisition and worldwide
license or sale of distribution rights to independently produced motion
pictures. We directly distribute certain motion pictures in the domestic
theatrical market under the name "First Look Pictures" and in the domestic video
market under the name "First Look Home Entertainment." Additionally, we have
established a television commercial production operation, which operates under
the name "First Look Artists."
Results of Operations
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Revenues decreased by $4,667,000 (47.8%) to $5,092,000 for the quarter
ended June 30, 2002 from $9,759,000 for the quarter ended June 30, 2001. The
decrease was primarily due to decreased revenue from the licensing of films from
foreign territories and U.S. television markets ($2,909,000 for the quarter
ended June 30, 2002 compared to $7,972,000 for the quarter ended June 30, 2001).
This decrease was partially offset by an increase in revenue from direct video
distribution in the U.S. ($1,591,000 for the quarter ended June 30, 2002
compared to $694,000 for the quarter ended June 30, 2001).
Film costs decreased by $5,071,000 (70.2%) to $2,148,000 for the
quarter ended June 30, 2002 compared to $7,219,000 for the quarter ended June
30, 2001. Film costs include amortization of capitalized production and
acquisition costs, video and DVD duplication costs, as well as current period
participation cost accruals. The decrease was primarily due to lower accrued
participation expense ($1,409,000 for the quarter ended June 30, 2002 compared
to $5,732,000 for the quarter ended June 30, 2001). Participation expense will
fluctuate period to period (including as a percentage of revenue) as a function
of various factors, including the specific films generating revenue in a
particular period, changes in projected ultimate revenue and changes in actual
and projected distribution costs.
Distribution and marketing expenses increased by $785,000 (62.2%) to
$2,046,000 for the quarter ended June 30, 2002 from $1,261,000 for the quarter
ended June 30, 2001. Distribution and marketing expenses as a percentage of
revenues increased to 40.2% for the quarter ended June 30, 2002 compared to
12.9% for the quarter ended June 30, 2001. The increase was primarily due to
increased expenses related to the direct distribution of video and DVD in the
U.S. ($643,000 for the quarter ended June 30, 2002 compared to $184,000 for the
quarter ended June 30, 2001). In accordance with the accounting standards
established pursuant to SoP 00-2, we expense all distribution and marketing
expenses as incurred.
9
General and administrative expenses, net of amounts capitalized to film
costs, increased by $1,597,000 (91.9%) to $3,334,000 for the quarter ended June
30, 2002 from $1,737,000 for the quarter ended June 30, 2001. The increase was
primarily due to an increase in bad debt expense and reserves for doubtful
accounts of $1,496,000. As a result of depressed worldwide television market
conditions during the past several months, we have substantially increased our
reserve for doubtful accounts and written off uncollectible accounts. However,
we believe the remaining accounts receivable are fully collectible. Other items
that contributed to the increase in general and administrative expense include
increases in accounting fees of $44,000, rent and parking expense of $34,000,
and decreased overhead capitalization of $93,000. These increases were partially
offset by decreases in consulting fees and contract labor of $30,000, health
insurance premiums of $14,000, and office expense of $31,000.
Net other expense decreased by $45,000 (21.2%) to $167,000 for the
quarter ended June 30, 2002 compared to $212,000 for the quarter ended June 30,
2001. The decrease was primarily due to increased other income of $86,000 for
the quarter ended June 30, 2002, compared to $41,000 for the quarter ended June
30, 2001.
As a result of the above, we had a net loss of $2,616,000 (reflecting
state and foreign withholding taxes of $13,000) for the quarter ended June 30,
2002 compared to a net loss of $673,000 (reflecting state and foreign
withholding taxes of $3,000) for the quarter ended June 30, 2001.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Revenues decreased by $8,128,000 (40.6%) to $11,873,000 for the six
months ended June 30, 2002 from $20,001,000 for the six months ended June 30,
2001. The decrease was primarily due to decreased revenue from the licensing of
films from foreign territories and U.S. television markets ($7,170,000 for the
six months ended June 30, 2002 compared to $16,186,000 for the six months ended
June 30, 2001), decreased airline revenues ($149,000 for the six months ended
June 30, 2002 compared to $961,000 for the six months ended June 30, 2001) and
decreased executive producer fees ($0 for the six months ended June 30, 2002
compared to $1,091,000 for the six months ended June 30, 2001). These decreases
were partially offset by an increase in revenue from direct video distribution
in the U.S. ($3,105,000 for the six months ended June 30, 2002, compared to
$1,295,000 for the six months ended June 30, 2001)and from commercial production
($897,000 for the six months ended June 30, 2002 compared to $0 for the six
months ended June 30, 2001).
Film costs decreased by $8,731,000 (59.9%) to $5,849,000 for the six
months ended June 30, 2002 compared to $14,580,000 for the six months ended June
30, 2001. Film costs include amortization of capitalized production and
acquisition costs, video and DVD duplication costs, as well as current period
participation cost accruals. The decrease was primarily due to lower accrued
participation expense ($3,458,000 or 29.1% for the six months ended June 30,
2002 compared to $12,234,000 or 61.2% for the six months ended June 30, 2001).
Participation expense will fluctuate period to period (including as a percentage
of revenue) as a function of various factors, including the specific films
generating revenue in a particular period, changes in projected ultimate revenue
and changes in actual and projected distribution costs.
Distribution and marketing expenses increased by $1,391,000 (64.7%) to
$3,542,000 for the six months ended June 30, 2002 from $2,151,000 for the six
months ended June 30, 2001. Distribution and marketing expenses as a percentage
of revenues increased to 29.8% for the six months ended June 30, 2002 compared
to 10.8% for the six months ended June 30, 2001. The increase was primarily due
to increased expenses related to the direct distribution of video and DVD in the
U.S. ($983,000 for the six months ended June 30, 2002 compared to $299,000 for
the six months ended June 30, 2001), as well as expenses related to distribution
of film rights in foreign territories and U.S. television markets ($2,067,000
for the six months ended June 30, 2002 compared to $1,521,000 for the six months
ended June 30, 2001). In accordance with the accounting standards established
pursuant to SoP 00-2, we expense all distribution and marketing expenses as
incurred.
General and administrative expenses, net of amounts capitalized to film
costs, increased by $1,796,000 (52.9%) to $5,190,000 for the six months ended
June 30, 2002 from $3,394,000 for the six months ended June 30, 2001. The
increase was primarily due to an increase in bad debt expense and reserves for
doubtful accounts of $1,757,000. As a result of depressed worldwide television
market conditions during the past several months, we have substantially
increased our reserve for doubtful accounts and written off uncollectible
accounts. However, we believe the remaining accounts receivable are fully
collectible. Other items that contributed to the increase in general and
administrative expense include increases in accounting fees of $56,000,
consulting fees of $24,000, and rent and parking expense of $79,000. These
increases were partially offset by decreases in depreciation expense of $14,000,
health and liability insurance premium of $15,000, legal fees of $56,000, and
publicity fees of $36,000.
As a result of the above, we had a net loss of $3,142,000 for the six
months ended June 30, 2002 (reflecting state and foreign withholding taxes of
$32,000) compared to a net loss of $544,000 (reflecting state and foreign
withholding taxes of $19,000) for the six months ended June 30, 2001.
10
Liquidity and Capital Resources
We require substantial capital for the acquisition of film rights, the
funding of distribution costs and expenses, the payment of ongoing overhead
costs and the repayment of debt. The principal sources of funds for our
operations have been cash flow from operations, bank borrowings and equity
financings.
June 2002 Private Placement
In June 2002, we consummated a private placement with Seven Hills
Pictures, LLC, in which we sold to Seven Hills, for an aggregate cash purchase
price of $6,050,000, 2,630,434 shares of our common stock and five-year warrants
to purchase up to 1,172,422 shares of our common stock at an exercise price of
$3.40 per share. Warrants to purchase 881,137 shares of common stock are
immediately exercisable and will expire on June 25, 2007. Warrants to purchase
291,285 shares of common stock ("Note Warrants") only will become exercisable
upon conversion of the convertible promissory note described below, in
proportion to the amount of the note converted if the note is not converted in
whole, and will expire on June 25, 2007. If no portion of the note is converted
into common stock, then the Note Warrants will not become exercisable. As of
June 30, 2002, Seven Hills owned approximately 18.1% of our outstanding voting
securities.
Additionally, in May 2002, we and Seven Hills formed a joint venture
company that will provide marketing and distribution funds for the theatrical
release of motion pictures that we or Seven Hills select on an alternating
basis. In June 2002, Seven Hills funded our $2,000,000 capital contribution to
the joint venture company pursuant to a convertible promissory note issued by us
and the joint venture company. The investment in the joint venture company is
reported as an asset on the balance sheet under "Investment." The related
liability, discounted by $268,000 for the fair market value of the Note Warrant,
has been reported as a liability on the balance sheet with other notes payable
under "Notes payable." The discounted amount will be amortized using the
effective interest rate method over the term of the note through the maturity
date. The principal amount of the note is payable on June 25, 2008 and interest
is payable quarterly at 4% per annum. The note is recourse against us as to
interest only (accrued prior to the maturity date) and against the joint venture
company as to both principal and interest. Seven Hills also funded its own
$2,000,000 capital contribution to the joint venture company in June 2002.
JP Morgan (or "Chase") Facility
In June 2000, we entered into a $40 million credit facility with JP
Morgan Chase Bank (formerly known as The Chase Manhattan Bank) and other
commercial banks and financial institutions. A portion of the proceeds from this
credit facility was used to refinance outstanding loans and accrued interest
under our previous credit facility with Coutts & Co. and Bankgesellschaft Berlin
A.G. The remaining proceeds are available to finance our production,
acquisition, distribution and exploitation of feature length motion pictures,
television programming, video product and rights and for working capital and
general corporate purposes, including our expansion into television commercial
production.
Under the Chase facility, we borrow funds through loans evidenced by
promissory notes. The loans are made available through a revolving line of
credit which may be reduced, partially or in whole, at any time and is to be
fully paid on June 20, 2005. The Chase facility also provides for letters of
credit to be issued from time to time upon our request. Amounts available for
drawing (referred to as the "borrowing base") under the Chase facility are
calculated each month, and cannot exceed the $40 million commitment. The main
components of the borrowing base include a library credit (50% of the value of
our film library, based upon a third party valuation of future cash flows,
which, under the terms of the credit agreement, is required to be updated every
twelve months) and an accounts receivable credit (85% of net accounts receivable
which are acceptable to Chase). At June 30, 2002, we had borrowed an aggregate
of $17,000,000 under the Chase facility and an additional $1,827,000 was
available to borrow based upon borrowing base calculations provided to Chase.
The amounts drawn down under the Chase facility bear interest, as we
may select, at rates based on either LIBOR plus 2% or a rate per annum equal to
the greater of (a) the Prime Rate plus 1%, (b) the Base CD Rate plus 2% and (c)
the Federal Funds Effective Rate plus 1.5% (as these terms are defined in the
credit agreement). In addition to an annual management fee of $125,000, we pay a
commitment fee on the daily average unused portion of the Chase facility at an
annual rate of 0.5%. Upon entering the Chase facility, we were required to pay a
one-time fee of approximately $848,000 as a cost of acquiring the Chase
facility. Additionally, in 2001 we added one lender (increasing total
commitments to $40,000,000 from $33,000,000) and paid an additional fee of
$42,000. The Chase facility also restricts the creation or incurrence of
indebtedness of additional securities. The Chase facility is collateralized by
all of our tangible and intangible assets and future revenues.
11
Off Balance Sheet Commitments
In addition to direct bank borrowings, we sometimes enter into
contractual arrangements whereby we commit to pay certain amounts for the
acquisition of distribution rights of a film at a date in the future. These
contractual commitments are sometimes used by producers or other rights owners
to access production financing with respect to the given film. These commitments
are generally subject to certain conditions being met by the rights owner,
including delivery by the rights owner to us of certain physical materials, as
well as legal documents relating to the film which will enable us to properly
exploit the rights we are acquiring. Once these conditions are met, we become
obligated under our contract to pay the amounts called for in the given
contract. We treat these types of commitments as liabilities, includable in our
balance sheet only upon satisfaction of the conditions to our obligation and
disclose these obligations as commitments. As of June 30, 2002, these
outstanding commitments totaled $5,191,000.
Additionally, we have entered into certain arrangements with German
film financing partnerships whereby we have guaranteed that within three years
from the commencement of principal photography of the related film, the
licensing and distribution proceeds, net of our fees and expenses, will be no
less than sixty to eighty percent (depending upon the specific arrangement) of
the amount funded toward the production cost of the related film. These
commitments are not recorded as liabilities unless and until management expects
that proceeds from the licensing and distribution of the related film, net of
our fees and expenses, will be insufficient to cover the guarantee within the
agreed upon period for the particular film. As of June 30, 2002, we had three
such commitments outstanding, whereby the total amount committed was $10,238,000
and the expected uncovered portion of these commitments (amounts not covered by
licensing agreements or pending licensing agreements with minimum guaranteed
payments due to us), was approximately $4,132,000. The commitments become due,
if at all, between September 2003 and September 2004. We currently believe that
none of our guarantees will be called upon because the existing and projected
licensing and distribution proceeds of each film are expected to be sufficient
to fully cover each commitment.
Resources
For the two years ended December 31, 2001, we had operating losses of
$8,634,000 and our operating activities used $11,556,000 of cash. During the
first half of 2002, operating losses totaled $2,708,000 and net cash used in
operating activities totaled $3,952,000. As of June 30, 2002, we had cash and
cash equivalents of $5,762,000 (compared to $1,673,000 as of December 31, 2001)
and, based on our calculations, approximately $1,827,000 available for borrowing
under our Chase facility. In management's opinion, existing cash and available
borrowings, totaling approximately $7,589,000, along with future cash
anticipated to be generated from operations, will provide us with sufficient
resources to fund operations and execute our current business plan through at
least July 1, 2003. If we are not successful in generating sufficient future
cash flow from operations in accordance with our current business plan, raising
additional capital through public or private financings, strategic relationships
or other arrangements will be necessary. This additional funding, if needed,
might not be available on acceptable terms, or at all. Failure to raise
sufficient capital, if and when needed, could have a material adverse effect on
our business, results of operations and financial condition.
12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates. We
do not use derivative financial instruments. Because only a small portion of our
revenues is denominated in foreign currency, we do not believe there is a
significant risk imposed on us due to the fluctuations in foreign currency
exchange rates. The table below provides information about our debt obligations
as of June 30, 2002, including principal cash flows and related weighted average
interest rates by expected maturity dates:
Expected Maturity Date
(in thousands)
2003 2004 2005 2006 2007 Thereafter
---- ---- ---- ---- ---- ----------
Borrowing under Chase facility - - $17,000 - - -
Average interest rate 4.1% 4.1% 4.1% - - -
Convertible note payable - - - - - $2,000
Average interest rate 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
13
PART II - OTHER INFORMATION
ITEM 1. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2002, we made the following sales of
unregistered securities:
--------------- ---------------------- ---------------- ---------------------------- -------------- ----------------------------
Consideration Received and
Description of Exemption If Option, Warrant or
Underwriting or Other from Convertible Security,
Discounts to Market Price Registration Terms of Exercise or
Date of Sale Title of Security Number Sold Afforded to Purchasers Claimed Conversion
--------------- ---------------------- ---------------- ---------------------------- -------------- ----------------------------
6/25/02 common stock 2,630,434 (1) 4(2) N/A
--------------- ---------------------- ---------------- ---------------------------- -------------- ----------------------------
6/25/02 common stock 881,137 (1) 4(2) Immediately exercisable
purchase warrants until 6/25/07 at an
exercise price of $3.40
per share
--------------- ---------------------- ---------------- ---------------------------- -------------- ----------------------------
6/25/02 common stock 291,285 (1) 4(2) Exercisable if and to the
purchase warrants extent of the conversion
of $2,000,000 principal
amount promissory note
until 6/25/07 at an
exercise price of $3.40
per share
--------------- ---------------------- ---------------- ---------------------------- -------------- ----------------------------
Convertible, in whole or
6/25/02 convertible $2,000,000 Issued in consideration 4(2) in part, at election of
promissory note aggregate for funding our $2,000,000 holder until 6/25/08 into
principal capital contribution to a shares of common stock at
amount joint venture company a conversion price of
formed by us and Seven $2.30 per share. We may
Hills force conversion at any
time if the closing bid
price of our common
stock equals or exceeds
$2.30 per share during
the 20-trading days prior
to our conversion notice.
--------------- ---------------------- ---------------- ---------------------------- -------------- ----------------------------
(1) We sold these shares of our common stock and warrants to Seven Hills
for an aggregate cash purchase price of $6,050,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
Current Report on Form 8-K, dated May 20, 2002, filed with the
SEC on May 29, 2002, and amendment thereto on Form 8-K/A filed with the
SEC on July 1, 2002
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 14, 2002
FIRST LOOK MEDIA, INC.
By: /s/ William F. Lischak
---------------------------
William F. Lischak
Chief Financial Officer, Chief
Operating Officer and Secretary
16
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of First Look Media, Inc. (the
"Company") on Form 10-Q for the period ended June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), each of
the undersigned, in the capacities and on the dates indicated below, hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation of
the Company.
August 14, 2002
/s/ Christopher J. Cooney
-------------------------------
Christopher J. Cooney
Chief Executive Officer
/s/ William F. Lischak
-------------------------------
William F. Lischak
Chief Financial Officer, Chief
Operating Officer and Secretary
17