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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 September 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 November 14, 2002
was 14,539,573.
FIRST LOOK MEDIA, INC.
INDEX
Part I - Financial Information
Page
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2002 (unaudited) and December 31, 2001.................3
Consolidated Statements of Operations (unaudited)
for the three months and nine months ended
September 30, 2002 and September 30, 2001............................4
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2002
and September 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.........................................14
Item 4. Controls and Procedures...............................................14
Part II - Other Information
Item 1. Legal Proceedings....................................................15
Item 2. Changes in Securities and Use of Proceeds............................15
Item 3. Defaults Upon Senior Securities......................................15
Item 4. Submission of Matters to a Vote of Security Holders..................15
Item 5. Other Information....................................................15
Item 6. Exhibits and Reports on Form 8-K.....................................15
Signature...................................................16
Certification Pursuant to 18 U.S.C. Section 1350............17
Certification Pursuant to Rule 13a-14 and 15d-14............18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST LOOK MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
------------- ------------
2002 2001
---- ----
(Unaudited)
(in thousands)
ASSETS:
------
Cash and cash equivalents $ 1,582 $ 1,673
Accounts receivable, net of allowance for doubtful accounts of $3,017,000 and
$1,150,000 at September 30, 2002 and December 31, 2001, respectively 15,331 23,668
Investment 2,000 -
Film costs, net of accumulated amortization 21,531 18,304
Other assets 1,752 1,826
------------------ ------------------
Total assets $ 42,196 $ 45,471
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY:
------------------------------------
Accounts payable and accrued expenses $ 1,760 $ 1,777
Deferred revenue 1,260 810
Accrued interest payable 72 166
Payable to producers 16,893 21,987
Notes payable 16,743 14,680
------------------ ------------------
Total liabilities 36,728 39,420
------------------ ------------------
Shareholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized; no shares
issued or outstanding at September 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
September 30, 2002 and December 31, 2001, respectively 14 12
Additional paid in capital 36,646 30,674
Accumulated deficit (31,105) (24,548)
Treasury stock at cost, 45,000 shares (87) (87)
------------------ ------------------
Total shareholders' equity 5,468 6,051
------------------ ------------------
Total liabilities and shareholders' equity $ 42,196 $ 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 September 30, Nine months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
---- ---- ----- ----
(in thousands except per share data)
Revenues $ 5,759 $ 8,171 $ 17,631 $ 28,172
Expenses:
Film costs 4,828 4,592 12,086 19,171
Distribution and marketing 1,896 2,677 5,438 4,829
General and administrative 2,220 1,537 6,000 4,931
--------------- ----------------- ------------ ------------------
Total expenses 8,944 8,806 23,524 28,931
--------------- ----------------- ------------ ------------------
Loss from operations (3,185) (635) (5,893) (759)
--------------- ----------------- ------------ ------------------
Other income (expense):
Interest income 49 2 66 10
Interest expense (281) (307) (813) (822)
Other income 47 110 159 217
--------------- ----------------- ------------ ------------------
Net other expense (185) (195) (588) (595)
--------------- ----------------- ------------ ------------------
Loss before income taxes (3,370) (830) (6,481) (1,354)
Income tax provision 45 5 76 25
--------------- ----------------- ------------ ------------------
Net loss $ (3,415) $ (835) $ (6,557) $ (1,379)
=============== ================= ============ ==================
Basic and diluted loss per share $ (0.23) $ (0.09) $ (0.51) $ (0.14)
=============== ================= ============ ==================
Weighted average number of common
shares outstanding 14,540 9,804 12,843 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)
Nine months Ended September 30,
-------------------------------
2002 2001
---- ----
(in thousands)
Cash flows from operating activities:
Net loss $ (6,557) $ (1,379)
Adjustments to reconcile net loss to net
cash used in operating activities:
Film costs 12,086 19,171
Additions to film costs (11,370) (8,889)
Payments to producers (9,037) (14,017)
Changes in operating assets and liabilities:
Accounts receivable 8,337 (2,932)
Other assets 74 (306)
Accounts payable and accrued expenses (111) 342
Deferred revenue 450 1,035
-------------------- ---------------------
Net cash used in operating activities (6,128) (6,975)
-------------------- ---------------------
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 500 6,500
Net pay down of subordinated note payable (180) (316)
Capital investment, net of fees 5,913 -
Equity financing costs (196) -
Convertible note payable 2,000 -
-------------------- ---------------------
Net cash provided by financing activities 8,037 6,184
-------------------- ---------------------
Net decrease in cash and cash equivalents (91) (791)
Cash and cash equivalents at beginning of period 1,673 832
-------------------- ---------------------
Cash and cash equivalents at end of period $ 1,582 $ 41
==================== =====================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,045 $ 905
==================== =====================
Income taxes $ 11 $ 9
==================== =====================
Foreign withholding taxes $ 65 $ 16
==================== =====================
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 nine months ended September 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 to the financial statements
contained in the quarterly reports on Form 10-Q for the quarters ended
March 31, 2002 and June 30, 2002 in order to conform to 2001 comparable
period presentations.
For the two years ended December 31, 2001, the Company had operating losses
of $8,634,000 and its operating activities used $11,556,000 of cash. During
the first nine months of 2002, operating losses totaled $5,893,000 and net
cash used in operating activities totaled $6,128,000. As of September 30,
2002, the Company had cash and cash equivalents of $1,582,000 (compared to
$1,673,000 as of December 31, 2001) and, based on the Company's
calculations, approximately $4,763,000 available for borrowing under its
Chase facility. As described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources," pursuant to terms of the Company's credit agreement with Chase,
the expected future cash flows from the Company's library of film rights is
currently being valued by a third party. The valuation is expected to be
completed prior to December 31, 2002. The valuation of the Company's
library forms a part of its borrowing base which determines available funds
for borrowing. If it is determined that the Company's library value is
lower than its last valuation, the Company's borrowing capacity under the
Chase facility will be reduced. At this time, management is unable to
predict the expected valuation of the library and cannot make any
representation as to such valuation. Subject to the valuation of the film
library, in management's opinion, existing cash and available borrowings,
totaling approximately $6,345,000, along with future cash anticipated to be
generated from operations, will provide the Company with sufficient
resources to fund operations and execute its current business plan through
at least October 1, 2003. If the Company's borrowing capacity is reduced as
a result of a lower library valuation or 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:
September 30, December 31,
------------ ------------
2002 2001
----- ------
(in thousands)
Films in release net
of accumulated amortization $ 17,841 $ 13,167
Films not yet available for release 3,690 5,137
------------- -----------
$ 21,531 $ 18,304
============= ===========
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.
6
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.
The Company currently is in the process of evaluating the performance of
the Television Commercial Production division in order to determine its
ability to continue as a business segment.
Financial information by operating segment is set forth below:
Three Months Ended September 30, 2002 Three Months Ended September 30, 2001
------------------------------------- -------------------------------------
Television Television
Motion Commercial Motion Commercial
Pictures Production Totals Pictures Production Totals
---------- --------------- ---------- ----------- ------------- --------
(in thousands) (in thousands)
Revenues from external customers $ 5,499 $ 260 $ 5,759 $ 7,966 $ 205 $ 8,171
Loss from operations
before interest, taxes and other
income $ (3,064) $ (121) $ (3,185) $ (489) $ (146) $ (635)
Nine months Ended and as of September Nine months Ended and as of September
30, 2002 30, 2002
-------------------------------------- -------------------------------------
Television Television
Motion Commercial Motion Commercial
Pictures Production Totals Pictures Production Totals
---------- --------------- ---------- ----------- ------------- --------
(in thousands) (in thousands)
Revenues from external customers $ 16,473 $ 1,158 $ 17,631 $ 27,967 $ 205 $ 28,172
Loss from operations
before interest, taxes and other
income $ (5,781) $ (112) $ (5,893) $ (341) $ (418) $ (759)
Total assets $ 41,875 $ 321 $ 42,196 $ 50,591 $ 132 $ 50,723
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 September 30,
7
2002, Seven Hills owned approximately 18.1% of the Company's outstanding
voting securities.
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 $256,833 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 September 30, 2002, the Company was committed to pay minimum
guarantees of approximately $2,958,000 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 September 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 $2,169,000. 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 previously 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 our 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 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, in December 2000 we established a
television commercial production operation, which operates under the name "First
Look Artists." We are currently in the process of evaluating the performance of
the television commercial production division in order to determine its ability
to continue as a business segment.
Results of Operations
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001
Revenues decreased by $2,412,000 (29.5%) to $5,759,000 for the quarter
ended September 30, 2002 from $8,171,000 for the quarter ended September 30,
2001. The decrease was primarily due to decreases in revenue from the licensing
of films in foreign territories and U.S. television markets ($2,853,000 for the
quarter ended September 30, 2002 compared to $5,494,000 for the quarter ended
September 30, 2001) and from decreases in revenue from U.S. theatrical
distribution activities ($103,000 for the quarter ended September 30, 2002
compared to $1,236,000 for the quarter ended September 30, 2001). These
9
decreases were partially offset by an increase in revenue from video and DVD
distribution activities in the U.S. ($2,460,000 for the quarter ended September
30, 2002 compared to $1,013,000 for the quarter ended September 30, 2001).
Film costs increased by $236,000 (5.1%) to $4,828,000 for the quarter ended
September 30, 2002 compared to $4,592,000 for the quarter ended September 30,
2001. Film costs as a percentage of revenues increased by 27.6% to 83.8% for the
quarter ended September 30, 2002 compared to 56.2% for the quarter ended
September 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 increase was primarily due to an
increase in the write down of acquisition and production costs to market value
for projects with lower than expected performance ($1,696,000 for the quarter
ended September 30, 2002 compared to $65,000 for the quarter ended September 30,
2001).
Distribution and marketing expenses decreased by $781,000 (29.2%) to
$1,896,000 for the quarter ended September 30, 2002 from $2,677,000 for the
quarter ended September 30, 2001. In accordance with accounting standards, we
expense distribution and marketing expenses as incurred. The decrease was
primarily due to decreased distribution and marketing expenses related to our
U.S. video, DVD and theatrical distribution activities ($862,000 for the quarter
ended September 30, 2002 compared to $1,932,000 for the quarter ended September
30, 2001). The decrease was partially offset by increased distribution and
marketing expenses related to the licensing of films in foreign territories
($894,000 for the quarter ended September 30, 2002 compared to $669,000 for the
quarter ended September 30, 2001).
General and administrative expenses, net of amounts capitalized to film
costs, increased by $683,000 (44.4%) to $2,220,000 for the quarter ended
September 30, 2002 compared to $1,537,000 for the quarter ended September 30,
2001. The increase was primarily due to an increase in bad debt expense and
reserves for doubtful accounts of $616,000. As a result of depressed worldwide
television market conditions during the past several months, we have
substantially increased our reserves for doubtful accounts and written off
uncollectible accounts. Other items that contributed to the increase in general
and administrative expenses include increases in health and liability insurance
of $21,000, legal fees of $22,000, rent and parking expense of $37,000, and
decreased overhead capitalization of $30,000. These increases were partially
offset by decreased salary and payroll taxes of $46,000.
As a result of the above, we had a net loss of $3,415,000 (reflecting
foreign withholding taxes of $45,000) for the quarter ended September 30, 2002
compared to a net loss of $835,000 (reflecting state and foreign withholding
taxes of $5,000) for the quarter ended September 30, 2001.
Nine months Ended September 30, 2002 Compared to Nine months Ended September 30,
2001
Revenues decreased by $10,541,000 (37.4%) to $17,631,000 for the nine
months ended September 30, 2002 from $28,172,000 for the nine months ended
September 30, 2001. The decrease was primarily due to decreases in revenue from
the licensing of films in foreign territories and U.S. television markets
($9,911,000 for the nine months ended September 30, 2002 compared to $21,560,000
for the nine months ended September 30, 2001), decreases in revenue from U.S.
theatrical distribution activities ($292,000 for nine months ended September 30,
2002 compared to $1,401,000 for the nine months ended September 30, 2001),
decreased airline revenues ($262,000 for the nine months ended September 30,
2002 compared to $1,081,000 for the nine months ended September 30, 2001), and
decreased executive producer fees ($0 for the nine months ended September 30,
2002 compared to $1,150,000 for the nine months ended September 30, 2001). These
decreases were partially offset by increases from revenue in video and DVD
distribution activities in the U.S. ($5,564,000 for the nine months ended
September 30, 2002 compared to $2,308,000 for the nine months ended September
30, 2001) and from television commercial production activities ($1,158,000 for
the nine months ended September 30, 2002 compared to $205,000 for the nine
months ended September 30, 2001).
10
Film costs decreased by $7,085,000 to $12,086,000 for the nine months ended
September 30, 2002 compared to $19,171,000 for the nine months ended September
30, 2001. As a percentage of revenues, however, film costs increased to 68.5%
for the nine months ended September 30, 2002 compared to 68.0% for the nine
months ended September 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. Participation expense fluctuates
period to period 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. The increase was
primarily due to an increase in the write down of acquisition and production
costs to market value for projects with lower than expected performance
($1,865,000 (10.6%) for the nine months ended September 30, 2002 compared to
$566,000 (2.0%) for the nine months ended September 30, 2001. The increase, as a
percentage of revenues, was partially offset by decreased film costs and lower
accrued participation expenses of $10,221,000 (58.0%) for the nine months ended
September 30, 2002 compared to $18,605,000 (66.0%) for the nine months ended
September 30, 2001.
Distribution and marketing expenses increased by $609,000 (12.6%) to
$5,438,000 for the nine months ended September 30, 2002 from $4,829,000 for the
nine months ended September 30, 2001. In accordance with accounting standards,
we expense distribution and marketing expenses as incurred. The increase was
primarily due to increased distribution and marketing expenses related to
licensing of films in foreign territories ($2,758,000 for the nine months ended
September 30, 2002, compared to $2,094,000 for the nine months ended September
30, 2001).
General and administrative expenses, net of amounts capitalized to film
costs, increased by $1,069,000 to $6,000,000 for the nine months ended September
30, 2002 compared to $4,931,000 for the nine months ended September 30, 2001.
The increase was primarily due to an increase in bad debt expense and reserves
for doubtful accounts of $963,000. As a result of depressed worldwide television
market conditions during the past several months, we have substantially
increased our reserves for doubtful accounts and written off uncollectible
accounts. Other items that contributed to the increase in general and
administrative expense include increases in accounting fees of $54,000,
consulting fees of $27,000, travel expenses of $37,000, rent and parking expense
of $115,000 and a decrease in capitalized overhead of $30,000. These increases
were partially offset by decreases in depreciation expense of $22,000, office
expense of $24,000, legal fees of $33,000, salary and payroll taxes of $43,000,
and publicity fees of $36,000.
As a result of the above, we had a net loss of $6,557,000 for the nine
months ended September 30, 2002 (reflecting state and foreign withholding taxes
of $76,000) compared to a net loss of $1,379,000 (reflecting state and foreign
withholding taxes of $25,000) for the nine months ended September 30, 2001.
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
11
September 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 $254,600 for the fair market value of the Note Warrant,
has been reported as a liability on the balance sheet combined 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 that 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). Our library is currently being valued. The
valuation is expected to be completed prior to December 31, 2002. If it is
determined that our library value is lower than the current valuation, our
borrowing base will be reduced. At this time, management is unable to predict
the expected valuation of the library and cannot make any representation as to
such valuation. At September 30, 2002, we had borrowed an aggregate of
$15,000,000 under the Chase facility and an additional $4,763,000 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.
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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 that 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 September 30, 2002, these outstanding
commitments totaled $2,958,000.
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 September 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 $2,169,000. 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 nine months of 2002, operating losses totaled $5,893,000 and net cash used
in operating activities totaled $6,128,000. As of September 30, 2002, we had
cash and cash equivalents of $1,582,000 (compared to $1,673,000 as of December
31, 2001) and, based on our calculations, approximately $4,763,000 available for
borrowing under our Chase facility. As described above, pursuant to the terms of
our credit agreement with Chase, the expected future cash flows from our library
of film rights is currently being valued by a third party. The valuation is
expected to be completed prior to December 31, 2002. The valuation of our
library forms a part of our borrowing base which determines available funds for
borrowing. If it is determined that our library value is lower than our last
valuation, our borrowing capacity under the Chase facility will be reduced. At
this time, management is unable to predict the expected valuation of the library
and cannot make any representation as to such valuation. Subject to the
valuation of the film library, in management's opinion, existing cash and
available borrowings, totaling approximately $6,345,000, 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 October 1, 2003. If our borrowing capacity is reduced as a result of a
lower library valuation or 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.
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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 September 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 - - $15,000 - - -
Average interest rate 3.8% 3.8% 3.8% - - -
Convertible note payable - - - - - $2,000
Average interest rate 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation
of the effectiveness of our disclosure controls and procedures was made under
the supervision and with the participation of our management, including the
chief executive officer and chief financial officer. Based on that evaluation,
the CEO and CFO concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Subsequent to the date of
our evaluation, there were no significant changes in our internal controls or in
other factors that could significantly affect these controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
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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
None
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.
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.
November 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 September 30, 2002 as filed with
the Securities and Exchange Commission (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:
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.
November 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
CERTIFICATION PURSUANT TO
RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Christopher J. Cooney, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Look Media,
Inc.;
2. based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. the registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days of the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and to the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
18
6. the registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2002 /s/ Christopher J. Cooney
------------------------------------
Christopher J. Cooney
Chief Executive Officer
19
CERTIFICATION
PURSUANT TO RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, William F. Lischak, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Look Media,
Inc.;
2. based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. the registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days of the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and to the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
20
6. the registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2002 /s/ William F. Lischak
-------------------------------------
William F. Lischak
Chief Financial Officer,
Chief Operating Officer and Secretary
21