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file | filename |
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EX-31.1 - EX-31.1 - Film Department Holdings, Inc. | p17834exv31w1.htm |
EX-31.2 - EX-31.2 - Film Department Holdings, Inc. | p17834exv31w2.htm |
EX-32.2 - EX-32.2 - Film Department Holdings, Inc. | p17834exv32w2.htm |
EX-32.1 - EX-32.1 - Film Department Holdings, Inc. | p17834exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2010
OR
o | 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: 001-34706
THE FILM DEPARTMENT HOLDINGS, INC.
Delaware | 27-2442818 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
8439 Sunset Boulevard, 2nd Floor West Hollywood, California |
90069 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: 323-785-3700
Indicate by a 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. o Yes þ No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). o Yes o No.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
nonaccelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Shares of Common Stock outstanding as of June 4, 2010: 10,211,538
THE FILM DEPARTMENT HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
TABLE OF CONTENTS
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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
The Film Department Holdings LLC
CONSOLIDATED BALANCE SHEETS
March 31, 2010 | ||||
Unaudited | ||||
(Amounts in Thousands) | ||||
ASSETS |
||||
Cash and cash equivalents |
$ | 1,010 | ||
Restricted cash and cash equivalents |
137 | |||
Accounts receivable, net |
7,628 | |||
Property and equipment, net |
82 | |||
Development costs |
1,812 | |||
Capitalized film costs, net |
24,937 | |||
Other assets |
1,292 | |||
Debt issuance costs, net |
373 | |||
Total assets |
$ | 37,271 | ||
LIABILITIES, REDEEMABLE MEMBER UNITS AND MEMBERS DEFICIT |
||||
Liabilities |
||||
Accounts payable and accrued liabilities |
$ | 1,238 | ||
Accrued residuals and participations |
928 | |||
Deferred revenue |
418 | |||
Second Lien Notes, net of discount |
27,279 | |||
Total liabilities |
$ | 29,863 | ||
Commitments and Contingencies (Note 10) |
||||
Redeemable member units |
41,625 | |||
Members deficit |
(34,217 | ) | ||
Total liabilities, redeemable member units and members deficit |
$ | 37,271 | ||
See accompanying notes to consolidated financial statements.
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The Film Department Holdings LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Unaudited | ||||||||
(Amounts in thousands) | ||||||||
Revenues |
$ | 5,821 | $ | | ||||
Expenses |
||||||||
Direct operating expense |
4,026 | | ||||||
Distribution and marketing expense |
138 | 242 | ||||||
General and administration expense |
3,963 | 1,739 | ||||||
Depreciation and amortization expense |
48 | 48 | ||||||
Total expenses |
8,175 | 2,029 | ||||||
Operating loss |
(2,354 | ) | (2,029 | ) | ||||
Other expense (income) |
||||||||
Interest expense |
||||||||
Contractual interest expense |
1,413 | 1,221 | ||||||
Amortization of debt discount |
267 | 46 | ||||||
Amortization of debt issuance costs |
74 | 303 | ||||||
Amortization of debt administration fees |
| 31 | ||||||
Total interest expense |
1,754 | 1,601 | ||||||
Other expense |
| | ||||||
Interest and other (income) |
| (9 | ) | |||||
Total other expenses, net |
1,754 | 1,592 | ||||||
Net Loss |
$ | (4,108 | ) | $ | (3,621 | ) | ||
See accompanying notes to consolidated financial statements.
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The Film Department Holdings LLC
CONSOLIDATED STATEMENTS OF MEMBERS DEFICIT
Total | ||||||||
Accumulated | Members | |||||||
Deficit | Deficit | |||||||
Unaudited | ||||||||
(Amounts in thousands) | ||||||||
Balance, December 31, 2009 |
$ | (30,065 | ) | $ | (30,065 | ) | ||
Deemed dividend accretion of Class B redeemable units |
(44 | ) | (44 | ) | ||||
Net loss for the three months ended March 31, 2010 |
(4,108 | ) | (4,108 | ) | ||||
Balance, March 31, 2010 |
$ | (34,217 | ) | $ | (34,217 | ) | ||
See accompanying notes to consolidated financial statements.
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The Film Department Holdings LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Unaudited | ||||||||
(Amounts in thousands) | ||||||||
Increase (Decrease) in Cash and Cash Equivalents |
||||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (4,108 | ) | $ | (3,621 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
Amortization of film cost |
3,812 | | ||||||
Depreciation and amortization |
48 | 48 | ||||||
Unit-based compensation |
2,575 | | ||||||
Amortization of debt discount and issuance costs |
341 | 349 | ||||||
Changes in operating assets and liabilities: |
||||||||
Decrease (increase) in restricted cash and cash equivalents |
1,280 | (4,186 | ) | |||||
(Increase) in accounts receivable |
(2,079 | ) | (1,112 | ) | ||||
Decrease (increase) in prepaid expenses and other current assets |
6,567 | (1 | ) | |||||
(Increase) in development costs |
(124 | ) | (417 | ) | ||||
Decrease (increase) in film costs |
71 | (26,265 | ) | |||||
Decrease (increase) in deposits and other assets |
3 | (595 | ) | |||||
Decrease in accounts payable |
(226 | ) | | |||||
Increase (decrease) in accrued expenses and other liabilities |
313 | (174 | ) | |||||
(Decrease) increase in deferred revenue |
(194 | ) | 2,332 | |||||
Increase in accrued interest on notes payable |
1,413 | 1,036 | ||||||
Net cash provided by (used in) operating activities |
9,692 | (32,606 | ) | |||||
Cash flows from investing activities |
||||||||
Proceeds from Sale of short-term investments |
| 10,350 | ||||||
Net cash provided by investing activities |
| 10,350 | ||||||
Cash flows from financing activities |
||||||||
Repayment of Second Lien Notes |
(10,887 | ) | | |||||
Proceeds from Senior Credit Facility |
| 15,218 | ||||||
Proceeds from Issuance of Membership Units |
2,000 | | ||||||
Net cash (used in) provided by financing activities |
(8,887 | ) | 15,218 | |||||
Net increase (decrease) in cash and cash equivalents |
805 | (7,038 | ) | |||||
Cash and cash equivalents, beginning of period |
205 | 13,730 | ||||||
Cash and cash equivalents, end of period |
$ | 1,010 | $ | 6,692 | ||||
See accompanying notes to consolidated financial statements.
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The Film Department Holdings LLC
Notes to Unaudited Consolidated Financial Statements
1. Description of Business
Company Overview
The Film Department Holdings LLC (Holdings) was formed as a Delaware limited liability
company on May 22, 2007. Holdings is the parent of a wholly-owned subsidiary, The Film Department
LLC (LLC), a Delaware limited liability company that was formed on July 27, 2006 (collectively
the Company). The Company commenced its operations on June 27, 2007, in accordance with its
Amended and Restated Limited Liability Company Agreement (the Operating Agreement) executed on
June 8, 2007.
At the initial closing on June 27, 2007, the Company was capitalized with $25 million in
equity through the issuance of 25,000 Class B Units with a par value of $1,000 per Unit to various
investors.
Additionally, the Company raised $30 million in operating capital through the issuance of
Secured Second Lien Notes (Second Lien Notes) (see Note 6) and implemented a Senior Revolving
Borrowing Base Senior Credit Facility (Senior Credit Facility) for $140 million (see Note 7) with
a senior lender group (Senior Lenders).
The Company negotiated forbearance agreements with the lenders under the Note Holders of the
Second Lien Notes and Senior Credit Facility (see Note 6 and Note 7). This enabled the Company to
recapitalize by entering into an agreement with H&W Movie Partners, LLC (HWMP) on December 2,
2009 pursuant to which HWMP agreed to make equity investments in the Company in exchange for the
issuance to HWMP of Class G units (see Note 9). As part of the recapitalization, the Company
amended its operating agreement and is currently governed by the Second Amended and Restated
Limited Liability Company Agreement, dated November 25, 2009.
As part of the recapitalization, the Company entered into a buyout agreement on November 23,
2009 with the Note Holders of the Second Lien Notes. (see Note 6). The buyout agreement will allow
the Company to repay the Second Lien Notes upon the occurrence of a recapitalization event.
For the three months ended March 31, 2010 and 2009, the Company had incurred a net loss of
$4.11 million and $3.62 million, respectively, and an accumulated members deficit of $34.22
million and $23.59 million, respectively. For the three months ended March 31, 2010 and 2009, cash
flows from operating activities was not sufficient to support its operations. Also, the Company had
Events of Default under the Senior Credit Facility and Securities Purchase Agreement. These
matters, among others, raise substantial doubt about the Companys ability to continue as a going
concern.
While the Company continues to produce new film assets, adverse changes in market conditions
or limits on the Companys ability to obtain financing could limit the Companys production of new
films. The impact of such eventualities could influence future operations of the Company. See Note
11 for Going Concern matters.
The accompanying consolidated financial statements at March 31, 2010 and for the three month
periods ended March 31, 2010 and 2009 are unaudited, but include all adjustments, consisting of
normal recurring entries, that management believes to be necessary for a fair presentation of the
periods presented. Interim results are not necessarily indicative of results for a full year.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the consolidated accounts of The Film Department
Holdings LLC and its wholly owned subsidiary, The Film Department LLC and LLCs wholly owned
subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
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Revenue Recognition
Revenue from the sales or licensing of films is recognized upon meeting all recognition
requirements of Accounting Standard Codification 926, Entertainment Films (ASC 926) (formerly
Statement of Position 00-2). These requirements are a) persuasive evidence of a sale or licensing
arrangement with a customer exists, b) the film is complete and, in accordance with the terms of
the arrangement, has been delivered or is available for immediate and unconditional delivery, c)
the license period of the arrangement has begun and the customer can begin its exploitation,
exhibition, or sale, d) the arrangement fee is fixed or determinable, and e) collection of the
arrangement fee is reasonably assured. In 2009, the Company produced and theatrically released two
films that would meet all of the above-stated requirements and recognized $40.32 million in
revenues. The Company recognized an additional $5.82 million in revenues from these films for the
three months ended March 31, 2010.
Cash payments received in advance are recorded as deferred revenue until all the conditions of
revenue recognition have been met. As of March 31, 2010, the Company recorded deferred revenue
totaling $0.42 million.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original maturities of three
months or less that are readily convertible into cash and are not subject to significant risk from
fluctuations in interest rates. As a result, the carrying amount of cash and cash equivalents
approximates fair value.
The Company places its cash and cash equivalents with major financial institutions. At times,
cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation
(FDIC).
Restricted Cash and Cash Equivalents
The Companys Senior Credit Facility required the establishment of an Overhead Reserve
Account, an Interest Reserve Account, and a Collection Account, which are reflected as
restricted cash and cash equivalents in the accompanying consolidated balance sheet. Restricted
cash and cash equivalents include cash on deposit with financial institutions in demand accounts,
savings accounts and short-term certificates of deposits.
Upon the initial closing on June 27, 2007, approximately $7.50 million was deposited into the
Overhead Reserve Account. During the first year after the initial closing, the Company was able to
draw down funds from the Overhead Reserve Account until the balance in the Overhead Reserve Account
reached approximately $3 million. Pursuant to the Credit Agreement, which governed the Senior
Credit Facility, the Company was required to keep a minimum balance of $3 million in the Overhead
Reserve Account up to June 27, 2012 (one year prior to the scheduled maturity date of the Senior
Credit Facility).
As part of the forbearance agreements, which the Company entered into with the lenders of the
Senior Credit Facility as well as the Note Holders of the Second Lien Notes, the Company was
allowed to draw down funds from the Overhead Reserve Account pursuant to a pre-approved budget to
fund its operations. The balance in the Overhead Reserve Account as of March 31, 2010 was $0.
Additionally, the Company was required to maintain a balance of approximately $4.20 million in
the Interest Reserve Account, representing an estimated twelve months of interest due on the Second
Lien Notes. As part of the forbearance agreement, the Senior Lenders and the Note Holders required
that the balance in the Interest Reserve Account on September 2, 2009 of approximately $4.29
million be applied against the outstanding balance of the Senior Credit Facility and the
requirement for the Interest Reserve Account was eliminated. As such, the balance for the Interest
Reserve Account as of March 31, 2010 was $0.
Accounts Receivable
Accounts receivable represent customer obligations due under contractual obligations where the
conditions stated above in respect of revenue recognition have been fulfilled and where the
customer has been invoiced for the amount payable.
The carrying amount of accounts receivable is reduced by an allowance that reflects
managements best estimate of the amounts that will not be collected. Management individually
reviews all delinquent accounts receivable balances.
The Company evaluates accounts receivable where it believes that there may be a possibility
that the license agreement concerned may be at risk of being cancelled in the future. In these
cases, the Company uses its judgment, based on the available facts and circumstances, and records a
specific reserve for that customer against amounts due to reduce the receivable to the amount that
is expected to be collected. These specific reserves are re-evaluated and adjusted as additional
information is received that impacts the amount reserved.
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If circumstances change (for example, the Company experiences higher than expected defaults or
an unexpected
material adverse change in a major customers ability to meet its financial obligation to the
Company), estimates of the recoverability of amounts due to the Company could be reduced by a
material amount. There was no allowance for doubtful accounts at March 31, 2010.
Fair Value Accounting
The Companys financial assets and liabilities recorded at fair value in the consolidated
balance sheet are categorized based upon the level of judgment associated with the inputs used to
measure their fair value. Financial instruments are considered Level 1 when their values are
determined based on quoted prices in active markets for identical assets or liabilities. Financial
instruments are considered Level 2 when their values are determined using quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data. Financial instruments are considered
Level 3 when their values are determined using pricing models, discounted cash flow methodologies
or similar techniques and at least one significant model assumption or input is unobservable or
when the determination of the fair value requires significant management judgment or estimation. At
March 31, 2009, the Company had warrants marked to fair value of $2.44 million, and classified as a
Level 3 financial instrument, as the fair value was determined based on the price paid for the
Class B redeemable units (see Note 9) and adjusted for the order of expected future distributions
of the Company. There were no changes in the values during the three months ended March 31, 2009.
Effective September 2, 2009 as discussed in Notes 6 and 7, the Company entered into a forbearance
agreement that modified the expected future cash distributions of the Company. On November 23, 2009
as part of the recapitalization, the Company redeemed all outstanding C, D and E class warrants for
an aggregate of $1 and recognized a gain of $2.44 million at that time.
There were no financial instruments marked to fair value during the three months ended March
31, 2010.
Property and Equipment
Property and equipment is recorded at historical cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets of three years. When property
and equipment is sold or otherwise disposed of, the cost and related accumulated depreciation or
amortization is removed from the accounts and any resulting gain or loss is included in income. The
costs of normal maintenance and repairs are charged to expense when incurred.
In the event that facts and circumstances indicate that the cost of an asset may be impaired,
an evaluation of recoverability would be performed. There was no impairment recorded for the three
months ended March 31, 2010.
Film Costs
Film costs are capitalized in accordance with ASC 926. Film costs represent capitalized costs
for the production of films and other entertainment projects. These costs will be amortized when
the films that the Company is producing meet all the requirements listed in ASC 926 and the Company
is recognizing revenues for the Films.
Film costs are amortized in the same proportion that the current revenue bears to the
estimated remaining unrecognized revenue as of the beginning of the current year. Revenue and cost
forecasts are periodically reviewed by management and revised when warranted.
The carrying value of the film costs are periodically reviewed for impairment. If events or
changes in circumstance indicate that the fair value of the capitalized costs on a specific film
are less than their carrying value, an impairment charge is recognized in the amount by which the
unamortized costs exceed the projects fair value. No impairment charge was recognized for the
three-month periods ended March 31, 2010 and 2009, respectively.
Development Costs
Development costs are capitalized costs related to projects not in production. If the project
is greenlit, the costs are reclassified as Film Costs. The Company evaluates on a monthly basis,
all projects in development. If the Company decides to abandon any project, an expense for the
costs incurred to date will be included in the Companys consolidated statements of operations.
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Debt Issuance Costs
Debt issuance costs are amortized using the effective interest method, over the expected term
of the underlying debt instruments. On September 2, 2009 the Company entered into a forbearance
agreement with the Senior Lenders regarding the Senior Credit Facility. As part of this forbearance
agreement, the Senior Credit Facility was terminated and the Company was only allowed to draw down
additional funds related to the completion and delivery of the picture Law Abiding Citizen.
This reduction resulted in an accelerated amortization of the Debt Issuance Costs. As of
November 24, 2009 the Senior Credit Facility was paid in full and terminated, therefore all debt
issuance costs previously capitalized, which were related to the establishment of the Senior Credit
Facility in 2007 were expensed.
As part of the forbearance agreement with the Note Holders of the Second Lien Notes, the
scheduled maturity date for the Second Lien Notes was amended from June 27, 2014 to June 27, 2011.
The debt issuance costs associated with the Second Lien Notes continue to be amortized at an
accelerated rate using the effective interest method over the remaining term through June 27, 2011.
Amortization expense for the three months ended March 31, 2010 and 2009, totaled $0.07 million
and $0.30 million, respectively, and such expense is included in interest expense in the
accompanying statements of operations.
Marketing Costs
The Company expenses distribution and marketing costs as incurred. Distribution and Marketing
costs for the three months ended March 31, 2010 and 2009 totaled $0.14 million and $0.24 million,
respectively.
Income Taxes
The Company is not a taxpaying entity for federal income tax purposes. The various members of
the Company include their respective share of the Companys income in their respective income tax
returns.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the financial statement date and the reported amount of revenues and expenses during
the reporting year. Actual results may differ from those estimates.
3. Property and Equipment
Property and equipment are comprised of the following:
March 31, | ||||||||
Life | ||||||||
2010 | (in years) | |||||||
(Amounts in | ||||||||
thousands) | ||||||||
Technical equipment and computers |
$ | 172 | $ | 3 | ||||
Furniture, fixtures and equipment |
185 | 3 | ||||||
Computer software |
72 | 3 | ||||||
Leasehold improvements |
122 | 3 | ||||||
Subtotal |
551 | |||||||
Less: accumulated depreciation and amortization |
(469 | ) | ||||||
Property and equipment, net |
$ | 82 | ||||||
Depreciation and amortization expense related to property and equipment was $0.05 million and
$0.05 million for the three months ended March 31, 2010 and 2009, respectively.
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4. Development Costs
Development costs at March 31, 2010 consist entirely of costs for projects in development.
(Amounts in | ||||
thousands) | ||||
Balance at December 31, 2009 |
$ | 1,689 | ||
Additions |
124 | |||
Balance at March 31, 2010 |
$ | 1,813 | ||
The Company did not incur expenses for the three months ended March 31, 2010 and 2009 related
to abandoned projects.
5. Film Costs
The Company has completed two feature films, The Rebound and Law Abiding Citizen. The Rebound
was released in September of 2009 and Law Abiding Citizen was released on October 16, 2009.
Film costs at March 31, 2010 consist of the following:
(Amounts in | ||||
thousands) | ||||
Films in release |
$ | 56,195 | ||
Accumulated amortization |
$ | (31,258 | ) | |
Film costs, net |
$ | 24,937 | ||
Based on the Companys estimates of projected gross revenues as of March 31, 2010, the Company
expects approximately 80% of completed films, net of accumulated amortization, will be amortized
during the one year period ending March 31, 2011, and 100% of unamortized film costs applicable to
films in release are expected to be amortized during the next three years.
6. Second Lien Notes
On June 27, 2007, the Company entered into a Securities Purchase Agreement for a total
committed funding of $30 million through the issuance of Second Lien Notes. At the date of
issuance, the purchasers of the Second Lien Notes (Note Holders) were granted a second lien
security interest in all of the Companys property and interests in property and proceeds thereof.
The second lien security interest is subordinated to the first lien security interest, granted to
the Senior Lenders of the Senior Credit Facility under the Credit Agreement (see Note 7).
The first and second liens are currently held by Union Bank, N.A. Union Bank, N.A. was the
administrative and collateral agent for the Senior Lenders and the collateral agent for the Note
Holders.
The Second Lien Notes, as originally issued, included a payment in kind (PIK) feature that
permitted the Company to capitalize and add to the aggregate outstanding principal amount of the
Second Lien Notes each quarterly interest payment due thereunder and defer payment thereof to the
scheduled maturity date of June 27, 2014 (although as originally issued the Second Lien Notes also
permitted the Company in its discretion to pay quarterly interest in cash subject to satisfaction
of certain conditions). At the request of General Electric Capital Corporation (GECM), the
initial Note Holder of all Second Lien Notes, and in order to assist GECM in its post-closing
syndication efforts, the Company entered into an amendment to the Securities Purchase Agreement on
August 7, 2007, pursuant to which, among other things, the Second Lien Notes were amended and
restated to eliminate the PIK feature for, and require the cash payment of, all quarterly interest
payments, at an annual rate of 12%, required to be made by the Company after September 30, 2008,
subject to the ability of the Company to elect to defer the payment of interest due on any
quarterly interest payment date to the next succeeding quarterly interest payment date (on which
date all accrued and unpaid interest for the preceding two quarterly periods would be required to
be paid in cash). Following this amendment, GECM syndicated the Second Lien Notes in a series of
transactions to R6 Capital and its successor company, Eton Park.
Due to liquidity and capital resource issues resulting in part from the aforementioned
amendments to the Second Lien Notes, the Company was unable to pay scheduled quarterly interest
payments totaling $2.16 million due on June 30, 2009 under the Second Lien Notes.
The Company negotiated forbearance agreements on September 2, 2009 with its Note Holders under
the
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Securities Purchase Agreement and Senior Credit Facility pursuant to which such holders agreed
to forbear from
exercising any rights and remedies under the Securities Purchase Agreement and the Senior
Credit Facility (absent the occurrence of any additional events of default thereunder) until June
30, 2010, and December 31, 2009, respectively.
As part of the forbearance agreements, the Senior Lenders allowed the Company to draw funds
from the Overhead Reserve Account pursuant to a pre-approved budget to fund its operations.
Additionally, the Note Holders and the Senior Lenders required that the balance in the Interest
Reserve Account on September 2, 2009 of approximately $4.29 million be applied against the
outstanding balance of the Senior Credit Facility.
Additionally, the forbearance agreement included a provision that amended the scheduled
maturity date on the Second Lien Notes from June 27, 2014 to June 27, 2011.
The Second Lien Notes initially accrued interest at 13.5% per annum through September 30, 2008
(the initial PIK period). All interest through September 30, 2008 was capitalized and added to the
aggregate outstanding principal amount of the Second Lien Notes. Since October 1, 2008, the Second
Lien Notes bear interest at 12.0% per annum. The Second Lien Notes currently accrue interest at the
default rate of 16% per annum. As of March 31, 2010, the amount of the Second Lien Notes totaled
$27.28 million net of $0.29 million of debt discount, of which $15.61 million represents the
original principal amount and $11.96 million represents the amount of accrued but unpaid interest
that was capitalized and added to the principal amount of the Second Lien Notes. The aggregate
principal amount of the Second Lien Notes, including all capitalized interest, shall be paid in
full on June 27, 2011.
In connection with the Securities Purchase Agreement, the Company granted to the Purchasers of
its Second Lien Notes, warrants to acquire an aggregate of 1,538 Class C Units of the Company, at a
purchase price of $0.01 per Class C Unit.
The value of the warrants at issuance of $1.30 million was treated as a discount to the debt
and amortized over the life of the Second Lien Notes using the effective interest rate method. As
part of a buyout agreement (as outlined below), which the Company entered into on November 23, 2009
with the Note Holders, all Class C warrants were redeemed for an aggregate of $1 (see Note 9).
For the three months ended March 31, 2010 and 2009, the amount of discount amortized to
interest expense in the accompanying statements of operations totaled $0.27 million and $0.05
million, respectively.
As of March 31, 2010, the Second Lien Notes payable are comprised of the following:
(Amounts in | ||||
thousands) | ||||
Original principal amount |
$ | 15,606 | ||
Accrued interest |
11,958 | |||
Less: unamortized discount |
(285 | ) | ||
Second Lien Notes payable, net of interest and unamortized discount |
$ | 27,279 |
On November 23, 2009, the Company entered into a Buyout Agreement (the Buyout Agreement)
with HWMP, a company related through common ownership, and the Note Holders of the Second Lien
Notes, Eton Park CLO Management 1, Eton Park CLO Management 2, Eton Park Master Fund, Ltd., and
Eton Park Fund, L.P. (collectively Eton Park). Under the terms of the Buyout Agreement, should
the Company consummate an Equity Transaction, as defined therein, either through an initial public
offering (an Offering) or through a private equity investment (a Private Investment), the
Company agrees to pay Eton Park a portion of the proceeds received to repay the Second Lien Notes.
Upon an Offering, the Company will pay to Eton Park the lesser of (a) $37.5 million or (b) the
outstanding obligations owing to Eton Park under the Second Lien Notes less $1.5 million, and, in
addition thereto, will issue and deliver to Eton Park the number of shares of common stock having a
value of $1.5 million. If the Offering is not consummated and a Private Investment is completed,
the Company will pay the lesser of (i) $39 million or (ii) the outstanding obligations owing to
Eton Park under the Second Lien Notes as of the date of the receipt of such funds. Effective
immediately upon receipt by Eton Park of the applicable initial cash paydown described above upon
consummation of an Equity Transaction, the Companys obligations to Eton Park under the Second Lien
Notes will be terminated, and all liens securing those obligations will be extinguished. In
conjunction with the Buyout Agreement, EP Holding (Film), Corp., Eton Parks designated holder of
the Class C warrants of the Company, entered into a Redemption Agreement on November 23, 2009,
pursuant to which the Company redeemed all outstanding Class C warrants held by such Eton Park
designee for an aggregate purchase price of $1.
In addition to the initial cash paydown to be paid by the Company to Eton Park upon
consummation of an Equity
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Transaction as described above, to the extent that the aggregate
outstanding obligations owing to Eton Park under the Second Lien Notes at the time of such initial
cash paydown exceeds $39 million (such excess, the Additional
Payment), the Company will also pay to Eton Park an amount equal to all cash receipts
actually received by the Company from Overture Films, LLC (Overture) under the Companys
distribution agreement with Overture in respect of the film Law Abiding Citizen until the
Additional Payment is paid in full, together with any accrued and unpaid interest thereon at a rate
of 16% per annum.
As part of the Buyout Agreement, HWMP agreed to make certain equity investments in the Company
as specified therein in exchange for the issuance to HWMP of Class G units. The Buyout Agreement
also provides for the consent by Eton Park to the sale by the Company and the purchase by HWMP of
all right, title and interest of the Company in and to that certain film currently entitled
Earthbound (the Purchased Film) for a cash purchase price of $0.15 million and otherwise on the
terms and conditions set forth in the Earthbound Acquisition Agreement (as defined therein). As
additional consideration for Eton Parks consent to the sale by the Company of the Purchased Film,
Eton Park is also entitled to a participation in an amount equal to 8.6% of the adjusted gross
receipts of the Purchased Film and any other films or entertainment products made based upon the
Purchased Film, commencing at Cash Breakeven as defined in the Earthbound Participation Agreement
referred to in the Buyout Agreement. However, in the event that an Equity Transaction is
consummated on or before July 1, 2010 (as amended) and Eton Park receives the applicable cash
paydown, then Eton Parks right to receive the participation shall terminate.
Through March 31, 2010, the Company had received approximately $12.80 million from HWMP
pursuant to the Buyout Agreement. The anticipated total amount actually invested by HWMP prior to
the Offering will be approximately $13.15 million.
7. Senior Credit Facility
On June 27, 2007, the Company entered into a Credit Agreement for a Senior Credit Facility
that provided for borrowings under a line of credit up to a maximum of $140 million. The Company
had the option to draw from the Senior Credit Facility via Base Rate Loans or Eurodollar Rate
Loans.
Borrowings made as Base Rate Loans bear interest at the Base Rate, defined as the higher of
(a) the rate last quoted by The Wall Street Journal as the base rate on corporate loans posted by
at least 75% of the nations largest banks in the United States (commonly known as the Prime rate)
or the sum of 0.5% per annum and the Federal Funds Rate; plus a margin of 2.25%.
As of March 31, 2010, there were no outstanding Base Rate Loans.
Borrowings made as Eurodollar Rate Loans bear Interest at the Eurodollar Rate, defined as the
rate offered for deposits in Dollars for the applicable Interest Period appearing on Reuters Screen
LIBOR01; plus a margin of 2.25%. The Company can select to fix the applicable Libor Rate for the
Eurodollar Rate Loans at one, two, three or six month options.
The Senior Credit Facility also incurred an unused commitment fee equal to 0.50% per annum,
payable quarterly. The Company incurred $0 and $0.52 million of unused commitment fee for the three
months ended March 31, 2010 and 2009, respectively.
As previously mentioned in Note 6, on September 2, 2009 the Company entered into a forbearance
agreement with the Senior Lenders under the Senior Credit Facility and the Securities Purchase
Agreement. The forbearance agreement effectively resulted in the termination of the Senior Credit
Facility, and reduced the credit commitment to $0. At March 31, 2010, there were no amounts
outstanding under the Senior Credit Facility. The forbearance agreement with the Senior Lenders
also stipulates that the borrowing base facility cannot be utilized with respect to any future
films.
The default under the Senior Credit Facility was based on a provision included in a waiver,
consent and amendment agreement, dated February 27, 2009. The provision stipulated that the Company
was required to utilize any additional borrowing base availability to establish a cash reserve
account of up to $5 million no later than July 31, 2009 in order to enable the Company to be able
to service an obligation it had entered into pursuant to the license agreement for the film Law
Abiding Citizen with the U.S. distributor, Overture Films.
The Company was able to extend the deadline from July 31, 2009 to August 28, 2009, however the
Company was not able to establish the required reserve of $5 million, hence an Event of Default
occurred on such date under the Credit Agreement and Securities Purchase Agreement.
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The balance in the above stated cash reserve account as of August 29, 2009 was $1.22
million. As part of the forbearance agreement with the Note Holders, it was agreed that the Note
Holders would provide additional funding of $3.78 million in order to provide the Company with the
ability to fulfill its contractual obligation it had with Overture Films.
As part of the forbearance agreement, the Senior Lenders and the Note Holders required that
the balance in the Interest Reserve Account on September 2, 2009 of approximately $4.29 million be
applied against the outstanding balance of the Senior Credit Facility and the requirement for the
Interest Reserve Account was eliminated.
The Senior Credit Facility was paid in full and terminated on November 24, 2009.
8. Warrants
On June 27, 2007, in connection with the terms of the Securities Purchase Agreement, the
Company issued warrants to the Note Holders of the Second Lien Notes to acquire an aggregate of
1,538 Class C Units of the Company, at a purchase price of $0.01 per Class C Unit. At issuance, the
warrants had a fair value of $1.30 million in the aggregate, resulting in a discount to the Second
Lien Notes (see Note 6). The warrants were exercisable at any time after the Class B members (Note
9) had received distributions equal to the amounts contributed by the Class B members and their
preferred return, as defined in the Operating Agreement, until June 27, 2017.
On June 27, 2007, the Company issued 1,282 Class D warrants and 641 Class E warrants, with an
exercise price of $0.01 per Unit, to certain consultants of the Company. The warrants were
exercisable at any time after the Class B members (Note 9) had received distributions equal to the
amounts contributed by the Class B members and their preferred return, as defined in the Operating
Agreement, until June 27, 2017.
The Class C, D and E Warrants were exercisable into Class C, D and E member units,
respectively, as discussed in Note 9. Previously, the warrants had been classified as liabilities
in the accompanying consolidated balance sheet due to the redeemable feature of the related member
units.
As part of the recapitalization agreement the Company entered into with HWMP on December 2,
2009, the Class D and Class E warrants were redeemed by the Company for $1.00 each (see Note 9).
Additionally, as part of the Eton Park Buyout Agreement (see Note 6) the Class C units were
redeemed for $1.00 in December 2009.
9. Redeemable Member Units
On June 8, 2007, the Company executed the Operating Agreement, and issued an aggregate of
25,000 units of Class B redeemable units at a value of $1,000 per unit, and received net proceeds
of $23.80 million (net of allocated underwriting fees, commissions, and other issuance costs in
aggregate of $1.20 million) on the closing date of the Senior Credit Facility, as well as the
Securities Purchase Agreement.
As part of the recapitalization and the HWMP agreement, the Companys operating agreement was
revised on December 2, 2009 and the initial Class B units were converted to Class B-1 units.
On November 13, 2008 the Company issued an additional 7,644 units of Class B redeemable units
at a value of $1,000 per unit and received proceeds of $7.64 million. As part of the amended and
restated Operating agreement on December 2, 2009, these Class B units were converted to Class B-2
units.
On December 2, 2009, the Company entered into an agreement with HWMP pursuant to which HWMP
agreed to make equity investments in the Company in exchange for the issuance to HWMP of Class G
units. HWMP also agreed to make equity investments in Earthbound Films, LLC and Earthbound
Productions, LLC (collectively, the Earthbound Films Entities), 8439 Holdings, LLC (8439) and
8440 Holdings, LLC (8440), and the Company and HWMP entered into a put/call agreement pursuant to
which the parties agreed that HWMP would transfer to the Company 100% of the equity of Earthbound
Films, 8439 and 8440 in exchange for the issuance by the Company to HWMP of Class G units. The
primary purpose of this transaction was to facilitate the financing by HWMP of certain production
expenses of Earthbound incurred by the Earthbound Films Entities as well as the acquisition of new
motion picture development projects, but to allow the Company to subsequently acquire all rights to
Earthbound and other assets then held by the Earthbound Films Entities, 8439 and 8440 by acquiring
100% of the equity of each such entity in consideration for the issuance to HWMP of Class G units.
Upon exercise of the put/call agreement, Class G membership units will constitute a majority of the
equity of TFD.
As consideration for the purchase by the Company of such equity interests pursuant to the Put
Notice or the Call Notice, the Company shall issue such number of Class G Units to HWMP so that
HWMP shall receive an additional
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percentage in the Company equal to a fraction, the numerator of
which is the aggregate amount of cash that HWMP
actually contributed to the capital of its subsidiaries, and the denominator of which is $0.18
million, subject to certain limitations set forth in the Operating Agreement. The rights under the
Put Notice and the Call Notice expire if the Company or its successor-in-interest does not
consummate an Equity Transaction on or before the later of (i) June 1, 2010, or (ii) such later
date as Eton Park may agree the Company or its successor-in-interest may consummate an Equity
Transaction pursuant to the Buyout Agreement, provided that such date shall not be later than June
1, 2010.
The Call Notice was exercised on April 26, 2010. See Subsequent Events Note 12.
As part of the HWMP agreement Class D and E units were redeemed for $1.00 respectively. The
former holders of the Class D units were issued Class J units representing 1%.
The aggregate investment commitment of HWMP through December 31, 2009 was a minimum of $7.83
million. Of this amount, $3.33 million was committed for investment in or for the benefit of the
Company, while $4.5 million was committed for investment in the Earthbound Films Entities, 8439 and
8440.
Additionally, HWMP committed an additional $6.5 million if the Equity Transaction is delayed
past January 10, 2010. Per the agreement, such investment may be funded either in a lump sum on
January 10, 2010 or on a monthly basis in accordance with the Budget funding requirements. The
Company will issue additional Class G units, which will dilute existing Class B units and Class J
units until they reach a dilution floor of 15.00% and 0.25% respectively. As of March 31, 2010, the
Company had received $2.0 million to support Budget requirements and $7.36 million was invested in
Earthbound Films. As such, 2,000 Class G units were issued to HWMP in consideration of its
additional investment.
On December 2, 2009, the Company issued 500 Class G units to Sandeman, Ltd. for a prior
investment of $0.50 million.
Under the Operating Agreement, at any time after the 10th anniversary of the Closing Date,
Class B Members holding at least 25% of the Class B Units and Class G Members holding at least 25%
of the Class G units will have the right to deliver a Put Option Notice to the Company, requiring
the Company to purchase for an amount equal to the fair market value, all of the Class B units or
Class G units.
Following the delivery of the Put Option Notice, the applicable Class B Members, Class G
Members and the Company shall negotiate in good faith to attempt to determine the Put Option Price
for the Put Interests and the other Interests based on the Company being sold for its fair market
value with the net proceeds remaining after payment of any indebtedness being distributed.
The Class B and Class G redeemable units contain certain provisions that allow the holder to
redeem the units for cash after a certain date. As redemption under these circumstances is not
solely within the Companys control, the Class B and Class G redeemable units are classified
outside of members equity.
The Company accretes changes in the redemption value of the redeemable units as a deemed
dividend on the Class B and Class G Units over the period from the date of issuance to the earliest
redemption date using the effective interest method.
In connection with the Executive Services Agreement entered between the Company and certain
Executives, the Company issued 640 Class A units with a fair market value of $900 per unit and
1,000 Class F-1 units with a fair market value of $1,000 per unit on the effective date of each
Agreement. These units had a vesting term of three years, of which 25% shall vested on the
Effective Date and 25% on each anniversary thereafter, provided, however, that vesting should cease
if the Executives employment terminates for any reason.
As part of the amendment to the Operating Agreement on November 25, 2009, the Company redeemed
all outstanding Class A and F-1 units for $1.00 per Class of units. In exchange the Company issued
Class H units to the unit holders. Class H units originally vested over a period of 5 years. As
such, the Company recorded compensation expense of $0.02 million for the Class H units for the year
ended December 31, 2009.
As of December 31, 2008, the Company had issued 74 Management Incentive Shares (MIS Units)
at $900 per MIS Unit for a total value of $0.07 million, leaving 273.5 MIS Units outstanding. The
MIS Units vest 20% per year beginning either on the date of issuance, or upon the second
anniversary of issuance.
As part of the amendment to the Operating Agreement on November 25, 2009, the Company
cancelled all outstanding MIS Units. In exchange the Company issued Phantom Class H units to the
unit holders. Phantom
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Class H units originally vested over a period of 5 years. As such, the
Company recorded compensation expense of $0.03
million for the Phantom Class H units for the year ended December 31, 2009.
Per an amendment to the December 14, 2009 meeting of the Board of Directors, the Board
authorized full vesting of the Class H and Phantom Class H Units as of January 1, 2010. The Company
recorded compensation expense for the full vesting of Class H and Phantom H at January 1, 2010 in
the amount of $2.58 million.
The Company also issued 1,000 Class F-2 Units to two of the Companys investors. These units
vested in the same manner as the Class A and F-1 Units described above.
As part of the amendment to the Operating Agreement on November 25, 2009, the Company redeemed
all outstanding F-2 Units for $1.00. No units were issued in exchange for the redemption.
Unit Based Compensation activity during the three months ended March 31, 2010 and 2009 is as
follows:
Weighted | ||||||||
Average | ||||||||
Exercise | ||||||||
Units | Price | |||||||
(Units and per unit prices not in | ||||||||
thousands) | ||||||||
Outstanding at December 31, 2008 |
1,913.5 | $ | 952 | |||||
Granted (MIS) |
| | ||||||
Forfeited (MIS) |
| | ||||||
Outstanding at March 31, 2009 |
1,913.5 | 952 | ||||||
Granted (Phantom H units) |
1,580 | 13 | ||||||
Granted (Class H) |
15,352 | 13 | ||||||
Forfeited (MIS) |
(9 | ) | 900 | |||||
Redeemed (MIS) |
(1,904.5 | ) | 952 | |||||
Outstanding at December 31, 2009 |
16,932 | 952 | ||||||
Granted (Phantom H units) |
93,243 | 10 | ||||||
Granted (Class H) |
905,786 | 10 | ||||||
Forfeited (MIS) |
| |||||||
Outstanding at March 31, 2010 |
1,015,961 | $ | 10 | |||||
No stock based awards were outstanding as of March 31, 2010. Information relating to the stock
based awards at March 31, 2009 is as follows:
Stock Based Awards Outstanding | Stock Based | |||||||||||||||||||||||
Weighted | Compensation | |||||||||||||||||||||||
Average | Exercisable | |||||||||||||||||||||||
Remaining | Weighted | Weighted | ||||||||||||||||||||||
Contractual | Average | Average | ||||||||||||||||||||||
Exercise | Life | Exercise | Exercise | |||||||||||||||||||||
Price | Number | (Years) | Price | Number | Price | |||||||||||||||||||
(Amounts not in thousands) | ||||||||||||||||||||||||
2009 |
||||||||||||||||||||||||
$ | 1,000 | 1,000 | 2.00 | $ | 1,000 | 500 | $ | 1,000 | ||||||||||||||||
$ | 900 | 913.5 | 2.48 | $ | 900 | 394 | $ | 900 | ||||||||||||||||
$ | 900 $1,000 | 1,913.5 | 2.18 | $ | 951 | 894 | $ | 956 | ||||||||||||||||
The Class H, Phantom H and J units have certain Tag-Along Rights as defined in the Operating
Agreement, which allow the members to redeem the units for cash, if and when such rights are
exercised by the Class B members and Class G members. As redemption under these circumstances is
not solely within the Companys control, these units were classified outside of members equity.
In the event that either (i) Members holding at least 50% of the Class G units and at least
50% of the Class B units, or (ii) Members holding at least 50% of the Class G units (in each case,
the Electing Members) has indicated the desire to effect a sale of 100% of its units at any time
after June 8, 2012, with respect to a determination by Class G and Class B Members, or after June
8, 2017 with respect to determination by the Class G Members, the Electing Members may request by
delivery of a Drag-Along notice setting forth the price in cash to be paid by the proposed
purchaser for all of such Members Interests. Other Members shall have the obligation to sell
all of their interests.
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Each Member shall own the number and type of Interest as set forth in the Operating Agreement.
The Profits or Losses of the Company shall be allocated to the Capital Accounts of the Members such
that the Capital Accounts of the Members are as nearly as possible equal (proportionately) to the
amounts that would be distributed to the Members if all assets of the Company were sold as of the
end of such period for cash equal to their book values, all liabilities of the Company were
satisfied to the extent required by their terms and the net proceeds were distributed
(Hypothetical Liquidation).
Redeemable member units as of March 31, 2010 is as follows:
Total | ||||||||||||||||||||||||
Class B-1 | Class B-2 | Class G | Class H | Class J | Redeemable | |||||||||||||||||||
(Amounts in thousands) | Units | Units | Units | Units | Units | Units | ||||||||||||||||||
Balance, December 31, 2009 |
$ | 23,970 | 7,328 | $ | 3,437 | $ | 2,096 | 175 | $ | 37,006 | ||||||||||||||
Issuance of Units |
| | $ | 2,000 | | | 2,000 | |||||||||||||||||
Deemed dividend on Class B-1 & B-2 |
34 | 10 | | | | 44 | ||||||||||||||||||
Unit-based compensation |
| | | 2,575 | | 2,575 | ||||||||||||||||||
Balance, March 31, 2010 |
$ | 24,004 | 7,338 | $ | 5,437 | $ | 4,671 | 175 | $ | 41,625 | ||||||||||||||
10. Commitments and Contingencies
The Company leases office space under a non-cancelable operating lease, which expires June
2010. The Company signed a lease for office space under a non-cancelable operating lease, which
commenced March 22, 2010 and expires July 21, 2015. The future minimum rental payments under the
lease agreements at March 31, 2010 are as follows:
Years Ending December 31, | Amount | |||
(Amounts in | ||||
thousands) | ||||
2010 |
$ | 528 | ||
2011 |
677 | |||
2012 |
697 | |||
2013 |
718 | |||
2014 |
739 | |||
2015 |
435 | |||
Total minimum lease payments |
$ | 3,794 | ||
Expense incurred under the lease agreement was $0.09 million and $0.08 million for the three
months ended March 31, 2010 and 2009, respectively.
The Company has employment contracts with certain of its key employees. The contracts will
terminate upon a termination event as defined in the contracts, normally requiring notice by the
Company or the employee. Future minimum payments under the employment contracts at December 31,
2009 are as follows:
Years Ending December 31, | Amount | |||
(Amounts in | ||||
thousands) | ||||
2010 |
$ | 3.00 | ||
2011 |
4.00 | |||
2012 |
0.70 | |||
Thereafter |
| |||
Total |
$ | 7.70 | ||
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Legal Matters
The Company may, from time to time, be involved in legal proceedings, regulatory actions,
claims and litigation arising in the ordinary course of business. These matters are not expected to
have a material adverse effect upon the Companys financial statements.
Indemnification
Under its Operating Agreement, the Company has agreed to indemnify its Directors, Officers,
Members and Affiliates of a Member, and any Representative of a Member and its Affiliates, and any
employee of the Company and its Affiliates (collectively Covered Persons) for certain events or
occurrences arising as a result of the Covered Persons serving in such capacity, that require the
Company, subject to certain exceptions, to indemnify the Covered Persons to the fullest extent
authorized or permitted by its Operating Agreement. The maximum potential amount of future payments
the Company could be required to make under these indemnification agreements is unlimited. The
Company believes the estimated fair value of these indemnification agreements is minimal and has no
liabilities recorded for these agreements as of March 31, 2010.
11. Going Concern
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. For the years ended December 31, 2009 and 2008, cash
flows from operating activities were not sufficient to support its operations. As of December 31,
2009, 2008, and 2007 the Company had incurred a net loss of $9.98 million, $14.10 million, and
$5.63 million, respectively, and an accumulated deficit of $30.07 million, $19.93 million, and
$5.90 million, respectively.
The Company was unable to pay a scheduled quarterly interest payment on June 30, 2009 under
the Second Lien Notes, and in addition, the Company was unable to fully fund a required reserve
account by the August 28, 2009 deadline required under the terms of the Senior Credit Facility
resulting in the occurrence of Events of Default under the Senior Credit Facility and Securities
Purchase Agreement. These matters, among others, raise substantial doubt about the Companys
ability to continue as a going concern.
Managements plans to ensure the Company continues as a going concern include the paydown of
outstanding debt of the Company using proceeds from the revenues generated from the film title Law
Abiding Citizen which was released on October 16, 2009 and through the Buyout Agreement the Company
entered into on November 23, 2009 with HWMP, a company related through common ownership, and the
Note Holders of the Second Lien Notes, Eton Park CLO Management 1, Eton Park CLO Management 2, Eton
Park Master Fund, Ltd., and Eton Park Fund, L.P. Under the terms of the Buyout Agreement, should
the Company consummate an Equity Transaction, as defined therein, either through an initial public
offering (the Offering) or through a private equity investment (the Private Investment), the
Company agrees to pay Eton Park a portion of the proceeds received to repay the Second Lien Notes.
Upon an Offering, the Company will pay to Eton Park the lesser of (a) $37.50 million or (b) the
outstanding obligations owing to Eton Park under the Second Lien Notes less $1.50 million, and, in
addition thereto, will issue and deliver to Eton Park the number of shares of common stock having a
value of $1.50 million. If the Offering is not consummated and a Private Investment is completed,
the Company will pay the lesser of (i) $39.00 million or (ii) the outstanding obligations owing to
Eton Park under the Second Lien Notes as of the date of the receipt of such funds.
Effective immediately upon receipt by Eton Park of the applicable initial cash paydown
described above upon consummation of an Equity Transaction, the Companys obligations to Eton Park
under the Second Lien Notes will be terminated, and all liens securing those obligations will be
extinguished.
In addition to the initial cash paydown to be paid by the Company to Eton Park upon
consummation of an Equity Transaction as described above, to the extent that the aggregate
outstanding obligations owing to Eton Park under the Second Lien Notes at the time of such initial
cash paydown exceeds $39.00 million (such excess, the Short Fall Amount), the Company will also
pay to Eton Park an amount equal to all cash receipts actually received by the Company from
Overture Films, LLC (Overture) under the Companys distribution agreement with Overture in
respect of the film Law Abiding Citizen until the Short Fall Amount is paid in full, together with
any accrued and unpaid interest thereon at a rate of 16% per annum.
As part of the Buyout Agreement, HWMP agrees to make certain equity investments in the Company
as specified therein in exchange for the issuance to HWMP of Class G units. These equity
investments will be used to fund
operations of the Company until the consummation of the Offering
(see Note 9).
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While the Company continues to produce new film assets, adverse changes in market conditions
or limits on the Companys ability to obtain financing could limit the Companys production of new
films. The impact of such eventualities could influence future operations of the Company.
12. Subsequent Events
On April 26, 2010, The Film Department Holdings, LLC converted to a Delaware corporation by
the name of The Film Department Holdings, Inc. (TFDI). The Company also exercised its Call Right
in accordance with the put/call agreement entered into with HWMP on December 2, 2009 (see Note 9).
At the issuance of the Call Notice, HWMP transferred to TFDI 100% of the equity of Earthbound
Films, 8439 and 8440 in exchange for the issuance by the Company to HWMP of 7,986 Class G units.
Concurrent with the closing of its initial public offering, the Company intends to enter into
a loan and security agreement with H&W Movie Partners, LLC, or an entity managed or controlled by
it, pursuant to which the Company will incur a loan in the principal amount of $15.00 million (the
HWMP Loan). The loan will be repayable in full on the second anniversary of the closing date of
the offering and will bear interest at the rate of ten percent (10%) per annum, payable quarterly
in arrears. As partial consideration for extending the loan, the Company will also issue to the
lender warrants to purchase 150,000 shares of common stock at an exercise price equal to the
initial public offering price.
As of June 1, 2010, the Company owed approximately $28.42 million to Eton Park under the Second
Lien Notes. The Company intends to repay in full the Second Lien Notes using the $15.00 million in
proceeds from the HWMP Loan, approximately $11.92 million from the proceeds of the initial public
offering, and issuing and delivering the number of shares of common stock having a value of the
remaining $1.50 million.
Management has evaluated subsequent events and their impact on the reported results and
disclosures through May 28, 2010, which is the date these financial statements were issued.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the related notes included in
Item 1, Consolidated Financial Statements in this quarterly report on Form 10-Q and our
consolidated financial statements and related notes for the fiscal year ended December 31, 2009,
which are included in the Companys Post-Effective Amendment No. 3 to its Registration Statement on
Form S-1, filed with the Commission on May 28, 2010.
References in this Form 10-Q to The Film Department, TFD, the Company, we, us, and our,
refer to The Film Department Holdings LLC prior to the Corporate Conversion (as defined below),
unless otherwise specified.
Cautionary Statement Regarding Forward-Looking Statements
The statements in this report include forward-looking statements. These forward-looking statements
are based on our managements current expectations and beliefs and involve numerous risks and
uncertainties that could cause actual results to differ materially from expectations. You should
not rely upon these forward-looking statements as predictions of future events because we cannot
assure you that the events or circumstances reflected in these statements will be achieved or will
occur. You can identify forward-looking statements by the use of forward-looking terminology,
including the words believes, expects, may, will, should, seeks, intends, plans,
estimates or anticipates or the negative of these words and phrases or other variations of
these words and phrases or comparable terminology.
For a discussion of the factors that could cause actual results to differ materially from the
forward-looking statements, see the Risk Factors set forth in the Companys Post-Effective
Amendment No. 3 to its Registration Statement on Form S-1, filed with the Securities and Exchange
Commission (the Commission) on May 28, 2010 and the other risks and uncertainties that are set
forth elsewhere in this report or detailed in our other Commission reports and filings. We assume
no obligation to update these forward-looking statements.
Introduction
Managements Discussion and Analysis (MD&A) is intended to facilitate an understanding of our
business and results of operations. MD&A consists of the following sections:
| Corporate Conversion | ||
| Overview | ||
| Results of Operations | ||
| Liquidity and Capital Resources | ||
| Off Balance Sheet Arrangements |
Corporate Conversion
In connection with the planned initial public offering of our common stock, we converted from
a Delaware limited liability company to a Delaware corporation named The Film Department Holdings,
Inc. on April 26, 2010 (the Corporate Conversion). The Company was a Delaware limited liability
company at all times during the period January 1, 2010 through March 31, 2010, the period covered
by this report on Form 10-Q.
Overview
The Film Department is an independent movie finance and production company founded in 2007 by
Mark Gill and Neil Sacker, two experienced film industry executives. Since that time we have
produced two films and have concluded filming and entered post-production on a third. The first
film released in the U.S., Law Abiding Citizen, has achieved $73 million in gross revenue at the
North American box office and more than $121 million worldwide to date (which includes the North
American box office). The Companys second film, The Rebound, has been released internationally
and is targeted for a Summer 2010 U.S. theatrical release.
Our business strategy is to produce four motion pictures with net budgets between $10 million
and $45 million each year for release worldwide. The Company also plans to launch a U.S.
distribution business, in which we would distribute movies that we produce along with approximately
two to six additional movies produced by third parties. In general, motion pictures produced and/or
distributed by The Film Department will be exhibited theatrically in the
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U.S. and internationally, followed by their release on DVDs, VOD, pay and basic cable
television, broadcast television, digital media and other outlets (which may in some cases include
exhibitors such as airlines and hotels).
Results of Operations
The following discussion provides an analysis of our results of operations and should be read
in conjunction with our consolidated financial statements. The operating results of the periods
presented were not significantly affected by general inflation in the U.S. economy. The following
table sets forth the components of net loss for the periods indicated:
Three Months | Three Months | |||||||
Ended | Ended | |||||||
March 31, | March 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | (Unaudited) | |||||||
Revenues |
$ | 5,821 | $ | | ||||
Expenses |
||||||||
Direct operating expense |
4,026 | | ||||||
Distribution and marketing expense |
138 | 242 | ||||||
General and administrative expense |
3,963 | 1,739 | ||||||
Depreciation and amortization expense |
48 | 48 | ||||||
Total expenses |
$ | 8,175 | $ | 2,029 | ||||
Operating loss |
(2,354 | ) | (2,029 | ) | ||||
Other expenses (income) |
||||||||
Interest expense |
||||||||
Contractual interest expense |
1,413 | 1,221 | ||||||
Amortization of debt discount |
267 | 46 | ||||||
Amortization of debt issuance costs |
74 | 303 | ||||||
Amortization of debt administration fees |
| 31 | ||||||
Total interest expense |
$ | 1,754 | $ | 1,601 | ||||
Other expense |
| | ||||||
Interest and other (income) |
| (9 | ) | |||||
Investment Loss |
| | ||||||
Total other expenses, net |
1,754 | 1,592 | ||||||
Loss before income taxes |
(4,108 | ) | (3,621 | ) | ||||
Income tax provision |
| | ||||||
Net loss |
$ | (4,108 | ) | $ | (3,621 | ) | ||
Realized (Unrealized) Investment Loss |
||||||||
Comprehensive Loss |
Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009
Revenue
Our revenue for the three months ended March 31, 2010 was $5.82 million as compared to revenue
of $0 for the three months ended March 31, 2009. This increase was primarily due to revenue
recognition of international sales of The Rebound and Law Abiding Citizen totaling $1.04 million
and $4.54 million, respectively. The recognition of revenue from sales of international delivery
materials to international licensees of The Rebound and Law Abiding Citizen for the three months
ended March 31, 2010 was $0.24 million as compared to $0 for the three months ended March 31, 2009.
Direct Operating Costs
Direct operating costs for the three months ended March 31, 2010 was $4.03 million as compared
to $0 for the three months ended March 31, 2009. This increase primarily represents film
amortization expense and residual and participation expense associated with the international
release of The Rebound and Law Abiding Citizen totaling $0.45 million and $3.36 million,
respectively.
Distribution and marketing expense
Our distribution and marketing expenses for the three months ended March 31, 2010 were $0.14
million, a decrease of $0.10 million, or 43%, as compared to distribution and marketing expenses of
$0.24 million for the three months ended March 31, 2009. This decrease was primarily due to
decreased participation in international film markets during the first quarter of 2010.
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General and administration expense
General and administration expenses for the three months ended March 31, 2010 were $3.96
million, an increase of $2.22 million, or 128%, as compared to general and administration expenses
of $1.74 million for the three months ended March 31, 2009. The increase is due to stock
compensation expense related to the full vesting of Class H and Phantom Class H units on January 1,
2010 in the amount of $2.58 million. This increase is partially offset by decreased salaries and
benefits expense as a result of lower employee headcount.
Depreciation and amortization expense
Depreciation and amortization expense includes depreciation of property, plant, and equipment.
Depreciation and amortization expense for the three months ended March 31, 2010 was $0.48 million
and did not vary from depreciation amortization expense of $0.48 million for the three months ended
March 31, 2009.
Interest expense
Our interest expense for the three months ended March 31, 2010 was $1.75 million, an increase
of $0.15 million from $1.60 million for the three months ended March 31, 2009. This was primarily a
result of accelerated amortization of the debt discount related to the $30 million second lien note
purchase agreement (the Securities Purchase Agreement) governing $30 million of secured second
lien notes (the Second Lien Notes) in September 2009. This increase was partially offset by a
decrease in amortization of debt issuance costs related to the forbearance agreements for the
Credit Agreement governing the Senior Credit Facility (as defined in Note 1 to the Consolidated
Financial Statements in Item 1 of this Form 10-Q). As part of the forbearance agreements, the
scheduled maturity dates of the Senior Credit Facility and for the Second Lien Notes were amended.
This change led to an acceleration of debt issuance costs including full acceleration of Senior
Credit Facility debt issuance costs as of December 31, 2009. Additionally, under the forbearance
agreement related to the Second Lien Notes, the interest rate was changed from 12% to 16%, which
led to an increase in interest expense.
Other expenses
No material variance.
Interest and other (income)
No material variance.
Net Loss
Our net loss for the three months ended March 31, 2010 was ($4.11 million), an increase of ($0.49
million), or 13%, as compared to net loss of ($3.62 million) for the three months ended March 31,
2009, and was primarily due to the increased revenue offset by stock compensation expense related
to the vesting of Class H and Phantom Class H units, as discussed above.
Liquidity and Capital Resources
General
The Company commenced operations on June 27, 2007 and, at formation, issued equity interests
to various investors in exchange for an aggregate investment of $25 million. The Company
subsequently issued additional equity interests to various investors for aggregate additional
investments (not including the HWMP Investment described below) of $7.6 million. In addition, on
June 27, 2007, the Company also raised $30 million in operating capital through the issuance of
Second Lien Notes and entered into the Senior Credit Facility with borrowing availability of up to
$140 million (which credit facility was subsequently repaid in full from revenues generated by Law
Abiding Citizen and The Rebound and terminated in November, 2009). The Company paid approximately
$7.5 million in closing costs for fees, legal costs, finders fees and other costs associated with
entering into the Senior Credit Facility and issuing the Second Lien Notes.
Our principal ongoing uses of cash are to meet working capital requirements, fund debt
obligations and to finance our operations.
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Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009
Cash provided by operating activities in the three months ended March 31, 2010 was $9.69
million compared to cash used in operating activities in the three months ended March 31, 2009 of
$32.61 million. The positive variance was caused by the fact that the company did not have any
significant production outflows in the first quarter of 2010 compared to the prior year when Law
Abiding Citizen was in principal photography. Additionally, the company collected funds from the
buyer of the tax credit of the state of Pennsylvania related to the production of Law Abiding
Citizen in the first quarter of 2010.
Cash provided by investing activities in the three months ended March 31, 2010 was $0 as
compared to $10.35 million for the three months ended March 31, 2009. The Company did not purchase
or sell short-term investments during the three months ended March 31, 2010. During the three
months ended March 31, 2009, the Company sold short-term investments of $10.35 million.
Cash used in financing activities in the three months ended March 31, 2010 was $8.89 million
compared to cash provided by financing activities of $15.22 million for the three months ended
March 31, 2009. During the three months ended March 31, 2009, the Company drew $15.22 million in
proceeds from the Senior Credit Facility. During the three months ended March 31, 2010, the Company
repaid $10.89 million of the Second Lien Notes. Additionally, the company issued Class G units to
HWMP in exchange for an equity contribution of $2 million during the first quarter of 2010.
Liquidity and Capitalization as of December 31, 2009 and March 31, 2010
We are highly leveraged. As of December 31, 2009 and March 31, 2010, we had $36.49 million and
27.28 million, respectively, in aggregate indebtedness consisting of the aggregate principal amount
outstanding of the Second Lien Notes. As of November 30, 2009, the debt under the Senior Credit
Facility had been repaid in full from revenues generated by Law Abiding Citizen and The Rebound.
Subject to any contractual restrictions, we and our subsidiaries, affiliates or significant
stockholders may from time to time, in their sole discretion, purchase, repay, redeem or retire any
of our outstanding debt or equity securities (including any publicly issued debt or equity
securities), in privately negotiated or open market transactions, by tender offer or otherwise.
As of December 31, 2009, we had total cash and cash equivalents of $1.62 million including
$0.58 million of restricted cash in an overhead reserved controlled and paid to the Company
bi-weekly by the administrative agent for the Companys first and second-lien lenders. As of March
31, 2010, we had total cash and cash equivalents of $1.15 million including $0.14 million of
restricted cash.
Off-Balance Sheet Arrangements
In conjunction with the licensing agreement for domestic distribution rights of Law Abiding
Citizen, the Company guaranteed a shortfall in distribution expenses that Overture Films (the
films third-party distributor) might have incurred on Law Abiding Citizen. As the film is now
profitable on an ultimate basis, management does not anticipate any shortfall. Going forward,
management does not expect to incur such obligations, as TFD will be the U.S. distributor of its
films, and international licensing agreements do not customarily call for such arrangements.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, including the Chief Executive Officer (CEO) and the Chief Financial Officer
(CFO), has carried out an evaluation of the effectiveness of our disclosure controls and
procedures as of March 31, 2010, pursuant to Exchange Act Rules 13a-15(e) and 15(d)-15(e). Based
upon that evaluation, our CEO and CFO have concluded that as of such date, our disclosure controls
and procedures in place are effective.
Changes in Internal Control Over Financial Reporting
There has been no change in TFDs internal control over financial reporting during the three months
ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect,
its internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Pursuant to the the Buyout Agreement described at Note 6 to Item 1 of this report on Form 10-Q, the
Companys predecessor, The Film Department Holdings LLC, issued Class G membership units to H&W
Movie Partners, LLC. Class G units issued to HWMP pursuant to the Buyout Agreement and during the
period covered by this report include (1) 600 units on February 24, 2010 in consideration of an
investment of $600,000, (2) 700 units on March 1, 2010 in consideration for an investment of
$700,000, (3) 700 units on March 10, 2010 in consideration for an investment of $700,000 and (4) 20
shares on March 26, 2010 in consideration of an investment of $20,000.
All securities issued were exempt from registration with the Securities and Exchange Commission
under Section 4(2) of the Securities Act of 1933 and the rules and regulations promulgated
thereunder, and were subsequently converted to common stock in the Company pursuant to the
Corporate Conversion.
Item 3. Defaults Upon Senior Securities
As described in Note 6 to Item 1 of this report on Form 10-Q, we were unable to pay scheduled
quarterly interest payments totaling $2.16 million on June 30, 2009 under the Second Lien Notes
(the Second Lien Note Default). Despite the occurrence of the Second Lien Note Default, the
Company negotiated forbearance agreement in early September 2009 with the noteholders, pursuant to
which the noteholders agreed to forebear from exercising any default rights and remedies until June
30, 2010. The Second Lien Notes currently bear interest at a default rate of 16% per annum.
Item 6. Exhibits
10.6
|
First Amendment to Second Amended and Restated Executive Services Agreement by and between Mark Gill and The Film Department Holdings LLC, dated March 30, 2010 (1) | |
10.12
|
First Amendment to Second Amended and Restated Executive Services Agreement by and between Neil Sacker and The Film Department Holdings LLC, dated March 30, 2010 (2) | |
10.19
|
First Amendment to Amended and Restated Executive Services Agreement by and between Robert Katz and The Film Department Holdings LLC, dated March 30, 2010 (3) | |
10.29
|
Fifth Amendment to Employment Agreement by and between Bernd Stephan and The Film Department Holdings LLC, dated February 8, 2010 (4) | |
10.35
|
Loan and Security Agreement by and between Earthbound Films, LLC and Union Bank, N.A., dated January 29, 2010 (5) | |
10.36
|
Investment Advisory Services Agreement by and between The Film Department Holdings LLC and Girard Securities, Inc., dated March 30, 2010 (6) | |
31.1
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended (7) | |
31.2
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended (7) | |
32.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (7) | |
32.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (7) |
(1) | Incorporated by reference to Exhibit 10.6 to the Companys Amendment No. 4 to Registration Statement on Form S-1, filed with the Commission on April 6, 2010. | |
(2) | Incorporated by reference to Exhibit 10.8 to the Companys Amendment No. 4 to Registration Statement on Form S-1, filed with the Commission on April 6, 2010. | |
(3) | Incorporated by reference to Exhibit 10.10 to the Companys Amendment No. 4 to Registration Statement on Form S-1, filed with the Commission on April 6, 2010. | |
(4) | Incorporated by reference to Exhibit 10.13 to the Companys Amendment No. 2 to Registration Statement on Form S-1, filed with the Commission on March 5, 2010. | |
(5) | Incorporated by reference to Exhibit 10.19 to the Companys Amendment No. 4 to Registration Statement on Form S-1, filed with the Commission on April 6, 2010. |
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(6) | Incorporated by reference to Exhibit 10.20 to the Companys Amendment No. 4 to Registration Statement on Form S-1, filed with the Commission on April 6, 2010. | |
(7) | Filed herewith. |
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SIGNATURES
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.
THE FILM DEPARTMENT HOLDINGS, INC. |
||||
By | /s/ Mark Gill | Dated: June 10, 2010 | ||
Mark Gill | ||||
Chief Executive Officer |
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EXHIBIT INDEX
10.6
|
First Amendment to Second Amended and Restated Executive Services Agreement by and between Mark Gill and The Film Department Holdings LLC, dated March 30, 2010 (1) | |
10.12
|
First Amendment to Second Amended and Restated Executive Services Agreement by and between Neil Sacker and The Film Department Holdings LLC, dated March 30, 2010 (2) | |
10.19
|
First Amendment to Amended and Restated Executive Services Agreement by and between Robert Katz and The Film Department Holdings LLC, dated March 30, 2010 (3) | |
10.29
|
Fifth Amendment to Employment Agreement by and between Bernd Stephan and The Film Department Holdings LLC, dated February 8, 2010 (4) | |
10.35
|
Loan and Security Agreement by and between Earthbound Films, LLC and Union Bank, N.A., dated January 29, 2010 (5) | |
10.36
|
Investment Advisory Services Agreement by and between The Film Department Holdings LLC and Girard Securities, Inc., dated March 30, 2010 (6) | |
31.1
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended (7) | |
31.2
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended (7) | |
32.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (7) | |
32.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (7) |
(1) | Incorporated by reference to Exhibit 10.6 to the Companys Amendment No. 4 to Registration Statement on Form S-1, filed with the Commission on April 6, 2010. | |
(2) | Incorporated by reference to Exhibit 10.8 to the Companys Amendment No. 4 to Registration Statement on Form S-1, filed with the Commission on April 6, 2010. | |
(3) | Incorporated by reference to Exhibit 10.10 to the Companys Amendment No. 4 to Registration Statement on Form S-1, filed with the Commission on April 6, 2010. | |
(4) | Incorporated by reference to Exhibit 10.13 to the Companys Amendment No. 2 to Registration Statement on Form S-1, filed with the Commission on March 5, 2010. | |
(5) | Incorporated by reference to Exhibit 10.19 to the Companys Amendment No. 4 to Registration Statement on Form S-1, filed with the Commission on April 6, 2010. | |
(6) | Incorporated by reference to Exhibit 10.20 to the Companys Amendment No. 4 to Registration Statement on Form S-1, filed with the Commission on April 6, 2010. | |
(7) | Filed herewith. |
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