FILM ROMAN INC - 10-K - 20030331 - RESULTS_OF_OPERATIONS
RESULTS OF OPERATIONS
Year Ended December 31, 2002 Compared with Year Ended December 31,
2001
Total revenue decreased by 2%, or $0.8 million, to $43.3 million for
the year ended December 31, 2002, from $44.1 million for the prior year. Total
revenue decreased because in 2001, the Company delivered a movie-of-the-week and
a live action direct-to-video two-hour film, neither of which repeated in 2002.
This decrease was partially offset by an increase in the delivery of prime time
fee-for-services episodes.
The Company delivered 64 prime time and other fee-for-services
episodes during the year ended December 31, 2002, compared to 71 episodes in the
comparable period in 2001. Fee-for-services revenue increased 16%, or $5.8
million, to $41.6 million for the year ended December 31, 2002, from $35.8
million in 2001 as a result of the increase in prime-time episodes delivered.
The Company delivered no "proprietary" episodes for the years ended
December 31, 2002 and 2001. "Proprietary revenue" consists of revenue derived
from the U.S. license fees paid upon the initial delivery of a new episode of
proprietary programming to a U.S. broadcaster and from the exploitation of the
proprietary rights (e.g., merchandising, licensing and/or international
distribution rights) associated with the proprietary episodes in the Company's
library that were initially delivered in prior periods. "Proprietary" revenue
decreased $0.8 million, to a minimal amount for the year ended December 31,
2002, from $0.8 million in 2001.
Other revenue decreased to $1.7 million for the year ended December
31, 2002 compared to $7.5 million for the prior year. This decrease is primarily
due to the delivery of a movie-of-the-week special and a live action
direct-to-video 2-hour film in 2001.
Total cost of revenue decreased by 8%, or $3.4 million, to $41.9
million from $45.3 million in the prior year. Total cost of revenue as a
percentage of sales decreased by 6%, to 97% for the year ended December 31,
2002, from 103% for the year ended December 31, 2001. Cost of revenue decreased
primarily due to a write-down to fair value of certain of the Company's library
episodic programming of $690,000 as a result of changes in estimated future
revenues and a write-down of development projects of $1.9 million as a result of
management's evaluation of the development slate after the selling season in
2001.
Total selling, general and administrative expenses for the year ended
December 31, 2002 decreased by $0.7 million to $3.6 million from $4.3 million
for the year ended December 31, 2001, due to a one-time costs incurred in
connection with the termination of certain administrative employees along with
costs incurred from the Pentamedia transaction in 2001.
16
Operating loss was $2.2 million for the year ended December 31, 2002
as compared to a loss of $5.6 million for the year ended December 31, 2001.
Year Ended December 31, 2001 Compared with Year Ended December 31,
2000
Total revenue decreased by 1%, or $0.5 million, to $44.1 million for
the year ended December 31, 2001, from $44.6 million for the prior year. Total
revenue decreased because the Company delivered fewer prime-time
fee-for-services episodes offset by more Saturday morning fee-for-services
episodes, a movie-of-the-week and a live action direct-to-video two-hour film.
The Company delivered 71 fee-for-services episodes during the year
ended December 31, 2001, compared to 64 episodes in 2000 as a result of
providing services on more shows in 2001 compared to 2000. Fee-for-services
revenue decreased 16%, or $6.8 million, to $35.8 million for the year ended
December 31, 2001, from $42.6 million in 2000 as a result of the decrease in
prime-time episodes delivered. This decrease in revenue was partially offset by
an increase in Saturday morning episodes delivered.
The Company delivered no "proprietary" episodes for years ended
December 31, 2001 and 2000. "Proprietary revenue" consists of revenue derived
from the U.S. license fees paid upon the initial delivery of a new episode of
proprietary programming to a U.S. broadcaster and from the exploitation of the
proprietary rights (e.g., merchandising, licensing and/or international
distribution rights) associated with the proprietary episodes in the Company's
library that were initially delivered in prior periods. "Proprietary" revenue
increased $0.4 million, to $0.8 million for the year ended December 31, 2001,
from $0.4 million in 2000.
Other revenue increased to $7.5 million for the year ended December
31, 2001 compared to $1.6 million for the prior year. This increase is primarily
due to the delivery of a movie-of-the-week special and a live action
direct-to-video 2-hour film.
Total cost of revenue increased by 5%, or $2.2 million, to $45.3
million from $43.1 million in the prior year. Total cost of revenue as a
percentage of sales increased by 6%, to 103% for the year ended December 31,
2001, from 97% for the year ended December 31, 2000. Cost of revenue increased
primarily due to a write-down to fair value of certain of the Company's library
episodic programming of $690,000 as a result of changes in estimated future
revenues and a write-down of development projects of $1.9 million as a result of
management's evaluation of the development slate after the selling season. The
majority of these development costs were incurred prior to 2000.
Total selling, general and administrative expenses for the year ended
December 31, 2001 remained constant at $4.3 million as compared to 2000. The
Company continued to lower its general and administrative costs, however this
decrease was offset by an increase of expensing excess film overhead costs. Such
costs, which typically are reduced from selling, general and administrative
expenses and allocated to the Company's film inventory, would have overburdened
the inventory due to the slowdown in production activity of the Company.
Taking into account these write-downs, operating loss was $5.6 million
for the year ended December 31, 2001, as compared to a loss of $2.9 million for
the year ended December 31, 2000.
17
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company had cash and short-term investments
of approximately $1.3 million compared to $2.8 million at December 31, 2001. The
Company's cash and short-term investment balances have continued to decline and
the Company would expect cash balances to decline further during fiscal 2003.
The Company may need to secure additional equity or debt financing
during fiscal 2003 in order to fund its operations and/or fulfill its growth
strategies. However, operating losses, the Company's declining cash balances,
trends in the entertainment industry adversely affecting independent production
companies similar to the Company and the Company's historical stock performance
may make it difficult for the Company to attract equity investments on terms
that are deemed to be favorable to the Company. In addition, the Company's
losses may make it more difficult for the Company to attract debt financing. As
a consequence, there can be no assurance that the Company would be successful in
arranging for additional equity or debt financing at levels sufficient to meet
its planned needs, should it be required to do so. The failure to obtain such
financing could have an adverse effect on the implementation of the Company's
growth strategies and its ability to successfully run its operation.
The Company has taken a substantial number of actions in order to
implement significant cost reductions, including reducing expenditures for
development projects and in its corporate infrastructure. These cost reductions
could adversely impact the Company's ability to implement its business plans
resulting in a possible adverse impact on its future operations. Although
management believes that its existing cash balances and cash equivalents,
combined with anticipated cash flows will be sufficient to meet its cash
requirements through at least the next 12 months, all of the above conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
For the fiscal year ended December 31, 2002, net cash used in
operating activities was approximately $1.4 million, principally due to cash
used in connection with film production activities. Cash used in investing
activities for the year ended December 31, 2002 was $53,693 due to additions to
property and equipment. No cash was generated by financing activities for the
year ended December 31, 2002.
Cash collected in advance of revenue recognition is recorded as
deferred revenue. As of December 31, 2002, the Company had a balance in its
deferred revenue account of $22.0 million. There will be a net cost of
approximately $3.8 million to the Company (future receipts less future
expenditures) to finish the programs for which cash has been collected in
advance and included in deferred revenue.
The following table summarizes the contractual obligations and
commitments the Company has over the next 5 years:
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 144 establishes a single accounting model
for the impairment of disposal of long-lived assets, including discontinued
operations. SFAS No. 144 changes the criteria that have to be met to classify an
asset as held-for-sale, extends the reporting of discontinued operations to all
components of an entity, and requires expected future operating losses from
discontinued operations to be recorded in the period in which the losses are
incurred. SFAS No. 144 was effective for the Company on January 1, 2002 and
generally is to be applied prospectively. The adoption of SFAS No. 144 had no
impact on the Company's consolidated results of operations or financial
position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123 (SFAS 123)." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation" to provide alternative methods of transition for a
voluntary change to the fair value-based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
SFAS No. 148 is effective for the year ending December 31, 2002. SFAS No.148 has
no material impact on the Company, as it does not plan to adopt the fair-value
method of accounting for stock options at the current time, and will continue to
apply the disclosure only provision of SFAS 123, as amended by SFAS 148. The
Company has included the required disclosures in Note 9.
CHANGE IN ACCOUNTING PRINCIPLE
In June 2000, Statement of Position 00-2 "Accounting by Producers or
Distributors of Films" ("SOP 00-2") was issued. SOP 00-2 establishes new
financial accounting and reporting standards for producers and distributors of
films, including changes in accounting for advertising, development and overhead
costs. The Company adopted the provisions of SOP 00-2 as of January 1, 2001.
SOP 00-2 requires that certain indirect overhead costs and development
costs for abandoned projects be charged directly to expense, instead of those
costs being capitalized to film costs as was required under the previous
accounting model. In connection with the adoption of SOP 00-2, the Company
recorded a non cash charge of $364,000 to reduce the carrying value of its film
inventory. Such amount is primarily due to the expensing of certain indirect
overhead costs and development costs for abandoned projects, which were
previously capitalized. The non-cash charge is reflected as a cumulative effect
of a change in accounting principle in the accompanying consolidated statement
of operations for the year ended December 31, 2001.
SUBSEQUENT EVENTS
Resignation from Board of Directors. On February 5, 2003 Mr. Medavoy
and Mr. Villaneuva and on February 6, 2003 Mr. Tisch resigned from the Board of
Directors of the Company due to other commitments. At this time, the Company
does not intend to replace the board members.
19
RISK FACTORS
The Company's business is subject to numerous risk factors, not all of
which can be known or anticipated and any one of which could adversely impact
the Company or its financial condition. Some of those risk factors are as
follows:
Company Has a History of Losses and Declining Cash Balances and There
Can Be No Assurance That It Will Be Able to Execute on Its Business Strategy.
The Company has accumulated losses of approximately $42.4 million through
December 31, 2002. Because substantial portions of the Company's expenses are
fixed and its gross margin is relatively low, achieving profitability and
positive cash flows depends upon the Company's ability to generate and sustain
substantially higher revenues. Although the Company's strategy is to increase
revenues and gross margin, it is not assured that it will be able to do so and
consequently the Company may experience additional losses and a further decline
in its cash balances in 2003.
Dependence on a Limited Number of Television Programs. The Company's
revenue has historically come from the production of a relatively small number
of animated television programs. King of the Hill, The Simpsons and X-MEN
accounted for approximately 40%, 41%, and 15%, respectively, of the Company's
total revenue for the year ended December 31, 2002. Film Roman cannot assure
that broadcasters will continue to broadcast the Company's "proprietary" or
"fee-for-services" programs or that Film Roman will continue to be engaged to
produce such programs.
Failure to Renew Licenses or Production Agreements. There can be no
assurance that any of the programs being produced by the Company will be
relicensed for additional broadcast seasons or renewed for production or, if so
relicensed or renewed, that the terms of the license agreements or production
agreements will be as favorable to the Company as those of existing licenses or
production agreements.
Declining Value of License Fee Agreements and Increasing Control of
Proprietary Rights by Broadcasters. Competition created by the emergence of new
broadcasters (such as UPN, WB, Nickelodeon and the USA Network) has provided
television audiences with more choices, thereby generally reducing the number of
viewers watching any one program. As a result, the market share of, and license
fees paid by, FOX, CBS, NBC and ABC may continue to decrease and make it
difficult for Film Roman to finance certain proprietary programs.
Risks of Vertical Integration. Over the last decade, broadcasters,
distributors and producers of television and motion picture programming have
become increasingly integrated vertically through mergers, acquisitions,
partnerships, joint ventures or other affiliations. Film Roman has not entered
into any of these relationships. As a result, the number of time slots available
for children's and/or animated programming and, specifically, for animated
programming supplied by independent animation studios, may decrease, making it
more difficult to compete successfully for available time slots.
Current Programs May Not Sustain Their Popularity and New Programs May
Not Become Popular. Film Roman derives substantially all of its revenue from the
production and distribution of animated television programs. Each program is an
individual artistic work, and consumer reaction will determine its commercial
success. Film Roman cannot assure that the Company will be able to continue to
create entertaining episodes for its existing programs or that the Company will
be able to create new programs that are appealing to broadcasters.
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Risks Related to Expansion of Production of Proprietary Programming.
Film Roman intends to expand its production of programming for which the Company
owns or controls certain licensing and/or distribution rights ("proprietary
programming"). These rights may include domestic and international broadcast
distribution, home video distribution, licensing and merchandising, and
interactive/game development ("proprietary rights"). While Film Roman seeks to
limit the financial risk associated with the development of proprietary
programming by obtaining commitments prior to production to cover a portion of
its direct production costs, the Company cannot be sure that it will be able to
recover the balance of the production and overhead costs through the
exploitation of its remaining rights.
Risk of Budget and Cost Overruns. Although Film Roman reviews cost
reports and updates the Company's cost projections regularly and has generally
completed each of the Company's productions within its budget, the Company
cannot assure that the actual production costs for its programming will remain
within budget. Significant cost or budget overruns could negatively impact the
Company's gross margin since the majority of the Company's revenues result from
fixed fee arrangements.
Revenues and Costs Recognized in Certain Periods May Be Overstated or
Understated Due to the Application of Entertainment Accounting Policies. In
2001, Film Roman adopted SOP 00-2 regarding revenue recognition and amortization
of production costs. All costs incurred in connection with an individual program
or film, including acquisition, development, production and allocable production
overhead costs, are capitalized as television and film costs. These costs are
stated at the lower of unamortized cost or fair value. Film Roman amortizes its
estimated total production costs for an individual program or film in the
proportion that revenue realized relates to management's estimate of the total
revenue expected to be received from such program or film. As a result, if
revenue or cost estimates change with respect to a program or film, the Company
may be required to write-down all or a portion of its unamortized costs for the
program or film. The Company cannot make assurances that these write-downs will
not have a significant impact on its results of operations and financial
condition.
Competition. The creation, development, production and distribution of
television programming, together with the exploitation of the proprietary rights
related to such programming, is a highly competitive business. Film Roman
competes with producers, distributors, licensors and merchandisers, many of whom
are larger and have greater financial resources than does the Company. Although
the number of outlets available to producers of animated programming has
increased with the emergence of new broadcasters, the number of time slots
available to independent producers of children's and animated programming
remains limited. Moreover, because license fees in the United States have
dropped substantially recently, companies that do not rely on U.S. broadcast
license fees to finance the production of animation programming, particularly
international animation companies that receive governmental subsidies, have
achieved a competitive advantage. These companies now serve as an additional
source of competition for the limited slots available to independent animation
companies. As a result of these factors, the Company cannot make assurances that
it will be able to remain competitive.
Overseas Subcontractors. Like other producers of animated programming,
Film Roman subcontracts some of the less creative and more labor-intensive
components of its production process to animation studios located in low-cost
labor countries, primarily in the Far East. As the number of animated feature
films and animated television programs increases, the demand for the services of
overseas studios has increased substantially. This increased demand may lead
overseas studios to raise their fees, which may result in increased production
costs, or an inability to contract with the Company's preferred overseas
studios. Further, political considerations, such as acts of war or terrorism,
may affect the Company's ability to obtain services from Far East countries.
21
Technological Changes; Possible Changes in Production of Products. The
proliferation of new production technologies may change the manner in which the
animation industry creates and distributes programming. Recently, certain
animators have begun to use computer-generated animation, including
three-dimensional digital animation, instead of two-dimensional cell animation,
to create their animated programming. Film Roman cannot be sure that the
introduction and proliferation of three-dimensional digital animation or other
technological changes will not cause the Company's historical methods of
producing animation to become less cost competitive or less appealing to its
audiences. In addition, the Company cannot be sure that it will be able to adapt
to such changes in a cost-effective manner.
Dependence upon Key Personnel. Film Roman's success depends to a
significant extent upon the expertise and services of John Hyde, President and
Chief Executive Officer. Although the Company has employment agreements with Mr.
Hyde and certain other key management personnel, the loss of services of Mr.
Hyde and/or other key management personnel could have an adverse effect on the
Company's business, results of operations and financial condition. Film Roman
does not currently carry "key man" life insurance policies on any of the
Company's executives.
Casualty Risks. Substantially all of the Company's operations and
personnel are located in its North Hollywood headquarters, resulting in
vulnerability to fire, flood, power loss, telecommunications failure or other
local conditions, including the risk of seismic activity. If a disaster were to
occur, the Company's disaster recovery plans may not be adequate to protect the
Company and its business interruption insurance may not fully compensate the
Company for its losses.
Volatility of Stock Price. The market price of the Company's Common
Stock, which trades on the NASD OTCBB, could fluctuate significantly in response
to operating results and other factors.
Impact of FCC Regulations. The policies of the current FCC indicate a
potential lessening of government restrictions that may facilitate more vertical
integration of companies than in the past, this could have an adverse effect on
the availability of buyers for the Company's product.
Potential Union Activity. There have been and may be efforts by the
International Alliance of Theatrical State Employees ("I.A.T.S.E") Local Union
839 (Animation Guild) to collect enough signatures from employees to have an
election for representation of the Company's production employees. Union
representation of the production employees could have an adverse effect on the
Company.
Film Roman Does Not Intend to Pay Dividends. Film Roman has never paid
dividends and currently does not intend to declare or pay dividends. The Company
plans to follow a policy of retaining earnings to finance the growth of its
business. Whether or not the Company declares or pays dividends is up to the
Board of Directors and will depend on results of operations, financial
condition, contractual and legal restrictions and other factors the Board of
Directors deems relevant at that time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not utilize market risk sensitive instruments (such
as derivative financial instruments) for trading or other purposes.
The Company has low exposure to interest rate risk. The Company
currently does not have any debt (fixed or floating rate) other than trade
liabilities and invests its cash assets in debt instruments with
22
maturities of less than 90 days. Thus, a decrease (or increase) in future
interest rates will directly and proportionately decrease (or increase,
respectively) the Company's future interest income. For the twelve months ended
December 31, 2002, the Company earned interest income of $41,095.
The Company is not exposed to significant foreign exchange rate risk.
All of the Company's contracts with foreign subcontractors are
dollar-denominated. The Company makes limited international sales in foreign
currencies, the aggregate of which the Company estimates to be less than one
percent of the Company's yearly revenue.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set forth in this
Annual Report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
The following table sets forth certain information with respect to the
directors of the Company as of March 31, 2003:
Year First
Elected or
Appointed
Name Age a Director Principal Occupation and Business Experience
----------------------- --- ------------ ----------------------------------------------------------------
John W. Hyde 62 1999 John W. Hyde joined Film Roman as President and CEO in December
1999. Mr. Hyde is CEO and the principal of Producers Sales
Organization, which holds investments in film negatives, film
and television rights, a music library and agricultural real
estate. Mr. Hyde was the Trustee, General Manager and FCC
license holder for KADY-TV from July 1996 through the sale of
the television station in July 1998; since that time, Mr. Hyde
has remained as Trustee to disburse the funds from the sale.
From August 1994 through July 1998, Mr. Hyde was Trustee and CEO
of Cannon Pictures, Inc. and Cannon Television Inc. Mr. Hyde was
CEO of MCEG Sterling, Inc. from December 1990 through December
31, 1995, at which time MCEG was part of a three-way merger with
Orion Pictures, Inc. and Actava Group, Inc. Prior to his term
at MCEG, Mr. Hyde held numerous senior executive positions in
the entertainment industry. Mr. Hyde graduated from New York
University in 1963.
Robert Cresci 59 1995 Mr. Cresci has been a Director of Film Roman since August 1995
and has been a Managing Director of Pecks Management Partners
Ltd., an investment management firm, since September 1990. Mr.
Cresci currently serves on the board of directors of Sepracor,
Inc., Aviva Petroleum, Candlewood Hotel Co., Castle Dental
Centers Inc., j2 Global Communications, Inc., Seracare Inc.,
E-Stamp Corporation and several private companies.
Dixon Q. Dern 74 1995 Mr. Dern has been a director of Film Roman since August 1995.
Mr. Dern has practiced entertainment law for over 40 years and
currently owns and operates his own private practice, which
specializes in entertainment, copyright and communications law.
Mr. Dern also serves as Secretary of the Company.
24
Peter Mainstain 54 1995 Mr. Mainstain has been a director of Film Roman since August
1995. He is a certified public accountant as well as an officer
and shareholder of Tanner, Mainstain, Hoffer & Peyrot, and
accountancy corporation, where he has been employed since 1976.
Phil Roman 72 1996 Mr. Roman served as the Company's Chief Executive Officer, and a
Director, from the founding of the Company until February 5,
1999. Phil Roman began his animation career in 1955 at The Walt
Disney Company as an assistant animator on Sleeping Beauty.
Over the next 30 years, Mr. Roman worked at many of the major
studios, including MGM Animation and Warner Brothers Cartoons.
Mr. Roman has also directed 13 Emmy-nominated Charlie Brown
specials. Since his resignation as Chief Executive Officer, Mr.
Roman has worked at his new company, Phil Roman Entertainment,
and recently joined the Company as an employee/consultant.
IDENTIFICATION OF EXECUTIVE OFFICERS
The names of the executive officers of the Company, and certain information
about them as of March 31, 2003 are set forth below:
Year Began
Employment
With
Name Age Company Position
----------------------- --- ------------ ----------------------------------------------------------------
John W. Hyde 62 1999 President and CEO. John W. Hyde joined Film Roman as President
and CEO in December 1999. Mr. Hyde is CEO and the principal of
Producers Sales Organization, which holds investments in film
negatives, film and television rights, a music library and
agricultural real estate. Mr. Hyde was the Trustee, General
Manager and FCC license holder for KADY-TV from July 1996
through the sale of the television station in July 1998; since
that time, Mr. Hyde has remained as Trustee to disburse the
funds from the sale. From August 1994 through July 1998, Mr.
Hyde was Trustee and CEO of Cannon Pictures, Inc. and Cannon
Television Inc. Mr. Hyde was CEO of MCEG Sterling, Inc. from
December 1990 through December 31, 1995, at which time MCEG was
part of a three-way merger with Orion Pictures, Inc. and Actava
Group, Inc. Prior to his term at MCEG, Mr. Hyde held numerous
senior executive positions in the entertainment industry. Mr.
Hyde graduated from New York University in 1963.
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Sidney Clifton 44 1998 Senior Vice-President, Television Programming and Development.
Sydney Clifton was promoted to Senior Vice President, Television
Programming and Development in November 2002. Ms. Clifton
joined Film in March 1998 as Development Coordinator and in July
of that year she was promoted to Manager of Animation
Development. In September of 1999, Ms. Clifton was again
promoted to Director of TV Development and in July of 2000 rose
to Vice President of Development. Before joining Film Roman in
1998, Ms. Clifton was a member of the Operations Department of
Fox Sports network. Ms. Clifton is also a published writer with
works appearing in multicultural publications including Exodus
Newsmagazine and Essence Magazine.
Brett Coker 40 1991 Senior Vice President of Studio Administration. Brett Coker was
promoted to Senior Vice President in August 2001. He joined
Film Roman in February 2001 as Vice President of Studio
Administration. From 1998 through January 2001, Mr. Coker was
Vice President General Manager for CrownStar, LLC a niche record
label specializing in music distribution. From 1995 to 1998, he
was the Director of Operations for Crossroads V Communications,
a management consulting company. His tenure included large-scale
operations management and consulting services for companies such
as Cannon Pictures, Grove Television, Reeves Entertainment and
KADY Television.
Joan Thompson 44 1992 Chief Accounting Officer. Joan Thompson was promoted to Chief
Accounting Officer in August 2001. Ms. Thompson joined Film
Roman in April 1992 as Accounting Manager. In April 1994, she
was promoted to Assistant Controller and became Controller in
April 1999. Ms. Thompson was promoted to Vice President of
Finance in April 2000.
Mike Wolf 51 1990 Senior Vice President of Animation Production. Mike Wolf has
held the office of Senior Vice President of Animation Production
since March 1999. He joined Film Roman in April 1990 as a
Director for Emmy nominated Bobby's World. In October 1990, Mr.
Wolf became a Producer for the Animated Feature Tom & Jerry: The
Movie. Since August 1992, his producing credits include The
Simpsons, King of the Hill, The Critic, The Family Guy, Mission
Hill and The Oblongs. During his tenure with Film Roman, he has
been honored with Five Emmy Awards for producing The Simpsons
and several Annie Awards.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
beneficially own more than 10% of the Company's Common Stock, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). The SEC has designated specific due dates for such reports and the
Company must identify in this Proxy Statement those persons who did not timely
file such reports.
Based solely upon a review of Forms 3, 4 and 5, the amendments
thereto, and certain written representations furnished to the Company pursuant
to Rule 16a-3(e) of the Exchange Act, the Company believes that, during the
fiscal year ended December 31, 2002, its directors and officers, and persons who
beneficially own more than 10% of its Common Stock, complied with all applicable
filing requirements, with the exception that reports on Form 3 were not filed
for Sidney Clifton, Brett Coker, Joan Thompson, Michael Wolf, Peter Schankowitz
and John O. Francis and that reports on Form 4 were not filed for Dixon Dern and
Peter Mainstain with repect to the vesting of certian options.
27
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth, as to the Chief Executive Officer and
each of the other three most highly compensated officers whose compensation
exceeded $100,000 during the last fiscal year (the "Named Executive Officers"),
information concerning all compensation paid for services to the Company in all
capacities during the last three fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
----------------------------------------- -----------------------------------------------
Number of
Fiscal Year Securities
Ended Underlying Restricted All Other
Name and Principal Position December 31 Salary Bonus Options(1) Stock Compensation
----------------------------- ----------- -------------- ---------- -------------- ------------- --------------
John W. Hyde 2002 $ 364,910.24 $ 1,676.05(3)
Chief Executive 2001 $ 327,983.94 25,000 200,000 $ 5,962.74(2)
Officer and President 2000 $ 255,999.00 400,000 $ 8,759.67(2)
Peter Schankowitz 2002 $ 305,250.17 $ 2,500.00(3)
President, Television 2001 $ 240,884.07 $ 2,012.02(3)
Programming & Development 2000 $ 66,500.07 50,000
Mike Wolf 2002 $ 301,981.32 $ 2,500.00(3)
Senior Vice President of 2001 $ 296,334.46 $ 2,125.00(3)
Animation Production 2000 $ 267,587.03 $ 2,125.00(3)
John O. Francis Jr. 2002 $ 117,502.09 $ 1,369.51(3)
Vice President of 2001 $ 125,000.00 $ 1,322.20(3)
Recruiting 2000 $ 125,000.23 $ 1,322.20(3)
(1) The securities underlying the options are shares of Common Stock.
(2) Represents reimbursement of health and disability insurances.
(3) Represents contributions pursuant to the Company's 401(k) profit
sharing plan for each individual listed in the table. Option Grants in
Last Fiscal Year
28
Option Grants in Last Fiscal Year
There were no grants of stock options made to any of the Named
Executive Officers during the year ended December 31, 2002.
Stock Options Held at Fiscal Year End
The following table sets forth, for each of the Named Executive
Officers, certain information regarding the number of shares of Common Stock
underlying stock options held at fiscal year end and the value of options held
at fiscal year end based upon the last reported sales price of the Common Stock
on the over the counter bulletin board market on December 31, 2002 ($0.07 per
share). During fiscal 2002, no options were exercised by any Named Executive
Officer.
AGGREGATED FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised in-the-
Underlying Unexercised Money Options at December
Options at December 31, 2002 31, 2002 (1)
Name Exercisable Unexercisable Exercisable Unexercisable
-------------------- ------------- -------------- ------------- --------------
John W. Hyde 533,332 166,668 0 0
Peter Schankowitz 50,000 0 0 0
Mike Wolf 85,000 0 0 0
Jay Frances 0 0 0 0
(1) Amounts represent the difference between the aggregated exercise
price of unexercised options and the $0.07 closing sale price of the Common
Stock on the over the counter bulletin board market on December 31, 2002.
401(k) Profit Sharing Plan
The Company has a defined contribution 401(k) Profit Sharing Plan
which covers substantially all of its employees. The plan became effective on
January 1, 1991 and was amended effective January 1, 1992. Under the terms of
the plan, employees can elect to defer up to 15% of their wages, subject to
certain Internal Revenue Service limitations, by making voluntary contributions
to the plan. Additionally, the Company, at the discretion of management, can
elect to match up to 100% of the voluntary contributions made by its employees.
For the years ended December 31, 2000, 2001 and 2002, the Company contributed
$167,881, $155,020 and $165,863, respectively, to the plan on behalf of its
employees.
Compensation of Directors
For fiscal year 2002 all Non-Employee Directors received $4,500 as
compensation for serving on the Board of Directors, $1,000 for attendance at
each meeting of the Board of Directors and $500 for attendance at each meeting
of a committee of the Board of Directors. Under the Company's 2000 Stock Option
Plan, as amended (the "Stock Option Plan"), all the Board of Directors, except
for Phil Roman and John Hyde, also received an option to purchase 5,000 shares
of Common Stock.
29
Employment Contracts
The Company or Film Roman, Inc., a California corporation and a
wholly-owned subsidiary of the Company ("Film Roman California") has entered
into the following employment agreements with the Named Executive Officers:
John W. Hyde. On June 1, 2001 the Company entered into a new agreement
to extend Mr. Hyde's employment as the Company's Chief Executive Officer. Under
the terms of this agreement, Mr. Hyde will serve the Company for three years
from the date of the new agreement, and the Company has an option to extend the
term of his employment for an additional period of two consecutive years. As a
bonus for services rendered under the employment agreement dated December 9,
1999 between Producers Sales Organization ("PSO") and the Company, Mr. Hyde
received $25,000. The compensation payable to Mr. Hyde is $120,000 for the first
year of service under the new employment agreement, $130,000 for the second year
and $140,000 for the third year. If the Company chooses to exercise its option
to extend Mr. Hyde's term, he will receive $150,000 for his fourth year of
service to the Company and $160,000 for the fifth year. Mr. Hyde received
200,000 shares of the Company's common stock with a 10-year term at the exercise
price of $.92 per share. The Company can terminate Mr. Hyde for cause, which
includes: (a) the conviction of a felony or crime involving moral turpitude, (b)
gross negligence or willful malfeasance, (c) the failure to adhere to Board
policies or the Company's business plan and such failure is not cured within
five business days of notice of such failure or (d) any other material breach
not cured within five business days after notice. If the Company terminates Mr.
Hyde for cause, then the Company will no longer have any obligations to pay Mr.
Hyde any compensation, other than compensation accrued but unpaid. If the
Company terminates Mr. Hyde without cause or Mr. Hyde dies, the Company must pay
all remaining compensation and all compensation owing as of the date of death,
respectively.
In addition, on June 18, 2001 the Company concluded an agreement with
PSO to release Mr. Hyde from exclusive employment with PSO so that he may serve
the Company as its Chief Executive Officer. The term of Mr. Hyde's employment
commences on the date of the agreement and continues for up to five years. In
consideration for releasing Mr. Hyde from exclusive employment, PSO will receive
$205,000 for the first contract year of Mr. Hyde's employment, $245,000 for the
second contract year, $285,000 for the third contract year, and if the company
exercises its option to retain Mr. Hyde for the fourth and fifth contract years,
Mr. Hyde will receive $325,000 for the fourth contract year and $365,000 for the
fifth contract year.
Mr. Schankowitz. On September 6, 2000, Film Roman contracted with Mr.
Schankowitz to retain his services as the President of Television Programming
and Development. Under the terms of the agreement, Mr. Schankowitz served in his
capacity as an executive for 18 months from the date of September 6, 2000. On
March 7, 2002, Film Roman exercised its option under the employment agreement to
extend Mr. Schankowitz's employment to March 6, 2003. For compensation, Mr.
Schankowitz earned $17,916.66 per month for the first 18 months of service and
will receive $19,583.33 per month for the extended period of employment. Mr.
Schankowitz will receive a sales bonus for each program he secures a license or
sales agreement and for any television program he co-creates. Mr. Schankowitz
received 50,000 shares of the Company's common stock with a 10-year term and at
the exercise price equal to its fair market value. The option grants, with
respect to 35,000 shares, will vest in equal monthly installments during the
initial 18 months of employment. The remaining 15,000 shares will vest in equal
monthly installments over a period of twelve months during the extension period
of Mr. Schankowitz's employment. If the Company terminates Mr. Schankowitz
without cause, Film Roman will pay Mr. Schankowitz his salary and accrued
bonuses for the remainder of the current term, provided that, salary payments
will be reduced by any payments which Mr. Schankowitz receives from
30
employment elsewhere. If the Company terminates his employment for death,
disability or without cause, the Company will pay Mr. Schankowitz accrued
bonuses for the Company's fiscal year in which termination occurred. The Company
did not extend Mr. Schankowitz's employment once his employment agreement
terminated on March 6, 2003.
Mike Wolf. There is no employment agreement between Film Roman and
Mike Wolf. Mr.Wolf an at will employee.
John O. Francis, Jr. There is no employment agreement between Film
Roman and John Francis. Mr. Francis is an at will employee. The Company and Mr.
Francis agreed that his employment would end on December 31, 2002.
Compensation Committee Interlocks and Insider Participation
No executive officer of the Company either served in 2002 or now
serves as a member of the Board of Directors or the compensation committee of
any entity, which has one or more executive officers who serve on the Board or
are members of the Compensation Committee.
The Compensation Committee of the Board of Directors serves as an
advisory committee to the Board and is responsible for reviewing the
compensation of the senior management team and for making recommendations
regarding compensation.
Compensation Philosophy:
The Compensation Committee's philosophy is to provide sufficient
compensation to attract, motivate and retain skilled management while linking
that compensation to corporate performance and increases in stockholder wealth
where possible. The Compensation Committee determines the compensation of the
executive officers with the assistance of the Chief Executive Officer and
determines the compensation of the Chief Executive Officer independently. The
Compensation Committee determines the compensation of the executive based on its
evaluation of the Company's overall performance, primarily based on the
Company's operating performance compared with the Company's operating plan, and
the current market for executives. The Compensation Committee also considers
various qualitative factors such as the extent to which the executive officer
has contributed to forming a strong management team, the growth and development
of proprietary and fee-for-services programming and other factors, which the
Compensation Committee believes are indicative of the Company's ongoing ability
to achieve its long-term growth and profit objectives. With respect to each
executive, the Compensation Committee focuses on that individual executive's
area of responsibility and his or her contribution toward achieving corporate
objectives.
Compensation Program:
Consistent with achieving the Company's long-term objectives,
executive compensation packages are generally comprised of two components: base
compensation and stock options. The base compensation portion of the
compensation package is determined by considering such factors as breadth of
responsibility, areas of expertise and experience, and comparable compensation
in the industry. As is the custom in the industry, most of the senior management
team is under some form of employment contract with the Company. The stock
option incentive portion of the compensation package has been implemented
through the Stock Option Plan. Each member of the senior management team has
been granted options, which are intended to provide each individual with a
strong economic interest in the
31
appreciation of the stock price. The Stock Option Plan, permits the Board to
grant options to other key employees to provide similar incentives. A number of
key employees have been granted such options. While the Compensation Committee
might consider performance bonuses in the event of exceptional contributions to
enhance corporate performance, no such consideration was made in 2002.
To the extent readily determinable and as one of the factors in its
consideration, the Compensation Committee considers the anticipated tax
treatment to the Company and to its executives of various payments and benefits.
Some types of compensation payments and their deductibility depend upon the
timing of an executive's vesting or exercise of previously granted rights,
qualification of the Compensation Committee and other factors. Further,
interpretations of and changes in the tax laws and other factors beyond the
Compensation Committee's control also affect the deductibility of compensation.
For these and other reasons, the Compensation Committee will not necessarily
limit executive compensation to that amount deductible under section 162(m) of
the Internal Revenue Code of 1986, as amended. The Compensation Committee will
consider various alternatives to preserve the deductibility of compensation
payments and benefits to the extent reasonably practicable and to the extent
consistent with its other compensation objectives.
Date: 3-31-03
PERFORMANCE GRAPH
The following graph sets forth the percentage change in cumulative
total stockholder return of the Company's Common Stock during the last five
fiscal years, compared with (a) the Standard & Poor's 500 Composite Index ("S&P
500 Index") and (b) the Standard & Poor's Entertainment Index ("S&P
Entertainment Index"). The graph assumes that $100 was invested on December 31,
1998 in Film Roman stock or on December 31, 1998 in the indexes and assumes
reinvestment of dividends. The stock price performance on the following graph is
not necessarily indicative of future stock price performance.
S& P
Entertainment
Date S&P 500 Index Index Film Roman, Inc
--------- ---------------- --------------- ------------------
31-Dec-98 100 100 100
31-Dec-99 120 116 100
31-Dec-00 107 99 20
31-Dec-01 93 85 19
31-Dec-02 72 * 4
*The S&P Entertainment Index has changed.
32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance under Equity Compensation Plans
(a) (b) (c)
Number of
Securities Remaining
Number of Available for Future
Securities to Be Issued Weighted- Issuance Under Equity
Upon Exercise of Average Exercise Price Compensation Plans
Outstanding Options, of Outstanding Options, (excluding securities
Plan Category Warrants and Rights Warrants and Rights reflected in Column(a)
----------------------------------------------------------------------------------------------------------------------
Equity Compensation
Plans Approved by
Security Holders 1,424,500 $ 1.27 775,500
----------------------------------------------------------------------------------------------------------------------
Equity Compensation
Plan Not Approved by
Security Holders NONE NONE NONE
----------------------------------------------------------------------------------------------------------------------
Total 1,424,500 $ 1.27 775,500
----------------------------------------------------------------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 31, 2003 certain
information relating to the ownership of the Common Stock by (i) each person
known by the Company to be the beneficial owner of more than five percent of the
outstanding shares of the Company's Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers, and (iv) all of the
Company's executive officers and directors as a group. Except as may be
indicated in the footnotes to the table and subject to applicable community
property laws, each such person has the sole voting and investment power with
respect to the shares owned.
Unless otherwise noted, the address of each of the Company's officers
and directors is 12020 Chandler Blvd., Suite 200, North Hollywood, California
91607.
Number of Shares of
Common Stock
Name and Address Beneficially Owned(1) Percent(1)
----------------------------------- ---------------------- ----------------
Pecks Management Partners Ltd.(2) 1,198,993 14.0%
John W. Hyde(3) 591,665 6.5%
Peter Schankowitz(4) 50,000 *
Mike Wolf (5) 85,000 1%
33
John O. Francis(6) - *
Robert J. Cresci(7) 1,248,993 14.5%
Dixon Q. Dern(8) 75,100 *
Peter Mainstain(9) 89,200 1%
Phil Roman(10) 3,028,650 35.2%
All Directors and Executive 5,168,608 54.4%
Officers as a group (8 persons)
* Less than one percent.
(1) Under Rule 13d-3 of the Exchange Act, certain shares may be deemed to
be beneficially owned by more than one person (if, for example,
persons share the power to vote or the power to dispose of the
shares). In addition, shares are deemed to be beneficially owned by a
person if the person has the right to acquire the shares (for example,
upon exercise of an option) within 60 days of the date as of which the
information is provided. In computing the percentage ownership of any
person, the amount of shares outstanding is deemed to include the
amount of shares beneficially owned by such person (and only such
person) by reason of these acquisition rights. As a result, the
percentage of outstanding shares of any person as shown in this table
does not necessarily reflect the person's actual ownership or voting
power with respect to the number of shares of Common Stock actually
outstanding at March 15, 2003.
(2) Based on information received from Pecks Management Partners Ltd.,
Pecks Management Partners Ltd. has sole voting power and sole
dispositive power with respect to all 1,198,993 shares. The mailing
address for Pecks Management Partners Ltd. is One Rockefeller Plaza,
New York, New York 10020.
(3) Includes 541,665 shares issuable upon exercise of outstanding options.
(4) Includes 50,000 shares of Common Stock, which may be acquired upon
exercise of employee stock options, which are currently exercisable.
(5) Includes 85,000 shares of Common Stock, which may be acquired upon
exercise of employee stock options, which are currently exercisable.
(6) John O. Francis does not beneficially own shares of the Company's
Common Stock.
(7) Includes 1,198,993 shares held by pension trusts and a pension fund
which are managed by Pecks Management Partners Ltd. and for which Mr.
Cresci disclaims beneficial ownership and 50,000 shares of Common
Stock, which may be acquired upon exercise of stock options, which are
currently exercisable. The mailing address for Mr. Cresci is c/o Pecks
Management Partners Ltd., One Rockefeller Plaza, New York, New York
10020.
(8) Includes 75,000 shares of Common Stock, which may be acquired upon
exercise of stock options, which are currently exercisable. The
mailing address for Mr. Dern is 1901 Avenue of the Stars, Suite 400,
Los Angeles, California 90067.
(9) Includes 75,000 shares of Common Stock, which may be acquired upon
exercise of stock options, which are currently exercisable. The
mailing address for Mr. Mainstain is c/o Tanner, Mainstain, Hoffer &
Peyrot, 10866 Wilshire Boulevard, 10th Floor, Los Angeles, California
90024.
34
(10) Represents 50,000 shares of Common Stock, which may be acquired upon
exercise of stock options, which are currently exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 1, 2001 the Company and Mr. Dern entered into a new agreement
pursuant to which, Mr. Dern would provide legal services to, and manage the
business affairs of the Company. Under the terms of the new agreement, Mr. Dern
will serve the Company for three years from the date of the agreement and will
receive $120,000 per annum for services provided as general counsel and $120,000
per annum for managing the business affairs of the Company. In addition, upon a
sale or merger of the Company, or an agreement whereby the Company secures a
strategic partnership or a strategic investor, Mr. Dern will receive an option
to purchase 100,000 shares of the Company's Common Stock.
On June 18, 2001 the Company concluded an agreement with PSO to
release Mr. Hyde from exclusive employment with PSO so that he may service the
Company as its Chief Executive Officer. Mr. Hyde owns PSO. See "Employment
Contracts--Mr. Hyde."
PART IV
ITEM 14. CONTROLS AND PROCEDURES
(a) The Company, under the supervision and with the Company's
management, including the Company's Chief Executive Officer/Chief Operating
Officer, carried out an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (the "Evaluation")
as of the last day of the period covered by this Report. Based upon the
Evaluation, the Company's Chief Executive Officer/Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective,
alerting them to material information required to be disclosed in our periodic
reports filed with the SEC.
(b) There were no significant changes to the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of Evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements required to be filed hereunder are indexed on
page F-1 hereof. All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended December 31, 2002.
(c) Those Exhibits, and the Index thereto, required to be filed by
Item 601 of Regulation S-K are attached hereto. Certain management contracts and
other compensation plans or arrangements required to be filed are identified on
the attached Index with an asterisk.
35
ITEM 16. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees for professional services provided by our independent auditors in each of
the last two fiscal years, in each of the following categories (in thousands)
are:
Fees for audit services include fees associated with the annual audit and the
reviews of the Company's quarterly reports on Form 10-Q. Tax fees included tax
compliance, tax advice and tax planning. All other fees principally include
support and advisory services related to the Company's stock sale and potential
investments.
The Board has determined that annual audit services to be rendered by the
corporation's outside auditors shall be subject to specific pre-approval of the
Audit Committee. Such audit services include the annual financial statement
audit (including required quarterly reviews) and other procedures required to be
performed by an independent auditor to be able to form an opinion on the
company's consolidated financial statements. These other procedures include
information systems and procedural reviews and testing performed in order to
understand and place reliance on the systems of internal control, and
consultations relating to the audit or quarterly reviews. The Board has further
mandated that the Audit Committee shall approve annual fees for the outside
auditors and shall monitor their activities on a regular basis during any times
during which they render auditing services. The Audit Committee has authority to
pre-approve any audit-related services that are to be rendered in any year;
provided that the Audit Committee (unanimously) and the outside auditors concur
that such services do not impair the independence of the auditors.
In accordance with past procedure the outside auditors will be requested to
provide tax services to the Company, such as tax consultation and preparation of
the necessary tax returns. In no event will the Audit Committee approve of any
tax services in connection with transactions initially recommended by the
independent auditor, the primary purpose of which may not be tax avoidance, nor
shall the Audit Committee approve of rendition of any tax services for tax
compliance and filing of returns i.e. those historically rendered by the
Company's outside auditors in the past.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized as of the
31st day of March, 2003.
FILM ROMAN, INC.
/s/ John W. Hyde
---------------------------------------------
By: John W. Hyde
President, Chief Executive Officer and acting
Chief Financial Officer
37
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John Hyde and Dixon Q. Dern, or any one
of them, his attorney-in-fact and agent, with full power of substitution for
him, in any and all capacities, to sign any amendments to this Annual Report on
Form 10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact, or their substitutes,
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
-------------------------- ----------------------------------- --------------
/s/ John Hyde Chief Executive Officer, President, March 31, 2003
-------------------------- Director and acting Chief Financial
John Hyde Officer
/s/ Joan Thompson Executive Vice President, Chief March 31, 2003
-------------------------- Accounting Officer
Joan Thompson
/s/ Phil Roman Director March 31, 2003
--------------------------
Phil Roman
/s/ Robert Cresci Director March 31, 2003
--------------------------
Robert Cresci
/s/ Peter Mainstain Director March 31, 2003
--------------------------
Peter Mainstain
/s/ Dixon Q. Dern Director March 31, 2003
--------------------------
Dixon Q. Dern
38
CERTIFICATIONS
I, John W. Hyde, certify that:
1. I have reviewed this annual report on Form 10-K of Film Roman, Inc.;
2. Based on my knowledge, this annual 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 annual report:
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c) presented in this annual 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 the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
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
39
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
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not 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.
March 31, 2003 /s/ John W. Hyde
--------------------------------
John W. Hyde
Title: Chief Executive Officer,
Chief Financial Officer
40
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------------ -----------------------------------------------------------------
!3.1 Amended and Restated Certificate of Incorporation of Film Roman,
Inc., a Delaware corporation (the "Company").
!3.2 Amended and Restated Bylaws of the Company.
#4.1 Specimen Stock Certificate.
*10.1 Production Services Agreement, dated as of June 18, 2001, between
the Company and Producers Sales Organization, furnishing the
services of John W. Hyde. (Incorporated by reference to Exhibit
10.1(a) to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2001.)
*10.2 Executive Engagement Agreement, dated as of June 18, 2001,
between the Company and John W. Hyde. (Incorporated by reference
to Exhibit 10.13 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.)
*10.3 Intentionally Omitted.
*10.4 Transition, Settlement and Release Agreement dated February 5,
1999 by and between the Company and Mr. Phil Roman. (As indicated
by asterisk, selected text of the agreement has been redacted
pursuant to a confidentiality request.) (Incorporated by
reference to Exhibit 10.51 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000.)
10.5 Intentionally Omitted.
*10.6 Amended and Restated 2000 Stock Option Plan of the Company.
(Incorporated by reference to Annex A to the Company's 2000 Proxy
Statement.)
*10.7 Form of Non-Qualified Stock Option Agreement for Employees Under
the Amended and Restated 2000 Stock Option Plan. (Incorporated by
reference to Exhibit 10.3 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000.)
*10.8 Form of Option Certificate for Non-Qualified Stock Option for
Non-Employee Director. (Incorporated by reference to Exhibit 10.8
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)
*10.9 Intentionally Omitted.
10.10 Intentionally Omitted.
#10.11 Lease for Registrant's headquarters and studio in North
Hollywood, California.
10.12-27 Intentionally Omitted.
#10.28 Agreement dated November 9, 1993 between Film Roman, Inc. and
Felix The Cat Creations, Inc.
10.29 Intentionally omitted.
#10.30 Agreement dated September 27, 1994 between Felix The Cat
Creations, Inc. and Film Roman, Inc.
41
#10.31 Letter Agreement dated June 6, 1995 between Felix The Cat
Corporation and Film Roman, Inc.
#10.32 Agreement dated September 1, 1995 between Felix Comics, Inc. and
Film Roman, Inc.
#10.33 Agreement dated November 20, 1995 between Felix The Cat
Creations, Inc. and Film Roman, Inc.
10.34 Agreement dated as of February 26, 1998 between Claster
Television and Film Roman, Inc. in connection with "Mr. Potato
Head." (As indicated by asterisk, selected text of the agreement
has been redacted pursuant to a confidentiality request.)
(Incorporated by reference to Exhibit 10.45 of the Company's Form
10-Q for the quarter ended June 30, 1998.)
10.35 Agreement dated as of February 26, 1998 between Fox Kids
Worldwide, Inc. and Film Roman, Inc. in connection with "Mr.
Potato Head." (As indicated by asterisk, selected text of the
agreement has been redacted pursuant to a confidentiality
request.) (Incorporated by reference to Exhibit 10.46 of the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998.)
&10.36 Letter Agreement dated March 1, 1994 between Twentieth Television
and Film Roman, Inc. (Exhibit 10.47)
&10.37 Letter Agreement dated January 31, 2000 between Marvel
Entertainment and Film Roman, Inc. (Exhibit 10.48)
&10.38 Agreement dated July 25, 1999 between Oblong Productions, Inc.
and Film Roman, Inc. (Exhibit 10.49)
&10.39 Agreement dated as of March 1, 1996 between Twentieth Century Fox
Film Corporation and Film Roman, Inc. (Exhibit 10.50)
#10.40 Form of Agreement between Film Roman, Inc. and Threshold
Entertainment.
#10.41 Agreement dated as of January 29, 1992 between Film Roman, Inc.
and 20th Television. (Exhibit 10.43)
&21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
99.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
FOOTNOTES
! Incorporated by reference to a similarly numbered exhibit to the Company's
Quarterly Report on Form 10-Q as filed with the Securities and Exchange
Commission on May 14, 2001.
# Incorporated by reference to a similarly numbered exhibit (or to the
exhibit number listed in parentheses) to Amendment Number 1 to the
Company's Registration Statement on Form S-1, on Form S-1/A (Registration
No. 333-03987), as filed with the Securities and Exchange Commission on
July 12, 1996.
& Incorporated by reference to a similarly numbered exhibit (or to the
exhibit number listed in parentheses) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000 as filed with the
Securities and Exchange Commission on March 9, 2001.
* Management contract or other compensation plan or arrangement.
42
FILM ROMAN, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Index to Consolidated Financial Statements.......................................................... F-1
FILM ROMAN, INC.
Report of Independent Auditors................................................................ F-2
Consolidated Balance Sheets as of December 31, 2001 and 2002.................................. F-3
Consolidated Statements of Operations for the Years Ended December 31, 2000, 2001, and 2002... F-4
Consolidated Statements of Stockholders' Equity (Deficiency) for the Years Ended December 31,
2000, 2001, and 2002.......................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 2001 and 2002.... F-6
Notes to Consolidated Financial Statements.................................................... F-7
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Film Roman, Inc.
We have audited the accompanying consolidated balance sheets of Film
Roman, Inc. as of December 31, 2001 and 2002, and the related consolidated
statements of operations, stockholders' equity (deficiency), and cash flows for
each of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Film
Roman, Inc. at December 31, 2001 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.
The accompanying financial statements have been prepared assuming that
Film Roman, Inc. will continue as a going concern. As more fully described in
Note 1, the Company has incurred recurring operating losses and has a working
capital deficiency. This condition raises substantial doubt about the Company's
ability to continue as a going concern. Management's plan in regard to this
matter is also described in Note 1. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Los Angeles, California
March 24, 2003
F-2
FILM ROMAN, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------------
2001 2002
-------------- --------------
ASSETS
Cash and cash equivalents ...................................................... $ 2,776,757 $ 1,277,958
Accounts receivable ............................................................ 259,784 114,772
Film costs, net of accumulated amortization of
$50,663,342 (2001) and $39,927,593 (2002) ..................................... 22,030,027 18,141,712
Property and equipment, net of accumulated depreciation and
amortization of $2,797,025 (2001) and $3,097,691 (2002) ....................... 493,552 246,579
Deposits and other assets ...................................................... 612,492 293,119
-------------- --------------
Total assets ................................................................... $ 26,172,612 $ 20,074,140
============== ==============
LIABILITIES AND
STOCKHOLDERS' DEFICIENCY
Accounts payable ............................................................... $ 1,678,063 $ 1,842,904
Accrued expenses ............................................................... 1,964,982 2,098,354
Deferred revenue ............................................................... 26,312,646 22,026,710
-------------- --------------
Total liabilities .............................................................. 29,955,691 25,967,968
Commitments
Stockholders' deficiency:
Preferred Stock, $.01 par value, 10,000,000 shares authorized, none issued ..... -- --
Common Stock, $.01 par value, 40,000,000 shares authorized, 8,577,690
shares issued and outstanding in 2001 and 2002 ................................ 85,777 85,777
Additional paid-in capital ..................................................... 36,379,615 36,379,615
Accumulated deficit ............................................................ (40,248,471) (42,359,220)
-------------- --------------
Total stockholders' deficiency ................................................. (3,783,079) 5,893,828)
-------------- --------------
Total liabilities and stockholders' deficiency ................................. $ 26,172,612 $ 20,074,140
============== ==============
See accompanying notes.
F-3
FILM ROMAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------------------------
2000 2001 2002
-------------- -------------- --------------
Revenue .............................................................. $ 44,552,140 $ 44,088,173 $ 43,300,993
Cost of revenue ...................................................... 43,106,536 45,345,423 41,858,236
Selling, general and administrative expenses ......................... 4,308,109 4,337,615 3,594,601
-------------- -------------- --------------
Operating loss ....................................................... (2,862,505) (5,594,865) (2,151,844)
Interest income ...................................................... 278,196 82,166 41,095
-------------- -------------- --------------
Loss before cumulative effect of a change in accounting
principle and provision for income taxes ............................ (2,584,309) (5,512,699) (2,110,749)
Cumulative effect of a change in accounting principle ................ -- (364,000) --
Provision for income taxes ........................................... (1,588) -- --
-------------- -------------- --------------
Net loss ............................................................. $ (2,585,897) $ (5,876,699) $ (2,110,749)
============== ============== ==============
Loss before cumulative effect of a change in accounting
principle, per common share basic and diluted ...................... $ (0.30) $ (0.64) $ (0.25)
============== ============== ==============
Net loss per common share basic and diluted .......................... $ (0.30) $ (0.69) $ (0.25)
============== ============== ==============
Weighted average number of shares outstanding basic and diluted ...... 8,563,682 8,571,560 8,577,690
============== ============== ==============
See accompanying notes.
F-4
FILM ROMAN, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
TOTAL
ADDITIONAL STOCKHOLDERS'
COMMON STOCK PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIENCY)
-------------- -------------- -------------- -------------- --------------
Balance as of December 31, 1999 ... 8,524,190 $ 85,242 $ 36,311,838 $ (31,785,875) $ 4,611,205
Options exercised ................. 41,000 410 58,527 -- 58.937
Net loss .......................... -- -- -- (2,585,597) (2,585,897)
-------------- -------------- -------------- -------------- --------------
Balance as of December 31, 2000 ... 8,565,190 85,652 36,370,365 (34,371,772) 2,084,245
Options exercised ................. 12,500 125 9,250 -- 9,375
Net loss .......................... -- -- -- (5,876,699) (5,876,699)
-------------- -------------- -------------- -------------- --------------
Balance as of December 31, 2001 ... 8,577,690 85,777 36,379,615 (40,248,471) (3,783,079)
-------------- -------------- -------------- -------------- --------------
Net loss .......................... -- -- -- (2,110,749) (2,110,749)
-------------- -------------- -------------- -------------- --------------
Balance as of December 31, 2002 ... 8,577,690 $ 85,777 $ 36,379,615 $ (42,359,220) $ (5,893,828)
============== ============== ============== ============== ==============
See accompanying notes.
F-5
FILM ROMAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2000 2001 2002
-------------- -------------- --------------
OPERATING ACTIVITIES:
Net loss $ (2,585,897) $ (5, 876,699) $ (2,110,749)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................. 415,596 359,755 300,666
Amortization of film costs .................................... 43,106,536 45,345,423 41,858,236
Cumulative effect of a change in accounting principle ......... - 364,000 -
Changes in operating assets and liabilities:
Accounts receivable ........................................... 230,939 (9,891) 145,012
Film costs .................................................... (48,961,750) (43,180,741) (37,969,921)
Deposits and other assets ..................................... (195,362) 39,963 319,373
Accounts payable .............................................. (41,920) 5,278 164,841
Accrued expenses .............................................. (669,721) 138,122 133,372
Deferred revenue .............................................. 5,488,687 1,496,706 (4,285,936)
-------------- -------------- --------------
Net cash used in operating activities ............................ (3,212,892) (1,318,084) (1,445,106)
INVESTING ACTIVITIES:
Additions to property and equipment .............................. (200,497) (117,755) (53,693)
-------------- -------------- --------------
Net cash used in investing activities ......................... (200,497) (117,755) (53,693)
FINANCING ACTIVITIES:
Exercise of Stock Options ........................................ 58,937 9,375 -
-------------- -------------- --------------
Net cash provided by financing activities ..................... 58,937 9,375 -
-------------- -------------- --------------
Net decrease in cash ............................................. (3,354,452) (1,426,464) (1,498,799)
Cash and cash equivalents at beginning of period ................. 7,557,673 4,203,221 2,776,757
-------------- -------------- --------------
Cash and cash equivalents at end of period ....................... $ 4,203,221 $ 2,776,757 $ 1,277,958
============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes .................................................. $ 5,600 $ 5,600 $ 5,600
============== ============== ==============
See accompanying notes.
F-6
FILM ROMAN, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND ORGANIZATION
Film Roman, Inc., a Delaware corporation (the "Company"), currently
conducts all of its operations through its wholly owned subsidiaries, Film
Roman, Inc., a California corporation; Namor Productions, Inc., a California
corporation; Chalk Line Productions, Inc., a California corporation; Diversion
Entertainment, Inc., a Delaware corporation and Level 13 Entertainment, Inc., a
Delaware corporation, and Special Project Films, Inc., a Delaware corporation.
The Company operates in one segment and develops, produces and distributes a
broad range of television programming for the television network, cable
television, first-run domestic syndication and international markets.
MANAGEMENT STRATEGIES AND BASIS OF PRESENTATION
At December 31, 2002, the Company had cash and short-term investments
of approximately $1.3 million compared to $2.8 million at December 31, 2001. The
Company's cash and short-term investment balances have continued to decline and
the Company would expect cash balances to decline further during fiscal 2003.
The Company may need to secure additional equity or debt financing
during fiscal 2003 in order to fund its operations and/or fulfill its growth
strategies. However, operating losses, the Company's declining cash balances,
trends in the entertainment industry adversely affecting independent production
companies similar to the Company and the Company's historical stock performance
may make it difficult for the Company to attract equity investments on terms
that are deemed to be favorable to the Company. In addition, the Company's
losses may make it more difficult for the Company to attract debt financing. As
a consequence, there can be no assurance that the Company would be successful in
arranging for additional equity or debt financing at levels sufficient to meet
its planned needs, should it be required to do so. The failure to obtain such
financing could have an adverse effect on the implementation of the Company's
growth strategies and its ability to successfully run its operation.
The Company has taken a substantial number of actions in order to
implement significant cost reductions, including reducing expenditures for
development projects and in its corporate infrastructure. These cost reductions
could adversely impact the Company's ability to implement its business plans
resulting in a possible adverse impact on its future operations. Although
management believes that its existing cash balances and cash equivalents,
combined with anticipated cash flows will be sufficient to meet its cash
requirements through at least the next 12 months, all of the above conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
F-7
FILM ROMAN, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CASH AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less and investments in money
market accounts to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash equivalents and trade
receivables. The Company places its cash equivalents with high credit, quality
financial institutions. The Company has not incurred any losses relating to
these investments.
The Company performs production services for various companies within
the entertainment industry and licenses various rights in its product to
distributors throughout the world. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral. At December 31, 2002, substantially all of the Company's trade
receivables were from customers in the entertainment industry. Receivables
generally are due within 30 days. Credit losses relating to customers in the
entertainment industry consistently have been within management's expectations.
FINANCIAL INSTRUMENTS
Financial instruments are carried at historical cost which
approximates fair value.
REVENUE RECOGNITION AND FILM COSTS
Effective January 1, 2001, the Company recognizes revenue based on the
new accounting standard Statement of Position ("SOP") 00-2 (see note 12).
Revenue earned from fee-for-service productions is the principal source of
revenue earned by the Company. During 2001 and 2002, such revenues accounted for
more than 90% of the Company's total revenues. License fees received by the
Company for its work on fee-for-hire productions are recognized on an
episode-by-episode basis as each episode is completed and delivered to the
customer in accordance with the terms of the existing arrangement.
Revenue earned from proprietary programs is recognized as such
programs are exploited in the markets in which the Company has retained
ownership rights, typically upon the receipt of statements from the Company's
licensees. In the event that a licensee pays the Company a nonrefundable minimum
guarantee at the beginning of a license term, the Company will record this
amount as revenue if all of the criteria for recognition pursuant to SOP 00-2 is
met.
F-8
FILM ROMAN, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Costs incurred in connection with the acquisition of story rights, the
development of stories, production and allocable overhead are capitalized as
film costs. Film costs are stated at the lower of unamortized cost or fair
value. The costs of fee-for-service produced episodes are capitalized and
subsequently amortized to cost of revenues at the time revenue is recognized. If
the costs of an episode are expected to exceed the corresponding license fee,
all costs incurred in excess of this license fee will be expensed to cost of
revenues as incurred. The cost of each proprietary program is capitalized and is
amortized in the proportion that revenue realized relates to management's
estimate of the total revenue expected to be realized from such programs.
DEPRECIATION AND AMORTIZATION
Property and equipment are recorded at cost. Depreciation on furniture
and equipment is computed by the double-declining balance method over their
estimated useful lives, ranging from five to seven years. Leasehold improvements
are amortized over their estimated useful lives, or the remaining term of the
related lease, whichever is shorter, using the straight-line method.
INCOME TAXES
The Company uses the liability method required by Financial Accounting
Standards Board Statement (FAS) No. 109, "Accounting for Income Taxes." Deferred
taxes are provided for any differences between the carrying value of assets and
liabilities for financial reporting and tax purposes.
STOCK-BASED COMPENSATION
The Company accounts for its stock compensation arrangements under the
provisions of Accounting Principles Board (APB) No. 25, "Accounting for Stock
Issued to Employees" and intends to continue to do so. The Company has adopted
the disclosure provisions of FAS No. 123, "Accounting for Stock-Based
Compensation" (see Note 9).
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
NET LOSS PER COMMON SHARE
The per share data is based on the weighted average number of common
and common equivalent shares outstanding during the period. Common equivalent
shares, consisting of outstanding stock options of 1,525,250 (2000), 1,247,000
(2001) and 1,369,000 (2002) are not included since they are antidilutive.
F-9
FILM ROMAN, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 144 establishes a single accounting model
for the impairment of disposal of long-lived assets, including discontinued
operations. SFAS No. 144 changes the criteria that have to be met to classify an
asset as held-for-sale, extends the reporting of discontinued operations to all
components of an entity, and requires expected future operating losses from
discontinued operations to be recorded in the period in which the losses are
incurred. SFAS No. 144 was effective for the Company on January 1, 2002 and
generally is to be applied prospectively. The adoption of SFAS No. 144 had no
impact on the Company's consolidated results of operations or financial
position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123 (SFAS 123)." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation" to provide alternative methods of transition for a
voluntary change to the fair value-based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
SFAS No. 148 is effective for the year ending December 31, 2002. SFAS No.148 has
no material impact on the Company, as it does not plan to adopt the fair-value
method of accounting for stock options at the current time, and will continue to
apply the disclosure only provision of SFAS 123, as amended by SFAS 148. The
Company has included the required disclosures in Note 9.
F-10
FILM ROMAN, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
2. FILM COSTS
The components of film costs consist of the following:
December 31,
---------------------------------
2002 2001
--------------- ---------------
Film costs in process $ 21,844,184 $ 18,003,446
Film costs in development 185,843 138,266
--------------- ---------------
$ 22,030,027 $ 18,141,712
=============== ===============
All film costs in process will be fully amortized during the three
years ending December 31, 2005.
FILM ROMAN, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
4. INCOME TAXES
The significant components of the Company's net deferred tax assets
(liabilities), for which a 100% valuation allowance has been provided and which
have not been recognized in the Company's financial statements, are as follows:
December 31,
------------------------------
2001 2002
------------- --------------
Property and Equipment 92,915 119,097
Nondeductible accrual 158,576 102,391
Foreign Tax Credit Carryforward 162,995 162,995
Other 48,539 7,193
Net operating loss carryforwards 12,430,722 14,774,857
------------- --------------
12,893,747 15,166,533
Valuation allowance (12,893,747) (15,166,533)
------------- --------------
$ -- $ --
============= ==============
A reconciliation of income tax computed at the statutory federal
income tax rate to the effective tax rate for the Company is as follows:
December 31,
---------------------------------------------
2000 2001 2002
------------- ------------- -------------
Benefit for income taxes at statutory rate of 35% $ (905,064) $ (2,056,908) $ (738,762)
Permanent Differences 23,440 20,319 10,062
Benefit of deferred tax assets not currently recognized 881,624 2,036,589 728,700
------------- ------------- -------------
$ -- $ -- $ --
============= ============= =============
At December 31, 2002, the Company had available federal and state tax
net operating loss carryforwards of approximately $38,974748 and $19,730,161,
respectively, expiring through 2023 and 2013, respectively. At December 31,
2002, the Company had available foreign tax credit carryforwards of
approximately $162,995. Under Section 382 of the Internal Revenue Code, the
utilization of the net operating loss carryforward may be limited based on
changes in the percentage of ownership of the Company.
F-12
FILM ROMAN, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
5. STOCKHOLDERS' EQUITY (DEFICIENCY)
The Company's Board of Directors, without the approval of the holders
of the Common Stock, is authorized to designate for issuance up to 10,000,000
shares of preferred stock, par value $0.01 per share, in such series and with
such rights, privileges and preferences as the Board of Directors may from time
to time determine. Issuance of preferred stock may adversely affect the rights,
privileges and preferences afforded the holders of Common Stock, including a
decrease in the amount available for distribution to holders of the Common Stock
in the event of a liquidation or payment of preferred dividends. Issuance of
shares of preferred stock may also have the effect of preventing or delaying a
change in control of the Company without further action by the stockholders and
could make removal of present management of the Company more difficult. The
Company currently has no plans to designate and/or issue any shares of preferred
stock.
6. COMMITMENTS
The Company leases facilities for office space and its animation
studios under an operating lease for a five-year period expiring August 31, 2003
with an option for an additional five-year term. Under the terms of the lease
agreement the Company is required to pay a pro-rata share of the building's
operating expenses, maintenance and property taxes. The lease agreement includes
certain free rent periods and an escalation in the monthly rental amount, as
defined. The accompanying statements of operations for the years ended December
31, 2000, 2001 and 2002 reflect rent expense on a straight-line basis over the
term of the lease. The Company also has various lease agreements for equipment
and additional office space which expire through 2007. The following is a
schedule of the future minimum lease payments under all noncancelable operating
lease agreements:
Rent expense for the years ended December 31, 2000, 2001 and 2002,
prior to any allocation of rent to capitalized film costs, was $1,224,079,
$1,237,130, and $1,544,765, respectively.
At December 31, 2002, the Company had outstanding employment
agreements with various employees with initial terms ranging from one to two
years. Under the terms of the agreements, the Company is obligated to pay the
following amounts:
FILM ROMAN, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
7. 401(K) PROFIT SHARING PLAN
The Company has a defined contribution Profit Sharing 401(k) Savings
Plan which covers substantially all of its employees. The plan became effective
on January 1, 1991 and was amended effective January 1, 1992. Under the terms of
the plan, employees can elect to defer up to 15% of their wages, subject to
certain Internal Revenue Service (IRS) limitations, by making voluntary
contributions to the plan. Additionally, the Company, at the discretion of
management, can elect to match up to 100% of the voluntary contributions made by
its employees. The Company has received determination letters from the IRS
indicating that the above plan is qualified within the terms of the applicable
provisions of the Employee Retirement Income Security Act of 1974.
For the years ended December 31, 2000, 2001, and 2002 the Company
contributed $180,395, $155,020 and $165,863, respectively, to the plan on behalf
of its employees.
8. SIGNIFICANT CUSTOMERS AND PROPERTIES
In 2000, the Company earned revenue from two significant customers of
$31,420,000 (71%) and $11,110,000 (25%). In 2001, the Company earned revenue
from three significant customers of $27,590,000 (62%), $8,190,000 (19%) and
$3,820,000 (9%). In 2002, the Company earned revenue from two significant
customers of $35,130,000 (81%) and $6,480,000 (15%).
In 2000, the Company earned revenue from three significant properties
of $15,750,000 (35%), $15,560,000 (35%), and $6,940,000 (16%). In 2001, the
Company earned revenue from four significant properties of $14,390,000 (33%),
$13,190,000 (30%), $6,950,000 (16%) and $3,550,000 (8%). In 2002, the Company
earned revenue from three significant properties of $17,800,000 (41%),
$17,300,000 (40%) and $6,480,000 (15%).
9. STOCK OPTION PLAN
In 1996 the Company adopted a stock option plan (the "1996 Plan"). All
regular salaried employees of the Company may, at the discretion of the
compensation committee of the Board of Directors, be granted incentive and
non-qualified stock options to purchase shares of Common Stock at an exercise
price not less than 100% of the fair market value of such shares on the grant
date. Directors of the Company, consultants and other persons who are not
regular salaried employees of the Company are not eligible to receive incentive
stock options, but are eligible to receive non-qualified stock options.
The maximum number of shares subject to the 1996 Plan is 2,100,000 and
the 1996 Plan will terminate on August 7, 2005, unless sooner terminated by the
Board of Directors. The options generally vest over a five-year period and
expire ten years from the date of issuance.
On June 16, 1999, the shareholders ratified the 1999 Non-Employee
Director's Stock Option Plan ("1999 Plan"). As amended by the Board of Directors
the 1999 Plan provides that on the date of each annual meeting of the Company,
each non-employee Director who is then serving on the Board shall be granted
options to purchase 5,000 shares of Common Stock with an effective date of grant
as of the date such annual meeting. The exercise price for such option shall be
100% of the fair market value of such shares on the grant date. The maximum
number of shares subject to the 1999 Plan is 100,000 and the
F-14
FILM ROMAN, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
9. STOCK OPTION PLAN (CONTINUED)
1999 Plan will terminate on June 16, 2009, unless sooner terminated by the Board
of Directors. The options vest upon issuance and expire ten years from the date
of issuance.
In June 2000, the Company combined both the 1996 Plan and 1999 Plan
into one combined plan called the Amended and Restated 2000 Stock Option Plan
("2000 Plan"). The maximum number of shares subject to the 2000 Plan is the
2,200,000 shares that were subject to the previous plans. Options granted under
the 2000 Plan vest in the same manner as the 1996 Plan and the 1999 Plan and
expire ten years from the date of issuance. The 2000 Plan will terminate on June
14, 2010, unless sooner terminated by the Board of Directors.
The Company applies Accounting Principles Board Opinion 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for its
stock options. Accordingly, no compensation cost has been recognized. Had
compensation cost been determined based on the fair value at the grant date for
such awards, as set forth under FASB Statement No. 123, Accounting for
Stock-Based Compensation (FAS 123), the Company's net loss and net loss per
common share would have been increased to the pro forma amounts indicated below:
Year ended December 31,
---------------------------------------------
2000 2001 2002
------------- ------------- -------------
NET LOSS
As reported $ (2,585,897) $ (5,876,699) $ (2,110,749)
Pro forma $ (2,805,502) $ (6,345,587) $ (2,508,749)
NET LOSS PER SHARE
As reported $ (0.30) $ (0.69) $ (0.25)
Pro forma $ (0.33) $ (0.74) $ (0.29)
Since compensation expenses associated with option grants is
recognized over the vesting period, the initial impact of applying FAS 123 on
pro forma net loss and pro forma net loss per share is not representative of the
potential impact on pro forma amounts in future years, when the effect of the
recognition of a portion of compensation expenses from multiple awards would be
reflected.
The weighted average fair value of options granted during the year was
$1.18, $0.77 and $0.21 for the years ended December 31, 2000, 2001 and 2002. The
fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
FILM ROMAN, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
9. STOCK OPTION PLAN (CONTINUED)
A summary of stock option activity under the Plan is as follows:
Weighted Average
Shares Exercise Price
---------------- ----------------
Balance at December 31, 1999 (including 631,817 options exercisable at a
weighted average exercise price of $1.53 per share)....................... 1,192,500
Granted ................................................................... 630,000 $ 1.367
Exercised ................................................................. (41,000) $ 1.529
Cancelled ................................................................. (256,250) $ 1.585
----------------
Balance at December 31, 2000 (including 936,450 options exercisable at a
weighted average exercise price of $1.51 per share) ...................... 1,525,250
================
Granted ................................................................... 255,000 $ 0.877
Exercised ................................................................. (12,500) $ 0.750
Cancelled ................................................................. (520,750) $ 1.370
----------------
Balance at December 31, 2001 (including 810,669 options exercisable at a
weighted average exercise price of $1.51 per share) ...................... 1,247,000
================
Granted ................................................................... 150,000 $ 0.240
Cancelled ................................................................. (28,000) $ 1.393
----------------
Balance at December 31, 2002 (including 1,082,665 options exercisable at
a weighted average exercise price of $1.45 per share) .................... 1,369,000
================
Exercise prices for options outstanding as of December 31, 2002,
ranged from $0.20 to $2.94. The weighted-average remaining contractual life of
these options is 7.6 years.
As of December 31, 2001 and 2002, shares available under the 2000 Plan
for future grants of options were 897,030 and 775,030, respectively.
10. RELATED PARTY TRANSACTIONS
A firm in which an outside director of the Company is a shareholder
provides accounting and tax services to the Company and fees paid to that firm
during 2001 and 2002 amounted to $6,750 and $5,000 respectively. A firm in which
an outside director of the Company is the principal acts as a legal consultant
to the Company and fees paid to that firm during 2000, 2001 and 2002 amounted to
$140,706, $250,296 and $252,207, respectively.
F-16
FILM ROMAN, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
11. CHANGE IN ACCOUNTING PRINCIPLE
In June 2000, Statement of Position 00-2 "Accounting by Producers or
Distributors of Films" ("SOP 00-2") was issued. SOP 00-2 establishes new
financial accounting and reporting standards for producers and distributors of
films, including changes in accounting for advertising, development and overhead
costs. The Company adopted the provisions of SOP 00-2 as of January 1, 2001.
SOP 00-2 requires that certain indirect overhead costs and development
costs for abandoned projects be charged directly to expense, instead of those
costs being capitalized to film costs as was required under the previous
accounting model. In connection with the adoption of SOP 00-2, the Company
recorded a non cash charge of $364,000 to reduce the carrying value of its film
inventory. Such amount is primarily due to the expensing of certain indirect
overhead costs and development costs for abandoned projects, which were
previously capitalized. The non-cash charge is reflected as a cumulative effect
of a change in accounting principle in the accompanying consolidated statement
of operations for the year ended December 31, 2001.
F-17
FILM ROMAN, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
12. QUARTERLY INFORMATION (UNAUDITED)
2002
(In thousands, except per share and share data) THREE MONTHS ENDED
------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Revenue .......................................... $ 15,810 $ 11,081 $ 5,738 $ 10,672
Expenses:
Cost of revenue .............................. 15,794 10,499 5,851 9,714
Selling, general and administrative expenses . 842 758 911 1,084
------------ ------------ ------------ ------------
Operating loss ................................... (826) (176) (1,024) (126)
Interest income (expense), net ................... 10 6 3 22
------------ ------------ ------------ ------------
Net loss ......................................... $ (816) $ (170) $ (1,021) $ (104)
============ ============ ============ ============
Net loss per common share basic and diluted ..... $ (0.10) $ (0.02) $ (0.12) $ (0.01)
============ ============ ============ ============
Weighted average number of shares
outstanding basic and diluted .................... 8,577,690 8,577,690 8,577,690 8,577,690
============ ============ ============ ============
2001
(in thousands, except per share and share data) THREE MONTHS ENDED
--------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------- -------------- -------------- --------------
STATEMENT OF OPERATIONS DATA:
Revenue ............................................... $ 19,199 $ 9,401 $ 3,715 $ 11,773
Expenses:
Cost of revenue ................................... 18,254 9,287 4,405 13,399
Selling, general and administrative expenses ...... 923 1,416 1,342 657
-------------- -------------- -------------- --------------
Operating loss ........................................ 22 (1,302) (2,032) (2,283)
Interest income (expense), net ........................ 40 8 19 15
-------------- -------------- -------------- --------------
Income (Loss) before cumulative effect of change
in accounting principle ............................. 62 (1,294) (2,013) (2,268)
Cumulative effect of a change in accounting principle . 364 -- -- --
-------------- -------------- -------------- --------------
Net loss .............................................. $ (302) $ (1,294) $ (2,013) $ (2,268)
============== ============== ============== ==============
Income (loss) before cumulative effect of a change in
accounting principle per common share basic and
diluted .............................................. $ 0.01 $ (0.15) $ (0.23) $ (0.26)
============== ============== ============== ==============
Net loss per common share basic and diluted ........... $ (0.04) $ (0.15) $ (0.23) $ (0.26)
============== ============== ============== ==============
Weighted average number of shares
outstanding basic and diluted ........................ 8,565,190 8,565,465 8,577,690 8,577,690
============== ============== ============== ==============
F-18
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference into the following
Registration Statements, including amendments, pertaining to the Stock Option
Plan(s) of Film Roman, Inc.: Form S-8 (No. 333-19387), Form S-8 (No. 333-80779),
Form S-8 (No. 333-90003), and Form S-8 (No. 333-90009), of our report dated
March 24, 2003, with respect to the consolidated financial statements of Film
Roman, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 2002.
/s/ Ernst & Young LLP
----------------------------------
Ernst & Young LLP
Los Angeles, California
March 31, 2003
43
EXHIBIT 99.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, John W. Hyde, the Chief Executive Officer and Chief
Executive Officer of Film Roman, Inc. (the "Company"), has executed this
certification in connection with the filing with the Securities and Exchange
Commission of the Company's Annual Report on Form 10-K for the period ending
December 31, 2002 (the "Report"). The undersigned hereby certifies 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 operations of the
Company.
Date: March 31, 2003 /s/ John W. Hyde
-------------------------------------
Name: John W. Hyde
Title: Chief Executive Officer,
Chief Financial Officer
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