Our current directors and executive officers are set forth below. Biographical information concerning each of the directors and executive officers is presented on the following pages. Information is presented as of the date of this registration statement.
Our business and affairs are managed under our board of directors. Certain of our largest stockholders, specifically Henry Winterstern, for so long as he is serves as our chief executive officer, or if he is no longer our chief executive officer, PFLM, for so long as PFLM owns at least 10% of our outstanding common stock on an as converted basis, have the right to designate for nomination three members for our board pursuant to a stockholders agreement. See "Certain Relationships and Related Transactions—Stockholders' Agreement". Our board is composed of six directors, including Henry Winterstern, our chief executive officer. We are actively engaged in recruiting independent directors and expect to have at least one independent director, who we anticipate will also serve as Chairman of our audit committee, by the end of 2006.
The following table sets forth certain information regarding compensation paid by us to our chief executive officer and to each of our four most highly compensated executive officers whose salary and bonus for 2005 exceeded $100,000.
The following table sets forth each grant of stock options during 2005 to each of the executive officers.
The following table sets forth information for each of the named executive officers regarding the number of shares subject to both exercisable and unexercisable stock options, as well as the value of the unexercised options at December 31, 2005.
Aggregated Option Exercises in 2005
and December 31, 2005 Option Values
| | | Number of Securities
Underlying Unexercised
Options at
December 31, 2005 (#)
| Value of Unexercised
In-the-Money Options at
December 31, 2005 ($)(1)
| |
|---|
Name
| Share
Acquired on
Exercise (#)
| Value
Realized
($)
| Exercisable
| Unexercisable
| Exercisable
| Unexercisable
|
|---|
| Henry Winterstern | | | | 0 | | | 0 | | | 750,000 | | | 750,000 | | $ | -- | | $ -- | | |
| Henry Winterstern | | | | 0 | | | 0 | | | 750,000 | | | 750,000 | | $ | -- | | $ -- | | |
| William F. Lischak | | | | 0 | | | 0 | | | 1,000,000 | | | 1,000,000 | | $ | -- | | $ -- | | |
| William F. Lischak | | | | 0 | | | 0 | | | 440,000 | | | -- | | $ | 166,611 | | $ -- | | |
| William F. Lischak | | | | 0 | | | 0 | | | 75,000 | | | -- | | $ | -- | | $ -- | | |
| William F. Lischak | | | | 0 | | | 0 | | | 10,000 | | | -- | | $ | -- | | $ -- | | |
| Christopher J. Cooney | | | | 0 | | | 0 | | | -- | | | -- | | $ | -- | | $ -- | | |
| Richard Shore | | | | 0 | | | 0 | | | -- | | | 300,000 | | $ | -- | | $ -- | | |
| Kenneth Lynch | | | | 0 | | | 0 | | | -- | | | 100,000 | | $ | -- | | $ -- | | |
| Kenneth Lynch | | | | 0 | | | 0 | | | 15,000 | | | -- | | $ | 5,680 | | $ -- | | |
_______________________
(1) Assumes, for all unexercised in-the-money options, the difference between the fair market value of $0.45 per share at December 31, 2005 and the exercise price of the options ranging from $0.10 to $1.51 per share.
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2005 regarding all of our existing compensation plans pursuant to which shares of equity securities are authorized for issuance:
Plan Category
| Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights (a)
| Weighted-average
exercise price of
outstanding
options, warrants
and rights (b)
| Number of
securities
remaining available
for future issuance
under equity
compensation plans
(excluding
securities
reflected in column
(a)) (c)
|
|---|
| | | |
|---|
| Equity compensation plans | | | | | | | |
| approved by securityholders | | 5,299,500 | | $ 1 | .05 | 815,500 | |
| Equity compensation plans not | |
| approved by securityholders | | 3,000,000 | | $ 1 | .31 | 0 | |
|
|
|
|
| Total | | 8,234,500 | | $ 1 | .15 | 815,500 | |
Compensation Arrangements For Current Executive Officers
Henry Winterstern
In July 2005, we entered into an employment agreement with Henry Winterstern, which provides for Mr. Winterstern to serve as our chief executive officer for a two-year term ending in July 2007. Under the terms of the agreement, Mr. Winterstern receives a base salary of $400,000 per annum. Mr. Winterstern also is entitled to a bonus, if any, as may be determined in the discretion of the board. The agreement contains a non-compete clause whereby Mr. Winterstern has agreed not to compete with us for the duration of the agreement. In connection with our acquisition of Ventura and our entering into the bridge loan agreement with PFLM and the other lenders thereto, on March 20, 2006, Mr. Winterstern's employment agreement was amended. Pursuant to the amendment, effective as of March 20, 2006, Mr. Winterstern agreed to reduce and defer his base salary by $100,000 to $300,000 per annum and defer his entire bonus or other compensation to which he is entitled until such time that the loans and all other commitments arising under the bridge loan agreement are paid in full and the lenders' respective commitments are terminated. That condition has now been satisfied and Mr. Winterstern's compensation has returned to its contractual terms.
In connection with his employment agreement and pursuant to a stock option agreement entered into on November 14, 2005, we granted Mr. Winterstern an option to purchase 3,000,000 shares of common stock at exercise prices of $1.11 per share for 1,500,000 shares and $1.51 for 1,500,000 shares. These options vest as follows: 750,000 on the date of the employment agreement, 750,000 on December 31, 2005 and 1,500,000 on December 31, 2006, subject to the terms of the stock option agreement. As of December 31, 2005, 1,500,000 options were exercisable. Once exercisable, the options will remain exercisable until July 28, 2015.
Christopher J. Cooney
In July 2005, we entered into an employment agreement with Christopher J. Cooney, which provides for Mr. Cooney to serve as our president of branded entertainment for a two-year term ending in July 2007. Under the terms of the agreement, Mr. Cooney receives a base salary of $250,000 per annum. Mr. Cooney also is entitled to a bonus, if any, as may be determined in the discretion of the board. The agreement contains a non-compete clause whereby Mr. Cooney has agreed not to compete with us for the duration of the agreement. In connection with our acquisition of Ventura and our entering into the bridge loan agreement with PFLM and the other lenders thereto, on March 20, 2006, Mr. Cooney's employment agreement was amended. Pursuant to the amendment, effective as of March 20, 2006, Mr. Cooney agreed to reduce and defer his base salary by $250,000 per annum and defer his entire bonus or other compensation to which he is entitled until such time that the loans and all other commitments arising under the bridge loan agreement are paid in full and the lenders' respective commitments are terminated. That condition has now been satisfied and Mr. Cooney's compensation has returned to its contractual terms.
William F. Lischak
In July 2005, we entered into an employment agreement with William F. Lischak, which provides for Mr. Lischak to continue to serve as our president and chief operating officer for a two-year term ending in July 2007. Mr. Lischak receives a base salary of $350,000 per annum for the first year and $375,000 for the second year. Mr. Lischak also will be entitled to a bonus, if any, as may be determined in the discretion of the board. The agreement contains a non-compete clause whereby Mr. Lischak agreed not to compete with us for the duration of the agreement. In connection with our acquisition of the assets of Ventura and our entering into the bridge loan agreement with PFLM and the other lenders thereto, on March 20, 2006, Mr. Lischak's employment agreement was amended. Pursuant to the amendment, effective as of March 20, 2006, Mr. Lischak agreed to reduce and defer his base salary by $50,000 to $300,000 for the first year and $325,000 for the second year, and defer his entire bonus or other compensation to which he is entitled until such time that the loans and all other commitments arising under the bridge loan agreement are paid in full and the lenders' respective commitments are terminated. That condition has now been satisfied and Mr. Lischak's compensation has returned to its contractual terms.
In connection with his employment agreement and pursuant to a stock option agreement entered into simultaneously with the employment agreement, we granted Mr. Lischak an option under our 2005 Performance Equity Plan to purchase 2,000,000 shares of common stock at an exercise price of $1.11 per share, which options vest as follows: 500,000 on the date of the employment agreement, 500,000 on December 31, 2005 and 1,000,000 on December 31, 2006, subject to the terms of the stock option agreement. As of December 31, 2005, 1,000,000options were exercisable. Once exercisable, the options will remain exercisable until July 28, 2015.
Richard Shore
Pursuant to an amended and restated employment agreement between Capital Entertainment and Richard Shore effective as of December 21, 2004, Mr. Shore was engaged to serve as Capital Entertainment's senior vice president, business affairs and operations. Upon our merger with Capital Entertainment, we assumed his employment agreement and engaged Mr. Shore to serve as our chief administrative officer for a term ending in January 2007. Mr. Shore receives a base salary of $250,000 per annum. Mr. Shore also will be entitled to an additional bonus, if any, as may be established by the board based on performance criteria and financial and operational results of our company. The agreement contains a non-compete clause whereby Mr. Shore agreed not to compete with us for the duration of the agreement and for one year after its termination.
Kenneth Lynch
In June 2006, we entered into an employment agreement with Kenneth Lynch, which provides for Mr. Lynch to be our senior vice president and controller of our company. Mr. Lynch receives a base salary of $175,000 per annum. Mr. Lynch also will be entitled to an additional bonus, if any, as may be established by the board based on performance criteria for our company. On August 3, 2006, Mr. Lynch was also granted an option to purchase 35,000 shares of our common stock, at an exercise price of $1.11.
Stock Option Plans
1996 Basic Stock Option Plan
In October 1996, our stockholders approved the 1996 Basic Stock Option and Stock Appreciation Rights Plan under which a total of 550,000 shares of common stock are available for grant to our regular full-time employees, non-employee members of the board of directors, independent consultants and other persons who provide services to us on a regular or substantial basis. Awards consist of stock options (both non-qualified options and options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code) and stock appreciation rights. As of December 31, 2005, options to purchase an aggregate of 224,500shares of common stock were outstanding under the basic option plan, with exercise prices ranging from $1.75 to $5.25 per share.
2000 Performance Equity Plan
In November 2000, our stockholders approved the 2000 Performance Equity Plan, under which a total of 1,000,000 shares of common stock were available for grant to our key employees, officers, directors and consultants. Awards consist of stock options (both non-qualified options and options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code), restricted stock awards, deferred stock awards, stock appreciation rights and other stock-based awards, as described in the 2000 plan. As of December 31, 2005, options to purchase an aggregate of 675,000shares of common stock were outstanding under the 2000 plan at an exercise price of $0.10 per share.
2005 Performance Equity Plan
In August 2005, our stockholders approved the 2005 Performance Equity Plan, under which a total of 4,640,000 shares of common stock are available for grant to our key employees, officers, directors and consultants. Awards consist of stock options (both non-qualified options and options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code), restricted stock awards, deferred stock awards, stock appreciation rights and other stock-based awards, as described in the 2005 plan. As of December 31, 2005, options to purchase an aggregate of 4,400,000shares of common stock were outstanding under the 2005 plan at an exercise price of $1.11 per share.
Non-Plan Options
The following is a table of the non-plan options that our company granted.
Date of Option Grant
| Name of Grantee
| No. of Shares
Exercisable
| Exercise
Price
(per share)
| Expiration
Date
| |
|---|
| 07/11/99 | | Gary Stein | | 10,000 | | $2.440 | | 7/11/09 | | | |
| 04/8/05 | | Richard Williams | | 499,693 | | $0.01 | | 04/8/15 | |
| 11/14/05 | | Henry Winterstern | | 1,500,000 | | $1.11 | | 11/14/15 | |
| 11/14/05 | | Henry Winterstern | | 1,500,000 | | $1.51 | | 11/14/15 | |
| 01/01/06 | | Ruth Vitale | | 750,000 | | $1.11 | | 01/01/16 | |
| 03/20/06 | | Larry Hayes | | 1,000,000 | | $0.01 | | 03/20/16 | |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Loan from Reverge Anselmo. In December 2004, Reverge Anselmo, a former director of our company and securityholder, made a $1,000,000 payment to a third party producer in partial payment of accrued amounts owing with respect to our acquisition of a particular film in exchange for our promise to repay such payment within six months along with interest at a rate of twenty percent for the period such payment was outstanding. The arrangement was evidenced by an agreement whereby we also designated a specific account receivable as assigned to Mr. Anselmo toward such repayment. The obligation is reflected in our payable to producer liability at December 31, 2004. Our obligation to Mr. Aneselmo was paid in two $500,000 installments on January 25, 2005 and March 25, 2005, with accrued interest of $32,500 which was recorded as interest expense in our statement of operations for the quarter ended March 31, 2005.
Letter of Credit issued on our behalf by George Cooney. In April 2004, George Cooney, father of Christopher Cooney, one of our directors, and also an owner of Rosemary Street, one of our Majority Stockholders, issued a letter of credit on our behalf in the amount of $3.5 million in favor of JPMorgan, as agent under our revolving credit facility, and the participating lending group. The letter of credit terminated in July 2005 when the obligations due to JPMorgan under the revolving credit facility were satisfied. In order to induce Mr. Cooney to issue the letter of credit on our behalf, we agreed to pay him an annual fee of $175,000, payable in monthly installments of $12,500. The letter of credit expired in July 2005. During the years ended December 31, 2005 and 2004, we paid $87,500 and $100,000, respectively, to Mr. Cooney in annual fee payments.
Securities Purchase Agreement. On November 10, 2005, in connection with our acquisition of assets of DEJ, we consummated a Securities Purchase Agreement with PFLM and Highgate in which we sold to PFLM and Highgate for a total purchase price of $23.6 million (i) the principal amount of up to $23.6 million of 10% secured convertible debentures which are due in November 2010 and are convertible into shares of our common stock and (ii) warrants to purchase an aggregate of 6 million shares of common stock. We also paid PFLM and Highgate an aggregate of 1 million shares of our common stock as a structuring fee. We have a right of redemption at the price of 120% of the face value amount redeemed plus accrued interest. Pursuant to an Assignment Agreement, dated March 31, 2006, Highgate assigned its interests to Cornell Capital Markets, LP, whereafter, pursuant to an Assignment Agreement, dated May 31, 2006, Cornell assigned its interests to PFLM.
Registration Rights Agreement. In connection with the Securities Purchase Agreement dated as of November 10, 2005, we granted to PFLM and Highgate certain registration rights under the Securities Act and applicable state securities law. The registrable securities include 63,891,891 shares of our common stock, 42,594,594 of which are being held in escrow pending the conversion and/or issuance of shares of our common stock upon conversion of the secured convertible debentures and exercise of the warrants, 1 million shares of which were issued to PFLM and Highgate as a structuring fee and the remaining 20,297,297 shares of which were issued to PFLM in connection with other various financing transactions.
Pursuant to the terms of the Registration Rights Agreement, we agreed to prepare and file by April 9, 2006 a registration statement on Form S-1 or SB-2 for the resale by the investors of all the registrable securities. We also agreed to keep such registration statement "evergreen" for the life of the convertible debentures or until Rule 144(k) of the Securities Act is available to the holders for the conversion shares and warrant shares. Because we did not file the registration statement in a timely manner, we are subject to paying the investors liquidated damages of 1% per month, or $236,400 per month, of the outstanding principal amounts for the convertible debentures until November 15, 2006, and thereafter we will pay liquidated damages of 2% of the outstanding principal amounts for the convertible debentures until the registration statement of which this prospectus forms a part is declared effective. We also agreed to indemnify the investors, and their directors, officers and employees for any claims and administrative or regulatory proceedings in connection with the filing of such registration statement.
Amended Credit Facility. We, as borrower, entered into an Amendment to Loan Agreement with PFLM, LLC, as lender, effective July 26, 2005. The amendment modified a revolving credit facility agreement dated June 20, 2000 that we entered into with JPMorgan Chase Bank, as agent. JPMorgan assigned its interest in the credit facility to PFLM in exchange for PFLM satisfying the outstanding commitment owing to JPMorgan under the credit facility. Pursuant to the amendment, we borrowed an aggregate of $20 million from PFLM. The base interest rate under the PFLM loan was 5% per annum, compounded annually, with all interest for any calendar year becoming due on the first day of the calendar year (however, interest for calendar year 2005 was pro-rated and due on the effective date of the amended facility). The amended PFLM loan was a term loan that, absent earlier conversion, would mature on July 26, 2007. The PFLM loan was convertible into our common stock at a conversion price calculated at one share of our common stock for every $1.11 of the outstanding balance of the loan, on an all or nothing basis, upon us entering into a senior secured credit facility and obtaining an audit opinion without a "going concern" emphasis paragraph. These conditions were satisfied on June 15, 2006 and July 7, 2006, respectively, and, as such, on July 7, 2006, PFLM converted the $21,457,397 (consisting of $20 million principal plus $1,457,397 accrued interest) due under the loan to 19,330,988 shares of our common stock.
Investor Rights Agreement.Pursuant to an Investor Rights Agreement dated July 29, 2005, we agreed to furnish PFLM, Henry Winterstern and Richard Williams with two demand registration rights. Additionally, other holders of certain of our securities also were granted piggyback rights. We are obligated to notify the holders of our registrable securities in writing at least 30 days prior to filing any registration statement for the purposes of effecting a public offering of our securities and each such holder may participate in such registration statement to register all or any part of their registrable securities. We are not obligated to effect a registration if the aggregate price of such securities to the public is less than $3 million or the holders of such securities are eligible to sell all of their registrable securities within the 90-day period under Rule 144. Holders are limited in selling or otherwise transferring any registrable securities for up to 180 days after the effective date of the applicable filed registration statement.
Each holder of our registrable securities has a right of first refusal to purchase any new securities issued by us on a pro rata basis. Each such securityholder must be given 30 days written notice prior to the sale or transfer of such shares, and each such securityholder has 30 days after the date of such notice to agree to purchase such shares. There is a 10-day over allotment notice period in which non-purchasing holder's pro rata shares of such offering are available for purchase on a relative pro rata share basis to other purchasing holders. After all notice periods have expired, we have 120 days thereafter to sell the new securities with respect to such securityholders' rights of first refusal which were not exercised, at a price and upon general terms not materially more favorable to the purchasers.
Stockholders' Agreement. Pursuant to a Stockholders' Agreement, executed July 29, 2005, there are certain restrictions on the transfer or sale of our common stock. PFLM, Seven Hills, Rosemary Street, Henry Winterstern, Christopher J. Cooney and William F. Lischak were granted a reciprocal right of first refusal to purchase shares of our common stock that any of them desire to sell or transfer on a pro rata basis at the same price and subject to the same material terms as in the proposed transfer or sale.
Pursuant to the terms of the Stockholders' Agreement, our board of directors is obligated to increase its membership from six to eight members no later than January 29, 2007. The two additional members to the board of directors must be mutually approved by the then existing directors, each satisfying independence requirements, and at least one of whom will qualify as an "audit committee financial expert" under the applicable SEC rules. Three individuals on the board of directors will be designated by Christopher J. Cooney so long as he or his affiliates hold at least 10% of the outstanding common stock of our company. Three individuals on the board of directors will be designated by Henry Winterstern for so long as he is chief executive officer of our company (or three individuals elected by PFLM if he is no longer the chief executive officer and if PFLM owns or would own upon exercise of its conversion rights, at least 10% of the outstanding stock of our company). PFLM has the right to vote as a stockholder in the same manner as though it held the number of stock into which the PFLM Loan is convertible.
Winterstern Stock Sale Agreement. Pursuant to an agreement dated April 21, 2006, Henry Winterstern, our chief executive officer, sold an aggregate of 1.25 million shares of our common stock owned by him at a price of $1 per share, 1.2 million shares of which were sold to PFLM and 50,000 shares of which were sold to Mitchell P. Goldstein, one of our directors.
Acquisition Agreement with Dual Films Productions, Inc.Henry Winterstern, our chief executive officer, is the sole shareholder of Dual Films Productions, Inc. In 2005, Dual Films produced a film entitledWassup Rockers. Pursuant to an Acquisition Agreement dated as of June 1, 2006, we agreed to distributeWassup Rockersin the United States and Canada. The term of the agreement expires upon the fifteenth anniversary of the date we initially release the film. As consideration for our services under the Acquisition Agreement, we are entitled to receive 20% distribution fee on the film's gross receipts while simultaneously Dual Films receive a 20% "gross corridor" on the film's gross receipts. The remaining balance of gross receipts are retained by us and applied toward repayment of all third-party costs and expenses incurred by us relating to our acquisition, distribution and exploitation of the film, the balance of the gross receipts are to be split equally between Dual Films and us.
PRINCIPAL AND SELLING SECURITYHOLDERS
Principal Stockholders
The following table sets forth certain information as of August 14, 2006 with respect to the common stock ownership of:
| • | those persons or groups known to beneficially own more than 5% of our voting securities; |
| • | each executive officer listed in the Summary Compensation Table; and |
| • | all current directors and executive officers as a group. |
Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934. The information concerning the stockholders is based upon information furnished to us by these stockholders. Except as otherwise indicated, all of the shares of common stock are owned of record and beneficially and the persons identified have sole voting and investment power with respect to the shares. Except as otherwise indicated in the table below, the business address of each of the persons listed is care of First Look Studios, Inc., 8000 Sunset Boulevard, Penthouse East, Los Angeles, California 90046.
| Shares
Beneficially Owned |
|---|
Name of Beneficial Owner
| Number
| Percent
|
|---|
| PFLM, LLC (1) | | 31,530,989 | | 53 | .8% |
| Henry Winterstern | | 9,500,449 | | 16 | .2% |
| Rosemary Street Productions, LLC | | 6,216,620 | | 10 | .6% |
| Seven Hills Pictures, LLC (2) | | 3,511,571 | | 6 | .0% |
| William F. Lischak | | 1,774,560 | | 3 | .0% |
| Christopher J. Cooney (3) | | 6,216,620 | | 10 | .6% |
| Charles Phillips | | 0 | | 0 | |
| Mitchell P. Goldstein | | 50,000 | | 0 | .1% |
| Richard Shore | | 100,000 | | 0 | .2% |
| Kenneth Lynch | | 48,333 | | 0 | .1% |
All executive officers and directors as a group
(8 persons) | | 16,423,498 | | 28 | .0% |
| (1) | PFLM, LLC and PFLM Funding, LLC are managed by Prentice Capital Management, LP and owned by its affiliated funds and managed accounts. Prentice exercises voting and investment authority with respect to the shares of common stock held by PFLM, LLC and PFLM Funding, LLC. Michael Zimmerman is Managing Member of Prentice Management GP, LLC which is the general partner of Prentice Capital Management, LP. Each of Prentice Capital Management, LP and Zimmerman disclaim beneficial ownership of the shares of common stock held by PFLM, LLC, except to the extent of their pecuniary interest therein. Of the 31,530,989 shares of our common stock beneficially owned by PFLM, PFLM, LLC owns 27,530,989 shares and PFLM Funding, LLC owns 4,000,000 shares. |
| (2) | Reverge Anselmo, a former director of the Company, is the sole member and manager of Seven Hills Pictures, LLC. |
| (3) | Christopher J. Cooney is a manager and the president of Rosemary Street Productions, LLC. All shares indicated are deemed beneficially owned by Mr. Cooney due to his relationship with Rosemary Street. |
Selling Securityholders
This prospectus relates to the possible resale by PFLM and its affiliates of the Convertible Debentures, shares of our common stock that we may issue upon conversion of the Convertible Debentures and shares of our common stock issuable upon exercise of certain warrants issued to them and shares of our common stock owned by them. We are filing the registration statement of which this prospectus is a part pursuant to the provisions of the Registration Rights Agreement. We are also registering for sale shares of our common stock held by other selling securityholders identified below, to permit the such selling securityholders and PFLM and their pledgees, donees, transferees and other successors-in-interest that receive their shares from a stockholder as a gift, partnership distribution or other non-sale related transfer after the date of this prospectus to resell the shares when and as they deem appropriate. The following table sets forth:
| • | the name of the selling securityholders; |
| • | the number and percent of shares of our common stock that the selling securityholders beneficially owned prior to the offering for the shares under this prospectus; |
| • | the number of shares of our common stock that may be offered for the account of the selling securityholders under this prospectus; and |
| • | the number and percent of shares of our common stock to be beneficially owned by the selling securityholders after the offering of the shares (assuming all of the offered shares are sold by the securityholders). |
The number of shares in the column "Number of Shares Being Offered" represents all of the shares that each selling securityholder may offer under this prospectus. We do not know how long the selling securityholders will hold the shares before selling them or how many shares they will sell and we currently have no agreements, arrangements or understandings with any of the selling securityholders regarding the sale of any of the shares. The shares offered by this prospectus may be offered from time to time by the selling securityholders listed below.
This table is prepared solely based on information supplied to us by the listed selling securityholders, assumes the sale of all of the shares and is based on beneficial ownership of our common stock by the selling securityholders as of July 31, 2006.
| Shares Beneficially Owned
Prior To Offering(1)
| Number of Shares
Being Offered
| Shares Beneficially
Owned
After Offering
|
|---|
Selling Securityholders
| Number
| Percent
| | Number
| Percent
|
|---|
| PFLM, LLC (2) | | 74,125,583 | | 73 | .8% | 74,125,583 | | 0 | | 0 | |
| Seven Hills Pictures, LLC (3) | | 3,511,571 | | 3 | .5% | 3,511,571 | | 0 | | 0 | |
| Henry Winterstern (4) | | 11,000,449 | | 11 | .0% | 8,000,449 | | 3,000,000 | | 3.0% | |
| Robert and Ellen Little(5) | | 1,364,406 | | 1 | .4% | 1,364,406 | | 0 | | 0 | |
| Christopher J. Cooney (6) | | 6,216,620 | | 6 | .2% | 6,216,620 | | 0 | | 0 | |
| William F. Lischak (7) | | 2,774,560 | | 2 | .8% | 249,560 | | 2,525,000 | | 2.5% | |
| Reverge Anselmo (8) | | 3,511,571 | | 3 | .5% | 3,511,571 | | 0 | | 0 | |
| Mitchell P. Goldstein | | 50,000 | | 0 | .1% | 50,000 | | 0 | | 0 | |
| (1) | Based on the number of issued and outstanding shares of common stock as of July 31, 2006. All percentages of beneficial ownership presented herein are calculated after giving effect to the issuance of the shares of our common stock pursuant to exercise of warrants currently owned by the selling securityholders and the conversion of the Convertible note, including such additional notes issued in payment of accrued interest thereon for the period from July 31, 2006 through maturity, November 10, 2010. |
| (2) | Prentice Capital Management, LP is the Manager of PFLM, LLC and exercises voting and investment authority with respect to the shares of common stock held by PFLM, LLC. Michael Zimmerman is Managing Member of Prentice Management GP, LLC which is the general partner of Prentice Capital Management, LP. Each of Prentice Capital Management, LP and Zimmerman disclaim beneficial ownership of the shares of common stock held by PFLM, LLC, except to the extent of their pecuniary interest therein. PFLM shares to include 10% debenture shares, warrants and fee shares regarding DEJ transaction. The address for PFLM, LLC is 623 Fifth Avenue, 32nd Floor, New York, NY 10022. |
| (3) | The address for Seven Hills Pictures, LLC is c/o Northway Management, 164 Mason Street, Greenwich, CT 06830. |
| (4) | Includes 8,000,449 shares owned by Henry Winterstein and options to purchase 1,500,000 shares at $1.11 and options to purchase 1,500,000 shares at $1.51. |
| (5) | The address for Robert and Ellen Little is 12309 View Crest Rd., Studio City, CA 91604. |
| (6) | Christopher J. Cooney is the managing partner of Rosemary Street Productions, LLC. All shares indicated are deemed beneficially owned by Mr. Cooney due to his relationship with Rosemary Street. |
| (7) | Includes 249,560 shares owned by William Lischak and options to purchase 10,000 shares at $2.4375, options to purchase 75,000 shares at $3.40, options to purchase 440,000 shares at $0.10 and options to purchase 2,000,000 shares at $1.11. |
| (8) | Reverge Anselmo is the Managing Partner of Seven Hills Pictures, LLC. All shares indicated are deemed beneficially owned by Mr. Anselmo due to his relationship with Seven Hills Pictures, LLC. |
PLAN OF DISTRIBUTION
The selling securityholders may sell the shares, for cash, from time to time in one or more transactions at:
| • | market prices at the time of sale; |
| • | varying prices and terms to be determined at the time of sale; or |
The selling securityholders will act independently of us in making decisions regarding the timing, manner and size of each sale. The selling securityholders may effect these transactions by selling the shares to or through broker-dealers. Broker-dealers engaged by the selling securityholders may arrange for other broker-dealers to participate in the resales. The shares may be sold in one or more of the following types of transactions:
| • | block trade(s) in which a broker-dealer attempts to sell the shares as agent but may resell a portion of the block as principal to facilitate the transaction; |
| • | purchase(s) by a broker-dealer as principal and resale(s) by the broker-dealer for its account under this prospectus; |
| • | ordinary brokerage transactions and transactions in which a broker solicits purchasers; |
| • | privately negotiated transactions between the selling securityholders and purchasers, without a broker-dealer; |
| • | a combination of any of the above transactions; and |
| • | any other method permitted pursuant to applicable law. |
We may amend or supplement this prospectus from time to time to describe a specific or additional plan of distribution. If the plan of distribution involves an arrangement with a broker-dealer for the sale of shares through a block trade, special offering, exchange distribution or secondary distribution, or a purchase by a broker-dealer, the supplement will disclose:
| • | the name of the selling securityholder and the participating broker-dealer; |
| • | the number of shares involved; |
| • | the price at which the shares were sold; |
| • | the commissions paid or discounts or concessions allowed to the broker-dealer; |
| • | that the broker-dealer did not conduct any investigation to verify the information contained or incorporated by reference in this prospectus; and |
| • | any other facts material to the transaction. |
In addition, if a selling securityholder notifies us of any material change with respect to the plan of distribution of the shares described herein, we will file a post-effective amendment to the registration statement of which this prospectus forms a part.
The selling securityholders may enter into hedging transactions with broker-dealers in connection with distributions of the shares. In these transactions, broker-dealers may engage in short sales of the shares to offset the positions they assume with the selling securityholders. The selling securityholders also may sell shares short and redeliver the shares to close out their short positions. The securityholders may enter into option or other transactions with broker-dealers that require the delivery to the broker-dealer of the shares. The broker-dealer may then resell or otherwise transfer the shares under this prospectus. The securityholders also may loan or pledge the shares to a broker-dealer. The broker-dealer may sell the loaned or pledged shares under this prospectus.
The selling securityholders may pledge or grant a security interest in some or all of the debentures, warrants or shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledges or secured parties may offer and sell the shares of common stock (including the shares of common stock underlying the debentures and warrants) from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933, as amended, amending, if necessary, the list of selling securityholders to include the pledge, transferee other successors in interest as selling securityholders under this prospectus.
Broker-dealers or agents may receive compensation from selling securityholders in the form of commissions, discounts or concessions. Broker-dealers or agents may also receive compensation from the purchasers of the shares for whom they act as agents or to whom they sell as principals, or both. A broker-dealer's compensation will be negotiated in connection with the sale and may exceed the broker-dealer's customary commissions. Broker-dealers, agents or the securityholders may be deemed to be "underwriters" within the meaning of the Securities Act in connection with sales of the shares. Any commission, discount or concession received by these broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting discounts or commissions under the Securities Act.
Because the selling securityholders may be deemed to be "underwriters" within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act. In addition, any securities covered by this prospectus that qualify for resale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus.
The selling securityholders have advised us that they have not entered into any agreements, understandings or arrangements with any underwriter or broker-dealer regarding the sale of the shares. There is no underwriter or coordinating broker acting in connection with the proposed sale of the shares by the selling securityholders.
The shares will be sold only through registered or licensed brokers or dealers if so required under applicable state securities laws. In addition, in certain states the shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the shares may not simultaneously engage in market making activities with respect to our common stock for a period of two business days prior to the commencement of the distribution. In addition, the selling securityholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of our common stock by the selling securityholders or any other person. We will make copies of this prospectus available to the selling securityholders and we have informed them of the requirement to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale.
We have provided this prospectus at the request of the selling securityholders in replacement of certain registration rights that certain of such selling securityholders and their affiliates had in connection with its acquisition of shares of our common stock. The selling securityholders will pay all commissions and discounts, if any, associated with the sale of the shares. The selling securityholders may agree to indemnify any broker-dealer or agent that participates in sales of the shares against specified liabilities, including liabilities arising under the Securities Act. We have limited indemnifications from third parties relative to any claims. There may be liabilities assumed in any acquisition or business combination that we did not discover or that we underestimated in the course of performing our due diligence investigation. Due to the nature of our business and our recent acquisition and mergers, we often obtain limited indemnification obligations from sellers under the applicable acquisition or merger agreements.
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 110 million shares of capital stock, of which 100 million shares are designated common stock, par value $.001 per share, and 10 million shares are designated preferred stock, par value $.001 per share.
Common Stock
Holders of our common stock are entitled to one vote per share on all matters to be voted on by our stockholders. The holders of our common stock do not have cumulative voting rights, which means that the holders of more than 50% of the shares voted can elect all of our directors. Holders of our common stock are entitled to receive such dividends, if any, as may be declared from time to time by the board of directors out of legally available funds. In the event we are liquidated or dissolved, holders of our common stock are entitled to receive all assets available for distribution to them. Holders of our common stock have no preemptive or other subscription rights and there are no conversion rights or redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are validly issued, fully paid and non-assessable.
Preferred Stock
Our restated certificate of incorporation authorizes us to issue preferred stock with such designations, rights and preferences as may be determined by our board of directors. Accordingly, the board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the common stock holders. In addition, the preferred stock could be utilized as a methods of discouraging, delaying or preventing a change in control. Currently, there is no issued and outstanding preferred stock.
Series A Preferred Stock
The Series A preferred stock ranks senior to our common stock and all other future capital stock that does not expressly provide for it to be senior to the Series A preferred stock and ranks equally with all capital stock created in the future that expressly provides for it to be on parity with the Series A preferred stock. We are not permitted to issue any senior securities without the consent of the holders of the Series A preferred stock. The Series A preferred stock has a liquidation preference over the common stock and holders of the Series A preferred stock will have pre-emptive rights to maintain their proportionate economic interest if we sell any additional common stock or convertible securities.
Holders of the Series A preferred stock are entitled to vote on all matters on an as-converted basis. In addition, so long as any shares of Series A preferred stock is outstanding, the affirmative vote of the holders of a majority of the outstanding shares of Series A preferred stock, voting together as a single class, will be necessary to (i) amend, alter or repeal any provision of our restated certificate of incorporation or bylaws so as to adversely affect the Series A preferred stock; (ii) issue any additional preferred stock or create, authorize or issue any capital stock that ranks prior, whether with respect to dividends or upon liquidation, dissolution, winding up or otherwise, to the Series A preferred stock; or (iii) redeem for cash any junior securities, subject to certain exemptions. Currently, there is no issued and outstanding preferred stock.
Transfer Agent
The transfer agent for our common stock is Continental Stock Transfer and Trust Company located at 17 Battery Place, New York, New York 10004.
Anti-takeover effect of various provisions of Delaware corporate law and our restated certificate of incorporation and by-laws.
Our restated certificate of incorporation, by-laws and sections of Delaware corporate law contain provisions that may discourage a third party from pursuing a non-negotiated takeover of our company because they have the effect of delaying, deterring or preventing a change in our control. These provisions may have an adverse impact on the price our securities are traded in the public market. Our restated certificate or incorporation authorizes the issuance of blank check preferred stock with rights and preferences as may be determined from time to time by our board of directors, without stockholder approval. If issued, the preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control even though such an attempt might be economically beneficial to our stockholders. Additionally, our restated certificate of incorporation and by-laws contain provisions limiting who may call a special meeting of stockholders and contain provisions requiring advance notice for stockholder proposals. We also are subject to provisions of the Delaware corporate law, which subject to certain exceptions, will prohibit us from engaging in any business combination with a person who, together with affiliates and associates, owns 15% or more of our common stock for a period of three years following the date that the person became a 15% or greater stockholder, unless the business combination is approved in a prescribed manner as was the merger with Capital Entertainment. These provisions of Delaware corporate law and of our restated certificate of incorporation and bylaws may have the effect of delaying, deterring or preventing a change in control, may discourage bids for our common stock at a premium over market price and may adversely affect the market price, and the voting and other rights of the holders, of our common stock. In addition, the acceleration of vesting of options granted under our stock option plans in the event of a change in our ownership or control may be seen as an anti-takeover provision and may have the effect of discouraging a merger proposal, a takeover attempt or other efforts to gain control of us.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed on for us by Stroock & Stroock & Lavan LLP, New York, New York and Los Angeles, California.
EXPERTS
The consolidated financial statements as of December 31, 2004 and for the years ended December 31 , 2004 and 2003 included in this Prospectus have been so included in reliance on the report (which contains an explanatory paragraph relating to the Company's ability to continue as a going concern as described in Note 1 to the financial statements) of PricewaterhouseCoopers LLP , an independent registered public accounting firm , given on the authority of said firm as experts in auditing and accounting.
The 2005 consolidated financial statements and schedule included in this Prospectus and in the Registration Statement have been audited by BDO Seidman, LLP, an independent registered public accounting firm, to the extent and for the period set forth in their reports appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such reports given upon the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and Exchange Commission for the common stock we are offering by this prospectus. This prospectus does not include all of the information contained in the registration statement. You should refer to the registration statement and its exhibits for additional information. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete and you should refer to the exhibits attached to the registration statement for copies of the actual contract, agreement or other document. When we complete this offering, we also will be required to file annual, quarterly and special reports, proxy statements and other information with the SEC. We anticipate making these documents publicly available free of charge on our website at www.firstlookstudios.com as soon as practicable after filing such documents with the SEC. Information contained on our website is not incorporated by reference into this prospectus and should not be considered to be a part of this prospectus. Our website address is included here only as an inactive technical reference.
You also can read our SEC filings, including the registration statement, over the Internet at the SEC's web site at www.sec.gov. You also may read and copy any document we file with the SEC at its public reference facility at 100 F Street, N.E., Washington, D.C. 20549. You also may obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.
INDEX OF FINANCIAL STATEMENTS
Page
| Report of Independent Registered Public Accounting Firm | F-2 |
| Report of Independent Registered Public Accounting Firm | F-3 |
| Consolidated Balance Sheets at December 31, 2005 and 2004 | F-5 |
Consolidated Statements of Operations for the Years Ended
December 31, 2005, 2004 and 2003 | F-6 |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003 | F-7 |
| Consolidated Statements of Shareholder's Equity for the Years Ended December 31, 2005, 2004 and 2003 | F-8 |
| Notes to Consolidated Financial Statements | F-9 |
| Unaudited Condensed Consolidated Balance Sheet at March 31, 2006 and December 31, 2005 | F-32 |
Unaudited Condensed Consolidated Statements of Operations for
the Three Months ended March 31, 2006 and 2005 | F-33 |
Unaudited Condensed Consolidated Statements of Cash Flows for
the Three Months ended March 31, 2006 and 2005 | F-34 |
Notes to Condensed Consolidated Financial Statements for
the Three Months ended March 31, 2006 and 2005 | F-35 |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
First Look Studios, Inc.
Hollywood, California
We have audited the accompanying consolidated balance sheet of First Look Studios, Inc. as of December 31, 2005, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2005 consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Look Studios, Inc., at December 31, 2005, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP
Los Angeles, California
June 15, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of First Look Studios, Inc.
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows present fairly, in all material respects, the financial position of First Look Studios, Inc. (the "Company") and its subsidiaries at December 31, 2004, and the results of their operations and their cash flows for the years ended December 31, 2004 and 2003 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with the standards of the Public Company Accounting Oversight Board (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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred operating losses over the past three years ended December 31, 2004 and negative cash flows from operations for the year ended December 31, 2004, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ PricewewaterhouseCoopers LLP
Los Angeles, California
April 8, 2005
FIRST LOOK STUDIOS, INC.
CONSOLIDATED BALANCE SHEETS
| Year Ended December 31,
|
|---|
| 2005
| 2004
|
|---|
| (in thousands except per share data) |
| ASSETS | | | | | | | | |
| Cash and cash equivalents | | | $ | 7,517 | | $ | 1,441 | |
| Accounts receivable, net of allowance of $3,465 and $2,245 , respectively | | | | 26,315 | | | 12,067 | |
| Film costs, net of accumulated amortization | | | | 32,333 | | | 18,347 | |
| Other assets | | | | 2,614 | | | 658 | |
|
| |
| |
| Total assets | | | $ | 68,779 | | $ | 32,513 | |
|
| |
| |
| LIABILITIES AND SHAREHOLDERS' DEFICIT | | |
| Accounts payable and accrued expenses | | | $ | 9,660 | | $ | 2,282 | |
| Payable to producers and participants | | | | 31,830 | | | 16,188 | |
| Notes payable (Note 5) | | | | 40,550 | | | 14,212 | |
| Deferred revenue | | | | 1,395 | | | 2,183 | |
|
| |
| |
| Total liabilities | | | | 83,435 | | | 34,865 | |
|
| |
| |
| Commitments and contingencies (Note 9) | | |
| Shareholders' deficit: | | |
| Preferred stock, $.001 par value, 10,000,000 shares authorized; 0 shares issued and | | |
| outstanding at December 31, 2005 and 2004 | | | | -- | | | -- | |
| Common stock, $.001 par value, 100,000,000 and 50,000,000 shares authorized at December | | |
| 31, 2005 and 2004 respectively; 25,159,880 and 14,584,573 shares issued at December 31, | | |
| 2005 and 2004 respectively and 24,114,880 and 14,539,573 shares outstanding at December | | |
| 31, 2005 and 2004 respectively | | | | 25 | | | 15 | |
| Additional paid-in capital | | | | 44,193 | | | 36,657 | |
| Accumulated deficit | | | | (58,787 | ) | | (38,937 | ) |
| Treasury stock at cost, 45,000 shares | | | | (87 | ) | | (87 | ) |
|
| |
| |
| Total shareholders' deficit | | | | (14,656 | ) | | (2,352 | ) |
|
| |
| |
| Total liabilities and shareholders' deficit | | | $ | 68,779 | | $ | 32,513 | |
|
| |
| |
The accompanying notes are an integral part of these consolidated financial statements.
FIRST LOOK STUDIOS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended December 31,
|
|---|
| 2005
| 2004
| 2003
|
|---|
| | (in thousands except shares and per share amounts) |
| |
| Revenues | | | $ | 49,589 | | $ | 29,331 | | $ | 28,087 | |
| |
| Expenses: | | |
| Film costs | | | | 45,683 | | | 16,871 | | | 17,679 | |
| Distribution and marketing | | | | 11,344 | | | 7,512 | | | 6,685 | |
| Selling, general and administrative | | | | 10,656 | | | 5,883 | | | 5,685 | |
|
| |
| |
| |
| Total expenses | | | | 67,683 | | | 30,266 | | | 30,049 | |
|
| |
| |
| |
| Loss from operations | | | | (18,094 | ) | | (935 | ) | | (1,962 | ) |
|
| |
| |
| |
| Other income (expense): | | |
| Interest income | | | | 83 | | | 27 | | | 36 | |
| Interest expense | | | | (2,157 | ) | | (993 | ) | | (1,187 | ) |
| Other income | | | | 408 | | | 136 | | | 89 | |
|
| |
| |
| |
| Total other expense | | | | (1,666 | ) | | (830 | ) | | (1,062 | ) |
|
| |
| |
| |
| Loss before income taxes | | | | (19,760 | ) | | (1,765 | ) | | (3,024 | ) |
| |
| Income tax provision | | | | 90 | | | 100 | | | 122 | |
|
| |
| |
| |
| Net loss | | | $ | (19,850 | ) | $ | (1,865 | ) | $ | (3,146 | ) |
|
| |
| |
| |
| |
| Basic and diluted loss per share | | | | (1.07 | ) | | (0.13 | ) | | (0.22 | ) |
|
| |
| |
| |
| Weighted average number of common shares outstanding | | | | 18,600,595 | | | 14,539,573 | | | 14,539,573 | |
|
| |
| |
| |
The accompanying notes are an integral part of these consolidated financial statements.
FIRST LOOK STUDIOS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31,
|
|---|
| 2005
| 2004
| 2003
|
|---|
| (in thousands) |
| Cash flows from operating activities: | | | | | | | | | | | |
| Net loss | | | $ | (19,850 | ) | $ | (1,865 | ) | $ | (3,146 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) | | |
| operating activities | | |
| Amortization of debt discount and loan fees | | | | 41 | | | -- | | | -- | |
| Film costs | | | | 45,684 | | | 16,871 | | | 17,679 | |
| Additions to film costs | | | | (22,755 | ) | | (11,626 | ) | | (3,578 | ) |
| Payments to producers | | | | (2,117 | ) | | (5,515 | ) | | (8,876 | ) |
| Stock compensation | | | | 27 | | | -- | |
| Loss on investment | | | | -- | | | -- | | | 246 | |
| Changes in operating assets and liabilities: | | |
| Accounts receivable, net | | | | (3,310 | ) | | (2,652 | ) | | 5,130 | |
| Other assets | | | | 335 | | | 296 | | | 512 | |
| Accounts payable and accrued expenses | | | | 6,702 | | | 821 | | | (256 | ) |
| Deferred revenue | | | | (788 | ) | | 1,119 | | | (144 | ) |
|
| |
| |
| |
| Net cash provided by (used in) operating | | |
| Activities | | | | 3,969 | | | (2,551 | ) | | 7,567 | |
|
| |
| |
| |
| Cash flows from investing activities: | | |
| Investment | | | | -- | | | -- | | | 2,000 | |
| Purchase of DEJ assets | | | | (25,000 | ) | | -- | | | -- | |
|
| |
| |
| |
| Net cash (used in ) provided by investing | | |
| Activities | | | | (25,000 | ) | | -- | | | 2,000 | |
|
| |
| |
| |
| Cash flows from financing activities: | | |
| Net (pay down) borrowing under JP Morgan credit facility | | | | (14,212 | ) | | 2,712 | | | (7,000 | ) |
| Borrowing under convertible note payable | | | | 20,000 | | | -- | |
| Borrowing (pay down) under convertible debenture and warrants | | | | 23,640 | | | -- | | | (2,000 | ) |
| Debt issuance costs | | | | (2,321 | ) | | -- | | | -- | |
|
| |
| |
| |
| Net cash provided by (used in) financing | | |
| Activities | | | | 27,107 | | | 2,712 | | | (9,000 | ) |
|
| |
| |
| |
| Net increase in cash and cash equivalents | | | | 6,076 | | | 161 | | | 567 | |
| Cash and cash equivalents at beginning of year | | | | 1,441 | | | 1,280 | | | 713 | |
|
| |
| |
| |
| Cash and cash equivalents at end of year | | | $ | 7,517 | | $ | 1,441 | | $ | 1,280 | |
|
| |
| |
| |
| Supplemental disclosure of cash flow information: | | |
| Cash paid during the year for: | | |
| Interest | | | $ | 1,872 | | $ | 782 | | $ | 889 | |
| Income taxes | | | $ | 10 | | $ | 10 | | $ | 9 | |
| Foreign withholding taxes | | | $ | 80 | | $ | 90 | | $ | 113 | |
| Non-cash items | | |
| Issuance of common stock and options for acquisition of | | |
| Capital Entertainment | | | $ | 5,094 | | $ | -- | | $ | -- | |
| Common stock issued in connection with convertible debt | | | $ | 510 | | $ | -- | | $ | -- | |
The accompanying notes are an integral part of these consolidated financial statements
FIRST LOOK STUDIOS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
| (in thousands) |
|---|
| Common Stock
| | | | |
|---|
| Number
| Amount
| Additional
Paid-in
Capital
| Accumulated
Deficit
| Treasury
Stock
| Total
Shareholders'
Equity
(Deficit)
|
|---|
| |
| Balance at December 31, 2002 | | | | 14,584 | | $ | 15 | | $ | 36,657 | | $ | (33,926 | ) | $ | (87 | ) | $ | 2,659 | |
| Net loss | | | | -- | | | -- | | | -- | | | (3,146 | ) | | -- | | | (3,146 | ) |
|
| |
| |
| |
| |
| |
| |
| Balance at December 31, 2003 | | | | 14,584 | | | 15 | | | 36,657 | | | (37,072 | ) | | (87 | ) | | (487 | ) |
| Net loss | | | | -- | | | -- | | | -- | | | (1,865 | ) | | -- | | | (1,865 | ) |
| Balance at December 31, 2004 | | | | 14,584 | | | 15 | | | 36,657 | | | (38,937 | ) | | (87 | ) | | (2,352 | ) |
|
| |
| |
| |
| |
| |
| |
| Issuance of Common Stock in connection | | |
| with the Capital Entertainment | | |
| acquisition | | | | 9,500 | | | 9 | | | 4,836 | | | -- | | | -- | | | 4,845 | |
| Issuance of common stock in connection | | |
| with convertible debt | | | | 1,000 | | | 1 | | | 509 | | | -- | | | -- | | | 510 | |
| Beneficial Conversion Feature on | | |
| convertible debt | | | | -- | | | -- | | | 1,908 | | | -- | | | -- | | | 1,908 | |
| Exercise of Stock Options | | | | 75 | | | -- | | | 7 | | | -- | | | -- | | | 7 | |
| Exchange of Stock Options in | | |
| connection with the Capital | | |
| Entertainment acquisition | | | | -- | | | -- | | | 249 | | | -- | | | -- | | | 249 | |
| Stock Options issued to non-employees | | | | -- | | | -- | | | 27 | | | -- | | | -- | | | 27 | |
| Net loss | | | | -- | | | -- | | | -- | | | (19,850 | ) | | -- | | | (19,850 | ) |
|
| |
| |
| |
| |
| |
| |
| Balance at December 31, 2005 | | | | 25,159 | | $ | 25 | | $ | 44,193 | | $ | (58,787 | ) | $ | (87 | ) | $ | (14,656 | ) |
|
| |
| |
| |
| |
| |
| |
The accompanying notes are an integral part of these consolidated financial statements
FIRST LOOK STUDIOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — DESCRIPTION OF BUSINESS:
General
First Look Studios, Inc. ("Company") is principally involved in, a) the direct distribution of video rights in the domestic market under the name "First Look Home Entertainment", b) the acquisition and worldwide license or sale of distribution rights to independently produced motion pictures under the name "First Look International" and c) the distribution of motion pictures in the domestic theatrical market under the name "First Look Pictures."
As of December 31, 2004, the Company had cash and cash equivalents of $1,441,000 and the Company's credit facility with JPMorgan and the participating bank group expires in June 2005. However, the Company is currently negotiating with JPMorgan and the participating bank group to renew the current credit facility while pursing refinancing arrangements with other financial institutions. Also, the Company has had operating losses over the past three years ending December 31, 2004 totalling approximately $11.5 million and had negative cash flows from operations of approximately $2.6 million in 2004. Although the Company has reduced its operating loss from $1.9 million in 2003 to $0.9 million in 2004, its historical operating losses and negative cash flow from operating activities raises questions about its ability to continue as a going concern. The Company is continuing to review its business plan and is actively in discussion with various parties regarding potential strategic relationships, equity investment and revised business plans.
If the Company is not successful in generating sufficient future cash flow from operations in accordance with its current or revised business plan and obtaining or renewing its credit facility, raising additional capital through public or private financings, strategic relationships or other arrangements will be necessary. This additional funding, if needed, might not be available on acceptable terms, or at all. Failure to raise sufficient capital, if and when needed, could have a material adverse effect on the business, results of operations and financial condition of the Company, including the ability of the Company to continue to operate as a going concern.
The Company entered into an $80 million revolving credit facility with Merrill Lynch Commercial Finance Corp in June 2006 — see Note 12.
Corporate Transactions
Acquisition of Capital Entertainment, Inc. On July 29, 2005, the Company acquired 100% of the assets and assumed 100% of the liabilities of Capital Entertainment, Inc. ("Capital"), after which the Company changed its name from First Look Media, Inc. to First Look Studios, Inc. The total assets acquired were $14.3 million and total liabilities assumed were $9.2 million. Capital was principally owned by Henry Winterstern, who is now the Company's chief executive officer. Capital owned certain exploitation rights to content, including DVD exploitation rights to various television series such as rights to distribute a compilation of selected "best" and "worst" performances from seasons 1 through 4 of American Idol and rights to nine seasons of the hit television series, Baywatch. As part of this transaction, the Company paid approximately $5.1 million for the equity of Capital in the form of 9,500,000 shares of the Company's common stock and 499,693 options to purchase common stock of the Company at $0.01.
Concurrent with the acquisition of Capital, the Company entered into an agreement with PFLM LLC ("PFLM"), an entity owned and controlled by Prentice Capital Management, L.P., whereby PFLM purchased the loan agreement the Company had established with JPMorgan Chase Bank N.A. ("JPMorgan") in 2000, repaying JPMorgan the approximately $14.4 million then outstanding. Simultaneously the Company amended the loan agreement to provide for total borrowings of $20 million on a non-revolving basis and, in addition to repaying JPMorgan, the Company drew approximately $5.6 million to be used for working capital. The base interest rate under the PFLM loan is 5% per annum, compounded annually, with all interest for any calendar year becoming due on the first day of the following calendar year (however, interest for calendar year 2005 was pro-rated and due on the effective date of the amended facility). The amended PFLM loan is a term loan that is convertible at anytime by PFLM at a conversion price of $1.11 per share, absent earlier conversion, would mature on July 26, 2007, however, will convert into common stock upon the Company entering into a senior secured credit facility and obtaining an audit opinion without a "going concern" emphasis paragraph. When these conditions are satisfied, the $20 million loan principal will convert into 18,018,018 shares of the Company's common stock plus additional shares based on accrued and unpaid interest.
Acquisition of Assets of DEJ Productions, Inc. On November 10, 2005, the Company acquired DEJ Productions, Inc. ("DEJ"), a wholly owned subsidiary of Blockbuster, Inc. ("Blockbuster"). Although the Company purchased the stock of DEJ, the substance of this acquisition was the acquisition of assets, consisting primarily of a film library, representing distribution rights to 218 motion pictures, along with related accounts receivable and the Company's assumption of certain liabilities. Included in the film library were selected rights to such films as Crash, Monster and Matador. As a part of the arrangement, the Company assumed certain film related liabilities and hired selected DEJ personnel. The purchase price that the Company paid was $25 million. Total assets acquired included $15.9 million of accounts receivable and $17.5 million of film costs. The total liabilities assumed were $9.1 million. The total purchase price was allocated based on preliminary studies and valuations (which are expected to be completed in the second quarter of 2006) to the estimated fair value of assets acquired and liabilities assumed. In addition to acquiring DEJ, as a part of the transaction, the Company entered into a new three year revenue sharing agreement with Blockbuster, in which Company receives 29% of rental revenue income.
Funding for the DEJ acquisition came significantly from the issuance and sale of convertible debentures whereby PFLM, LLC and Highgate House Funds, Ltd. ("Highgate") invested $23.6 million into the Company in exchange for debentures with a five-year term. Significant aspects of the debentures include an obligation for the Company to pay interest every thirty days at an annual interest rate of 10% (with no principal amortization during the term) and the right of the investors to convert any or all of the face amount of the debenture into the Company's common stock at the lower of $1.11 per share or 95% of the lowest bid price for the thirty trading days immediately preceding the date of conversion. Conversion is allowed on the earlier of the effectiveness of a registration statement on Form S-1 or August 14, 2006 (nine months following the closing of the investment). As part of the funding for the DEJ transaction, the Company issued warrants to purchase an aggregate of 6 million shares of its common stock at an exercise price of $1.11 per share. The warrants are exercisable immediately at the option of the warrant holder and expire on November 9, 2010. The warrants were valued using a Black-Scholes model and the fair value was recorded as a liability. The value of the warrants was recorded as a discount to the debentures in the financial statements and will be accreted over the term of the debentures, using the effective interest method.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements of the Company include the financial position, results of operations and cash flows of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Revenues
Revenue from the sale of video cassettes and digital video disks ("DVDs") in the retail market, net of an allowance for estimated returns, is recognized on the later of shipment to the customers or "street date" (when it is available for sale by the customer). Under revenue sharing arrangements, rental revenue is recognized when the Company is entitled to receipts and such receipts are determinable. The Company estimates reserves for video returns based on previous returns experience and the Company's estimated expected future returns related to current period sales on a title-by-title basis. Revenue from sales to international territories are recognized when the feature film is available to the distributor for exploitation and no conditions for delivery exist. Revenue from the sales or licensing of films and television programs is recognized upon meeting all recognition requirements of SOP 00-2, which are a. Persuasive evidence of a sale or licensing arrangement with a customer exists, b. The film is complete and, in accordance with the terms of the arrangement, has been delivered or is available for immediate and unconditional delivery. c. The license period of the arrangement has begun and the customer can begin its exploitation, exhibition, or sale. d. The arrangement fee is fixed or determinable. e. Collection of the arrangement fee is reasonably assured.
Film Costs
The Company accounts for film costs in accordance with SOP 00-2. Film costs consist of direct production costs and capitalized production overhead, net of accumulated amortization, and is stated at the lower of unamortized costs or estimated fair value on an individual film basis. Capitalized costs are amortized using the individual film forecast method whereby expense is recognized in the proportion that current year revenues for each film bear to management's estimate of ultimate revenues. Revenue and cost forecasts are continually reviewed by management and revised when warranted by changing conditions. If estimates of total revenues and costs change or other changes in circumstances indicate that a motion picture has a fair value that is less than the unamortized cost, a loss would be recognized currently to the extent that the capitalized film costs exceed the film's fair value. The Company has recorded impairment losses of film costs amounting to $11,267,000, $318,000 and $330,000 for the years ended December 31, 2005, 2004 and 2003 respectively, as a result of downward adjustments of projected ultimate revenues. These amounts are included in film costs in the Consolidated Statements of Operations.
Home video and DVD inventory costs are charged to operations concurrent with home video and DVD revenue recognition.
Home video product inventory consists of videocassettes and DVDs and are stated at the lower of cost or market value (first-in, first-out method).
In accordance with SOP 00-2, all exploitation costs such as advertising and marketing costs for theatrical, video and television products as well as development costs for abandoned projects are expensed as incurred.
Advertising
The Company expenses the cost for advertising as incurred. Advertising expenses were $2,959,000, $1,141,000, and $1,539,000 for the years ended December 31, 2005, 2004, and 2003, respectively, and are included in distribution and marketing expenses in the accompanying statement of operations.
Payables to Producers and Participants
The Company accounts for participations due to producers and others in accordance with SOP 00-2. Management's estimate of ultimate participations is accrued as an expense using the individual film forecast method whereby expense is recognized in the proportion that current year revenues for each film bear to management's estimate of ultimate revenues. During the year ending December 31, 2006, management expects to make payments of approximately $8,150,000 for producer and participant liabilities outstanding at December 31, 2005.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of less than three months to be cash equivalents. The carrying value of the Company's cash and cash equivalents approximate fair value due to their short-term nature.
Accounts Receivable
Accounts receivable represent customer obligations due under contractual obligations in the case of feature film licenses and 60 days after street date in the case of videocassette and DVD sales. Accounts receivable are stated at the amount billed to the customers.
The carrying amount of receivables is reduced by a valuation allowance that reflects management's best estimate of the amounts that will not be collected. Management individually reviews all delinquent accounts receivable balances.
The Company's estimate for the allowance for doubtful accounts related to accounts receivable receivables is based on two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved. First, the Company evaluates specific accounts where it has information that the customer may have an inability to meet its financial obligations (for example, bankruptcy). In these cases, the Company uses its judgment, based on the available facts and circumstances, and records a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. These specific reserves are reevaluated and adjusted as additional information is received that impacts the amount reserved. Second, a reserve is established for all other customers based on a range of percentages applied to aging categories. These percentages are based on historical collection and write-off experience. If circumstances change (for example, the Company experiences higher than expected defaults or an unexpected material adverse change in a major customer's ability to meet its financial obligation to the Company), estimates of the recoverability of amounts due to the Company could be reduced by a material amount. The allowance for doubtful accounts at December 31, 2005 and 2004 was $3,465,000 and $2,245,000 respectively.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of assets, which range from 5 to 7 years using the straight line method. Leasehold improvements are amortized over the shorter of the useful lives of the assets or the term of the lease.
Debt Issuance Cost
Debt issuance costs are capitalized and amortized over the life of the debt using the effective interest method.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. If such assets are considered impaired, the amount of the impairment losses recognized is measured as the amount by which the carrying value of the asset exceeds the fair value of the asset, fair value being determined based upon discounted cash flows.
Fair Value of Financial Instruments
The recorded value of the Company's cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and payable to producers approximate their fair value due to the relative short maturities of these instruments. The fair value of notes payable approximates the recorded value due to the stated interest rate on such instruments.
Income Taxes
The Company records income taxes in accordance with the provisions of Statement of Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income Taxes". The standard requires, among other provisions, an asset and liability approach to recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities. Valuation allowances are provided if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Accounting for Stock Based Compensation
The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees," FASB Interpretation ("FIN") No. 28 "Accounting for Stock Appreciation Rights and Other Variable Stock Option Award Plans an Interpretation of APB Opinions No. 15 and 25" and FIN No. 44, "Accounting for Certain Transactions involving Stock Compensation" and complies with the disclosure requirement of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost, if any, is recognized over the respective vesting period based on the difference, if any, on the date of grant, between the fair value of the Company's common stock and the grant price. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and EITF 96-18, "Accounting for Equity Instruments that are issued to other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." The Company values the equity instrument at the date at which a commitment for the performance of the services is reached, and records the expense in the period in which the services are performed.
The weighted average estimated fair value of stock options granted during the year ended December 31, 2005 was $0.15 per share.
For disclosure purposes the fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for stock options granted: a dividend yield of 0%, expected volatility of 50%, risk-free interest rate of 4.5% at November 14, 2005 and 4.04% at July 28, 2005 and expected life of five years.
The following table illustrates the effect on net loss if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock based employee compensation for the years ended December 31, 2005, 2004, and 2003:
| December 31,
|
|---|
| 2005
| 2004
| 2003
|
|---|
| (Amounts in thousands,
except per share amounts)
| |
|---|
| Net loss available to common shareholders, as reported | | | $ | (19,850 | ) | $ | (1,865 | ) | $ | (3,146 | ) |
| |
| Add: stock-based compensation expense calculated using the | | |
| intrinsic value method | | | | -- | | | -- | | | -- | |
| |
| Less: stock-based compensation expense determined under the fair | | |
| value based method, net of income tax benefits | | | | (393 | ) | | -- | | | -- | |
|
| |
| |
| |
| Pro forma net loss | | | $ | (20,243 | ) | $ | (1,865 | ) | $ | (3,146 | ) |
|
| |
| |
| |
| Loss per share: | | |
| As reported: | | |
| Basic | | | $ | (1.07 | ) | $ | (0.13 | ) | $ | (0.22 | ) |
|
| |
| |
| |
| Diluted | | | $ | (1.07 | ) | $ | (0.13 | ) | $ | (0.22 | ) |
|
| |
| |
| |
| Pro forma: | | |
| Basic | | | $ | (1.09 | ) | $ | (0.13 | ) | $ | (0.22 | ) |
|
| |
| |
| |
| Diluted | | | $ | (1.09 | ) | $ | (0.13 | ) | $ | (0.22 | ) |
|
| |
| |
| |
Earnings Per Share
The Company calculates earnings per share in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per share is calculated based on the weighted average common shares outstanding for the period. Diluted earnings per share includes the impact of the convertible senior subordinated notes, convertible promissory notes, share purchase warrants, Series A preferred shares and stock options, if dilutive.
| December 31,
|
|---|
| 2005
| 2004
| 2003
|
|---|
| (Amounts in thousands,
except per share amounts) |
|---|
| Basic and diluted loss per common share is calculated as follows: | | | | | | | | | | | |
| |
| Numerator: | | |
| Net loss available to common shareholders | | | $ | (19,850 | ) | $ | (1,865 | ) | $ | (3,146 | ) |
| Denominator: | | |
| Weighted average common shares outstanding (basic) | | | | 18,600,595 | | | 14,539,573 | | | 14,539,573 | |
| Share purchase options | | | | -- | | | -- | | | -- | |
| Share purchase warrants | | | | -- | | | -- | | | -- | |
|
| |
| |
| |
| Weighted average common shares outstanding (diluted) | | | | 18,600,595 | | | 14,539,573 | | | 14,539,573 | |
| Basic loss per common share | | | $ | (1.07 | ) | $ | (0.13 | ) | $ | (0.22 | ) |
| Diluted loss per common share | | | $ | (1.07 | ) | $ | (0.13 | ) | $ | (0.22 | ) |
Options to purchase 8,799,000 common shares (2004 and 2003 – 729,500 common shares) at an average price of $1.08 (2004 and 2003 $3.21) were outstanding at December 31, 2005. Warrants to purchase 6,881,000 common shares (2004 and 2003 – 3,870,000 common shares) at an average exercise price of $1.41 (2004 and 2003 — $3.40) were outstanding at December 31, 2005. Convertible debt in the aggregate amount of $43,640,000, convertible into 39,315,315 shares of common stock was outstanding at December 31, 2005. There was no convertible debt outstanding during the years ended December 31, 2004 or 2003.
All of the options, warrants and convertible debt were anti-dilutive, and thus not converted in the diluted loss per share calculation.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist primarily of cash and accounts receivable. The Company places its cash with a financial institution and, at times, such amounts may be in excess of the FDIC insurance limits. Concentration of credit risk associated with accounts receivable is limited due to the large number of customers, as well as their dispersion across geographic areas. The Company performs credit evaluations of its customers and generally does not require collateral. As of December 31, 2005 and December 31, 2004, one customer had an outstanding balance of 13.3% and 23.3% of the Company's total accounts receivable respectively.
Comprehensive Income
The Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity during a period from non-owner sources.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 154. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections," a replacement of Accounting Principles Board Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements" ("SFAS 154"). SFAS 154 changes the requirements for the accounting for, and reporting of, a change in accounting principle (including voluntary changes). Previously, changes in accounting principles were generally required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. SFAS 154 requires retrospective application to prior periods' financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, the statement does not change the transition provisions of any existing accounting pronouncements. The Company will adopt this pronouncement beginning in fiscal year 2006 and does not believe adoption of SFAS 154 will have a material effect on its results of operations, financial position or cash flows.
Statement of Financial Accounting Standards No. 123R. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS 123(R)). SFAS 123(R) revises SFAS No. 123 and eliminates the alternative to use the intrinsic method of accounting under APB No. 25. SFAS 123(R) requires all public companies accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments to account for these types of transactions using a fair-value-based method. The Company currently accounts for share-based payments to employees using the intrinsic value method as set forth in APB No. 25 "Accounting for Stock Issued to Employees." As such, the Company generally recognizes no compensation cost for employee stock options. SFAS No. 123(R) eliminates the alternative to use APB No. 25‘s intrinsic value method of accounting. Accordingly, the adoption of SFAS No. 123(R)‘s fair value method will have an impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income (loss) available to common shareholders and basic and diluted income (loss) per share. SFAS No. 123(R) permits companies to adopt its requirements using either a modified prospective method or a modified retrospective method. The Company has determined it will utilize the modified prospective method. The provisions of SFAS No. 123(R) are effective for financial statements with the first interim or annual reporting period beginning after June 15, 2005. However, the SEC announced on April 14, 2005 that it would provide for a phased-in implementation process for SFAS No. 123(R). As a result, the Company will not be required to apply SFAS No. 123(R) until the period beginning January 1, 2006.
FASB Interpretation No. 48. In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48) "Accounting for Uncertainty in Income Taxes" which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 will be effective for the Company beginning January 1, 2007. The Company is in the process of determining the effect, if any, the adoption of FIN 48 will have on its financial statements.
NOTE 3 – EQUITY TRANSACTIONS:
June 2002 Securities Purchase Agreement with Seven Hills
In June 2002, the Company consummated a private placement with Seven Hills Pictures, LLC, in which the Company sold to Seven Hills, for an aggregate cash purchase price of $6,050,000, 2,630,434 shares of the Company's common stock and five-year warrants to purchase up to 881,137 shares of the Company's common stock at an exercise price of $3.40 per share (Note 7) which warrants are immediately exercisable and will expire on June 25, 2007. Seven Hills owned approximately 10.9% of the Company's outstanding voting securities as of December 31, 2005.
Additionally, in May 2002, the Company and Seven Hills formed a joint venture company that was to provide marketing and distribution funds for the theatrical release of motion pictures that the Company or Seven Hills would select on an alternating basis. In June 2002, Seven Hills funded the Company's $2,000,000 capital contribution to the joint venture company pursuant to a convertible promissory note issued by the Company. In return for funding of the joint venture, the Company issued warrants to Seven Hills to purchase up to 291,285 shares of the Company's common stock at an exercise price of $3.40 per share. At December 31, 2003, the convertible promissory note was paid off from the funds available in the joint venture company and, as a result, the warrants expired.
July 2005 Acquisition of Capital Entertainment
In July 2005, Capital Entertainment merged with First Look Media and the surviving company was renamed First Look Studios, Inc. A total of 9,500,000 shares of First Look Media stock were issued in exchange for the assets of Capital Entertainment. Additionally, one Capital Entertainment executive's options to purchase 12.37 shares of Capital Entertainment were exchanged for 499,693 options to purchase common stock of the Company. The options were fully vested and accounted for at fair value as part of the purchase price. The purchase price totalled $5,094,000 which was paid in common stock of the company in lieu of cash. The issuance of the 9,500,000 shares was valued at $0.51 per share which was the average trading price 5 days before and 5 days after the number of the Company's common shares to be exchanged for the assets of Capital Entertainment were agreed upon. The 499,693 options to purchase common stock of the Company were valued using a Black Scholes model with the following variables (risk free rate 4.38%, volatility 50%, expected life 5 years). The resulting fair value was $0.50 per share.
The Capital Entertainment acquisition was accounted for as a purchase, with the results of operations of Capital Entertainment consolidated from July 28, 2005. The allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their fair values is as follows:
| (Amounts in
thousands)
|
|---|
| Film costs | | | $ | 14,330 | |
| Payable to producers and participants | | | | (9,236 | ) |
|
| |
| Total | | | $ | 5,094 | |
|
| |
The results of operations for Capital Entertainment prior to the acquisition were immaterial to the financial statements.
NOTE 4 — FILM COSTS:
Film costs consist of the following:
| December 31,
|
|---|
| 2005
| 2004
|
|---|
| | (in thousands) |
| |
| Films in release net of accumulated amortization | | | $ | 21,958 | | $ | 16,246 | |
| Films not yet available for release: | | |
| In process | | | | 9,211 | | | 1,241 | |
| In development | | | | 1,164 | | | 860 | |
|
| |
| |
| | | | $ | 32,333 | | $ | 18,347 | |
|
| |
| |
Based on the Company's estimates of projected gross revenues as of December, 31, 2005, the Company expects approximately 28% of completed films, net of accumulated amortization will be amortized during the one year period ending December 31, 2006.
Based on the Company's estimates of projected gross revenues as of December 31, 2005, approximately 82% of unamortized film costs applicable to films in release are expected to be amortized during the next three years.
No interest costs were capitalized to films during the three years ended December 31, 2005.
NOTE 5 — NOTES PAYABLE:
Notes payable consist of the following:
| December 31,
|
|---|
| 2005
| 2004
|
|---|
| | (in thousands) |
| |
| Borrowing under JP Morgan credit facility | | | $ | -- | | $ | 14,212 | |
| Convertible note - PFLM | | | | 20,000 | | | -- | |
| Convertible debenture - PFLM / HH | | | | 23,640 | | | -- | |
| Note discount | | | | (3,090 | ) | | -- | |
|
| |
| |
| |
| Total borrowings | | | $ | 40,550 | | $ | 14,212 | |
|
| |
| |
In June 2000 the Company entered into a five-year $40 million revolving credit facility (the "JP Morgan Credit Facility") with JP Morgan Chase (formerly Chase Securities, Inc. and The Chase Manhattan Bank) and other commercial banks and financial institutions. Through subsequent amendments, the total amount of the facility was reduced to $14.5 million, and the amount the Company was allowed to borrow in relation to its library value was reduced from 50% (the "Advance Rate") of the library value to 17.5% for a maximum of $3,500,000. In addition, the Company could borrow against a letter of credit (included in the borrowing base) which was issued by a majority shareholder in favor of JPMorgan and the participating bank group in the amount of $3,500,000 (Note 8). Interest charged on the outstanding balance under the credit facility are LIBOR plus 2% to 2 ¼% through June 30, 2004, to 2 ½% through September 30, 2004, to 2 ¾% through December 31, 2004, to 3% through March 31, 2005 and, to 3 ¼% through June 30, 2005; and on the loans which are Prime rate indexed from 1% to 1 ¼% through June 30, 2004, to 1 ½% through September 30, 2004, to 1 ¾% through December 31, 2004, to 2% through March 31, 2005, and to 2 ¼% through June 30, 2005. The Company was also required to pay additional commitment fees on the total facility of ¼ of 1% on April 18, 2004, ¼ of 1% on July 1, 2004, and ½ of 1% on January 1, 2005. The Company also paid an annual management fee of $125,000. The JPMorgan facility restricted the creation or incurrence of indebtedness or the issuance of additional securities. The JPMorgan facility was collateralized by all tangible and intangible assets and future revenues of the Company.
In July 2005, the Company entered into an amendment to the JP Morgan Chase Loan Agreement with PFLM. JP Morgan assigned its interest in the credit facility to PFLM in exchange for PFLM satisfying the outstanding commitment owing to JPMorgan Chase under the facility. Pursuant to the terms of the amendment, the Company borrowed an aggregate of $20 million from PFLM. The base interest rate under the PFLM loan is 5% per annum, compounded annually, with all interest for any calendar year becoming due on the first day of the following calendar year (however, interest for calendar year 2005 was due on the effective date of the amended facility). The PFLM loan is a term loan that will mature on July 26, 2007. However, PFLM has the option to convert the outstanding balance of the loan at any time, on an all-or-nothing basis, into shares of the Company's common stock at a conversion price calculated at one share for every $1.11 of the outstanding balance of the loan. The amendment also calls for the debt to convert into common stock upon us entering into a senior secured credit facility and obtaining an audit opinion without a "going concern" emphasis paragraph. The embedded conversion feature was analyzed under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." The conversion feature did not meet the definition of a stand-alone derivative under SFAS 133, and therefore, was not bifurcated.
In November 2005, in connection with the Company's purchase of DEJ Productions, the Company borrowed $23,640,000 in the form of a convertible debenture. The funding was provided by PFLM and Highgate. The debenture bears interest at 10% per annum, payable monthly with no principal amortization. PFLM and Highgate may at their sole option, convert any or all of the face amount of the debenture upon the earlier of either the effectiveness of the Company's registration statement or August 17, 2006. Additionally, the Company issued 6,000,000 warrants to purchase common stock at an exercise price of $1.11. The warrants are exercisable immediately at the option of the warrant holder. The fair value of the warrants was determined using the Black-Scholes model with the following variables (risk free rate 4.16%, volatility 49%, expected life 5 years) or $0.11 per share. The conversion price of the debenture is calculated at the lower of: $1.11 per share or 95% of the lowest bid price for the thirty trading days immediately preceding the date of conversion. The note has been discounted by approximately $2,580,000, representing $672,000 for the fair value of the 6,000,000 warrants issued in connection with this note, and $1,908,000 for the beneficial conversion feature (BCF) imbedded. The note discount, including the BCF, will be accreted over the term of the note under the effective interest method. The embedded conversion feature was analyzed under SFAS 133. The conversion feature did not meet the definition of a stand-alone derivative under SFAS 133, and therefore, was not bifurcated.
At the time the $23,640,000 convertible debenture was issued, the Company granted registration rights to PFLM and Highgate pursuant to which, subject to certain terms and conditions, the Company agreed to file a registration statement to register for resale under the Securities Act of 1933, as amended (the "Securities Act"), the shares of Common Stock underlying the debenture and the related warrants with in 150 days from the closing date of the loan. If the registration statement is not declared effective with in a specified time frame, the Company must pay PFLM and Highgate liquidated damages of 1% per month up to the one-year anniversary of the closing date, and 2% per month thereafter. The conditions to the Company's obligation to file such registration statement have not yet been satisfied, and no such registration statement is currently pending. These registration rights are accounted for under SFAS 5, "Accounting for Contingencies." No expense has been recorded related to these registration rights as of December 31, 2005.
In addition to the above, the Company issued PFLM 1,000,000 shares of common stock for their assistance in arranging the November 2005 loan. The value of the 1,000,000 shares at the time of closing the loan was approximately $510,000 and has been recorded as debt issuance cost and is being amortized over the life of the loan on the effective interest method.
NOTE 6 — INCOME TAXES:
The Company income tax expense is comprised of the following:
| 2005
| 2004
| 2003
|
|---|
| Current Tax Expense | | | | | | | | | | | |
| | | |
| Foreign | | | | 80 | | | 90 | | | 113 | |
| | | |
| Federal | | | | -- | | | -- | | | -- | |
| | | |
| State | | | | 10 | | | 10 | | | 9 | |
|
| |
| |
| |
| Current Tax Expense | | | | 90 | | | 100 | | | 122 | |
|
| |
| |
| |
| Deferred Tax Expense | | |
| | | |
| Foreign | | | | -- | | | -- | | | -- | |
| | | |
| Federal | | | | -- | | | -- | | | -- | |
| | | |
| State | | | | -- | | | -- | | | -- | |
|
| |
| |
| |
| Deferred Tax Expense | | | | -- | | | -- | | | -- | |
|
| |
| |
| |
| Income Tax Expense | | | | 90 | | | 100 | | | 122 | |
|
| |
| |
| |
The Company's income tax expense differs from the federal statutory tax rate as follows:
| 2005
| 2004
| 2003
|
|---|
| | | |
|---|
| Stautory federal tax rate | -34.00% | -34.00% | -34.00% |
| State taxes, net | -0.37% | 1.50% | 0.00% |
| Foreign taxes | 0.40% | 5.10% | 3.74% |
| Valuation Allowance | 33.77% | 29.99% | 32.76% |
| Other | 0.66% | 3.07% | 1.53% |
|
|
|
|
| | 0.46% | 5.66% | 4.03% |
|
|
|
|
The Company's deferred tax assets and liabilities are comprised of the following:
| 2005
| 2004
|
|---|
| | |
|---|
| Deferred Tax Assets: | | | | | | | | |
| Net Operating Losses | | | | 24,157 | | | 14,859 | |
| Tax Credits | | | | 463 | | | 634 | |
| Reserves | | | | 1,295 | | | 839 | |
| Fixed Assets | | | | 18 | | | 10 | |
| Other | | | | 5 | | | 5 | |
|
| |
| |
| Total Deferred Tax Assets | | | | 25,938 | | | 16,347 | |
|
| |
| |
| |
| Deferred Tax Liabilities: | | |
| Film Amortization | | | | (4,164 | ) | | (1,246 | ) |
|
| |
| |
| |
| Total Deferred Tax Liabilities | | | | (4,163 | ) | | (1,246 | ) |
|
| |
| |
| |
| Valuation Allowance | | | | (21,774 | ) | | (15,101 | ) |
| Net Deferred Tax Assets / (Liabilities) | | | | -- | | | -- | |
|
| |
| |
The Management believe that it is more likely than not that the net deferred tax assets will not be realizable in the future. As such, the Management established a valuation allowance for all of the net deferred tax assets.
The Company has provided a valuation allowance for the full amount of its net deferred tax assets since realization of any future benefit from deductible temporary differences and net operating loss and tax credit carryforwards are not more likely than not to be realized at December 31, 2005.
The Company has federal and state net operating losses of $69,679,000 and $16,463,000, respectively, expiring from 2006 through 2025. The Company also has tax credits of $466,000 expiring from 2010 through 2015. The net operating losses can be carried forward to offset future taxable income, if any. Utilization of the carryforwards may be subject to utilization limitations which may inhibit the Company's ability to use carryforwards in the future. Under Section 382 of the Internal Revenue Code of 1986, as amended, certain significant changes in ownership that the company has currently undertaken have restricted the future utilization of these tax loss carryforwards.
NOTE 7 — SHAREHOLDERS' EQUITY:
Preferred Stock
10,000,000 shares of preferred stock, $.001 par value, were authorized at December 31, 2005 and 2004. No shares of preferred stock were issued or outstanding during 2005 and 2004.
Stock Option Plans
In October 1996, the Company's stockholders approved the 1996 Basic Stock Option and Stock Appreciation Rights Plan ("1996 Plan"), under which incentive and non-qualified stock options and stock appreciation rights may be granted to certain employees, directors, independent consultants and certain other persons who provide services to the Company to purchase up to a maximum of 550,000 shares of common stock. The 1996 Plan calls for annual grants to non-employee directors of 5,000 shares each at an exercise price equal to the fair market value of the common stock on the date of grant. These options are exercisable one year after the date of grant and expire on the earlier of ten years from the date of grant or three years from the date on which the director ceases to be a director of the Company.
In November 2000, the Company's stockholders approved the 2000 Performance Equity Plan ("2000 Plan"), under which a total of 1,000,000 shares of common stock were available for grant to the Company's key employees, directors and independent consultants. Awards consist of stock options, restricted stock awards, deferred stock awards, stock appreciation rights and other stock-based awards, as described in the 2000 plan.
In 2000, as part of a refinancing and restructuring plan the Company granted fully vested stock options to purchase 500,000 shares of common stock at an exercise price of $3.40 per share. These options expired in June 2005.
In July 2005, the Company's stockholders approved the 2005 Performance Equity Plan ("2005 Plan"), under which a total of 4,640,000 shares of common stock were available for grant to the Company's key employees, directors and independent consultants. Awards consist of stock options, restricted stock awards, deferred stock awards, stock appreciation rights and other stock-based awards, as described in the 2005 plan.
In July 2005, in connection with the acquisition of Capital Entertainment, the options of one Capital Entertainment executive to purchase 12.37 shares of Capital Entertainment, Inc. at an exercise price of $0.01 were exchanged for options to purchase 499,693 shares of the Company's common stock at an exercise price of $0.01.
In July 2005, the Company granted a total of 175,000 options to purchase the Company's common stock to two non-employee consultants in exchange for services rendered by the non-employee consultants. The options were immediately vested at an exercise price of $1.11 per share. The Company recorded compensation expense in the amount of $27,000 in the 2005 Consolidated Statements of Operations. The fair value of the options was determined using a Black Scholes model with the following variables (risk free rate 4.38%, volatility 50%, expected life 5 years). All 175,000 options issued to the non-employee consultants were exercisable and outstanding at December 31, 2005.
The Board of Directors is responsible for administration of the 2000 Plan. The Board determines the term of each award, including the option exercise price, the number of shares for which each option is granted and the rate at which each option is exercisable. Incentive stock options granted pursuant to the Plan cannot be granted with an exercise price of less than 100% of the fair market value on the date of grant (110% if the award is issued to a 10% or more shareholders). The term of the options granted under the Plan cannot be greater than 10 years; 5 years for certain optionees who have a specified ownership interest in the Company or one if its subsidiaries. Options granted under the Plan are exercisable at times and increments as specified by the Board of Directors.
An aggregate of 1,550,000 shares of common stock were reserved for grant under the 1996 Plans and the 2000 Plan, of which 815,000 shares were available for future grant at December 31, 2005.
The following table summarizes stock option transactions during the years ended December 31, 2005, 2004 and 2003:
| Number of
Shares
| Weighted
Average
Exercise
Price Per
Share
|
|---|
| | |
|---|
| Balance at December 31, 2002 | | | | 770,000 | | $ | 3.18 | |
| Expired during 2003 | | | | (40,000 | ) | | 2.60 | |
|
| |
| |
| Balance at December 31, 2003 | | | | 730,000 | | $ | 3.21 | |
| No activity during 2004 | | | | -- | | | -- | |
|
| |
| |
| Balance at December 31, 2004 | | | | 730,000 | | $ | 3.21 | |
| Issued | | | | 8,240,000 | | | 1.08 | |
| Exchange of Capital Options to | | |
| First Look Options | | | | 500,000 | | | 0.01 | |
| Exercised | | | | (75,000 | ) | | 0.10 | |
| Expired | | | | (595,000 | ) | | 2.89 | |
|
| |
| |
| Outstanding at December 31, 2005 | | | | 8,800,000 | | $ | 1.08 | |
|
| |
| |
| Exercisable at December 31, 2005 | | | | 3,900,000 | | $ | 0.97 | |
|
| |
| |
The following summarizes prices and terms of options outstanding at December 31, 2005:
| Stock Options Outstanding
|
|---|
Exercise Price
| Number
Outstanding at
December 31, 2005
| Weighted Average
Remaining
Contractual Life
in Years
| Number
Exercisable at
December 31,
2005
|
|---|
| $0.01 | 500,000 | 9.33 | 500,000 |
| $0.10 | 675,000 | 2.79 | 675,000 |
| $1.11 | 5,900,000 | 9.67 | 1,750,000 |
| $1.51 | 1,500,000 | 9.83 | 750,000 |
| $1.75 | 10,000 | 2.21 | 10,000 |
| $1.88 | 10,000 | 2.21 | 10,000 |
| $2.25 | 10,000 | 2.21 | 10,000 |
| $2.38 | 20,000 | 3.13 | 20,000 |
| $2.44 | 90,000 | 3.50 | 90,000 |
| $3.40 | 75,000 | 3.40 | 75,000 |
| $5.25 | 10,000 | 1.83 | 10,000 |
|
| |
|
| | 8,800,000 | | 3,900,000 |
|
| |
|
Warrants
In June 2002, in accordance with the terms of the Securities Purchase Agreement with Seven Hills (Note 3), the Company issued to Seven Hills warrants to purchase up to 1,172,422 shares of common stock at an exercise price of $3.40 per share. Warrants to purchase 881,137 shares of common stock are immediately exercisable and will expire on June 25, 2007. Warrants to purchase 291,285 shares of common stock ("Note Warrants") were exercisable only upon conversion of a convertible promissory note, in proportion to the amount of the note converted if the note were not converted in whole, and would expire on June 25, 2007. At December 31, 2003, the promissory note was paid off and, as a result, the Note Warrants expired.
In November 2005, in accordance with the terms of the Convertible Debenture Agreement with PFLM and Highgate, (note 5), the Company issued to PFLM and Highgate warrants to purchase up to 6,000,000 shares of common stock at an exercise price of $1.11. All 6,000,000 warrants are immediately exercisable and will expire on November 10, 2010.
Due to the fact that the Company has entered into a convertible debt instrument on November 10, 2005 that is convertible into an indeterminate number of shares the Company's warrants are now classified as Liabilities and included in Accrual liabilities on the balance sheet.
In June 2000, in accordance with the terms of the Securities Purchase Agreement with Rosemary Street (see related party Note 8), the Company issued Rosemary Street warrants to purchase 2,313,810 shares of common stock. The Company also issued warrants to purchase 600,000 shares of common stock to individuals as compensation for services rendered in connection with closing of the Securities Purchase Agreement. The Company also issued warrants to purchase 75,000 shares of common stock to an individual in consideration of his consent to the assignment by Rosemary Street to the Company of his "first look" agreement. These warrants had an exercise price of $3.40 per share and expired in June 2005.
The following table summarizes warrant transactions during the years ended December 31, 2005, 2004 and 2003:
| Number of
Warrants
| Weighted
Average Exercise
Price Per Share
|
|---|
| Balance at December 31, 2002 | | | | 4,224,000 | | $ | 3.42 | |
| Expired during 2003 | | | | (354,000 | ) | | 3.68 | |
|
| |
| |
| Balance at December 31, 2003 | | | | 3,870,000 | | $ | 3.40 | |
| No activity during 2004 | | | | -- | | | -- | |
|
| |
| |
| Balance at December 31, 2004 | | | | 3,870,000 | | $ | 3.40 | |
| Issued in 2005 | | | | 6,000,000 | | | 1.11 | |
| Expired in 2005 | | | | (2,989,000 | ) | | 3.40 | |
|
| |
| |
| Outstanding at December 31, 2005 | | | | 6,881,000 | | $ | 1.40 | |
|
| |
| |
| Exercisable at December 31, 2005 | | | | 6,881,000 | | $ | 1.40 | |
|
| |
| |
The following summarizes prices and terms of warrants outstanding at December 31, 2005:
| Warrants Options Outstanding
|
|---|
Exercise Price
| Number
Outstanding at
December 31, 2005
| Weighted Average
Remaining
Contractual Life in
Years
| Number
Exercisable at
December 31, 2005
|
|---|
| $1.11 | 6,000,000 | 4.92 | 6,000,000 |
| $3.40 | 881,000 | 1.50 | 881,000 |
|
| |
|
| | 6,881,000 | | 6,881,000 |
|
| |
|
NOTE 8 — RELATED PARTY TRANSACTIONS:
In May 2002, the Company and Seven Hills formed a joint venture company to provide marketing and distribution funds for the theatrical release of motion pictures. Reverge Anselmo, a director of the Company, is the sole member and manager of Seven Hills, and Patrick Costello, a director of the Company, is the chief financial officer of Seven Hills. In June 2002, Seven Hills funded the Company's $2,000,000 capital contribution to the joint venture company pursuant to a convertible promissory note issued by the Company (Note 3). Also in June 2002, the Company, Seven Hills and the joint venture company entered into a Film Marketing and Distribution Agreement, pursuant to which the joint venture company would market and distribute motion pictures that the Company or Seven Hills would select on an alternating basis. Under the agreement, the Company would receive a distribution fee equal to 10% of the Theatrical Gross Receipts (as defined in the agreement) derived from the U.S. theatrical distribution of each picture designated by Seven Hills that the joint venture company would distribute. During 2003, the joint venture did not market or distribute any movies and therefore no fees were earned or received by the Company. In addition, on December 31, 2003, the Company paid off the promissory note and simultaneously dissolved the joint venture company.
The Company's employment agreement with Mr. Robert Little, the Company's founder and former president, expired on June 19, 2003. On June 20, 2003, the Company and Mr. Little entered into a one-year consulting agreement whereas Mr. Little would provide consulting services with respect to acquisition, marketing and distribution of films as well as future business plans or other related matters. In accordance with the agreement starting in July 2003, Mr. Little was paid $33,333 per month for an aggregate amount of $400,000.
In April 2004, George Cooney, father of Christopher Cooney, one of the Company's directors, and also an owner of Rosemary Street, and a majority shareholder in the Company, issued a letter of credit on the Company's behalf in the amount of $3,500,000 in favor of JPMorgan and the participating bank group. This letter of credit remained outstanding through the payoff of the Credit Facility in July 2005. The Company agreed to pay Mr. Cooney an annual fee of $175,000, payable in monthly installment of $12,500. The letter of credit expired in July 2005. During the years ended December 31, 2005 and 2004, $87,500 and $100,000 was paid to Mr. Cooney, respectively.
In December 2004, Reverge Anselmo ("Anselmo"), a director and securityholder, made a $1,000,000 payment to a third party producer in partial payment of accrued amounts owing with respect to our acquisition of a particular film in exchange for our promise to repay such payment within six months along with interest at a rate of twenty percent for the period such payment was outstanding. The arrangement was evidenced by an agreement whereby we also designated a specific account receivable as assigned to Anselmo toward such repayment. The obligation is reflected in our payable to producer liability at December 31, 2004. Our obligation to Aneselmo was paid in two $500,000 installments on January 25, 2005 and March 25, 2005, with accrued interest of $32,500 which was recorded as interest expense in our statement of operations for the quarter ended March 31, 2005.
NOTE 9 — COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases office space and office equipment under various operating leases which expire between 2006 and 2009. Total rental expense under these leases for the years ended December 31, 2005, 2004 and 2003 amounted to $515,000, $512,000 and $521,000, respectively. Minimum annual payments under non-cancelable leases are as follows:
| |
|---|
| |
|---|
| 2006 | | | $ | 519,000 | |
| 2007 | | | | 213,000 | |
| 2008 | | | | 3,000 | |
| 2009 | | | | 3,000 | |
|
| |
| | | | $ | 738,000 | |
|
| |
In 2005 the Company entered into an assumed unconditional purchase obligations for future delivery of films totaling $12,090,000. These unconditional purchase obligations require payments of $7,656,000, $1,675,000, $1,550,000, $800,000, $375,000 and 125,000 in 2006, 2007, 2008, 2009, 2010 and thereafter, respectively.
In 2005 the Company entered into and assumed employment contracts with certain executives which require payments of $2,423,000 and $1,414,000 in 2006 and 2007, respectively.
In 2005, the Company entered into marketing and distribution commitments on films which require payments of $1,638,000 during 2006. There are no marketing and distribution commitments which require payments beyond 2006.
Contingencies
The Company is from time to time involved in various claims, legal proceedings and complaints arising in the ordinary course of business. The Company does not believe that adverse decisions in any such pending or threatened proceedings, or any amount which the Company might be required to pay by reason thereof, would have a material adverse effect on the financial condition or future results of the Company.
NOTE 10 – SEGMENT INFORMATION:
The Company operates in one reportable business segment in which it markets and distributes motion pictures in all media (theatrical, video/DVD, television) worldwide.
Summarized financial information concerning the Company's geographical revenues is shown in the following table (amounts represent revenues earned from sales to customers located in these geographical regions):
| Years Ended December 31,
|
|---|
| 2005
| 2004
| 2003
|
|---|
| (in thousands) |
|---|
| United States | | | $ | 39,201 | | $ | 19,741 | | $ | 16,115 | |
| Western Europe | | | | 6,222 | | | 4,906 | | | 5,341 | |
| Asia | | | | 975 | | | 1,357 | | | 2,067 | |
| Latin America | | | | 1,100 | | | 615 | | | 1,753 | |
| Australia | | | | 605 | | | 700 | | | 1,032 | |
| Eastern Europe | | | | 902 | | | 1,090 | | | 693 | |
| Other | | | | 584 | | | 922 | | | 1,086 | |
|
| |
| |
| |
| | | | $ | 49,589 | | $ | 29,331 | | $ | 28,087 | |
|
| |
| |
| |
The Company does not maintain any long-lived assets in any foreign territories.
During the year ended December 31, 2005, revenues from Anderson Merchandisers, Blockbuster Entertainment and Ingram Entertainment accounted for 19.0%, 14.5% and 10% of the Company's total revenues respectively. During the year ended December 31, 2004, revenues from Anderson Merchandisers accounted for 28.9% of the Company's total revenue. No single customer accounted for 10% or more of the Company's revenues for the year ended December 31, 2003.
NOTE 11 – 401(k) PLAN
The Company has a 401(k) plan, which covers substantially all employees. Each participant is permitted to make voluntary contributions not to exceed the lesser of 15% of his or her respective compensation or the applicable statutory limitation. The Company matches one-half of the first 4% contributed by the employee. Amounts contributed by each employee are immediately vested and amounts contributed by the Company vest over a five-year period at the rate of 20% per year. The Company's contributions to the plan were $61,000, $41,000 and $47,000 in 2005, 2004 and 2003, respectively. In January 2006, the Company modified its 401(K) plan to allow participants to make voluntary contributions not to exceed the lesser of 80% of his or her respective compensation or the applicable statutory limitation.
NOTE 12 – SUBSEQUENT EVENTS
On March 20, 2006, the Company acquired the assets of Ventura Distribution, Inc. ("Ventura") for approximately $15.5 million. The assets were primarily accounts receivable and inventory, but also a vendor managed inventory ("VMI") system, used to better maintain and manage inventory levels with certain mass merchants, including Best Buy. The values assigned to the assets acquired were as follows: cash of $1.0 million, accounts receivable of $9.4 million, inventory of $3.7 million, fixed assets of $300,000 and film rights of $8.8 million, net of related liabilities of $7.7 million. In addition to acquiring assets, the Company offered employment, on an at-will basis, to most Ventura employees for an interim transitional period. Certain executives, including Larry Hayes, Ventura's founder, were employed by the Company on a term basis and will work under the direction of the Company's chief executive officer and president.
Funding for the Ventura acquisition was provided by PFLM Funding, LLC, through a bridge loan in the gross amount of $17 million which resulted in net funding of $16.5 million. In connection with the bridge loan, the Company issued 4 million warrants to purchase the Company's common stock at $0.75 per share. The warrants are exercisable immediately at the option of the warrant holder. The trading price of the Company's common stock on the closing date of the loan was $0.90. The fair value of $0.49 per warrant was valued under a Black Scholes model, using a risk free rate of 4.38%, volatility of 50% and life of 5 years. The resulting discount of $1.9 million will be accreted over the life of the debt under the effective interest rate. This loan was repaid on June 16, 2006 with the proceeds from the senior secured credit facility noted below.
On June 15, 2006, the Company, through its wholly-owned subsidiary, First Look SPV LLC, as borrower, entered into an $80 million revolving credit facility with Merrill Lynch Commercial Finance Corp, as agent and lender. The proceeds under the Merrill facility will be used to provide financing for production, acquisition, distribution, and exploitation of feature length motion pictures, television programming, video product and rights and for working capital and general corporate purposes.
The credit agreement provides for borrowings up to three years from closing, repayable, in part or in whole, at any time and to be fully paid on June 15, 2011. The primary components of the borrowing base include the following: (a) a library credit (50% of the value of the Company's film library, based upon a third party valuation of future cash flows, which, under the terms of the credit agreement, is required to be updated every twelve months), (b) a contracts credit (80% of the value of such royalties, residuals, commissions and other receivables payable to the Company pursuant to binding agreement which are acceptable to Merrill Lynch) and (c) an ultimates credit (67% of the value of the Company's films' net receipts over their life based upon a valuation specified in the credit agreement).
The amounts borrowed under the Merrill facility bear interest at rates based on LIBOR plus 1.5%. Upon entering the Merrill facility, the Company paid a one-time fee of approximately $1.6 million as a cost of acquiring the Merrill facility. In addition to this initial fee, the Company pays a commitment fee on the daily average unused portion of the Merrill facility at an annual rate of 0.5%. The Merrill facility restricts the creation or incurrence of indebtedness or the issuance of additional securities. To secure the obligations under the Merrill facility, First Look SPV granted a security interest in all of its assets, and thus substantially all of the Company's media assets, to Merrill Lynch.
FIRST LOOK STUDIOS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31,
2006
(Unaudited) | December 31,
2005
|
|---|
| (in thousands except per share data) |
| ASSETS: | | | | | | | | |
| Cash and cash equivalents | | | $ | 3,686 | | $ | 7,517 | |
| Accounts receivable, net of allowance for doubtful accounts of $20,029 and | | |
| $3,465 at March 31, 2006 and December 31, 2005, respectively | | | | 40,889 | | | 26,315 | |
| Film costs, net of accumulated amortization | | | | 44,813 | | | 32,333 | |
| Other assets | | | | 3,920 | | | 2,614 | |
|
| |
| |
| Total assets | | | $ | 93,308 | | $ | 68,779 | |
|
| |
| |
| LIABILITIES AND SHAREHOLDERS' DEFICIT: | | |
| Accounts payable and accrued expenses | | | $ | 16,794 | | $ | 9,660 | |
| Payable to producers and participants | | | | 41,507 | | | 31,830 | |
| Notes Payable | | | | 55,819 | | | 40,550 | |
| Deferred revenue | | | | 1,434 | | | 1,395 | |
|
| |
| |
| Total liabilities | | | | 115,554 | | | 83,435 | |
|
| |
| |
| Shareholders' deficit: | | |
| Preferred stock, $0.001 par value, 10,000,000 shares authorized; 0 shares | | |
| issued and outstanding at March 31, 2006 and December 31, 2005 | | | | -- | | | -- | |
| Common stock, $.001 par value, 100,000,000 shares authorized; 25,174,880 and | | |
| 25,159,880 shares issued at March 31, 2006 and December 31, 2005 respectively | | |
| and 25,159,880 and 24,114,880 shares outstanding at March 31, 2006 and December | | |
| 31, 2005 | | | | 25 | | | 25 | |
| Additional paid in capital | | | | 44,329 | | | 44,193 | |
| Accumulated deficit | | | | (66,513 | ) | | (58,787 | ) |
| Treasury stock at cost, 45,000 shares | | | | (87 | ) | | (87 | ) |
|
| |
| |
| Total shareholders' deficit | | | | (22,246 | ) | | (14,656 | ) |
| Total liabilities and shareholders' deficit | | | $ | 93,308 | | $ | 68,779 | |
|
| |
| |
The accompanying notes are an integral part of these consolidated financial statements.
FIRST LOOK STUDIOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended March 31,
|
|---|
| 2006
| 2005
|
|---|
| | (in thousands except per share data) |
| |
| Revenues | | | $ | 18,603 | | $ | 10,639 | |
| |
| Expenses: | | |
| Film costs | | | | 11,062 | | | 5,929 | |
| Distribution and marketing | | | | 3,299 | | | 1,751 | |
| General and administrative | | | | 5,461 | | | 2,258 | |
|
| |
| |
| Total expenses | | | | 19,822 | | | 9,938 | |
|
| |
| |
| Income (loss) from operations | | | | (1,219 | ) | | 701 | |
|
| |
| |
| Other income (expense): | | |
| Interest income | | | | 29 | | | 5 | |
| Interest expense | | | | (6,532 | ) | | (394 | ) |
| Other income | | | | 22 | | | 143 | |
|
| |
| |
| Net other expense | | | | (6,481 | ) | | (246 | ) |
|
| |
| |
| Income (loss) before income taxes | | | | (7,700 | ) | | 455 | |
| |
| Income tax provision | | | | 26 | | | 28 | |
|
| |
| |
| |
| Net income (loss) | | | $ | (7,726 | ) | $ | 427 | |
|
| |
| |
| |
| Basic and diluted earnings (loss) per share | | | $ | (0.31 | ) | $ | 0.03 | |
|
| |
| |
| Weighted average number of common | | |
| shares outstanding | | | | 24,705,991 | | | 14,539,753 | |
|
| |
| |
The accompanying notes are an integral part of these consolidated financial statements.
FIRST LOOK STUDIOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended March 31,
|
|---|
| 2006
| 2005
|
|---|
| | (in thousands) |
| Cash flows from operating activities: | | | | | | | | |
| Net income (loss) | | | $ | (7,726 | ) | $ | 427 | |
| Adjustments to reconcile net loss to net cash (used in) provided by | | |
| operating activities: | | |
| Amortization of debt discount | | | | 222 | | | -- |
| Increase in fair value of warrants | | | | 4,562 | | | -- |
| Stock option compensation expense | | | | 136 | | | -- |
| Amortization of film costs | | | | 11,062 | | | 5,929 | |
| Additions to film costs | | | | (11,975 | ) | | (2,001 | ) |
| Payments to producers and participants | | | | (995 | ) | | (2,302 | ) |
| Changes in operating assets and liabilities: | | |
| Accounts receivable | | | | (4,044 | ) | | (1,597 | ) |
| Other assets | | | | (495 | ) | | 122 | |
| Accounts payable and accrued expenses | | | | 4,488 | | | 344 | |
| Deferred revenue | | | | 39 | | | (300 | ) |
|
| |
| |
| Net cash provided by operating activities | | | | (4,726 | ) | | 622 | |
|
| |
| |
| |
| Cash flows from investing activities: | | |
| Acquisition of Ventura Distribution Assets | | | | (15,555 | ) | | -- | |
|
| |
| |
| Net cash used in investing activities | | | | (15,555 | ) | | -- | |
|
| |
| |
| |
| Cash flows from financing activities: | | |
| Borrowing under Bridge Loan | | | | 17,000 | |
| |
| Bridge Loan issuance costs | | | | (550 | ) |
| |
| Net (pay down) borrowings under credit facility | | | | -- | | | (295 | ) |
|
| |
| |
| Net cash provided by (used) in financing activities | | | | 16,450 | | | (295 | ) |
|
| |
| |
| Net (decrease) increase in cash and cash equivalents | | | | (3,831 | ) | | 327 | |
| Cash and cash equivalents at beginning of period | | | | 7,517 | | | 1,441 | |
|
| |
| |
| Cash and cash equivalents at end of period | | | $ | 3,686 | | $ | 1,768 | |
|
| |
| |
| Supplemental disclosure of cash flow information: | | |
| Cash paid during the period for: | | |
| Interest | | | $ | 740 | | $ | 260 | |
|
| |
| |
| Income taxes | | | $ | 10 | | $ | 10 | |
|
| |
| |
| Foreign withholding taxes | | | $ | 16 | | $ | 19 | |
|
| |
| |
The accompanying notes are an integral part of these consolidated financial statements.
FIRST LOOK STUDIOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — DESCRIPTION OF BUSINESS:
General
The accompanying unaudited consolidated financial statements of FIRST LOOK STUDIOS, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these consolidated financial statements. Operating results for the three months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's audited financial statements for the year ended December 31, 2005.
Corporate Transactions
Acquisition of the assets of Ventura Distribution, Inc.On March 20, 2006, the Company acquired the assets of Ventura Distribution, Inc. ("Ventura") for approximately $15.5 million. The assets were primarily accounts receivable and inventory, but also a vendor managed inventory ("VMI") system, used to better maintain and manage inventory levels with certain mass merchants, including Best Buy. The values assigned to the assets acquired were as follows: cash of $1.0 million, accounts receivable of $9.4 million, inventory of $3.7 million, fixed assets of $300,000 and film rights of $8.8 million, net of related liabilities of $7.7 million. The purchase price of $15.5 million was allocated to the assets acquired based on their fair values which approximated their book values. In addition to acquiring assets, the Company offered employment, on an at-will basis, to most Ventura employees for an interim transitional period. Certain executives, including Larry Hayes, Ventura's founder, were employed by the Company on a term basis and will work under the direction of its chief executive officer and president.
Funding for the Ventura asset acquisition was provided by PFLM, through a bridge loan in the gross amount of $17 million which resulted in net funding of $16.5 million. In connection with the bridge loan, the Company issued 4 million warrants to purchase the Company's common stock at $0.75 per share. The warrants are exercisable immediately at the option of the warrant holder. The warrants were valued using a Black Scholes model with the following variables (risk free rate 4.38%, volatility 50% and expected life of 5 years). The bridge loan was discounted by the resulting fair value of the warrants of $1.9 million. The discount will be accreted over the life of the bridge loan under the effective interest method.
NOTE 2 – ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS 123(R)). SFAS 123(R) revises SFAS No. 123 and eliminates the alternative to use the intrinsic method of accounting under APB No. 25. SFAS 123(R) requires all public companies accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments to account for these types of transactions using a fair-value-based method. The effects of SFAS 123(R) are included in the consolidated statement of operations.
In October 1996, the Company’s stockholders approved the 1996 Basic Stock Option and Stock Appreciation Rights Plan (“1996 Plan”), under which incentive and non-qualified stock options and stock appreciation rights may be granted to certain employees, directors, independent consultants and certain other persons who provide services to the Company to purchase up to a maximum of 550,000 shares of common stock. The 1996 Plan calls for annual grants to non-employee directors of 5,000 shares at an exercise price equal to the fair market value of the common stock on the date of grant. These options are exercisable one year after the date of grant and expire on the earlier of ten years from the date of grant or three years from the date on which the director ceases to be a director of the Company.
In November 2000, the Company’s stockholders approved the 2000 Performance Equity Plan (“2000 Plan”), under which a total of 1,000,000 shares of common stock were available for grant to the Company’s key employees, directors and independent consultants. Awards consist of stock options, restricted stock awards, deferred stock awards, stock appreciation rights and other stock-based awards, as described in the 2000 plan. The vesting of these options may vary, but typically vest on a step-up basis over a two year period. Share based compensation is recognized on a straight-line basis over the requisite service period.
In July 2005, the Company’s stockholders approved the 2005 Performance Equity Plan (“2005 Plan”), under which a total of 4,640,000 shares of common stock were available for grant to the Company’s key employees, directors and independent consultants. Awards consist of stock options, restricted stock awards, deferred stock awards, stock appreciation rights and other stock-based awards, as described in the 2005 plan. The vesting of these options may vary, but typically vest on a step-up basis over a three year period. Share based compensation is recognized on a straight-line basis over the requisite service period.
In December 2004, the Financial Accounting Standards Board (FASB) revised Statement of Financial Accounting Standards No. 123 (FAS 123R), “Share-Based Payment,” which establishes accounting for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. The accounting provisions of FAS 123R because effective for the Company beginning on January 1, 2006.
Under FAS 123R, share-based compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense over the employee’s requisite service period. The company adopted the provisions of FAS 123R using a modified prospective application. The valuation provisions of FAS 123R apply to new awards and to unvested awards that are outstanding on the effective date and any awards subsequently modified or cancelled. Estimated compensation expense for awards outstanding at the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FASB Statement No. 123, “Accounting for Stock-Based Compensation” (FAS 123).
The Company uses the Black-Scholes method of valuation for share-based option awards. In valuing the stock options, the Black-Scholes model incorporates assumptions about stock volatility, expected term of stock options, and risk free interest rate. The valuation is reduced by an estimate of stock option forfeitures, estimated based on historical experience.
Expected volatilities are based on historical volatility of the Company’s stock, and other factors. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of the options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S Treasury yield curve in effect at the time of grant.
| 2006
|
|---|
| Expected volatility | 50% |
| Expected dividends | 0% |
| Expected term (in years) | 5-10 |
| Risk-free rate | 4.1%-4.5% |
The Company issued 1,750,000 options during the three months ended March 31, 2006. The amount of share-based compensation expense recognized in the three months ended March 31, 2006 is based on options issued prior to January 1, 2006 and stock options issued during the three months ended March 31, 2006, and ultimately expected to vest, and it has been reduced for estimated forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Total share-based compensation expense recognized for the three months ended March 31, 2006 was $136,000. Stock option activity for the three months ended March 31, 2006 is summarized as follows:
| Plan Stock Options
|
|---|
| Number of
Shares
| Weighted
Average
Exercise Price
|
|---|
| Outstanding, December 31, 2005 | | | | 8,800,000 | | $ | 1.08 | |
| Granted | | | | 1,750,000 | | $ | 0.48 | |
| Exercised | | | | 15,000 | | $ | 0.10 | |
| |
| Forfeited | | | | -- | | | -- | |
|
| |
| Outstanding, March 31, 2006 | | | | 10,535,000 | | $ | 0.98 | |
|
| |
The following characteristics apply to the Company’s stock option plans that are fully vested as of March 31, 2006:
| |
|---|
| Number of options outstanding | | | | 10,535,000 | |
| Weighted-average exercise price | | | $ | 0.98 | |
| Aggregate intrinsic value | | | $ | 3,990,000 | |
| Weighted-average contractual term of options outstanding | | | | 9.91 years | |
| Number of options currently exercisable | | | | 3,885,000 | |
| |
| Aggregate intrinsic value of options currently exercisable | | | $ | 3,783,000 | |
| Weighted-average contractual term of currently exercisable | | | | 5.97 years | |
There were no stock-options granted during the three months ended March 31, 2005.
The weighted average estimated fair value of stock options granted during the quarter ended March 31, 2006 was $0.56 per share.
NOTE 3 – NEW ACCOUNTING PRONOUNCEMENTS
FASB Interpretation No. 48. In July 2006, the FASB issued Interpretation No. 48 (FIN 48) "Accounting for Uncertainty in Income Taxes" which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on the derecognition, classification, accounting i interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 will be effective for the Company beginning January 1, 2007. The Company is in the process of determining the effect, if any, the adoption of FIN 48 will have on its financial statements.
NOTE 4 — FILM COSTS:
Film costs consist of the following:
| March 31, | December 31, |
|---|
| 2006
| 2005
|
|---|
| (in thousands) |
| (unaudited) | |
| |
| Films in release net of accumulated amortization | | | $ | 28,989 | | $ | 21,958 | |
| Films not yet available for release: | | |
| In process | | | | 11,572 | | | 9,211 | |
| In development | | | | -- | | | 1,164 | |
| DVD Inventory | | | | 4,252 | | | -- | |
|
| |
| |
| | | | $ | 44,813 | | $ | 32,333 | |
|
| |
| |
| | |
DVD inventory consists primarily of finished DVD product for sale and is stated at the lower of cost or market. Film costs consist of capitalized costs to acquire and produce motion pictures for distribution in the international and domestic markets.
No interest costs were capitalized to films during the quarters ended March 31, 2006 and 2005.
NOTE 5 — NOTES PAYABLE:
Notes payable consist of the following:
| March 31, | December 31, | |
|---|
| 2006
| 2005
|
|---|
| | (unaudited) | (in thousands) |
| | | | | | | | |
| Bridge Loan - PFLM | | | | 17,000 | | | -- | |
| Convertible note - PFLM | | | | 20,000 | | | 20,000 | |
| Convertible debenture - PFLM / HH | | | | 23,640 | | | 23,640 | |
| Note discount | | | | (4,821 | ) | | (3,090) | |
|
| |
| |
| Total borrowings | | | $ | 55,819 | | $ | 40,550 | |
|
| |
| |
In June 2000 the Company entered into a five-year $40 million revolving credit facility (the "JP Morgan Credit Facility") with JP Morgan Chase (formerly Chase Securities, Inc. and The Chase Manhattan Bank) and other commercial banks and financial institutions. Through subsequent amendments, the total amount of the facility was reduced to $14.5 million, and the amount the Company was allowed to borrow in relation to its library value was reduced from 50% (the "Advance Rate") of the library value to 17.5% for a maximum of $3,500,000.
In July 2005, the Company entered into an Amendment to the JP Morgan Chase Loan Agreement with PFLM. JP Morgan assigned its interest in the credit facility to PFLM in exchange for PFLM satisfying the outstanding commitment owing to JPMorgan Chase under the facility. Pursuant to the terms of the Amendment, the Company borrowed an aggregate of $20 million from PFLM. The base interest rate under the PFLM loan is 5% per annum, compounded annually, with all interest for any calendar year becoming due on the first day of the following calendar year (however, interest for calendar year 2005 was due on the effective date of the amended facility). The PFLM loan is a term loan that will mature on July 26, 2007. However, PFLM has the option to convert the outstanding balance of the loan at any time, on an all-or-nothing basis, into shares of the Company's common stock at a conversion price calculated at one share for every $1.11 of the outstanding balance of the loan. The amendment also calls for the debt to convert into common stock upon us entering into a senior secured credit facility and obtaining an audit opinion without a "going concern" emphasis paragraph. In July 2006 the Company met these criteria and the $20 million loan and accrued interest of $1,457,397 was converted into 18,018,018 shares and 1,312,971 shares, respectively, of the Company's common stock. The embedded conversion feature was analyzed under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." The conversion feature did not meet the definition of a stand-alone derivative under SFAS 133, and therefore, was not bifurcated.
In November 2005, in connection with the Company's purchase of DEJ Productions, the Company borrowed $23,640,000 in the form of a convertible debenture. The funding was provided by PFLM and Highgate. The debenture bears interest at 10% per annum, payable monthly with no principal amortization. PFLM and Highgate may at their sole option, convert any or all of the face amount of the debenture upon the earlier of either the effectiveness of the Company's registration statement or August 14, 2006. Additionally, the Company issued 6,000,000 warrants to purchase common stock at an exercise price of $1.11. The warrants are exercisable immediately at the option of the warrant holder. The fair value of the warrants was determined using the Black-Scholes model with the following variables (risk free rate 4.16%, volatility 49%, expected life 5 years) or $0.11 per share. The conversion price of the debenture is calculated at the lower of: $1.11 per share or 95% of the lowest bid price for the thirty trading days immediately preceding the date of conversion. The note has been discounted by approximately $2,580,000, representing $672,000 for the fair value of the 6,000,000 warrants issued in connection with this note, and $1,908,000 for the beneficial conversion feature (BCF) imbedded. The note discount, including the BCF, will be accreted over the term of the note under the effective interest method. The embedded conversion feature was analyzed under SFAS 133. The conversion feature did not meet the definition of a stand-alone derivative under SFAS 133, and therefore, was not bifurcated.
At the time the $23,640,000 convertible debenture was issued, the Company granted registration rights to PFLM and Highgate pursuant to which, subject to certain terms and conditions, the Company agreed to file a registration statement to register for resale under the Securities Act of 1933, as amended (the "Securities Act"), the shares of Common Stock underlying the debenture and the related warrants with in 150 days from the closing date of the loan. If the registration statement is not declared effective with in a specified time frame, the Company must pay PFLM and Highgate liquidated damages of 1% per month up to the one-year anniversary of the closing date, and 2% per month thereafter. The conditions to the Company's obligation to file such registration statement have not yet been satisfied, and no such registration statement is currently pending. These registration rights are accounted for under SFAS 5, "Accounting for Contingencies." No expense has been recorded related to these registration rights as of December 31, 2005.
In addition, to the above the Company issued PFLM 1,000,000 shares of common stock for their assistance in arranging the November 2005 loan. The value of the 1,000,000 shares at the time of closing the loan was approximately $510,000 and has been recorded as debt issuance cost and is being amortized over the life of the loan on the effective interest method.
On March 20, 2006, the funding for the Ventura asset acquisition was provided by PFLM, through a bridge loan in the gross amount of $17 million which resulted in net funding of $16.5 million. In connection with the bridge loan, the Company issued 4 million warrants to purchase the Company's common stock at $0.75 per share. The warrants are exercisable immediately at the option of the warrant holder. The warrants were valued using a Black Scholes model with the following variables (risk free rate 4.38%, volatility 50% and expected life of 5 years). The bridge loan was discounted by the resulting fair value of the warrants of $1.9 million. The discount will be accreted over the life of the bridge loan under the effective interest method.
As indicated above, the 10,000,000 warrants issued have been classified as a liability. This liability is marked to market each quarter. This mark to market adjustment resulted in $4,562,000 of additional interest expense for the three months ended March 31, 2006.
NOTE 6 – EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per share is calculated based on the weighted average common shares outstanding for the period. Diluted earnings per share includes the impact of the convertible senior subordinated notes, convertible promissory notes, share purchase warrants, Series A preferred shares and stock options, if dilutive.
| March 31,
2006
| March 31,
2005
|
|---|
| (Amounts in thousands,
except per share amounts) |
|---|
| Basic and diluted loss per common share is calculated as follows: | | | | | | | | |
| |
| Numerator: | | |
| Net loss available to common shareholders | | | $ | (7,726 | ) | $ | 427 | |
| Denominator: | | |
| Weighted average common shares outstanding (basic) | | | | 24,705,991 | | | 14,539,573 | |
| Weighted average common shares outstanding (diluted) | | | | 24,705,991 | | | 15,332,891 | |
| Basic loss per common share | | | $ | (0.31 | ) | $ | 0.03 | |
| Diluted loss per common share | | | $ | (0.31 | ) | $ | 0.03 | |
Options to purchase 10,534,000 common shares at an average price of $0.98 were outstanding at March 31, 2006. Warrants to purchase 10,881,000 common shares at an average exercise price of $1.16 (2004 and 2003 — $3.40) were outstanding at March 31, 2006. Convertible debt in the aggregate amount of $43,640,000, convertible into 39,315,315 shares of common stock was outstanding at March 31, 2006. All of the options, warrants or convertible debit were anti-dilutive, and thus not converted in the diluted loss per share calculation for the quarter ended March 31, 2006.
At March 31, 2005 options to purchase 840,000 common shares at an exercise price of $0.10 were assumed converted, which resulted in net shares issued, using treasury stock method, of 793,318. The average price of the Company's stock during the quarter ended March 31, 2005 was $0.56. Options to purchase 234,500 shares at an average exercise price of $2.80 and warrants to purchase 881,137 at an exercise price of $3.40 were anti-dilutive, thus not converted in the diluted loss per share calculation.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
In connection with the Company's purchase of the assets of Ventura Distribution, Inc. the Company assumed certain operating leases for office space and office equipment. The minimum payments required under these leases as of March 31, 2006 are $991,000, $379,000, $191,000 and $61,000 in 2006, 2007, 20087 and 2009 respectively,
During the three months ended March 31, 2006, the Company entered into unconditional purchase obligations for future delivery of films totally $850,000 which the Company expects to pay in 2006.
During the three months ended March 31, 2006, the Company entered into employment contracts with certain executives which require payments of $1,951,000, $1,052,000 and $125,000 in 2006, 2007 and 2008 respectively.
The Company did not enter into any distribution and marketing commitments during the three months ended March 31, 2006.
NOTE 8 – SEGEMENT INFORMATION
The Company operates in one reportable business segment in which it markets and distributes motion pictures in all media (theatrical, video/DVD, television) worldwide. The Company has historically disclosed summarized financial information for the geographic areas of operations as if they were segments in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information."
Such summarized financial information concerning the Company's geographical revenues is shown in the following table (amounts represent revenues earned from sales to customers located in these geographical regions):
| Quarter Ended March 31, |
|---|
| 2006
| 2005
|
|---|
| United States | | | $ | 17,223 | | $ | 7,226 | |
| Western Europe | | | | 247 | | | 1,812 | |
| Asia | | | | 134 | | | 576 | |
| Latin America | | | | 22 | | | 316 | |
| Australia | | | | 249 | | | 338 | |
| Eastern Europe | | | | 539 | | | 268 | |
| Other | | | | 189 | | | 103 | |
|
| |
| |
| | | | $ | 18,603 | | $ | 10,639 | |
|
| |
| |
The Company does not maintain any long-lived assets in any foreign territories.
NOTE 9 – SUBSEQUENT EVENTS
Acquisition Agreement with Dual Films Productions, Inc.Henry Winterstern, the Company's chief executive officer, is the sole shareholder of Dual Films Productions, Inc. In 2005, Dual Films produced a film entitledWassup Rockers. Pursuant to an Acquisition Agreement dated as of June 1, 2006, the Company agreed to distributeWassup Rockers in the United States and Canada. The term of the agreement expires upon the fifteenth anniversary of the date the Company initially releases the film. As consideration for the Company's services under the Acquisition Agreement, the Company is entitled to receive 20% distribution fee on the film's gross receipts while simultaneously Dual Films receive a 20% "gross corridor" on the film's gross receipts. The remaining balance of gross receipts are retained by the Company and applied toward repayment of all third-party costs and expenses incurred relating to the Company's acquisition, distribution and exploitation of the film, the balance of the gross receipts are to be split equally between Dual Films and the Company.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses payable by First Look Studios, Inc. in connection with this registration statement. All of such expenses are estimates, other than the filing fees payable to the Securities and Exchange Commission.
| |
|---|
| SEC Registration Fee | $9,508.73 |
| Blue Sky Fees and Expenses | $* |
| Printing and Engraving Costs | $* |
| Legal Fees and Expenses | $* |
| Accounting Fees and Expenses | $* |
| Miscellaneous | $* |
|
|
| Total | $* |
____________________
*To be completed by amendment.
Item 14. Indemnification of Directors and Officers.
Our restated certificate of incorporation provides that all of our directors, officers, employees and agents shall be entitled to be indemnified by us to the fullest extent permitted by law.
Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee or agent to the Registrant. The Delaware General Corporation Law provides that Section 145 is not exclusive of other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. The Registrants' bylaws provide for indemnification by the Registrants of their directors, officers and employees to the fullest extent permitted by the Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts of omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for any transaction from which the director derived an improper personal benefit. The Registrant's Certificate of Incorporation provides for such limitation of liability to the fullest extent permitted by the Delaware General Corporation Law.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers, and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange (SEC) such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
Item 15. Recent Sales of Unregistered Securities.
Unregistered securities were issued in 2006 as follows:
Sales
Date(s) | No. of Shares | Net
Proceeds | Class of
Person | Exemption | Additional Information |
| 08/03/06 | 35,000 | Employment
Agreement | Employee | Section 4(2) | Grant of an option for 35,000 authorized, but unissued shares of common stock with exercise price of $1.11 per share. |
| 07/07/06 | 19,330,988 | $21,457,397 | Accredited
Investor | Section 4(2)
and Rule 506
of Reg. D | Issuance of common stock upon conversion of promissory note in the principal amount of $20 million plus $1,457,397 accrued interest. |
| 6/20/06 | 765,000 | N/A | Accredited
Investor | Section 4(2)
and Rule 506
of Reg. D | Warrant to purchase 765,000 shares of common stock at an exercise price of $1.11 per share which expire on June 20, 2011. |
| 03/20/06 | N/A | $17,000,000 | Accredited
Investor | Section 4(2)
and Rule 506 of
Reg. D | Bridge loan payable on or before March 19, 2007. |
| 03/20/06 | 4,000,000 | N/A | Accredited
Investor | Section 4(2)
and Rule 506
of Reg. D | Warrant to purchase 4,000,000 shares of common stock at an exercise price of $0.75 per share which expire on March 30, 2011. |
| 3/20/06 | 1,000,000 | Employee
Stock Option
Agreement | Employee | Section 4(2) | Grant of an option for 1,000,000 authorized, but unissued shares of common stock with exercise price of $0.01 per share. |
| 01/01/06 | 750,000 | Employee
Stock Option
Agreement | Employee | Section 4(2) | Grant of an option for 750,000 authorized, but unissued shares of common stock with exercise price of $1.11 per share. |
Unregistered securities were issued in 2005 as follows:
Sales
Date(s) | No. of Shares | Net
Proceeds | Class of
Person | Exemption | Additional Information |
| 12/05/05 | 500,000 | Employee
Stock Option
Agreement | Employee | Section 4(2) | Grant of an option for 500,000 authorized, but unissued shares of common stock with exercise price of $1.11 per share under 2005 Performance Equity Plan. |
| 11/14/05 | 1,500,000 | Employee
Stock Option
Agreement | Employee | Section 4(2) | Grant of an option for 1,500,000 authorized, but unissued shares of common stock with exercise price of $1.11 per share. |
| 11/14/05 | 1,500,000 | Employee
Stock Option
Agreement | Employee | Section 4(2) | Grant of an option for 1,500,000 authorized but unissued shares of common stock with exercise price of $1.51 per share. |
| 11/10/05 | N/A | Convertible
Promissory Note | Accredited
Investor | Section 4(2)
and Rule 506
of Reg D | 10% Secured Convertible Debenture issued in the aggregate principal amount of $23.64 million at a conversion rate of $1.11 per share. |
| 11/10/05 | 600,000 | N/A | Accredited
Investor | Section 4(2)
and Rule 506
of Reg. D | Warrant to purchase 600,000 shares of common stock at an exercise price of $1.11 per share which expire on November 9, 2011. |
| 11/10/05 | 5,400,000 | N/A | Accredited
Investor | Section 4(2)
and Rule 506
of Reg. D | Warrant to purchase 5,400,000 shares of common stock at an exercise price of $1.11 per share which expire on November 9, 2011. |
| 11/10/05 | 1,000,000 | N/A | Accredited
Investor | Section 4(2)
and Rule 506
of Reg. D | Issuance of 1,000,000 shares of common stock in lieu of payment of fees in connection with providing financing for the acquisition of assets of DEJ Productions, Inc. |
| 07/29/05 | 9,250,449 | Acquisition of
Capital
Entertainment,
Inc. | Accredited
Investor | Section 4(2)
and Rule 506
of Reg D | Issuance of 9,250,449 shares of common stock. |
| 07/29/05 | 249,858 | Acquisition of
Capital
Entertainment,
Inc. | Accredited
Investor | Section 4(2)
and Rule 506
of Reg D | Issuance of 249,858 shares of common stock. |
| 07/28/05 | 3,900,000 | Employee
Stock Option
Agreements | Employees/
Consultants | Section 4(2) | Grant of options for 3,900,000 authorized, but unissued shares of common stock with exercise price of $1.11 per share under 2005 Performance Equity Plan. |
| 04/08/05 | 499,963 | Employee
Stock Option
Agreements | Employees | Section 4(2) | Grant of options for 499,963 authorized, but unissued shares of common stock with exercise price of $0.01 per share. |
The registrant did not issue any unregistered securities in 2004.
Item 16. Exhibits and Financial Statements Schedules.
(a) Exhibits
The exhibits to the Registration Statement are listed in the Exhibit Index which precedes the exhibits to this Registration Statement and is hereby incorporated herein by reference.
(b) Financial Statement Schedules
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
First Look Studios, Inc.
Hollywood, California
The audit referred to in our report to First Look Studios, Inc., dated June 15, 2006, which is contained in the Prospectus constituting part of this Registration Statement on Form S-1, included the audit of the schedule listed under Item 16(b) for the year ended December 31, 2005. The financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement schedules based upon our audit.
In our opinion, such schedule presents fairly, in all material respects, the information set forth therein.
/s/BDO Seidman, LLP
Los Angeles, California
Date June 15, 2006
Report of Independent Registered Public Accounting Firm
on
Financial Statement Schedule
To the Board of Directors
of First Look Studios, Inc.
Our audits of the consolidated financial statements referred to in our report dated April 8, 2005 appearing in this Registration Statement on Form S-1 of First Look Studios, Inc. also included an audit of the financial statement schedule for the years ended December 31, 2004 and 2003 listed in Item 16(b) of this Form S-1. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein for the years ended December 31, 2004 and 2003 when read in conjunction with the related consolidated financial statements.
Our report on the consolidated financial statements for the years ended December 31, 2004 and 2003 included an explanatory paragraph relating to the Company's ability to continue as a going concern.
/s/PricewaterhouseCoopers LLP
[City, State]
April 8, 2005
FIRST LOOK STUDIOS, INC.
SCHDULE II — VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
Allowance for Reserves and Doubtful Accounts
| Balance at
Beginning of
Year
| Charged to
Costs and
Expenses
| Deductions
| Balance at End
of Year
|
|---|
| (in thousands)
|
|---|
| Year ended December 31, 2003 | | | $ | 2,401 | | $ | 2,632 | | $ | (3,474 | ) | $ | 1,559 | |
| Year ended December 31, 2004 | | | $ | 1,559 | | $ | 3,351 | | $ | (2,665 | ) | $ | 2,245 | |
| Year ended December 31, 2005 | | | $ | 2,245 | | $ | 9,177 | | $ | (7,957 | ) | $ | 3,465 | |
Deferred Tax Valuation
| Balance at
Beginning of
Year
| Charged to
Costs and
Expenses
| Deductions
| Balance at End
of Year
|
|---|
| | | | |
|---|
| |
| Year ended December 31, 2003 | | | $ | 13,581 | | $ | 997 | | $ | -- | | $ | 14,578 | |
| Year ended December 31, 2004 | | | $ | 14,578 | | $ | 523 | | $ | -- | | $ | 15,101 | |
| Year ended December 31, 2005 | | | $ | 15,101 | | $ | 6,673 | | $ | -- | | $ | 21,774 | |
All other schedules are omitted because the information required to be set forth therein is not applicable or is contained in the Financial Statements or Notes.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information in the Registration Statement. To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement;
(iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement.
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, California on the 11th day of August 2006.
| | FIRST LOOK STUDIOS, INC.
By:/s/ Henry Winterstern
Name: Henry Winterstern
Title: Chief Executive Officer and Chairman of the Board |
POWER OF ATTORNEY
Know all men by these presents, that the undersigned directors and officers of First Look Studios, Inc., a Delaware corporation, which is filing a registration statement on Form S-1 with the Securities and Exchange Commission, Washington, D.C. 20549 under the provisions of the Securities Act of 1933, as amended, hereby constitute and appoint William F. Lischak and Richard Shore, and each of them, the individual's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for the person and in his or her name, place and stead, in any and all capacities, to sign such registration statement and any or all amendments, including post-effective amendments to the registration statement, including a prospectus or an amended prospectus therein and any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b)under the Securities Act, and all other documents in connection therewith to be filed with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact as agents or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933 has been signed below by the following persons in the capacities and on the dates indicated below.
/s/ Christopher J. Cooney
Christopher J. Cooney | Director, President of Branded
Entertainment | August 11, 2006 |
/s/ Mitchell P. Goldstein
Mitchell P. Goldstein | Director | August 11, 2006 |
/s/ William F. Lischak
William F. Lischak | Director, President, Chief Operating
Officer and Chief Financial Officer | August 11, 2006 |
/s/ Charles Phillips
Charles Phillips | Director | August 11, 2006 |
/s/ Henry Winterstern
Henry Winterstern | Director and Chief Executive Officer | August 11, 2006 |
INDEX TO EXHIBITS
| 3.1(a) | Restated Certificate of Incorporation of Entertainment/Media Acquisition Corporation dated October 31, 1996. |
| 3.1(b) | Certificate of Amendment of Restated Certificate of Incorporation of Registrant dated November 15, 2000. |
| 3.1(c) | Certificate of Amendment of Restated Certificate of Incorporation of Registrant dated July 28, 2005. |
| 3.1(d) | Certificate of Amendment of Restated Certificate of Incorporation of Registrant dated September 28, 2005. |
| 3.1(e) | Certificate of Amendment of Restated Certificate of Incorporation of Registrant dated December 1, 2005. |
| 3.2 | Certificate of Designations for Series A Preferred Stock dated June 20, 2000. |
| 3.3 | Bylaws, as amended on June 20, 2000. |
| 3.4 | Operating Guidelines of Registrant. |
| 4.1 | Form of Common Stock certificate. |
| 4.2 | Intentionally omitted. |
| 4.3 | Warrant, dated June 25, 2002, to purchase 881,137 shares of Registrant's common stock issued to Seven Hills Pictures, LLC. |
| 4.4 | Warrant, dated June 25, 2002, to purchase 291,285 shares of Registrant's common stock issued to Seven Hills Pictures, LLC. |
| 4.5 | Warrant, dated November 10, 2005, to purchase 5,400,000 shares of Registrant's common stock issued to PFLM, LLC. |
| 4.6 | Amended and Restated Warrant, dated March 20, 2006, to purchase 4,000,000 shares of Registrant's common stock issued to PFLM, LLC. |
| 4.7 | Secured Convertible Promissory Note from Registrant to Seven Hills Pictures, LLC, dated June 25, 2002, due June 25, 2008. |
| 4.8 | Secured Convertible Debenture from Registrant to PFLM, LLC, dated November 10, 2005, due November 10, 2010. |
| 4.9 | Secured Convertible Debenture from Registrant to Highgate House Funds, Ltd., dated November 10, 2005, due November 10, 2010. |
| 5 | Opinion of Stroock & Stroock & Lavan LLP regarding legality.* |
| 10.1 | 1996 Basic Stock Option and Stock Appreciation Rights Plan. |
| 10.2 | 2000 Performance Equity Plan. |
| 10.3 | 2005 Performance Equity Plan. |
| 10.4 | Investor Rights Agreement, dated July 29, 2005. |
| 10.5 | Investor Rights Agreement, dated June 25, 2002. |
| 10.6 | Investor Registration Rights Agreement, dated November 10, 2005. |
| 10.7 | Stockholders' Agreement, dated July 28, 2005, by and among Registrant, PFLM, LLC, Seven Hills Pictures, LLC, Rosemary Street Productions, LLC, Henry Winterstern, Christopher J. Cooney and William F. Lischak. |
| 10.8 | License Agreement between DEJ Productions, Inc. (as distributor) and Media 8 Entertainment and MDP Distribution, Inc. with respect to the acquisition of certain rights in and to Monster (picture), dated October 1, 2003. |
| 10.9 | Amendment to Monster License Agreement between DEJ Productions, Inc. (as distributor) and Media 8 Entertainment and MDP Distribution, Inc., dated October 1, 2003. |
| 10.10 | Stock Purchase Agreement, dated November 2005, by and among Blockbuster Inc., D.E.J. Productions Inc. and Registrant.. |
| 10.11 | Acquisition & Distribution Agreement, dated October 14, 2005, between Ventura Distribution, Inc. and Skouras Films, Inc. terminating the June 1, 2004 Skoures Ventura Film Partners Agreement and allocating rights. |
| 10.12 | Asset Purchase Agreement, dated March 22, 2006, by and among Registrant, as Buyer, and Steven M. Spector, as the Assignee for the Benefit of the Creditors of Ventura Distribution, Inc. et al, as Seller, and Ventura Distribution, Inc. et al. |
| 10.13 | Letter Agreement of Indemnification, dated March 22, 2006, between Registrant and Mr. Hayes, as to Ventura Distribution, Inc. lease assumption. |
| 10.14 | Stock Pledge Agreement, dated March 20, 2006, between First Look Artists, Inc., as Pledgor, First Look Entertainment and PFLM, LLC, as Lender. |
| 10.15 | Guaranty by First Look Artists, Inc. in favor of PFLM, LLC, dated March 20, 2006. |
| 10.16 | Guaranty by First Look Entertainment in favor of PFLM, LLC, dated March 20, 2006. |
| 10.17 | Securities Purchase Agreement with PFLM, LLC and Highgate House Funds, Ltd., dated November 10, 2005. |
| 10.18 | Blockbuster Revenue Share Agreement, effective October 31, 2005.* |
| 10.19 | Blockbuster License Agreement, dated November 14, 2005. |
| 10.20 | Stock Assignment, dated March 14, 2006, by Registrant to First Look Artists, Inc. of 100% of the shares of Registrant. |
| 10.21 | Indemnity Agreement, dated October 31, 1996, between Registrant and Robert B. Little. |
| 10.22 | Indemnity Agreement, dated October 31, 1996, between Registrant and William F. Lischak. |
| 10.23 | Indemnity Agreement, dated October 31, 1996, between Registrant and Stephen K. Bannon. |
| 10.24 | Indemnity Agreement, dated October 31, 1996, between Registrant and Scot K. Vorse. |
| 10.25 | Indemnity Agreement, dated March 20, 2006, by and among Registrant and Steven M. Spector. |
| 10.26 | Lease Agreement, dated December 1, 1996, as amended. |
| 10.27 | Amendment, dated August 14, 1997 to Lease Agreement, dated December 1, 1996. |
| 10.28 | Agreement of Sublease between Scott Mednick & Associates, Inc. and Registrant, regarding 8000 Sunset Blvd., dated November 15, 2001, and underlying Shopping Center Lease. |
| 10.29 | Employment Agreement, dated July 28, 2005, between Registrant and William F. Lischak. |
| 10.30 | Amendment to Employment Agreement, dated March 20, 2006, between Registrant and William F. Lischak. |
| 10.31 | Employment Agreement, dated July 28, 2005, between Registrant and Christopher J. Cooney. |
| 10.32 | Amendment to Employment Agreement, dated March 20, 2006, between Registrant and Christopher J. Cooney. |
| 10.33 | Employment Agreement, dated July 28, 2005, between Registrant and Henry Winterstern. |
| 10.34 | Amendment to Employment Agreement, dated March 20, 2006, between Registrant and Henry Winterstern. |
| 10.35 | Amended and Restated Employment Agreement, dated December 21, 2004 between Capital Entertainment Enterprises, Inc. and Richard Shore. |
| 10.36 | Form of Credit, Security, Guaranty and Pledge Agreement, dated as of June 20, 2000, among Registrant, as borrower, the Guarantors named therein and the lenders named therein, with The Chase Manhattan Bank, as Administrative Agent, and The Chase Manhattan Bank, as Issuing Bank (without schedules and exhibits)(the "JPMorgan Facility"). |
| 10.37 | Amendment No. 1, dated as of May 16, 2001 to the JPMorgan Facility. |
| 10.38 | Amendment No. 2, dated as of September 17, 2001, to the JPMorgan Facility. |
| 10.39 | Amendment No. 3, dated as of June 24, 2002, to the JPMorgan Facility. |
| 10.40 | Amendment No. 4, dated as of February 18, 2003, to the JPMorgan Facility. |
| 10.41 | Amendment No. 5, dated as of April 18, 2003, to the JPMorgan Facility. |
| 10.42 | Amendment No. 6, dated as of April 30, 2004, to the JPMorgan Facility. |
| 10.43 | Amendment to Loan Agreement, between Registrant and PFLM, LLC, effective July 26, 2005. |
| 10.44 | Loan Agreement, dated March 20, 2006, by and among First Look Entertainment, as Borrower, and Registrant, as Lender. |
| 10.45 | Bridge Loan Credit Agreement, dated March 20, 2006, between PFLM, LLC and Registrant. |
| 10.46 | Amendment to Bridge Loan Credit Agreement, dated March 20, 2006, between PFLM, LLC and Registrant. |
| 10.47 | Assignment Agreement, dated May 31, 2006, among Cornell Capital Partners, LP, Cornell Capital Partners Offshore, Ltd, Highgate House Funds, Ltd, Prentice Capital Partners QP, LP, Prentice Capital Offshore, Ltd, PFLM, LLC and First Look Studios, Inc. |
| 10.48 | Credit and Security Agreement, dated June 14, 2006, between First Look SPV LLC and Merrill Lynch Commercial Financing Corp., as agent. |
| 10.49 | Sale and Contribution Agreement, dated June 14, 2006, by and among First Look SPV LLC, as purchaser, and Registrant, as seller. |
| 10.50 | Sales Agency and Servicing Agreement, dated June 14, 2006, between First Look SPV LLC, as purchaser, and Registrant, as Sales and Servicing Agent. |
| 10.51 | Registrant's Note in favor of First Look SPV LLC, dated June 14, 2006. |
| 10.52 | Warrant Agreement and Warrant, dated June 20, 2006, to purchase 765,000 shares of Registrant's common stock issued to Merrill Lynch Mortgage Capital Inc. |
| 10.53 | Employment Agreement, dated June 26, 2006, between Registrant and Kenneth Lynch. |
| 10.54 | Lease, dated June 9, 2006, between Ventura Distribution, Inc. and the Miller Family Trust for premises located at 2590 Conejo Spectrum Street, Thousand Oaks, CA. |
| 16 | Letter from PricewaterhouseCoopers LLP with respect to change in certifying accountant. |
| 23.1 | Consent of PricewaterhouseCoopers LLP with respect to financial statements. |
| 23.2 | Consent of BDO Seidman, LLP with respect to financial statements. |
| 24 | Power of Attorney (included in this Part II of the registration statement). |
* To be filed by amendment.
**Confidential treatment requested as to certain portions, which portions are omitted and filed separately with the Securities and Exchange Commission.
