<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1995
------------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
---------------------- ---------------------
Commission File Number 0-14333
ALL AMERICAN COMMUNICATIONS, INC
- - - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-3803222
---------------------------------- -------------------
(State of or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2114 Pico Boulevard, Santa Monica, California 90405
- - - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 450-3193
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares outstanding as of November 6, 1995: 5,535,533
------------------------
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(unaudited) (Note)
<S> <C> <C>
Cash and cash equivalents $ 10,629 $ 1,662
Restricted cash 4,719 10,246
Trade receivables, less allowances of $2,657 and $3,855 at September 30,
1995 and December 31, 1994, respectively 86,855 62,338
Unbilled receivables, less imputed interest of $2,128
at September 30, 1995 14,398 - -
Inventory of recorded music product, net 1,306 1,423
Advances to recording artists, net 947 1,801
Television program costs, less accumulated amortization of $214,935 and
$138,541 at September 30, 1995 and December 31, 1994, respectively 76,025 68,437
Property and equipment, less accumulated depreciation and amortization 3,876 3,772
Goodwill, less accumulated amortization of $2,848 and $1,242 at
September 30, 1995 and December 31, 1994, respectively 49,939 51,545
Deferred income taxes -- 235
Other 6,967 6,548
-------- --------
Total assets $255,661 $208,007
======== ========
</TABLE>
Note: The balance sheet at December 31, 1994 has been derived from the
audited financial statements at that date but does not include
all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
2
<PAGE> 3
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(unaudited) (Note)
<S> <C> <C>
Liabilities:
Accounts payable $ 7,766 $ 6,826
Accrued expenses 21,399 10,652
Royalties payable 4,326 2,477
Deferred revenues 7 257
Due to producers 25,547 27,278
Participations payable 28,869 17,091
Notes payable 135,300 115,343
--------- ---------
Total liabilities 223,214 179,924
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares, none issued -- --
Common stock, voting, $.0001 par value, authorized 20,000,000 shares,
issued 5,455,971 in 1995 and 1994 (including treasury shares) 1 1
Common stock, Class B non-voting, $.0001 par value, authorized
20,000,000 shares, issued 2,520,000 in 1995 and 1994 -- --
Additional paid-in capital 28,751 28,751
Common stock in treasury, at cost, 30,000 shares in 1995 and 1994 (135) (135)
Stock subscriptions receivable (68) (153)
Retained earnings (accumulated deficit) 3,748 (309)
Currency translation adjustment 150 (72)
--------- ---------
Total stockholders' equity 32,447 28,083
--------- ---------
Total liabilities and stockholders' equity $ 255,661 $ 208,007
========= =========
</TABLE>
Note: The balance sheet at December 31, 1994 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes to unaudited condensed consolidated financial statements
3
<PAGE> 4
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1995 1994
------------- --------------
(unaudited)
<S> <C> <C>
Revenues:
Television $ 76,818 $ 34,570
Recorded music and merchandising 8,332 3,541
-------- --------
85,150 38,111
-------- --------
Expenses:
Television 60,672 25,682
Recorded music and merchandising 6,438 2,366
Selling, general and administrative 6,000 6,657
Goodwill amortization 536 384
-------- --------
73,646 35,089
-------- --------
Operating income 11,504 3,022
Other income (expense):
Interest income 218 56
Interest expense, net of amounts capitalized (2,132) (1,613)
Other 114 (271)
-------- --------
(1,800) (1,828)
-------- --------
Income before provision for income taxes 9,704 1,194
Provision for income taxes 4,076 104
-------- --------
Net income $ 5,628 $ 1,090
======== ========
Primary:
Net income per share $ 0.68 $ 0.16
======== ========
Weighted average number of common shares and
common share equivalents outstanding 8,296 6,865
======== ========
Fully diluted:
Net income per share $ 0.46 $ 0.14
======== ========
Weighted average number of common shares and
common share equivalents outstanding 13,610 12,082
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE> 5
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1995 1994
------------- -------------
(unaudited)
<S> <C> <C>
Revenues:
Television $ 144,637 $ 54,771
Recorded music and merchandising 15,540 10,947
--------- --------
160,177 65,718
--------- --------
Expenses:
Television 114,980 41,294
Recorded music and merchandising 12,101 7,102
Selling, general and administrative 18,094 15,472
Goodwill amortization 1,606 430
--------- --------
146,781 64,298
--------- --------
Operating income 13,396 1,420
Other income (expense):
Interest income 262 152
Interest expense, net of amounts capitalized (6,904) (3,833)
Other 241 (271)
--------- --------
(6,401) (3,952)
--------- --------
Income (loss) before provision for income taxes 6,995 (2,532)
Provision for income taxes 2,938 135
--------- --------
Net income (loss) $ 4,057 $ (2,667)
========= ========
Primary:
Net income (loss) per share $ 0.50 $ (0.54)
========= ========
Weighted average number of common shares and
common share equivalents outstanding 8,083 4,960
========= ========
Fully diluted:
Net income (loss) per share $ 0.43 $ (0.54)
========= ========
Weighted average number of common shares and
common share equivalents outstanding 13,610 4,960
========= ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
<PAGE> 6
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1995 1994
------------ -------------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 4,057 $ (2,667)
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Depreciation and amortization of property, equipment and goodwill 2,011 774
Amortization of television program costs 76,394 22,141
Increase (decrease) in allowance for doubtful accounts 70 (63)
Increase (decrease) in allowance for sales returns 22 (231)
Increase (decrease) in make goods reserve (1,290) 1,217
Increase in imputed interest discount 2,128 --
Changes in operating assets and liabilities:
Restricted cash 137 (2,524)
Trade receivables, unbilled receivables, inventory and
advances to recording artists (38,875) 956
Additions to television program costs (83,982) (23,159)
Deferred income tax benefit 235 --
Accounts payable, accrued expenses and royalties payable 13,537 (4,739)
Due to producers and participations payable 10,047 (2,255)
Deferred revenues (250) 2,154
Other assets (419) (277)
--------- --------
Net cash used by operating activities (16,178) (8,673)
--------- --------
INVESTING ACTIVITIES
Purchase of property and equipment, net (509) (310)
Purchase of AAFII, net of cash acquired -- (32,300)
--------- --------
Net cash used in investing activities (509) (32,610)
--------- --------
FINANCING ACTIVITIES
Repurchase of redeemable warrants -- (250)
Payments on stock subscriptions receivable 85 197
Proceeds from borrowings 140,505 16,638
Repayments of borrowings (120,548) (3,487)
Restricted cash used for repayment of borrowings 5,390 (4,778)
Proceeds from borrowings - purchase of AAFII, net of issuance costs -- 33,884
--------- --------
Net cash provided by financing activities 25,432 42,204
--------- --------
Effect of exchange rate changes on cash 222 (241)
--------- --------
Increase in cash 8,967 680
Cash and cash equivalents at beginning of period 1,662 3,264
--------- --------
Cash and cash equivalents at end of period $ 10,629 $ 3,944
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 4,697 $ 4,671
========= ========
Income taxes $ 245 $ 275
========= ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
6
<PAGE> 7
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business:
All American Communications, Inc. ("AAC") and its wholly-owned subsidiaries,
All American Television, Inc. ("AATV"), All American Television Production,
Inc., ("AATP"), Scotti Brothers Entertainment Industries, Inc. ("SBEI"), All
American Fremantle International, Inc. ("AAFII"), All American FDF Holdings,
Inc. ("AAFDF") and All American Goodson, Inc. ("AAG") (and together with their
respective wholly-owned subsidiaries collectively, the "Company" or "All
American"), produce and/or distribute, market and promote television programs
and recorded music product both domestically and internationally.
Fremantle Acquisition:
In August 1994, the Company acquired (the "Fremantle Acquisition") certain
assets and securities and assumed certain liabilities of Fremantle
International, Inc. ("Fremantle") through the Company's newly formed
wholly-owned subsidiary, AAFII. The consideration for the Fremantle Acquisition
consisted of 630,000 shares of the Company's Common Stock, 2,520,000 shares of
nonvoting Class B Common Stock and $31,500,000 in cash funded by a term loan
from Chemical Bank (See Note 2). The Company has accounted for the Fremantle
Acquisition as a purchase and has allocated the purchase price based on the
estimated fair value of assets and liabilities acquired. The total consideration
of $52,527,000 (including expenses related to the acquisition of $1,027,000)
exceeded the estimated fair value of net assets acquired by $50,267,000
(goodwill); such goodwill is being amortized over 25 years. Results of
operations of AAFII have been included in the Company's results from August 3,
1994.
It is the Company's policy to evaluate the recovery of its intangible assets
(principally goodwill) and to recognize impairment if it is probable that the
recorded amounts are not recoverable from future undiscounted cash flows, or if
there is an event or change in circumstances which establish the existence of
impairment indicators.
The pro forma unaudited results from operations for the nine months ended
September 30, 1994 assuming consummation of the Fremantle Acquisition at January
1, 1994 follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1994
--------------------
(in thousands except
per share amounts)
<S> <C>
Revenues $ 96,282
Operating income $ 1,691
Net loss $ (4,224)
Loss per share $ (.52)
</TABLE>
The pro forma information presented above is prepared for comparative
purposes only and does not purport to be indicative of what would have occurred
had the Fremantle Acquisition been made at January 1, 1994, or of the results
which may occur in the future.
7
<PAGE> 8
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1995
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements
include the accounts of AAC and its direct and indirect subsidiaries. All
significant intercompany transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and the
applicable rules of the Securities and Exchange Commission. 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 of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results for the
three and nine month periods ended September 30, 1995 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1995. These financial statements should be read in conjunction with the
consolidated financial statements and related footnotes included in the
Company's latest Annual Report on Form 10-K.
Restricted Cash:
Pursuant to the Company's lending agreement, subject to certain exceptions
for working capital, substantially all cash collected is required to be paid
into accounts maintained by Chemical Bank and applied to the repayment of the
outstanding borrowings as specified in the lending agreement (See Note 2). The
cash held for repayment is included as restricted cash. Additionally, amounts
held in an interest bearing reserve account with respect to a dispute have been
included as restricted cash (See Note 5).
Unbilled Receivables:
Unbilled receivables represent amounts due under cash (excluding barter)
television syndication contracts which will be billed over the contractual
terms of the agreements, generally ranging from one to five years.
Imputed Interest Discount:
The Company records an imputed interest discount on contracted cash
(excluding barter) receivables with original payment terms extending
beyond one year. The discount is determined using the Company's incremental
borrowing rate of 8.63% at September 30, 1995 at the time of revenue
recognition. The discount is amortized over the underlying contracts' payment
stream using the interest method and is credited to interest income.
Foreign Currency:
The operations of all foreign entities are principally measured in local
currencies. Assets and liabilities are translated into United States ("U.S.")
dollars using exchange rates in effect at the end of each reporting period.
Revenues and expenses are translated at the average exchange rates prevailing
during the period. Adjustments resulting from translating the financial
statements of foreign entities into U.S. dollars are recorded as a separate
component of stockholders' equity.
Share Information - Income/(Loss) Per Share:
Primary net income/(loss) per share is based on the weighted average number
of common shares (including Common Stock and Class B Common Stock) outstanding
and dilutive common stock equivalents determined using the treasury stock
method.
Fully diluted net income per share reflects the assumed conversion of
the Company's 6 1/2% Convertible Subordinated Notes due 2003 (the "Notes")
(See Note 2) and results in an increase to net income for the assumed after tax
reduction in interest expense of $606,000 and $627,000 for the quarters ended
8
<PAGE> 9
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1995
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
September 30, 1995 and 1994, respectively and $1,818,000 for the nine months
ended September 30, 1995. Such assumed conversion is anti-dilutive for the nine
months ended September 30, 1994.
Income Taxes:
Income tax expense for 1995 has been determined using the expected annual
effective tax rates of 42%. Amounts recorded for 1994 represent foreign taxes
withheld at the source and minimum state franchise taxes.
2. NOTES PAYABLE
Notes payable and amounts due to banks are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(in thousands)
<S> <C> <C>
Convertible subordinated notes, 6 1/2% $ 60,000 $ 60,000
Notes payable to banks 75,300 55,343
-------- --------
$135,300 $115,343
======== ========
</TABLE>
In October 1995, $1,260,000 of the Notes were converted into 109,562
shares of the Company's common stock, $.0001 par value, resulting in a decrease
in convertible subordinated notes, 6 1/2% of $1,260,000, a decrease in
capitalized debt issuance costs related to the Notes of $60,000 and an increase
in additional paid in capital of $1,320,000.
In April 1995, the Company secured a new $110,000,000, subsequently
increased to $135,000,000, senior credit facility (the "Senior Credit Facility
Agreement"), with a syndicate of lenders led by Chemical Bank consisting of the
following five tranches: (A) a term loan of $30,000,000 (the "Term Loan" or
"Tranche A") which was utilized to refinance existing bank debt incurred in
connection with the Fremantle Acquisition; (B) a revolving credit facility of
up to $20,000,000 in the aggregate to be utilized for production and
distribution of Baywatch, of which $14,000,000 was initially utilized to
refinance existing bank debt related to production of Baywatch for the
1994/1995 and 1995/1996 broadcast seasons (the "Baywatch Production Line" or
"Tranche B"); (C) a revolving credit facility of up to $20,000,000 in the
aggregate for production and distribution of Baywatch Nights (the "Baywatch
Nights Production Line" or "Tranche C"); (D) a revolving credit facility of up
to $40,000,000 to be utilized to finance certain working capital needs of the
Company, of which $10,000,000 was initially used to primarily refinance
existing bank debt related to the (the "Working Capital Line" or "Tranche D")
and (E) the $25,000,000 Goodson Term Loan described below. The Working
Capital Line together with the Baywatch Production Line and the Baywatch Nights
Production Line are referred to collectively as the "Chemical Bank Facilities".
In connection with the Mark Goodson Acquisition, the Company effected a credit
utilization of the Working Capital Line in the form of a letter of credit (the
"Letter of Credit") from Chemical Bank to fund its $25,000,000 cash portion of
the total purchase price. On November 13, 1995, the Senior Credit Facility was
amended to provide an additional $25,000,000 term loan under this facility
("Tranche E" or the "Goodson Term Loan"), which increased the total facility to
a maximum of $135,000,000, in order to refinance the Company's reimbursement
obligations under the Letter of Credit.
9
<PAGE> 10
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1995
2. NOTES PAYABLE (Continued)
The obligations of the Company under the Chemical Bank Facilities, the
Term Loan and the Goodson Term Loan are cross-collateralized. The Term Loan
matures on December 31, 1998. The Chemical Bank Facilities and the Goodson Term
Loan mature on April 13, 1999. Under the terms of the Senior Credit Facility
Agreement, the amount the Company may borrow under Tranche B, C and D is based
upon the value of the collateral in the borrowing base which consists
principally of accounts receivable of the Company. Borrowings under the Senior
Credit Facility Agreement bear interest, at the Company's option, either (i) at
LIBOR plus 2-3/4% (8.56% as of November 13, 1995), or (ii) at the Alternate
Base Rate (which is the greater of Chemical Bank's Prime Rate, its Base CD Rate
plus 1%, or the Federal Funds Effective Rate plus 1/2%) plus 1-3/4% (10.50% as
of November 13, 1995), subject to reduction if certain financial ratios are
satisfied. As of September 30, 1995, the Company has outstanding borrowings of
$27,500,000 under the Term Loan and approximately $47,800,000 under the
Chemical Bank Facilities with approximately $25,600,000 available for borrowing
under the Chemical Bank Facilities.
The Senior Credit Facility Agreement imposes a number of financial and
other conditions upon the Company, including limitations on indebtedness,
restrictions on the disposition of assets, restrictions on making certain
payments (including dividends), restrictions on acquisitions and certain
financial tests. Additionally, the Baywatch Production Line and the Baywatch
Nights Production Line provide that certain conditions must be satisfied before
funding of each season of the respective series and such conditions have been
met for the 1995/1996 broadcast season of Baywatch and Baywatch Nights. The
Goodson Term Loan imposes a separate set of financial and other conditions upon
the Company, including a requirement that "International Cash Flow," defined to
mean all payments due to the LLC (as defined in Note 6) under the terms of its
primary license agreement (other than with respect to the domestic
exploitation of programs), be maintained at specified levels (or, in lieu
thereof, that the Goodson Term Loan be prepaid to specified levels).
Except to the extent set forth below, under the terms of the Senior Credit
Facility Agreement substantially all of the Company's cash collections are
required to be paid into accounts maintained by Chemical Bank and applied to
the repayment of the Company's obligations under the Chemical Bank Facilities.
All of AAFII's cash collections are required to be paid into accounts
maintained by Chemical Bank and applied, subject to certain exceptions for
working capital, to interest and principal amounts outstanding under the Term
Loan until such time as the Term Loan is repaid in full. The Term Loan is
repayable in thirteen quarterly principal installments as follows: September
1995, $2,500,000 (which amount was paid); December 1995, $2,500,000; March
1996, $500,000; June 1996, $500,000; September 1996, $3,000,000; December 1996,
$3,000,000; March 1997, $1,000,000; June 1997, $1,000,000; September 1997,
$3,000,000; December 1997, $3,000,000; March 1998, $1,000,000; June 1998,
$1,000,000; September 1998, $4,000,000 and a final installment due on the last
borrower's day of December 1998 (each such payment being subject to reduction
from certain prepayments). The amount the Company is able to reborrow under the
Chemical Bank Facilities is subject to the collateral pledged to the lenders
having sufficient borrowing base value to support such borrowings.
Substantially all of the Company's assets other than real property are pledged
under the Senior Credit Facility Agreement.
Under the Goodson Term Loan, substantially all of the cash flow
available to AAG from exploiting the Mark Goodson assets will be available,
after reserving for earn-out payments to the Sellers and certain
administrative, tax and other distributions to the LLC, to repay the Goodson
Term Loan. The Company has agreed to a "make whole" provision so that following
the repayment in full of the Goodson Term Loan (or earlier, in the case of
certain acceleration events), each of the other members of the LLC will have
received its equal share of LLC cash flow, together with interest to the extent
that the Company received disproportionate use of cash. The "make whole" will
be payable out of LLC cash flow or, if accelerated in accordance with its
terms, at the Company's option, in cash, shares of Common Stock or shares of
Class B Common Stock (subject, in the latter case, to certain liquidity tests
being met). Interpublic also has the benefit of certain "put" rights and the
Company has been granted certain "call" rights and, if granted, the proposed
Interpublic Option, with respect to Interpublic's membership interest in the
LLC, the exercise of which could substantially reduce the Company's liquidity.
The Company's obligations to Interpublic will be supported by guarantees by
AAG and certain related licensees and secured by a second priority security
interest, subject only to the first priority security interest of the lenders
with respect to the Goodson Term Loan in the assets and shares of AAG and the
related licensees and Company's direct or indirect membership interests in the
LLC. In this connection, the lenders and Interpublic have entered into an
Intercreditor Agreement with the Company relating to their respective rights
in
10
<PAGE> 11
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1995
2. NOTES PAYABLE (Continued)
connection with the Goodson Term Loan.
3. TELEVISION PROGRAM COSTS
Costs for television programs are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(in thousands)
<S> <C> <C>
Released, less accumulated amortization $75,241 $64,780
In process and development 784 3,657
------- -------
$76,025 $68,437
======= =======
</TABLE>
The Company capitalizes interest, using the Company's effective borrowing
rate, and overhead on television programs in production. Included in
television program costs for the quarter ended September 30, 1995 and 1994
is capitalized interest of $645,000 and $140,000, respectively and capitalized
overhead of $884,000 and $505,000, respectively. For the nine months ended
September 30, 1995 and 1994, the Company capitalized $1,006,000 and $155,000
of interest, respectively and $2,197,000 and $1,681,000 of overhead,
respectively.
4. RELATED PARTY TRANSACTIONS
Certain officers/stockholders of the Company have issued to the Company
promissory notes in consideration for shares of the Company's Common Stock.
Principal and interest under such notes are payable in five equal annual
installments. The principal balance outstanding on such notes as of September
30, 1995 was approximately $68,000.
During 1994 the Company loaned $250,000 to an officer of the Company, which
loan is secured by a pledge of shares of Common Stock of the Company owned by
such officer. The loan bears interest at a rate of 8.0% per annum (equal to the
rate then in effect under the Company's working capital loan) and will mature
upon expiration of the officer's employment agreement which is currently
February 1996. The loan has been included with other assets in the accompanying
condensed consolidated balance sheet at September 30, 1995.
5. COMMITMENTS AND CONTINGENCIES
All American Television entered into an exclusive license agreement dated as
of May 1, 1995 with USA Networks in regard to the licensing of 110 episodes of
Baywatch, 22 episodes of Sirens, and 22 episodes of Acapulco H.E.A.T. and, under
certain circumstances up to 22 episodes of Baywatch Nights. The license
11
<PAGE> 12
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1995
5. COMMITMENTS AND CONTINGENCIES (Continued)
agreement is exclusive in the United States, its territories and possessions
(including Puerto Rico) over all forms of transmission by all means (including,
without limitation, free over-the-air broadcasts, basic and pay cable, or via
video on demand), other than via continuous first run syndication, and other
than the strip syndication of the first 110 episodes of Baywatch produced by the
Company, during the period commencing June 26, 1995 through September 19, 1997.
The initial term of the license agreement commenced in May 1995 for Acapulco
H.E.A.T. and will commence in October 1995 for Sirens, September 1996 for
Baywatch Nights and September 1997 for Baywatch with a common termination date
of September, 2000 for all four shows. Revenue will be recognized on
commencement of the license period for each show. The initial minimum license
fee aggregates $25,300,000 payable in 36 equal monthly installments of
approximately $703,000 commencing September, 1997 through August, 2000. The
license agreement also contains certain additional obligations and rights of USA
Networks regarding additional episodes of Baywatch and the right to extend the
term of the license for up to four years for additional specified consideration.
In June 1995, the Company commenced principal photography (for the sixth
season) of the Company's weekly drama series Baywatch, consisting of 22 new one
hour episodes for the 1995/1996 television broadcast season. The total
production budget of approximately $22,000,000 for the 1995/1996 broadcast
season is expected to be funded through a combination of borrowings under the
Baywatch Production Line and cash payments pursuant to its foreign distribution
agreement. Through September 30, 1995, the Company has spent approximately
$15,000,000 towards the production of 22 episodes of Baywatch for the 1995/1996
broadcast season, of which ten have been completed and delivered.
The Company has begun production of a spin-off of Baywatch, Baywatch Nights,
which commenced principal photography in April 1995 and which has initially
aired in first-run syndication in September 1995 for the 1995/1996 broadcast
season. The Company is self-distributing Baywatch Nights both domestically and
internationally. The total revised production budget for the 22 planned new one-
hour episodes for the 1995/1996 broadcast season of approximately $23,000,000 is
expected to be funded through borrowings under the Baywatch Nights Production
Line or by obtaining funding from licensing of the program. Through September
30, 1995, the Company has spent approximately $12,500,000 towards the production
of ten of 22 episodes of Baywatch Nights for the 1995/1996 broadcast season, all
ten of which have been completed and delivered.
Minimum commitments for advances to recording artists at September 30, 1995
amounted to approximately $545,000.
In September 1994, the Company filed a complaint, as amended, against the
producers of the series Acapulco H.E.A.T. in the Superior Court of the State of
California alleging, among other things, breach of contract and fraud. The
Company had entered into an agreement, dated as of October 7, 1992, with the
producers for the Company to distribute the series Acapulco H.E.A.T. in the
domestic television market. Subject to the fulfillment of certain terms by the
producer, the Company agreed to pay a distribution advance of $6,600,000 (plus
an additional amount per episode under certain circumstances) payable over ten
months commencing November 30, 1993. As of September 1994, the Company had made
payments totaling approximately $4,698,000 at which time a dispute with the
producers with regard to the non-fulfillment of certain terms by the producers
was raised by the Company and the Company discontinued making such advance
payments. The unpaid portion of the advance payments, totaling approximately
$2,452,000, has been placed in an interest-bearing restricted cash account
pending resolution of the dispute. The producers have filed an answer and
cross-complaint alleging, among other things, breach of contract and fraud in
connection with the agreement to distribute Acapulco H.E.A.T. and breach of
contract and fraud in connection with the Company's barter distribution of
certain theatrical films unrelated to Acapulco H.E.A.T. The Company intends to
vigorously pursue its claim and defend against the cross-complaint.
12
<PAGE> 13
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1995
5. COMMITMENTS AND CONTINGENCIES (Continued)
The Court has indicated that a settlement conference has been set for January
1996 and a trial date has been set for April 1996. Discovery has been held in
abeyance while settlement discussions are ongoing. Management does not believe
the ultimate outcome of this matter will result in a materially adverse effect
on the Company's financial condition or results of operations. However, there
can be no assurance that the Company will be successful on the merits of the
lawsuit.
On May 31, 1995, Credit Lyonnais Bank Nederland N.V. ("CLBN") made demand
upon SBEI under a Guarantee dated July 29, 1986 (the "SBEI Guarantee"), (a) for
payment of approximately $916,000 plus interest accrued since October 31, 1994
under a Loan and Security Assignment dated July 29, 1986 (the "Loan Agreement")
between CLBN and various former subsidiaries of SBEI relating to the
discontinued motion picture operations of the Company, and (b) for payment of
$2,667,000 plus interest accruing since September 30, 1994 under an alleged
unmemorialized amendment of the Loan Agreement. This demand superseded an
earlier demand, made on December 12, 1994, for payment of $3,742,000 plus
interest or costs booked since November 11, 1994. SBEI rejected the foregoing
May 31, 1995 demand based upon, among other reasons, the following: (a) that in
a January 1993 agreement CLBN agreed to release all liens and any interests in
any property or assets of SBEI, which in effect released SBEI from any
obligations under the SBEI Guarantee; (b) that the loan purportedly guaranteed
has been repaid; and (c) that SBEI in any event is not a party to and was not
bound by the alleged "unmemorialized" amendment to the Loan Agreement.
In addition, since approximately November 1993, CLBN and its representatives
have been reviewing certain books and records relating to the distribution and
production of certain motion pictures by Minority Pictures, Inc. (formerly
Scotti Brothers Pictures, Inc.) or its subsidiaries for which CLBN provided
financing. In October 1994, and again in June 1995, CLBN requested that Minority
Pictures, Inc. and various of its current and former affiliates (including the
Company and certain of its subsidiaries) execute a tolling agreement which would
have tolled claims which CLBN may have against such persons, including but not
limited to causes of action based on such financing. The Company has declined to
enter into a tolling agreement because based upon the information thus far
provided by CLBN, or the lack thereof, it is extremely unclear whether there are
any tenable claims against the Company and its subsidiaries. While the Company
believes that SBEI has meritorious defenses with respect to the SBEI Guarantee
and any other claims which CLBN may assert, and that the ultimate outcome of
this matter will not result in a materially adverse effect on the Company's
financial condition or results of operations, there can be no assurance that the
Company ultimately will prevail.
The Company is party to certain other legal proceedings which are routine
and incidental to the business. The Company believes that the results of such
litigation will not have a material adverse effect on the Company's financial
condition or results of operations.
6. SUBSEQUENT EVENTS
Mark Goodson Acquisition:
As of October 6, 1995, the Company consummated an Asset Purchase Agreement
pursuant to which a newly-formed limited liability company (the "LLC"), jointly
owned, directly or indirectly by the Company and The Interpublic Group of
Companies, Inc. ("Interpublic"), acquired substantially all of the assets
(excluding assets relating to the lottery business) and to assume certain
specified liabilities (the "Mark Goodson Acquisition") of Mark Goodson
Productions, L.P. and The Child's Play Company (collectively the "Sellers").
The purchase price consists of a payment by the Company of $25,000,000 in
cash and issuance by Interpublic of $25,000,000 in its common stock to the
Sellers, together with a contingent earn-out described below. Under the
earn-out, the LLC will initially pay to an assignee of the Sellers a
specified percentage of
13
<PAGE> 14
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1995
6. SUBSEQUENT EVENTS (Continued)
"Domestic Net Profits" (i.e., generally gross receipts less production costs if
from the exploitation in the U.S. and Canada (currently, consisting of
"The Price Is Right") of the Goodson game shows and other purchased television
formats during the five-year period following October 6, 1995, which period is
subject to extension for an additional five years if total earn-out payments do
not equal $48,500,000, in which case the earn-out shall be payable in neither a
minimum nor a maximum amount). The specified percentage of Domestic Net Profits
payable to the Sellers with respect to "The Price Is Right" is 75% during the
network exhibition of the program during the five years after October 6, 1995
and otherwise the specified percentage is generally 50% for other programs.
However, the earn-out does not apply to any net profits realized from the
international exploitation of any of the purchased game shows or other purchased
television formats.
Based upon a preliminary review and evaluation, substantially all of the
Company's $25,000,000 portion of the initial purchase price has been allocated
to goodwill. The contingent purchase price, to the extent earned, will be
treated as an increase in goodwill and will be amortized coterminously with the
original goodwill over a 25 year period. Management of the Company is in the
process of reviewing the allocation of the purchase price and, when completed,
may modify its preliminary allocation. The Mark Goodson Acquisition will be
accounted for by the Company under the equity method of accounting. See "Notes
Payable". As a result of the Mark Goodson Acquisition, the Company expects, in
future quarters, to recognize in net income its 50% or the LLC's operating
results utilizing the equity method of accounting.
Common Stock:
On October 18, 1995 the Company filed a Form S-2 Registration Statement with
the Securities and Exchange Commission for purposes of registering a proposed
underwritten public offering of 4,500,000 shares of the Company's Class B
Common Stock, of which 500,000 shares are to be offered for sale by a selling
stockholder. 675,000 additional shares subject to an over-allotment option in
favor of the underwriters are to be offered for sale by certain officers and
employees of the Company (subject to being covered by the Company under certain
circumstances). There is no assurance that the offering will be consummated or,
if consummated, that the terms thereof will not be modified.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a diversified entertainment company which produces and
distributes, markets and promotes television programs and recorded music both
domestically and internationally.
The television industry may be broadly divided into three major segments:
production, involving the development, financing and making of television shows;
distribution, involving the promotion and exploitation of completed television
shows; and broadcast, involving the airing or broadcast of programming over
network affiliated stations, independent stations and cable or satellite
television. The United States broadcast television market is served principally
by network affiliated stations, independent stations and cable and satellite
television operators. During prime time hours (primarily 8:00 P.M. to 11:00 P.M.
in the Eastern and Pacific time zones and 7:00 P.M. to 10:00 P.M. in the Central
and Mountain time zones), network affiliates telecast network programming,
off-network programming (reruns), first-run programming (programming produced
for distribution on a syndicated basis) and local programming produced by the
local stations themselves. Independent television stations, during prime and
non-prime time, telecast self produced programming, off-network programming or
first-run programming from independent producers or "syndicators." In general
terms, a syndicator is a company that sells programming to independent
television stations and network affiliates. Programming acquired by stations on
a syndicated basis is acquired either for a cash license fee or in exchange for
a certain amount of commercial advertising time within the program which is
retained by the syndicator for sale thereby to advertisers ("barter"), or for a
combinations of cash and barter. The Company domestically distributes
programming for television produced by the Company or unrelated third parties in
the first-run and rerun syndication markets. In general, the Company receives
its revenues from program license fees paid by broadcasters and/or by selling
advertising time for programs distributed on a barter basis.
Barter syndication is the process whereby a syndicator obtains clearances
from television stations to broadcast a program in certain agreed upon time
periods, retains advertising time in the program in lieu of receiving a cash
licensing fee, and sells such retained advertising time for its own account to
national advertisers at rates based on projected ratings and viewer
demographics. From time to time, certain stations may obtain cash consideration
from the Company in addition to programming in exchange for advertising time
and/or a commitment for a particular time period. By placing the program with
television stations throughout the United States, the syndicator creates an "ad
hoc" network of stations that have agreed to carry the program. The creation of
this ad hoc network, typically representing a penetration of at least 70% of
total United States television households (calculated by means of a generally
recognized system as measured by Nielsen Media Ratings), enables the syndicator
to sell the commercial inventory to sponsors desiring national coverage. The
rates charged by a syndicator for advertising time are typically lower than the
rates charged by the networks for similar demographics since the networks'
coverage of the market is generally greater.
Rates for the sale of advertising time are established on the basis of
certain levels of audience rating and, in some cases, an assumed demographic
make-up of the viewing audience assumed by the Company. Because the Company's
arrangements with advertisers do not permit the Company to receive advertising
revenue on the amount by which the actual ratings or demographic make-up (as
determined by Nielsen Media Ratings or similar ratings services) exceed the
assumed ratings or demographic make-up, it is in the interest of the Company to
establish as high an assumed rating and as favorable a demographic make-up as
possible. If the television program does not achieve the assumed rating or
demographic make-up, the Company may be obligated to offer the advertiser
additional advertising time ("make goods") on the same program or on other
programs. "Make goods" are the predominant means whereby the Company satisfies
such obligations to advertisers. Alternatively, the Company may be obligated to
refund a portion of the advertising revenue derived from such sales. There can
be no assurance in advance that the actual rating or demographic make-up of a
particular program will support the rates initially charged for advertising time
on such
15
<PAGE> 16
program. The Company generally reports net revenues from barter syndication
after deducting a reserve for potential make goods. Historically, such reserve
has been sufficient to cover the actual provision for make goods, although there
is no assurance that such reserve will continue to be adequate.
Sponsors that regularly purchase advertising time in the Company's programs
include Proctor & Gamble, Bristol Myers-Squibb, MCI, Beecham, Kellogg Company,
Nestle and RJR Nabisco. Sales are typically made through advertising agencies
representing the sponsors. The barter syndication licenses granted by the
Company provide that the Company retains negotiated amounts of commercial time
per program for sale to national advertisers, with the remaining commercial time
retained by the station for local sale. A significant percentage of the
Company's revenues from television operations are derived from barter sales
(approximately 32% for the nine months ended September 30, 1995 and
approximately 42% in 1994, 58% in 1993 and 62% in 1992). Barter sales may
fluctuate significantly based on ratings of a particular program and general
economic trends, such as advertising rates.
In most cases, the Company's distribution revenues are based on a percentage
of the net revenues derived from the sale of advertiser sponsorships and/or on
cash license fees. The Company normally advances all distribution costs for
items such as advertising, promotion, and tape shipping and duplication and
recovers such expenses out of program revenues. The Company's fee for
distribution is generally between 15% and 35% of net revenues and its fee for
advertising sales representation is generally between 10% and 15% of net
revenues. However, each fee arrangement is separately negotiated and may be
subject to variation. Amounts remaining in excess of the Company's
distribution fees and recoupable expenses (including a portion of the amounts
derived from the sale of advertising time) are either remitted in full to the
producer from whom the Company obtained the distribution rights, or, if the
Company has a profit participation in the program, are shared between the
Company and the producer in accordance with a pre-determined allocation.
In some instances, the Company will make an advance payment to the producer
to cover production costs or will guarantee the producer certain minimum
license fees. For the 1994/1995 broadcast season the Company made advance
payments and/or certain guarantees with respect to SuperHuman Samurai Syber
Squad, Sirens and The New Family Feud. For the 1995/1996 broadcast season the
Company made no such guarantees.
Television production costs are capitalized as incurred. The income forecast
method is used to amortize these costs based upon the revenues recognized in
proportion to management's estimate of ultimate revenues to be received.
Unamortized costs are reviewed periodically and compared with net realizable
values on a project-by-project basis and losses are provided to the extent
necessary. Advertising revenues are recognized upon the commencement of the
license period of the program and when the advertising time has been sold
pursuant to non-cancelable agreements, provided the program is available for its
first broadcast. The portion of recognized revenue which is to be shared with
the producers and owners of the licensed program material (participations
payable and due to producers) is accrued as the related revenue is recognized.
Minimum guaranteed amounts from domestic television sales generally are
recognized when the license period begins and the program becomes available
pursuant to the terms of the license agreement. Foreign minimum guaranteed
amounts or outright fees are recorded as revenues and contracts receivable on
the date of the license agreement unless the program is not yet available for
exhibition. Revenues under foreign production agreements are recognized as
completed episodes are delivered. Deferred revenues consist principally of
advance payments received on television contracts for which the products are not
yet available for broadcast or exploitation.
Domestic revenues from recorded music are recorded as units are shipped to
customers. The Company provides for estimated future returns of recorded music
product at the time the products are initially sold. These reserves are based
upon historical experience. Actual returns are charged against the reserve.
Foreign distribution of recorded music is effected through a distributor in
exchange for guaranteed non-refundable advances against future royalties.
Non-refundable guarantees from foreign sales are generally recognized as the
Company satisfies its delivery requirements to its foreign distributor.
Royalties earned by artists from sales of recorded music product are charged
to expense as the related revenues are recognized. Advances to artists against
future royalties are recorded as assets if the Company estimates that the amount
of advances will be recoverable from future royalties to be earned by the
artist, based upon the past performance and current popularity of the artist to
whom the advance is made. Such advances are applied against subsequent royalties
earned by the artist. The Company expenses recoupable artist advances and
recording costs for new recording artists and for artists where recovery cannot
be estimated. Pursuant to this policy, capitalized artist advances are reviewed
on a quarterly basis and any portion of the advances that subsequently appear
not to be fully recoverable from future royalties to be earned by the artist are
charged to expense during the period in which the loss
16
<PAGE> 17
becomes evident. As a result, some quarters or years will have fluctuating
levels of these expenses depending on the number or type of artists signed or on
changes in recording activities from period to period. In the event of
subsequent sales for any such artists for which the related advances were
expensed, the Company will have a higher margin for these sales than for sales
by the Company's other artists.
A small number of television programs and musical recordings historically
have accounted for a significant portion of the Company's revenues in any given
fiscal period. In addition, the Company's television distribution revenues have
historically been higher in the first and fourth quarters as a result of the
commencement of the television season in the fall of each year. As a result of
the strip syndication of Baywatch, the third quarter of 1995 reflected
substantially all cash and barter sales on the re-run syndication of the series
to date. Additional barter sales on the strip syndication will be recognized in
subsequent periods. Any change in programs from period to period or the
discontinuation of certain projects may materially adversely affect a given
period's results of operations. Therefore, year-to-year results may not be
comparable and results in any quarter may not be indicative of results
for an entire year.
During the second and third quarters of 1995, the independent broadcast
stations, which have licensed the Company's domestic rerun ("strip") syndication
package of 111 previously aired Baywatch episodes, commenced telecast of such
episodes. Through November 7, 1995, the Baywatch strip package has been licensed
to television stations covering in excess of 93% of the United States television
market on a cash and barter basis and the Company continues to actively market
the package. As of October 26, 1995, the Company has generated approximately
$19,000,000 of cash sales (i.e., excluding barter), subject to increase based on
favorable audience acceptance, related to the domestic strip licensing of
Baywatch and, in addition, generally retains three minutes of advertising time
per telecast.
17
<PAGE> 18
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
The following unaudited table sets forth the percentage relationship to
total revenues of certain items included in the Company's unaudited condensed
consolidated statements of operations for the three months ended September 30,
1995 and 1994:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Revenues:
Television 90.2% 90.7%
Recorded music and merchandising 9.8 9.3
----- -----
Total 100.0 100.0
Operating expenses:
Television 71.2 67.4
Recorded music and merchandising 7.6 6.2
Selling, general and administrative 7.1 17.5
Goodwill amortization 0.6 1.0
----- -----
Total 86.5 92.1
----- -----
Other expense, principally interest 2.1 4.8
----- -----
Income before income taxes 11.4% 3.1%
===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1994
Revenues. The Company's total revenues increased by $47,039,000 or 123% to
$85,150,000 for the three months ended September 30, 1995 from $38,111,000
for the three months ended September 30, 1994. Revenues from television
operations increased by $42,248,000 or 122% to $76,818,000 for the three
months ended September 30, 1995 from $34,570,000 for the three months
ended September 30, 1994. This increase was due primarily to the recognition of
Baywatch strip revenues of $26,673,000; the recognition of $10,450,000 from the
new one-hour series Baywatch Nights, reflecting the delivery of ten of the 22
episodes for the 1995/1996 broadcast season during the quarter ended September
30, 1995; and an increase of $3,632,000 or 34% to $14,171,000 for the 1995/1996
broadcast season of Baywatch, reflecting the delivery of ten of 22 episodes
during the quarter ended September 30, 1995 from $10,539,000 for the 1994/1995
broadcast season of Baywatch, reflecting the delivery of nine of 22 episodes
during the quarter ended September 30, 1994. As a result of the strip
syndication of Baywatch, the third quarter of 1995 reflected substantially all
cash and barter sales on the re-run syndication of the series to date.
Additional barter sales on the strip syndication will be recognized in
subsequent periods.
AAFII revenues increased by $1,344,000 or 8% to $17,396,000 for the three
months ended September 30, 1995 from $16,052,000 for the three months ended
September 30, 1994. AAFII revenues from the production and distribution of
television programming in Germany contributed $14,654,000 (84% of total AAFII
revenues). AAFII revenues, on a pro forma basis (assuming a full three months
in 1994), decreased by $2,338,000 or 12%, to $17,396,000 for the three months
ended September 30, 1995. This decrease is attributable to the timing of the
recognition of certain contracts which are expected to be recognized in
future periods.
Recorded music and merchandising revenues increased by $4,791,000, or 135%,
to $8,332,000 for the three months ended September 30, 1995 from $3,541,000
for the three months ended September 30, 1994. This increase was primarily
attributable to higher sales of new releases in the three months ended
September 30, 1995, led by the new artist "Skee-Lo", with 383,000 albums
shipped in the quarter, as compared with lower sales of new releases in the
three
18
<PAGE> 19
three months ended September 30, 1994 and merchandising revenue of $1,430,000,
as compared with no merchandising revenues in the year ago period.
Operating Expenses. Total operating expenses increased by $38,557,000 or
110% to $73,646,000 for the three months ended September 30, 1995 from
$35,089,000 for the three months ended September 30, 1994 due primarily to
increased amortization of television program costs due to higher television
revenues and increased costs in connection with increased recorded music and
mechandising revenues. Such increases were offset by a $505,000 (7%) decrease
in selling, general and administrative expenses, including corporate overhead
and goodwill amortization, for the three months ended September 30, 1995 to
$6,536,000 from $7,041,000 for the three months ended September 30, 1994. Such
decrease is attributable to a one-time charge taken in 1994 relating to certain
employment terminations.
The Company's television division expenses, before overhead and goodwill
amortization, increased by $34,990,000 or 136% to $60,672,000 (79% of total
television revenues) for the three months ended September 30, 1995 from
$25,682,000 (74% of total television revenues) for the three months ended
September 30, 1994. The increase in television expenses as a percent of total
television revenues is attributable to revenues recognized from certain
programming which has lower gross profit percentages than the overall mix of
the Company's other distributed programming. Television selling, general and
administrative expenses during the three months ended September 30, 1995 of
$3,143,000 increased by $655,000 or 26% from $2,488,000 for the three months
ended September 30, 1994 due primarily to the increase in AAFII charges of
$483,000 to $1,256,000 for the three months ended September 30, 1995 as
compared with $773,000 for two months (from the date of the Fremantle
Acquisition) through September 30, 1994.
The Company's recorded music and merchandising expenses, before
selling, general and administrative expenses, increased $4,072,000 or 172% to
$6,438,000 (77% of total recorded music and merchandising revenues) for the
three months ended September 30, 1995 from $2,366,000 (67% of total recorded
music revenues) for the three months ended September 30, 1994. The dollar and
percentage increases were primarily due to an increase in artist cost
amortization, including the amortization of costs incurred for new artists
which increased by $976,000 to $1,163,000 for the three months ended September
30, 1995 from $187,000 for the three months ended September 30, 1994 and
merchandising costs of $1,030,000 as compared with no costs in the comparable
prior period and other variable costs attributable to increased revenues.
Operating Income. Total operating income for the Company increased
$8,482,000 or 281% to $11,504,000 for the three months ended September 30,
1995 from $3,022,000 for the three months ended September 30, 1994 due
principally to an increase in television operating income. Operating income
from television operations increased $6,451,000 or 107% to $12,467,000 for the
three months ended September 30, 1995 (after the inclusion of goodwill
amortization and selling, general and administrative expenses of $3,679,000)
from $6,016,000 for the three months ended September 30, 1994 (after the
inclusion of goodwill amortization and selling, general and administrative
expenses of $2,872,000). This increase in television operating income was
primarily attributable to the revenue increases discussed above. Goodwill
amortization for the quarter ended September 30, 1995 increased by $152,000
or 40% to $536,000 from $384,000 for the three months ended September 30, 1994
due primarily to the inclusion of AAFII amortization for three months in 1995
as compared with two months in the comparable 1994 period.
The Company's recorded music division recognized operating income of
$123,000 (after the inclusion of selling, general and administrative expenses of
$1,771,000) for the three months ended September 30, 1995 as compared to an
operating loss of $496,000 (after inclusion of selling, general and
administrative expenses of $1,671,000) for the three months ended September 30,
1994. Such increase in the operating income was primarily attributable to
increased revenues as discussed above.
Foreign Currency Exchange Gain. The Company recognized a foreign currency
exchange gain of $114,000 for the three months ended September 30, 1995 as
compared to a foreign currency exchange loss of $271,000 for the three months
ended September 30, 1994 which results from the settlement and valuation of
certain licensing agreements, denominated in foreign currencies, into U.S.
dollars as of September 30, 1995 and 1994. The Company has experienced in the
past, and may experience in the future, gains and losses as a result of
fluctuations in exchange rates.
19
<PAGE> 20
To the extent the Company does not enter into foreign
currency swap agreements, the Company can expect to record foreign exchange
losses and gains in the future.
Interest Expense. Interest expense, net of interest capitalized ($645,000)
and interest income ($218,000), increased $357,000 to $1,914,000 for the three
months ended September 30, 1995 from $1,557,000, net of interest capitalized
($140,000) and interest income ($56,000), for the three months ended September
30, 1994, due to increased borrowings in connection with the Fremantle
Acquisition and as a result of increased production activity. The Company
expects that the trend of increased interest costs will continue in part as a
result of increased borrowings in connection with the Mark Goodson Acquisition.
Income Taxes. The Company recorded a tax provision for the three months
ended September 30, 1995 in the amount of $4,076,000 representing an effective
rate of approximately 42%. During the three months ended September 30, 1994 the
Company recorded income taxes of $104,000, representing foreign taxes withheld
at the source and minimum state franchise taxes.
Net Income. The net income of $5,628,000 for the three months ended
September 30, 1995 compares with net income of $1,090,000 for the three months
ended September 30, 1994. The variance is attributable to matters discussed
above. Earnings per share increased to $.68 per primary share and $.46 per fully
diluted share for the three months ended September 30, 1995 as compared to $.16
per primary share and $.14 per fully diluted share for the three months ended
September 30, 1994 due to the quarter to quarter increase in net income
partially offset by an increase in the outstanding number of weighted average
common shares and common share equivalents. Such increase of shares is due to
the inclusion of the shares issued in connection with the Fremantle Acquisition
for three months through September 1995 as compared to two months through
September 1994 as well as an increase in the number of equivalent shares of
outstanding options and warrants determined using the treasury method.
20
<PAGE> 21
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
The following unaudited table sets forth the percentage relationship to
total revenues of certain items included in the Company's unaudited condensed
consolidated statements of operations for the nine months ended September 30,
1995 and 1994.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1995 1994
------------- --------------
<S> <C> <C>
Revenues:
Television 90.3% 83.3%
Recorded music and merchandising 9.7 16.7
----- -----
Total 100.0 100.0
Operating expenses:
Television 71.8 62.8
Recorded music and merchandising 7.5 10.8
Selling, general and administrative 11.3 23.5
Goodwill amortization 1.0 0.7
----- -----
Total 91.6 97.8
Other expense, principally interest 4.0 6.0
----- -----
Income (loss) before income taxes 4.4% (3.8)%
===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1994
Revenues. The Company's total revenues increased by $94,459,000 or 144%
to $160,177,000 for the nine months ended September 30, 1995 from $65,718,000
for the nine months ended September 30, 1994. Revenues from television
operations increased by $89,866,000 or 164% to $144,637,000 for the nine months
ended September 30, 1995 from $54,771,000 for the nine months ended September
30, 1994. This increase was due primarily to the inclusion of the AAFII
revenues of $53,100,000 for the full nine months ended September 30, 1995
compared to $16,052,000 for two months (from the date of the Fremantle
Acquisition) through September 30, 1994; the initial recognition of Baywatch
strip syndication revenue of $33,905,000; the recognition of $10,450,000 from
the new one-hour series Baywatch Nights, reflecting the delivery of ten of the
22 episodes for the 1995/1996 broadcast season; and a $9,015,000 or 45%
increase in distribution revenues to $28,946,000 for the nine months ended
September 30, 1995 from $19,931,000 for the nine months ended September 30,
1994. AAFII revenues from the production and distribution of television
programming in Germany contributed $40,372,000, 76% of AAFII revenues. On a pro
forma basis, AAFII revenues, assuming a full nine months, increased by
$6,484,000, or 14%, to $53,100,000 for the nine months ended September 30, 1995
due to the commencement of production operations in Germany during that time
period.
Recorded music and merchandising revenues increased by $4,593,000, or
42%, to $15,540,000 during the nine months ended September 30, 1995 from
$10,947,000 during the nine months ended September 30, 1994. This increase was
primarily attributable to higher sales of new releases in the nine months ended
September 30, 1995, as compared with sales of new releases in the nine months
ended September 30, 1994, and merchandising revenues of $1,849,000 for the nine
months ended September 30, 1995 as compared to no comparable revenues in the
nine months ended September 30, 1994 period. Partially offsetting these
revenue increases is a decrease in foreign licensing advances received in the
nine months ended September 30, 1995 as compared with the nine months ended
September 30, 1994.
21
<PAGE> 22
Operating Expenses. Total operating expenses increased by $82,483,000
or 128% to $146,781,000 for the nine months ended September 30, 1995 from
$64,298,000 for the nine months ended September 30, 1994 due primarily to the
inclusion of AAFII operating expenses which increased by $37,011,000 or 340% to
$47,894,000 for the full nine months ended September 30, 1995 (including AAFII
overhead and $1,509,000 of goodwill amortization) from $10,883,000 for the two
months (from the date of the Fremantle Acquisition) through September 30, 1994
and additional amortization of television program costs of $76,394,000 for the
nine months ended September 30, 1995, an increase of $54,253,000 or 245%, from
$22,141,000 for the nine months ended September 30, 1994, due to the higher
television revenues. Selling, general and administrative expenses, including
corporate overhead and goodwill amortization, increased by $3,798,000 or 24% to
$19,700,000 for the nine months ended September 30, 1995 from $15,902,000 for
the nine months ended September 30, 1994 due principally to the inclusion of
AAFII overhead, including goodwill amortization, for nine months in 1995 as
compared with two months in 1994.
The Company's television expenses increased by $73,686,000 or 128% to
$114,980,000 (79% of total television revenues) for the nine months ended
September 30, 1995 from $41,294,000 (75% of total television revenues) for the
nine months ended September 30, 1994. The increase was primarily due to an
increase in AAFII expenses of $32,607,000 or 333%, to $42,413,000 (80% of AAFII
revenues) for the nine months ended September 30, 1995 from $9,806,000 for the
two months (from the date of the Fremantle Acquisition) through September 30,
1994 and increased amortization of television program costs attributable to
increased revenues. Television selling, general and administrative expenses
during the nine months ended September 30, 1995 increased by $2,980,000 or
44%, to $9,817,000 from $6,837,000 for the nine months ended September 30,
1994 due primarily to the $3,199,000 increase in AAFII charges of $3,972,000
for the nine months ended September 30, 1995 from $773,000 for two months (from
the date of the Fremantle Acquisition) through September 30, 1994. On a pro
forma basis, AAFII expenses, assuming a full nine months, increased by
$6,787,000, or 19%, to $42,413,000 for the nine months ended September 30,
1995 from $35,626,000 for the pro forma nine months ended September 30, 1994.
Such increase was related to the commencement of production operations in
Germany during that time period.
Goodwill amortization for the nine months ended September 30, 1995
increased by $1,176,000 or 273% to $1,606,000 from $430,000 for the nine
months ended September 30, 1994 due to the inclusion of goodwill amortization
related to the Fremantle Acquisition of $1,509,000 for the nine months ended
September 30, 1995, an increase of $1,201,000 or 390% from $308,000 for the two
months (from the date of the Fremantle Acquisition) ended September 30, 1994.
Corporate overhead of $3,430,000 for the nine months ended September 30, 1995
decreased by $831,000 or 20% from $4,261,000 for the nine months ended
September 30, 1994 due primarily to charges for certain one-time employment
terminations taken in 1994.
The Company's recorded music and merchandising expenses increased
$4,999,000 or 70% to $12,101,000 (78% of total recorded music and merchandising
revenues) for the nine months ended September 30, 1995 from $7,102,000 (65% of
total recorded music and merchandising revenues) for the nine months ended
September 30, 1994. This increase was primarily due to an increase in artist
cost amortization including the amortization of costs incurred for new artists
which increased by $1,294,000 or 191% to $1,971,000 for the nine months ended
September 30, 1995 from $677,000 for the nine months ended September 30, 1994
and merchandising costs of $1,317,000 as compared with no costs in the
comparable prior period.
Operating Income. Total operating income for the Company increased by
$11,976,000 or 843%, to $13,396,000 for the nine months ended September 30,
1995 from $1,420,000 for the nine months ended September 30, 1994 due
principally to increases in television operating income. Operating income from
television operations increased by $12,024,000 or 194%, to $18,234,000
for the nine months ended September 30, 1995 from operating income of
$6,210,000 for the nine months ended September 30, 1994. This increase in
television operating income, which was primarily attributable to the increases
in revenues and expenses discussed above, was partially offset by increases in
amortization of goodwill and overhead.
The Company's recorded music operations recognized an operating loss of
$1,408,000 (after inclusion of selling, general and administrative expenses of
$4,847,000) for the nine months ended September 30, 1995 as compared to an
operating loss of $527,000 (after inclusion of selling, general and
administrative expenses of $4,372,000) for the nine months ended September 30,
1994. Such increase in the operating loss was primarily attributable to
increased artist cost amortization and decreased foreign licensing advances
offset by merchandising income.
Foreign Currency Exchange Gain. The Company recognized a foreign currency
exchange gain of $242,000 for the nine months ended September 30, 1995 as
compared to a foreign currency exchange loss of $271,000 at September 30, 1994
which results from the settlement and valuation of certain licensing agreements,
denominated in
22
<PAGE> 23
foreign currencies, into U.S. dollars as of September 30, 1995 and 1994. The
Company has experienced in the past, and may experience in the future, gains and
losses as a result of fluctuations in exchange rates. To the extent the Company
does not enter into foreign currency swap agreements, the Company may record
foreign exchange losses and gains in the future.
Interest Expense. Interest expense, net of interest capitalized ($1,006,000)
and interest income ($262,000), increased by $2,961,000, or 80% to $6,642,000
for the nine months ended September 30, 1995 from $3,681,000, net of interest
capitalized ($155,000) and interest income ($152,000), for the nine months
ended September 30, 1994, due to increased borrowings in connection with the
Fremantle Acquisition and as a result of increased production activities. The
Company expects that the trend of increased interest costs will continue in
part as a result of increased borrowings in connection with the Mark Goodson
Acquisition.
Income Taxes. The Company recorded a tax provision for the nine months ended
September 30, 1995 in the amount of $2,938,000 which reflects an expected
effective tax rate for 1995 of 42%. During the nine months ended September 30,
1994, the Company recorded income taxes of $135,000, representing foreign taxes
withheld at the source and minimum state franchise taxes.
Net Income. The net income increased by $6,724,000 to $4,057,000 for the
nine months ended September 30, 1995 from a net loss of $2,667,000 for the
nine months ended September 30, 1994 as a result of the factors discussed
above. Earnings per share increased to $.50 per primary share and $.43 per fully
diluted share for the nine months ended September 30, 1995 as compared to a loss
of ($.54) per primary and fully diluted share for the nine months ended
September 30, 1994 due to the period to period increase in net income partially
offset by an increase in the outstanding number of weighted average common
shares and common share equivalents. Such increase of shares is due to the
inclusion of the shares of stock issued in connection with the Fremantle
Acquisition for nine months through September 1995 as compared with two months
through September 1994 as well as an increase in the number of equivalent shares
of outstanding options and other warrants determined using the treasury method.
LIQUIDITY AND CAPITAL RESOURCES
This discussion should be read in conjunction with the notes to the
condensed consolidated financial statements and the corresponding information
more fully described in the Company's Form 10-K for the year ended December 31,
1994.
Historically, the Company has financed its cash flow requirements through
cash flows generated from operations, the issuance of securities and third party
and bank financings. The proceeds from these financings were used to complete
the Mark Goodson Acquisition, the Fremantle Acquisition and the LBS Acquisition,
to finance the Company's operations, including the production of Baywatch and
Baywatch Nights, and for general operating expenses.
On October 18, 1995 the Company filed a Form S-2 Registration Statement with
the Securities and Exchange Commission for purposes of registering a proposed
underwritten public offering of 4,500,000 shares of the Company's Class B
Common Stock, of which 500,000 shares are to be offered for sale by a selling
stockholder. 675,000 additional shares subject to an over-allotment option in
favor of the underwriters are to be offered for sale by certain officers and
employees of the Company (subject to being covered by the Company under certain
circumstances). There is no assurance that the offering will be consummated or,
if consummated, that the terms thereof will not be modified.
As of October 6, 1995, the Company consummated an Asset Purchase Agreement
pursuant to which a newly-formed limited liability company (the "LLC"), jointly
owned, directly or indirectly by the Company and The Interpublic Group of
Companies, Inc. ("Interpublic"), agreed to acquire substantially all of the
assets (excluding assets
23
<PAGE> 24
relating to the lottery business) and to assume certain specified liabilities
(the "Mark Goodson Acquisition") of Mark Goodson Productions, L.P. and The
Child's Play Company (collectively the "Sellers"). The purchase price consists
of a payment by the Company of $25,000,000 in cash and issuance by Interpublic
of $25,000,000 in its common stock to the Sellers, together with a contingent
earn-out described below. Under the earn-out, the LLC will pay to an assignee
of the Sellers a specified percentage of "Domestic Net Profits" (i.e.
generally gross receipts less production costs, if from the exploitation in
the U.S. and Canada (currently, primarily consisting of "The Price Is Right")
of the Goodson game shows and other purchased television formats during the
five-year period following October 6, 1995 (which period is subject to
extension for an additional five years if total earn-out payments do not equal
$48,500,000, in which case the earn-out shall be payable in neither a minimum
nor a maximum amount). The specified percentage of Domestic Net Profits
payable to the Sellers with respect to "The Price Is Right" is 75% during the
network exhibition of the program during the five years after October 6, 1995
and otherwise the specified percentage is generally 50% for other programs.
However, the earn-out does not apply to any net profits realized from the
international exploitation of any of the purchased game shows or other
purchased television formats.
Based upon a preliminary review and evaluation, substantially all of the
Company's $25,000,000 portion of the initial purchase price has been allocated
to goodwill. The contingent purchase price, to the extent earned, will be
treated as an increase in goodwill and will be amortized coterminously with the
original goodwill over a 25 year period. To the extent additional contingent
purchase price payments are made, amortization will increase in future periods.
Management of the Company is in the process of reviewing the allocation of the
purchase price and, when completed, may modify its preliminary allocation. The
Mark Goodson Acquisition will be accounted for by the Company under the equity
method of accounting.
In April 1995, the Company secured a new $110,000,000, subsequently
increased to $135,000,000, senior credit facility (the "Senior Credit Facility
Agreement"), with a syndicate of lenders led by Chemical Bank consisting of the
following five tranches: (A) a term loan of $30,000,000 (the "Term Loan" or
"Tranche A") which was utilized to refinance existing bank debt incurred in
connection with the Fremantle Acquisition; (B) a revolving credit facility of
up to $20,000,000 in the aggregate to be utilized for production and
distribution of Baywatch, of which $14,000,000 was initially utilized to
refinance existing bank debt related to production of Baywatch for the
1994/1995 and 1995/1996 broadcast seasons (the "Baywatch Production Line" or
"Tranche B"); (C) a revolving credit facility of up to $20,000,000 in the
aggregate for production and distribution of Baywatch Nights (the "Baywatch
Nights Production Line" or "Tranche C"); (D) a revolving credit facility of up
to $40,000,000 to be utilized to finance certain working capital needs of the
Company, of which $10,000,000 was initially used to primarily refinance
existing bank debt related to the (the "Working Capital Line" or "Tranche D")
and (E) the $25,000,000 Goodson Term Loan described below. The Working
Capital Line together with the Baywatch Production Line and the Baywatch Nights
Production Line are referred to collectively as the "Chemical Bank Facilities".
In connection with the Mark Goodson Acquisition, the Company effected a credit
utilization of the Working Capital Line in the form of a letter of credit (the
"Letter of Credit") from Chemical Bank to fund its $25,000,000 cash portion of
the total purchase price. On November 13, 1995, the Senior Credit Facility was
amended to provide an additional $25,000,000 term loan under this facility
("Tranche E" or the "Goodson Term Loan"), which increased the total facility to
a maximum of $135,000,000, in order to refinance the Company's reimbursement
obligations under the Letter of Credit.
24
<PAGE> 25
The obligations of the Company under the Chemical Bank Facilities, the
Term Loan and the Goodson Term Loan are cross-collateralized. The Term Loan
matures on December 31, 1998. The Chemical Bank Facilities and the Goodson Term
Loan mature on April 13, 1999. Under the terms of the Senior Credit Facility
Agreement, the amount the Company may borrow under Tranche B, C and D is based
upon the value of the collateral in the borrowing base which consists
principally of accounts receivable of the Company. Borrowings under the Senior
Credit Facility Agreement bear interest, at the Company's option, either (i) at
LIBOR plus 2-3/4% (8.56% as of November 13, 1995), or (ii) at the Alternate
Base Rate (which is the greater of Chemical Bank's Prime Rate, its Base CD Rate
plus 1%, or the Federal Funds Effective Rate plus 1/2%) plus 1-3/4% (10.50% as
of November 13, 1995), subject to reduction if certain financial ratios are
satisfied. As of November 13, 1995, the Company has outstanding borrowings of
$27,500,000 under the Term Loan and approximately $47,950,000 under the
Chemical Bank Facilities with approximately $26,150,000 available for borrowing
under the Chemical Bank Facilities.
The Senior Credit Facility Agreement imposes a number of financial and
other conditions upon the Company, including limitations on indebtedness,
restrictions on the disposition of assets, restrictions on making certain
payments (including dividends), restrictions on acquisitions and certain
financial tests. Additionally, the Baywatch Production Line and the Baywatch
Nights Production Line provide that certain conditions must be satisfied before
funding of each season of the respective series and such conditions have been
met for the 1995/1996 broadcast season of Baywatch and Baywatch Nights. The
Goodson Term Loan imposes a separate set of financial and other conditions upon
the Company, including a requirement that "International Cash Flow," defined to
mean all payments due to the LLC (as defined in Note 6) under the terms of its
primary license agreement (other than with respect to the domestic
exploitation of programs), be maintained at specified levels (or, in lieu
thereof, that the Goodson Term Loan be prepaid to specified levels).
Except to the extent set forth below, under the terms of the Senior Credit
Facility Agreement substantially all of the Company's cash collections are
required to be paid into accounts maintained by Chemical Bank and applied to
the repayment of the Company's obligations under the Chemical Bank Facilities.
All of AAFII's cash collections are required to be paid into accounts
maintained by Chemical Bank and applied, subject to certain exceptions for
working capital, to interest and principal amounts outstanding under the Term
Loan until such time as the Term Loan is repaid in full. The Term Loan is
repayable in thirteen quarterly principal installments as follows: September
1995, $2,500,000 (which amount was paid); December 1995, $2,500,000; March
1996, $500,000; June 1996, $500,000; September 1996, $3,000,000; December 1996,
$3,000,000; March 1997, $1,000,000; June 1997, $1,000,000; September 1997,
$3,000,000; December 1997, $3,000,000; March 1998, $1,000,000; June 1998,
$1,000,000; September 1998, $4,000,000 and a final installment due on the last
borrower's day of December 1998 (each such payment being subject to reduction
from certain prepayments). The amount the Company is able to reborrow under the
Chemical Bank Facilities is subject to the collateral pledged to the lenders
having sufficient borrowing base value to support such borrowings.
Substantially all of the Company's assets other than real property are pledged
under the Senior Credit Facility Agreement.
Under the Goodson Term Loan, substantially all of the cash flow
available to AAG from exploiting the Mark Goodson assets will be available,
after reserving for earn-out payments to the Sellers and certain
administrative, tax and other distributions to the LLC, to repay the Goodson
Term Loan. The Company has agreed to a "make whole" provision so that following
the repayment in full of the Goodson Term Loan (or earlier, in the case of
certain acceleration events), each of the other members of the LLC will have
received its equal share of LLC cash flow, together with interest to the extent
that the Company received disproportionate use of cash. The "make whole" will
be payable out of LLC cash flow or, if accelerated in accordance with its
terms, at the Company's option, in cash, shares of Common Stock or shares of
Class B Common Stock (subject, in the latter case, to certain liquidity tests
being met). Interpublic also has the benefit of certain "put" rights and the
Company has been granted certain "call" rights and, if granted, the proposed
Interpublic Option, with respect to Interpublic's membership interest in the
LLC, the exercise of which could substantially reduce the Company's liquidity.
The Company's obligations to Interpublic will be supported by guarantees by
AAG and certain related licensees and secured by a second priority security
interest, subject only to the first priority security interest of the lenders
with respect to the Goodson Term Loan in the assets and shares of AAG and the
related licensees and Company's direct or indirect membership interests in the
LLC. In this connection, the lenders and Interpublic have entered into an
Intercreditor Agreement with the Company relating to their respective rights
in connection with the Goodson Term Loan.
25
<PAGE> 26
During the nine months ended September 30, 1995, the Company used cash of
$16,178,000 in its operations which was an increase in cash usage of $7,505,000
compared with the $8,673,000 of net cash used by its operations for the nine
months ended September 30, 1994. This negative cash flow from operations was due
primarily to an increase in accounts receivables of $39,831,000 (primarily from
the strip syndication of Baywatch) and net additions to television program costs
of $7,588,000 (primarily related to the 1995/1996 broadcast season), partially
offset by an increase in accounts payable, accrued expenses and royalties
payable and due to producers and participations payable. The Company experienced
a net increase in cash flow from financing activities of $25,432,000 during the
first nine months of 1995, primarily due to an increase in borrowings under the
Company's production and working capital loans in excess of repayments. The
Company expects, from time to time, to continue to experience negative cash flow
from operations. Any such uses of cash flows are expected to be funded, pending
receipt of anticipated licensing revenues, out of its lines of credit or outside
sources.
As described more fully below, the Company will have substantial capital
requirements during the next twelve months principally arising from the
acquisition, production and distribution of television programming and the
continued release of record albums requiring related marketing, promotion and
recording expenses. The commencement of the production of television programming
for the 1995/1996 broadcast season has required the Company to incur substantial
production costs in advance of generating revenues and receipts. Similarly, the
Company plans to incur significant costs associated with its television
distribution operations. The Company believes that its existing working capital
together with anticipated cash flow from operations, net proceeds from the
offering and other available funding sources will be sufficient to meet its
working capital needs for the next twelve months.
The Company from time to time considers the acquisition of program rights
and the expansion of its business through the acquisition of businesses
complementary to the current operations of the Company. Consummation of any such
acquisition or other expansion of the business conducted by the Company, if
beyond the Company's capital resources, would be subject to the Company securing
additional financing to the extent required.
Television Production and Distribution
In order to obtain television programming for distribution, the Company may
be required to make advance cash payments to the producers of such programming.
However, the Company generally attempts to avoid advance payment requirements by
making minimum guarantees to producers or owners in connection with the
acquisition of television programming. In addition, the Company has obtained
letters of credit and other sources of bank financing to facilitate certain
programming acquisitions. The Company may acquire domestic or foreign
distribution rights to a particular television program in exchange for a minimum
guarantee against a specified percentage of future licensing and/or advertising
sales revenue less certain costs of distribution. These guarantees are typically
subject to delivery of the completed programs. While the Company generally
anticipates that it will ultimately recoup payments made under its guarantees
from licensing fees and the sale of advertising time, the Company often is
required to make payments under such guarantees in advance of generating
revenues and cash receipts. Any expansion of the Company's business could
require the Company to make substantially increased advance payments or provide
guarantees to third parties. Further, there can be no assurance that existing
advances and guarantees or those from expansion will be recouped by the Company
and, if not recouped, that such payments will not have a material adverse affect
on the Company. In addition, the Company's working capital requirements in
connection with development and production activities relating to potential
network programming are expected to substantially increase as a result of the
Company's agreement, effective August 1995, with The Gerber Company ("TGC") and
David Gerber.
Recorded Music Operations
In the course of its distribution activities, the Company is responsible for
funding all distribution activities, including producing, marketing, promoting
and manufacturing recorded music for domestic distribution. In order to perform
this responsibility, the Company has significant personnel and other overhead
and marketing expenses, which requires substantial capital.
26
<PAGE> 27
The Company currently has a roster of 15 active artists. Additionally, the
Company contracts from time to time with other artists or entities for the
production of recorded music for its special projects division. Such growth has
required the Company to fund artist advances and recording costs, recording
studio and other overhead and marketing expenses were funded with cash flows
from operations and by the Company's working capital credit facility.
Minimum contractual commitments to existing artists totaled approximately
$409,000 at November 13, 1995 and the Company will be required to spend
additional sums for recording and marketing expenses for several artists in
its current roster. The Company's receipt of periodic advances from its
foreign distributors is dependent upon the Company meeting certain minimum
delivery requirements under its foreign distribution agreement.
Inflation
The Company believes that the impact of inflation has not been significant
to its financial condition or results of operations.
27
<PAGE> 28
PART II OTHER INFORMATION
ITEM 5.
On November 1, 1995 All American Communications, Inc. announced, pursuant to
a news release, a copy of which is attached hereto as Exhibit 99 and
incorporated by this reference herein, that the acquisition of Mark Goodson
Productions, L.P., through a 50/50 joint venture with The Interpublic Group of
Companies, Inc. (NYSE: IPG), was completed following termination of a regulatory
waiting period.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement re: Computation of Per Share Earnings - Three
and Nine Months ended September 30, 1995 and 1994.
27 Financial Data Schedule.
99 News Release dated November 1, 1995.
(b) Reports on Form 8-K
None
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALL AMERICAN COMMUNICATIONS, INC.
Date: November 14, 1995 By: /s/ Anthony J. Scotti
--------------------------------
Anthony J. Scotti,
Chief Executive Officer
Date: November 14, 1995 By: /s/ Thomas Bradshaw
--------------------------------
Thomas Bradshaw,
Chief Financial Officer and
Treasurer (Principal financial
officer and principal accounting
officer)
29
<PAGE> 30
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE
EXHIBIT NUMBER
------- ------
<S> <C> <C>
11 Statement re: Computation of Per Share Earnings - Three and
Nine Months ended September 30, 1995 and 1994.
27 Financial Data Schedule.
99 News Release dated November 1, 1995.
</TABLE>
30
<PAGE> 1
EXHIBIT 11
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
3 Months Ended 9 Months Ended
September 30, September 30,
--------------------- -----------------------
1995 1994 1995 1994
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 7,976 6,812 7,976 4,960
Assumed exercise of dilutive options and warrants
under the treasury stock method based on
average market price 320 53 107 0
------- ------- ------- -------
Weighted average number of common shares and common
share equivalents - primary (B) 8,296 6,865 8,083 4,960
Additional shares from assumed exercise of dilutive
options and warrants under the treasury stock
method based on ending market price 97 0 310 0
Weighted average assumed conversion of 6 1/2%
Convertible Subordinated Notes due 2003 5,217 5,217 5,217 5,217
------- ------- ------- -------
Weighted average number of common shares and
common share equivalents - fully diluted (D) 13,610 12,082 13,610 10,177
======= ======= ======= =======
Computation of net income (loss) for per share
purposes:
Net income (loss) (A) $ 5,628 $ 1,090 $ 4,057 $ (2,667)
Add: After tax reduction of interest expense for
assumed conversion of 6 1/2% Convertible
Subordinated Notes due 2003 606 627 1,818 1,881
------- ------- ------- -------
Net income (loss) for fully diluted per share
computation (C) $ 6,234 $ 1,717 $ 5,875 $ (786)
======= ======= ======= =======
Net earnings (loss) per share - Primary (A)/(B) $ 0.68 $ 0.16 $ 0.50 $ (0.54)
======= ======= ======= =======
Net earnings (loss) per share - Fully diluted (C)/(D) $ 0.46 $ 0.14 $ 0.43 $ (0.08)(*)
======= ======= ======= =======
</TABLE>
(*) - Calculation is antidilutive
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1995
AND THE THREE AND NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 15,348
<SECURITIES> 0
<RECEIVABLES> 103,910
<ALLOWANCES> 2,657
<INVENTORY> 77,331
<CURRENT-ASSETS> 0
<PP&E> 6,881
<DEPRECIATION> 3,005
<TOTAL-ASSETS> 255,661
<CURRENT-LIABILITIES> 0
<BONDS> 135,300
<COMMON> 1
0
0
<OTHER-SE> 32,446
<TOTAL-LIABILITY-AND-EQUITY> 255,661
<SALES> 15,540
<TOTAL-REVENUES> 160,177
<CGS> 12,101
<TOTAL-COSTS> 145,175
<OTHER-EXPENSES> 1,606
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,904
<INCOME-PRETAX> 6,995
<INCOME-TAX> 2,938
<INCOME-CONTINUING> 4,057
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,057
<EPS-PRIMARY> .50
<EPS-DILUTED> .43
</TABLE>
<PAGE> 1
EXHIBIT 99
News Announcement [LOGO]
[JAFFONI & COLLINS LETTERHEAD]
CONTACT:
Joseph N. Jaffoni, David C. Collins
Jaffoni & Collins Incorporated
212/505-3015
Thomas Bradshaw
Chief Financial Officer
310/450-3193
FOR IMMEDIATE RELEASE
ALL AMERICAN COMMUNICATIONS REPORTS THIRD QUARTER
AND NINE MONTHS REVENUES AND EARNINGS AND
COMPLETION OF MARK GOODSON PRODUCTIONS ACQUISITION
Santa Monica, CA, (November 1, 1995) -- All American Communications, Inc.
(NASDAQ: AACI) today reported results for the third quarter and nine months
ended September 30, 1995. The Company also announced that the acquisition of
Mark Goodson Productions, through a 50/50 joint venture with The Interpublic
Group of Companies, Inc. (NYSE: IPG), was completed following termination of a
regulatory waiting period.
Revenues in the third quarter of 1995 increased over 100% to $85,150,000, a
record level for any quarter to date, compared to revenues of $38,111,000 in
the year-ago quarter. The revenue increase was primarily due to the commencement
of the Baywatch strip syndication; the delivery of episodes of the Company's new
series, Baywatch Nights, in addition to the ongoing delivery of new episodes of
Baywatch; an increase in recorded music revenues from sales of new releases; the
inclusion of three months of revenues from the Company's All American Fremantle
International (AAFI) subsidiary, compared to two months in the prior year and
increased distribution revenues from certain television programming.
Operating income after goodwill amortization rose to $11,504,000 in the three
month period
(more)
[JAFFONI & COLLINS FOOTER]
<PAGE> 2
All American Communications Third Quarter Results, 11/1/95 Page 2
ended September 30, 1995 versus operating income of $3,022,000 in the year-ago
period, reflecting the significant increase in the amount of television
programming delivered or available for airing during the period. Goodwill
amortization was $536,000 in the third quarter of 1995, compared to $384,000 in
1994, reflecting the impact of the AAFI acquisition. Net interest expense in
the three month period ended September 30, 1995 was $1,914,000 compared to
$1,557,000 in the year-ago period due to higher average borrowings in
connection with the Company's increased television production activities and
the Fremantle International acquisition.
For the 1995 third quarter, net income increased to $5,628,000, or $0.68 per
share on a primary basis, compared to net income of $1,090,000, or $0.16 per
share, in 1994. The weighted average number of primary shares outstanding in
the 1995 and 1994 third quarter periods was 8,296,000 and 6,865,000,
respectively. The increase reflects the issuance of securities to The
Interpublic Group of Companies in connection with All American's acquisition of
certain assets and securities of Fremantle International in August 1994.
Revenues in the first nine months of 1995 increased 144% to $160,177,000, a
record level, compared to revenues of $65,718,000 in the first nine months of
1994. Operating income after amortization of goodwill rose to $13,396,000 for
the period versus operating income of $1,420,000 during the year-ago period.
Goodwill amortization increased in the first nine months of 1995 to $1,606,000,
compared to $430,000 in 1994, as a result of the impact of the Fremantle
International acquisition. Net interest expense in the first nine months of
1995 was $6,642,000, compared to $3,681,000 in the year-ago period due to
higher average borrowings in connection with the Company's increased television
production activities and the Fremantle International acquisition.
For the first nine months of 1995, the Company achieved net income of
$4,057,000, or $0.50 per share on a primary basis, compared to a net loss of
($2,667,000), or ($0.54) per share in
(more)
[LOGO]
<PAGE> 3
All American Communications Third Quarter Results, 11/1/95 Page 3
1994, representing an improvement of more than $1.00 per share period to
period. The weighted average number of primary shares outstanding in the 1995
and 1994 nine months periods was 8,083,000 and 4,960,000, respectively.
Anthony J. Scotti, Chairman and Chief Executive Officer, stated, "The strength
of our third quarter and nine months revenues and earnings are a direct result
of our increased base of television production and distribution activities
worldwide. The third quarter performance includes the cash and barter sales to
date for the Baywatch strip while future quarters will reflect additional
barter sales.
"With the closing today of our acquisition of a fifty percent interest and
management control in Mark Goodson Productions, our future results will reflect
our share of these operations."
Mr. Scotti added, "Our recorded music business generated sales gains in the
third quarter as a result of an active roster of new artist releases, and we
look to build upon this growing base of promising new talent."
All American Communications, Inc. is a diversified worldwide entertainment
company with operations in television and recorded music production and
distribution. All American produces and/or distributes more than 100 shows in
29 countries. Its programming includes the Baywatch franchise, and
internationally, local game shows including The Price is Right, Family Feud and
Let's Make a Deal.
(table follows)
[LOGO]
<PAGE> 4
All American Communications Third Quarter Results, 11/1/95 Page 4
ALL AMERICAN COMMUNICATIONS, INC.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $85,150 $38,111 $160,177 $65,718
Operating income 11,504 3,022 13,396 1,420
Other income (expense) 114 (271) 241 (271)
Interest expense, net 1,914 1,557 6,642 3,681
Income (loss) before provision for income taxes 9,704 1,194 6,995 (2,532)
Provision for income taxes 4,076 104 2,938 135
Net income (loss) $ 5,628 $ 1,090 $ 4,057 $(2,667)
------- ------- -------- -------
Primary:
Net income (loss) per share $ 0.68 $ 0.16 $ 0.50 $ (0.54)
------ ------ ------ -------
Weighted average number of common shares
outstanding 8,296 6,865 8,083 4,960
------- ------- ------ ------
Fully Diluted:
Net income (loss) per share $ 0.46 $ 0.14 $ 0.43 *
------ ------ ------ -----
Weighted average number of common shares
outstanding 13,610 12,082 13,610 10,177
------- ------- ------- -------
* not meaningful, calculation is antidilutive
</TABLE>
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