<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 June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition 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.)
808 Wilshire Boulevard, Santa Monica, California 90401-1810
(Address of principal executive offices) (Zip Code)
(310) 656-1100
(Registrant's telephone number, including area code)
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. X Yes ______ No
As of July 29, 1996, there were 5,876,173 shares of $.0001 par value
Common Stock, and 5,720,000 shares of $.0001 par value Common Stock, Class B
outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- -----------
(unaudited) (Note)
<S> <C> <C>
Cash and cash equivalents $ 15,255 $ 13,126
Restricted cash 6,622 6,968
Trade receivables, less allowances of $3,636 and $2,980 at June 30,
1996 and December 31, 1995, respectively 66,625 103,896
Unbilled receivables, less imputed interest of $1,631 and $2,354 at
June 30, 1996 and December 31, 1995, respectively 7,935 11,685
Inventory, net 742 1,018
Advances to recording artists, net 472 544
Television program costs, less accumulated amortization of $258,842 and
$228,942 at June 30, 1996 and December 31, 1995, respectively 95,392 74,644
Property and equipment, less accumulated depreciation and amortization 5,247 4,526
Investment in unconsolidated affiliate - - 29,130
Goodwill, less accumulated amortization of $5,828 and $3,384 at
June 30, 1996 and December 31, 1995, respectively 102,121 49,403
Other 6,091 6,642
----------- ------------
Total assets $ 306,502 $ 301,582
=========== ============
</TABLE>
Note: The balance sheet at December 31, 1995 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>
JUNE 30, DECEMBER 31,
1996 1995
------------ -------------
(unaudited) (Note)
<S> <C> <C>
Liabilities:
Accounts payable $ 15,237 $ 14,293
Accrued expenses 20,893 19,823
Royalties payable 6,947 4,435
Deferred revenues 116 277
Due to producers 18,657 26,271
Participations payable 27,479 30,979
Notes payable 143,352 134,982
Deferred taxes payable 2,242 2,242
------------ -------------
Total liabilities 234,923 233,302
------------ -------------
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 5,876,173 and 5,662,052 in 1996 and 1995, respectively
(including treasury shares) 1 1
Common stock, Class B non-voting, $.0001 par value, authorized
20,000,000 shares, issued 5,720,000 in 1996 and 1995 1 1
Additional paid-in capital 63,304 61,522
Common stock in treasury, at cost, 30,000 shares in 1996 and (135) (135)
1995
Retained earnings 9,162 6,939
Currency translation adjustment (754) (48)
------------ -------------
Total stockholders' equity 71,579 68,280
------------ -------------
Total liabilities and stockholders' equity $ 306,502 $ 301,582
============ =============
</TABLE>
Note: The balance sheet at December 31, 1995 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 JUNE 30,
----------------------------------
1996 1995
----------------------------------
(unaudited)
<S> <C> <C>
Revenues:
Television $ 30,316 $ 33,875
Recorded music and merchandising 9,029 4,190
------------- -------------
39,345 38,065
------------- -------------
Expenses:
Television 22,107 26,259
Recorded music and merchandising 6,573 3,799
Selling, general and administrative 6,631 6,326
Goodwill amortization 1,101 530
------------- -------------
36,412 36,914
------------- -------------
Operating income 2,933 1,151
Other income (expense):
Interest income 368 23
Interest expense, net of amounts capitalized (3,035) (2,407)
Other (4) 67
------------- -------------
(2,671) (2,317)
------------- -------------
Income (loss) before provision (benefit) for income taxes 262 (1,166)
Provision (benefit) for income taxes 110 (490)
------------- -------------
Net income (loss) $ 152 $ (676)
============= =============
Net income (loss) per share $ 0.01 $ (0.08)
============= =============
Weighted average number of common shares and common share
equivalents outstanding 12,110,000 7,976,000
============= =============
</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>
SIX MONTHS ENDED JUNE 30,
----------------------------------
1996 1995
----------------------------------
(unaudited)
<S> <C> <C>
Revenues:
Television $ 71,673 $ 67,819
Recorded music and merchandising 15,815 7,208
------------- -------------
87,488 75,027
------------- -------------
Expenses:
Television 51,465 54,308
Recorded music and merchandising 11,551 5,663
Selling, general and administrative 13,293 12,094
Goodwill amortization 2,186 1,070
------------- -------------
78,495 73,135
------------- -------------
Operating income 8,993 1,892
Other income (expense):
Interest income 799 44
Interest expense, net of amounts capitalized (5,933) (4,772)
Other (26) 127
------------- -------------
(5,160) (4,601)
------------- -------------
Income (loss) before provision (benefit) for income taxes 3,833 (2,709)
Provision (benefit) for income taxes 1,610 (1,138)
------------- -------------
Net income (loss) $ 2,223 $ (1,571)
============= =============
Net income (loss) per share $ 0.19 $ (0.20)
============= =============
Weighted average number of common shares and common share
equivalents outstanding 11,941,000 7,976,000
============= =============
</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>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1996 1995
-----------------------------------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,223 $ (1,571)
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Depreciation and amortization of property, equipment and goodwill 3,141 1,330
Amortization of television program costs 29,900 12,409
Increase in allowance for doubtful accounts 17 38
Increase (decrease) in allowance for sales returns 600 (293)
Increase (decrease) in make goods reserve 39 (1,278)
Decrease in imputed interest discount (723) - -
Changes in operating assets and liabilities:
Restricted cash 2,628 136
Trade receivables, unbilled receivables, inventory and advances to
recording artists 43,756 (988)
Additions to television program costs (50,648) (32,081)
Deferred income tax benefit - - (1,138)
Accounts payable, accrued expenses and royalties payable 4,527 3,064
Due to producers and participations payable (11,114) 3,788
Deferred revenues (161) 2,621
Other assets 50 (74)
------------- --------------
Net cash provided (used) by operating activities 24,235 (14,037)
------------- --------------
INVESTING ACTIVITIES
Purchase of property and equipment, net (1,166) (214)
Purchase of remaining 50% interest in Mark Goodson Productions, LLC (25,145) - -
Contingent earn out from purchase of Mark Goodson Productions, LLC (3,460) - -
------------- --------------
Net cash used in investing activities (29,771) (214)
------------- --------------
FINANCING ACTIVITIES
Payments on stock subscriptions receivable - - 56
Proceeds from borrowings 57,600 109,880
Repayments of borrowings (74,747) (97,748)
Restricted cash held for repayment of borrowings (2,282) 5,857
Issuance of notes payable in connection with purchase of remaining 50%
interest in Mark Goodson Productions, LLC 27,800 - -
-------------- --------------
Net cash provided by financing activities 8,371 18,045
-------------- --------------
Effect of exchange rate changes on cash (706) 417
-------------- --------------
Increase in cash 2,129 4,211
Cash and cash equivalents at beginning of period 13,126 1,662
-------------- --------------
Cash and cash equivalents at end of period $ 15,255 $ 5,873
Supplemental disclosure of cash flow information:
============= ==============
Cash paid during the period for:
Interest, net of amounts capitalized $ 6,126 $ 4,482
============= ==============
Income taxes $ 1,331 $ 220
============= ==============
</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)
JUNE 30, 1996
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"), All American Entertainment Industries, Inc. -
formerly Scotti Brothers Entertainment Industries, Inc. ("AAEI" or "SBEI"),
All American Fremantle International, Inc. ("AAFII"), All American FDF
Holdings, Inc. ("AAFDF"), All American Goodson, Inc. ("AAG") and All American
Orbis, Inc. ("AAO") (and together with their respective wholly-owned
subsidiaries (including Mark Goodson Productions, LLC) collectively, the
"Company" or "All American") produce, distribute and market television programs
and recorded music both domestically and internationally.
The Company's primary source of revenues is from the production,
distribution and promotion of television programs. The Company has operations
throughout the world, with activities located principally in the United States
and Europe.
Intangible Assets
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
flow or if there is an event or change in circumstances which establish the
existence of impairment indicators.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of AAC and its subsidiaries; all significant intercompany balances and
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 six month periods ended June 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. 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.
Recognition of Revenues
Minimum guaranteed amounts from domestic television sales are
generally recognized when the license period begins and the program becomes
available pursuant to the terms of the license agreement. Advertising revenues
are recognized upon the commencement of the license period of the program and
the advertising time has been sold pursuant to non-cancelable agreements,
provided that the program is available for its first broadcast. 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 domestic and foreign
production agreements are recognized as completed episodes are delivered.
Deferred revenues consist principally of advance payments received on
television contracts for which the program materials are not yet available for
broadcast or exploitation.
The portion of recognized revenue to be shared with the producers and
owners of the licensed program material (participations payable and due to
producers) is accrued as the revenue is recognized.
7
<PAGE> 8
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In certain instances, the Company guarantees viewer ratings for its
syndicated programs. Applicable revenue is recorded net of estimated
shortfalls, which are settled by giving either additional advertising time
(make goods) or cash refunds to the advertiser. The Company provides for the
full amount of the estimated shortfall.
Domestic revenues from recorded music are recognized as units are
shipped to customers. The Company provides for estimated future returns of
recorded music product at the time when the products are initially sold. These
provisions 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 nonrefundable advances against
future royalties. Nonrefundable guaranties from foreign sales are recognized
as product is delivered to the Company's foreign distributor.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less and investments in money
market funds to be cash equivalents.
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 Chase Manhattan Bank, formerly known as
Chemical Bank ("Chase Manhattan Bank"), and applied to the repayment of the
outstanding borrowings as specified in the lending agreement (see Note 3). The
cash held for repayment is included as restricted cash.
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 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.
Inventory
Inventory consists of recorded music product and is carried at the
lower of cost or estimated net realizable value. Pursuant to the Company's
distribution agreement (the "WEA Distribution Agreement") with
Warner/Elektra/Atlantic Corporation, a division of Time Warner, Inc. ("WEA"),
WEA has a security interest in the Company's master recordings at any time when
the Company owes money to WEA.
8
<PAGE> 9
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Television Program Costs
Television program costs consist of direct production costs,
production overhead, capitalized interest and certain exploitation costs, less
accumulated amortization. Such costs are stated at the lower of unamortized
cost or estimated net realizable value. Selling costs and other distribution
costs which are not recoverable from the producers' share of revenues are
charged to expense as incurred.
Television program costs, and estimated total costs of participations
and residuals, are amortized under the individual film forecast method in the
ratio that current period revenue recognized bears to management's estimate of
remaining gross revenue to be recognized. The use of estimates which may
ultimately differ from actual results could materially affect the Company's
consolidated financial statements. Such estimates, which are subject to change
based on a comparison of actual to estimated information, are re-evaluated
quarterly in connection with a review of the Company's inventory of television
product, and estimated losses, if any, are provided for in full.
Artist Compensation Cost
Royalties earned by artists from sales of recorded music are charged
to expense as the related revenues are recognized. Advances to artists against
future royalties are recorded as assets if the Company estimates the amount of
the advances will be recoverable from future royalties to be earned by the
artist, based upon the past performance and current popularity of the artist.
Such advances are applied against subsequent royalties earned by the artist.
Depreciation and Amortization
Property and equipment are carried at cost, and depreciation is
computed using accelerated and straight line methods over the estimated useful
lives of the assets; thirty years for the Company owned building and ranging
from three to ten years for the remaining assets. Leasehold improvements are
amortized over the lesser of the term of the lease or the estimated useful
lives of the improvements.
Goodwill is amortized on a straight-line basis over periods ranging
from 10 to 25 years (principally 25 years).
Income Taxes
The Company records its income tax provision in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109").
Deferred income taxes under the liability method arise primarily from
the differences in the timing of the recognition of certain television and
recorded music revenue and expense items for book and tax purposes.
Stock Based Compensation
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees," and intends
to continue to do so.
Share Information; Earnings Per Share
Earnings per share represents the per share income or loss and is
computed based on the weighted average common shares outstanding and dilutive
common stock equivalents determined using the modified treasury stock method.
The fully diluted per share computations for 1996 and 1995 are anti-dilutive.
9
<PAGE> 10
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
2. ACQUISITIONS
Orbis Entertainment Company
As of July 19, 1996, the Company consummated a stock purchase
agreement ("Orbis Agreement") with Orbis Entertainment Company, Inc.
("Orbis"), a television production company, and the shareholders of Orbis (the
"Orbis Acquisition") to purchase all of the outstanding shares of Orbis for an
initial purchase price of $2,500,000, which has been paid. In addition to the
initial purchase price, the Orbis Agreement, for the first five years, provides
for a contingent earn out payment equal to 50% of net cash flow, as defined,
and an additional contingent payment due after year five based on the cash
flows of Orbis in years four and five, also as defined. Following the
acquisition, the name of Orbis was changed to All American Orbis, Inc. ("AAO").
The Company has accounted for the Orbis Acquisition under the purchase
accounting method. As of July 19, 1996, the Company entered into five year
employment agreements with the AAO executives.
Mark Goodson Productions
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
assumed certain specified liabilities ( the "MG Acquisition") of Mark Goodson
Productions, L.P. and The Child's Play Company (collectively, the "Sellers").
The Sellers were not affiliated with the Company. The purchase price paid by
the Company for its undivided 50% interest of the Sellers' net assets acquired
consisted of a cash payment of $25,000,000, transaction costs of $785,000, and
an as yet undetermined contingent purchase price. The contingent purchase
price, payable to the Sellers, is to be earned and paid based on the income (as
defined) resulting from a domestic television network contract and the actual
exploitation of certain other domestic television rights. The contingent
purchase price, in total, is limited to $48,500,000 if paid (whether earned or
not) during the first five years following October 6, 1995. Otherwise, the
amount of contingent purchase price is unlimited to the extent it is earned
within the first ten years following October 6, 1995. At the end of ten years,
no additional contingent purchase price accrues. Substantially all of the
Company's $25,785,000 portion of the initial purchase price was allocated to
goodwill and was originally reflected in "investment in unconsolidated
affiliate" in the condensed consolidated balance sheet at December 31, 1995.
Interpublic and the Company, effective January 1, 1996, entered into
an agreement pursuant to which the Company purchased Interpublic's 50% interest
in the LLC (the "IPG/Goodson Agreement") for: (i) $12,500,000 plus accrued
interest thereon at a rate of 7% per annum from January 1, 1996 to the closing
date, as defined (the "Closing Date"); (ii) the issuance of a subordinated note
in the amount of $12,500,000 due 12 months from the Closing Date, subject to
acceleration upon either a "Change of Control" (as defined), or the
acceleration of the Tranche A term loan (see Note 3), plus accrued interest
thereon at a rate of 7% per annum from January 1, 1996; and (iii) the issuance
of a subordinated note in the amount of $2,800,000, yielding interest at the
rate of 7% per annum from January 1, 1996, and representing Interpublic's 50%
share of the LLC's earnings through December 31, 1995, as defined, with
$687,000 due and paid 30 days from the Closing Date and the balance due 30 days
after maturity of the Tranche A term loan and subject to
10
<PAGE> 11
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
2. ACQUISITIONS (CONTINUED)
acceleration upon a "Change of Control" (as defined) or the acceleration of the
Tranche A term loan. The remaining amounts due under the IPG/Goodson Agreement
($12,500,000 plus accrued interest is due in April 1997 and $2,113,000 plus
accrued interest is due in December 1998) are expected to be paid from a
combination of: (i) cash flow from Mark Goodson Productions, (ii) borrowings
under the Company's borrowing facilities and or (iii) working capital. The
IPG/Goodson Agreement was in lieu of and replaced the Company's option to
acquire Interpublic's undivided 50% interest in the LLC commencing, and
effective only after, April 30, 1996 for $25,900,000 in cash (increasing during
the option exercise period at a rate of 7% per annum). The IPG/Goodson
Agreement together with the MG Acquisition (collectively the "Mark Goodson
Acquisition") resulted in the Company's full direct or indirect ownership of
the net assets held by the LLC. As of January 1, 1996, the Company's initial
purchase price for the net assets of Mark Goodson Productions increased by
$27,800,000 plus costs of $116,000 to $53,701,000. Consistent with its
treatment of its undivided 50% interest, the Company has allocated
substantially all of the increased purchase price to goodwill which is being
amortized over 25 years from October 6, 1995, the date of the MG Acquisition.
The IPG/Goodson Agreement further results in the Company absorbing the full
share of the contingent purchase price, to the extent earned by the Sellers.
Such contingent purchase price, which may total $48,500,000 by the fifth
anniversary of the MG Acquisition, will be treated as an increase in goodwill
and will be amortized coterminously with the original 25 year period. Through
June 30, 1996, the Company has recorded contingent purchase price totaling
$4,395,000 (excluding Interpublic's share through December 31, 1995).
As of June 30, 1996, goodwill, including the total initial purchase
price of $53,701,000 (before allocation of $2,934,000 to identifiable net
assets) and contingent purchase price of $4,395,000, totals $55,162,000. The
Company has accounted for the Mark Goodson Acquisition under the purchase
accounting method effective January 1, 1996.
The pro forma unaudited results from operations of the Company for the
six months ended June 30, 1995 (giving effect to the Mark Goodson Acquisition
as of January 1, 1995) follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1995
-------------------------
(in thousands except per
share amount)
<S> <C>
Revenues $81,626
Operating income $ 9,050
Net income $ 1,420
Net income per share $ 0.18
</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
if the Mark Goodson Acquisition had been made at January 1, 1995, or of the
results which may occur in the future.
11
<PAGE> 12
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
3. NOTES PAYABLE
Notes payable and amounts due to banks are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
(in thousands)
<S> <C> <C>
Notes payable to banks $ 73,410 $ 77,352
Other notes payable 14,595 - -
Convertible subordinated notes, 6 1/2% 55,347 57,630
------------ ------------
$ 143,352 $ 134,982
============ ============
</TABLE>
In April 1995, the Company secured a $110,000,000, subsequently
increased to $135,000,000, senior credit facility (the "Senior Credit Facility
Agreement"), with a syndicate of lenders led by Chase Manhattan Bank. This
facility currently consists of five tranches: (i) 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 AAFII acquisition; (ii) a revolving credit
facility of up to $20,000,000 in the aggregate to be utilized for production
and distribution of Baywatch (the "Baywatch Production Line" or "Tranche B");
(iii) a revolving credit facility of up to $20,000,000 in the aggregate for the
production and distribution of Baywatch Nights (the "Baywatch Nights Production
Line" or "Tranche C"); (iv) a revolving credit facility of up to $40,000,000 to
be utilized to finance certain working capital needs of the Company (the
"Working Capital Line" or "Tranche D"); and (v) the $25,000,000 Tranche E 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 "Chase Manhattan Bank Facilities"). In connection with the
MG Acquisition, the Company effected a credit utilization of its working
capital line in the form of a letter of credit (the "Letter of Credit") from
Chase Manhattan Bank to fund its initial $25,000,000 cash portion of the total
purchase price. On November 13, 1995, the Senior Credit Facility Agreement was
amended to provide an additional $25,000,000 term loan under this facility
("Tranche E"), 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. On April 18, 1996 and May 15, 1996, the Company utilized the
Working Capital Line to pay $12,500,000 (plus accrued interest) and
$687,000 (plus accrued interest), respectively to Interpublic in
connection with the Mark Goodson Acquisition (see Note 2). On July 19, 1996,
the Company further utilized the Working Capital Line to pay $2,500,000 in
connection with the Orbis Acquisition (see Note 2). The obligations of the
Company under the Chase Manhattan Bank Facilities, the Tranche A term loan and
the Tranche E term loan are cross-collateralized. The Tranche A term loan
matures on December 31, 1998, the Tranche E term loan matures on April 13, 1999
and the Chase Manhattan Bank Facilities are available through and mature on
April 13, 1999. Under the terms of the Senior Credit Facility Agreement, the
amounts which the Company may borrow under Tranches B, C and D are 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) LIBOR
plus 2% (7.44% as of July 31, 1996); or (ii) the Alternate Base Rate (which is
the greater of Chase Manhattan Bank's Prime Rate, its Base CD Rate plus 1%, or
the Federal Funds Effective Rate plus 1/2%) plus 1% (9.25% as of July 31,
1996), as reduced upon the Company's satisfaction of certain financial ratios.
As of July 31, 1996, the Company had outstanding borrowings of $21,000,000
under the Tranche A term loan, $23,410,000 under the Tranche E term loan, and
$27,450,000 under the Chase Manhattan Bank Facilities, and approximately
$26,000,000 was available for borrowing under the Chase Manhattan Bank
Facilities. As an interim use, the Company temporarily paid down certain
amounts borrowed under the revolving Chase Manhattan Bank Facilities from a
portion of the net proceeds of the Company's Class B Common Stock offering in
December 1995. Amounts repaid under the Chase Manhattan Bank Facilities may be
reborrowed, subject to the Company having an adequate borrowing base and
meeting the conditions precedent to each borrowing.
12
<PAGE> 13
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
3. NOTES PAYABLE (CONTINUED)
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. In particular, consummation of acquisitions may be subject to
obtaining bank consent under the Senior Credit Facility Agreement. 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 1996/1997
broadcast season of Baywatch and Baywatch Nights. The Tranche E 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 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 Tranche E 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 Chase Manhattan Bank and
applied to the repayment of the Company's obligations under the Chase Manhattan
Bank Facilities. All of AAFII's cash collections are required to be paid into
accounts maintained by Chase Manhattan Bank and are applied, subject to certain
exceptions for working capital, to interest and principal amounts outstanding
under the Tranche A term loan until such time as the Term Loan is repaid in
full. As of July 31, 1996, the Company has made quarterly principal
installment payments and prepayments totaling $9,000,000 due through the
September 1996 quarter. The remaining balance of the Tranche A term loan is
repayable in quarterly principal installments as follows: 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
business day of December 1998 (each such payment being subject to reduction
from certain prepayments). The amount which the Company is able to reborrow
under the Chase Manhattan 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 Tranche E term loan which refinanced the initial cash
portion of the purchase price paid by the Company in connection with the Mark
Goodson Acquisition, the borrower is All American Goodson, Inc. ("AAG"), a
wholly-owned subsidiary of the Company and the licensee of the world-wide
distribution rights of the LLC (subject to certain existing licenses). Under
the Tranche E 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 and tax
distributions to the LLC, to repay the Tranche E term loan.
In connection with the IPG/Goodson Agreement (see Note 2), the Company
issued three notes payable to Interpublic totaling $27,800,000 as follows: (i)
$12,500,000 plus accrued interest thereon at a rate of 7% per annum from
January 1, 1996 to the Closing Date (paid in April 1996 from borrowings under
the Working Capital Line); (ii) a subordinated note in the amount of
$12,500,000 due 12 months from the Closing Date, subject to acceleration upon
either a "Change of Control" (as defined, or the acceleration of the Tranche A
term loan, plus accrued interest thereon at a rate of 7% per annum from January
1, 1996; and (iii) a subordinated note in the amount of $2,800,000, yielding
interest at the rate of 7% per annum from January 1, 1996, with $687,000 due
and paid 30 days from the Closing Date and the balance due 30 days after
maturity of the Tranche A term loan and subject to acceleration upon a "Change
of Control" (as defined) or the acceleration of the Tranche A term loan.
13
<PAGE> 14
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
4. TELEVISION PROGRAM COSTS
Costs for television programs are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---------------- -----------------
(in thousands)
<S> <C> <C> <C> <C>
Released, less accumulated amortization $ 78,031 $ 73,902
In process and development 17,361 742
---------------- -----------------
$ 95,392 $ 74,644
================ =================
</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 six months ended June 30, 1996 and 1995 are
capitalized interest of $297,000 and $361,000, respectively and capitalized
overhead of $2,022,000 and $1,313,000, respectively.
5. COMMITMENTS AND CONTINGENCIES
The Company has reached an agreement with Atlantis Releasing B.V.
("Atlantis") whereby Atlantis will produce a minimum of 13 and a maximum of 22
one-hour live action episodes of a new series entitled Sinbad for the 1996/1997
broadcast season. In consideration for the Company providing the majority
(approximately $695,000 per episode) of the approximately $850,000 per episode
production budget, the Company will retain exclusive distribution rights to
Sinbad in the United States and Europe (including the United Kingdom and
excluding Scandinavia). The Company has an annual option, exercisable on or
before February 15 of each of the initial three potential broadcast seasons, to
cause Atlantis to produce up to 22 new episodes in each of the three subsequent
broadcast seasons. At the end of three years, if Atlantis does not exercise
its right to continue producing Sinbad, such right to produce the series
reverts to the Company. As of July 31, 1996, the Company has spent
approximately $6,595,000 towards the production of Sinbad for the 1996/1997
broadcast season. The total commitment of up to approximately $15,290,000 for
the 1996/1997 broadcast season is expected to be funded primarily through a
combination of: (i) borrowings under Tranche D of the Chase Manhattan Bank
Facilities; (ii) cash payments by international sub-licensees; and (iii)
working capital, pending receipt of license fees. Through July 31, 1996,
Sinbad has been cleared in 81% of the domestic television market for the
1996/1997 broadcast season and has been licensed to international licensees for
$8,200,000, payable in installments based on the commencement of production
and delivery of each episode of the series.
The Company has commenced production on the 22 episodes of Baywatch
for the 1996/1997 broadcast season. As of July 31, 1996, the Company has spent
approximately $4,467,000 towards the production of six episodes for the
1996/1997 broadcast season. The total production budget of approximately
$22,000,000 for the 1996/1997 broadcast season is expected to be funded
primarily through a combination of: (i) borrowings under Tranche B of the Chase
Manhattan Bank Facilities; (ii) cash payments by The Fremantle Corporation (an
unaffiliated company); and (iii) working capital, pending receipt of license
fees. Through July 31, 1996, Baywatch has been cleared in 89% of the domestic
television market for the 1996/1997 broadcast season and has been licensed to
international licensees for $14,750,000 payable in installments based on the
commencement of production and delivery of each episode of the series.
Through July 31, 1996, the Company has spent approximately $8,227,000
and completed principal photography on nine episodes of Baywatch Nights for the
1996/1997 broadcast season. The total production budget of approximately
$20,000,000 for the 1996/1997 broadcast season is expected to be funded
primarily through a combination of: (i) borrowings under Tranche C of the Chase
Manhattan Bank Facilities; (ii) cash payments received from international
sub-licensees; and (iii) working capital, pending receipt of license fees.
Through July 31, 1996, Baywatch Nights has been cleared in 85% of the domestic
television market for the 1996/1997 broadcast season and has been licensed to
14
<PAGE> 15
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
international licensees for amounts totaling in excess of $9,900,000 payable
in installments based on the commencement of production and delivery of each
episode of the series.
The Company presently has network or cable commitments in connection
with the production by the Company of two movies-of-the-week totaling
$4,755,000. The preliminary budgets in connection with such commitments total
$6,350,000. The total production budgets are expected to be funded primarily
through a combination of: (i) network or cable license fees; (ii) cash payments
from international licensees; and (iii) pending receipt of license fees,
working capital. There is no assurance that the Company will be successful in
its efforts to fully fund these productions through a combination of the
network or cable license fees and international sales.
On December 12, 1994, Credit Lyonnais Bank Nederland N.V. ("CLBN")
made a demand upon SBEI under a Guarantee, dated July 29, 1986 (the "SBEI
Guarantee"), for payment of approximately $3,742,000 plus interest accrued or
costs incurred since November 11, 1994 under a Loan and Security Assignment,
dated July 29, 1986, between CLBN and various former subsidiaries of SBEI
relating to the discontinued motion picture operations of the Company. In a
letter dated December 22, 1994, SBEI rejected the foregoing demand based upon,
among other reasons, the following: (i) 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; (ii) the loan purportedly guaranteed has been repaid; and (iii) SBEI
is not a party to and was not bound by a material amendment to the
above-referenced Loan and Security Assignment. The Company and CLBN are
engaged in discussions regarding the potential resolution of all of their
disputes. While the Company believes that SBEI has good and meritorious
defenses with respect to the SBEI Guarantee and any related claims by CLBN, and
that the ultimate outcome of this matter will not result in a material adverse
effect on the Company's financial condition or results of operations, there is
no assurance that the Company ultimately will prevail.
Minimum commitments for advances to recording artists at July 31, 1996
amounted to approximately $445,000.
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.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a diversified entertainment company which produces,
distributes and markets television programs and recorded music both
domestically and internationally.
The television industry may be broadly divided into three major
segments: (i) production, involving the development, financing and making of
television shows; (ii) distribution, involving the promotion and exploitation
of completed television shows; and (iii) broadcast, involving the domestic or
international airing of programming over network affiliated stations,
independent stations and cable or satellite television.
The U.S. broadcast television market is served principally by network
affiliated stations, independent stations and cable and satellite television
operators. Broadcasters telecast network programming, including off-network
programming (reruns) (in the case of network affiliates); self and/or locally
produced programming; and off-network programming or first-run programming from
independent producers or "syndicators" such as the Company. 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 to advertisers ("barter"), or for a
combination 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 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 U. S. television households (calculated by
means of a generally recognized system as measured by Nielsen Media Ratings),
enables the syndicator to sell the commercial inventory through advertising
agencies to sponsors desiring national coverage (including but not limited to
Proctor & Gamble, Bristol Myers-Squibb, MCI, Smith-Kline Beecham, Kraft/General
Foods, Mars, Nestle and RJR Nabisco). 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.
The international broadcast television market is served principally by
network affiliated stations, independent stations and cable and satellite
television operators. The Company produces and distributes "local" content
programming internationally through its wholly owned subsidiaries, All American
Fremantle International, Inc. ("AAFII"), principally using game and variety
show formats acquired as part of the Mark Goodson Acquisition or from third
parties and All American Orbis, Inc. ("AAO") using talk show formats. License
agreements for international programming are typically entered into prior to
the commencement of production and generally provide for license fees
sufficient to cover the costs of production. While the Company has
international production facilities in several countries, AAFII's production
activities occur primarily in Germany and the United Kingdom.
The international distribution and exploitation of Baywatch Nights
(worldwide), Sinbad (Europe only, including the United Kingdom and excluding
Scandinavia), the Company's movies-of-the-week and a portion of its library of
domestic content programming are also handled by AAFII. In addition to
producing and distributing Company owned product, AAFII provides television
related producer-for-hire and distributor services for a fee.
In most cases, the Company's domestic and international distribution
revenues are based on a percentage of the net revenues derived from cash
license fees and/or the sale of advertiser sponsorships. The Company normally
advances all distribution costs for items such as advertising, promotion, and
tape shipping and duplication and recovers such
16
<PAGE> 17
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. Such advance payment may
reduce the Company's distribution fee or result in a loss if sufficient
revenues are not generated. For the 1996/1997 broadcast season, the Company
has made certain guarantees to the producers with respect to Sinbad. See
"--Liquidity and Capital Resources."
A small number of programs and musical recordings has historically
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 third and fourth quarters as a result of
the commencement of the television season in the fall of each year. The
results of the first quarter of 1996 reflect the full consolidation of Mark
Goodson Productions, LLC, the remaining 50% of which was acquired effective as
of January 1, 1996. A change in a program's production schedule or ratings
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.
Except for the historical information contained herein, certain of the
matters discussed in this quarterly report are "forward-looking statements" as
defined in the Private Securities Litigation Reform Act of 1995, which involve
certain risks and uncertainties, which could cause actual results to differ
materially from those discussed herein, including but not limited to the
Company's dependence on a limited number of projects, risks of expansion,
acquisitions and new programming, dependence on key personnel, fluctuation in
results of operations, and risks relating to the nature of the entertainment
industry, government regulation, competition and control by management. See
the relevant discussions elsewhere herein, and the Company's periodic reports
and other documents filed with the Securities and Exchange Commission,
including the Company's registration statement on Form S-2, as amended on
December 11, 1995, for a further discussion of these and other risks and
uncertainties applicable to the Company's business.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996 AND 1995
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 June
30, 1996 and 1995:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------
1996 1995
----------- ----------
<S> <C> <C>
Revenues:
Television 77.1 % 89.0 %
Recorded music and merchandising 22.9 11.0
----------- -----------
Total 100.0 100.0
Operating expenses:
Television 56.2 69.0
Recorded music and merchandising 16.7 10.0
Selling, general and administrative 16.8 16.6
Goodwill amortization 2.8 1.4
----------- -----------
Total 92.5 97.0
Other expense, principally interest 6.8 6.1
----------- -----------
Income (loss) before income taxes 0.7 % (3.1) %
=========== ===========
</TABLE>
17
<PAGE> 18
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Revenues. The Company's total revenues increased by approximately
$1.3 million or 3% to $39.3 million for the three months ended June 30, 1996,
from $38.1 million for the three months ended June 30, 1995. Revenues from
television operations decreased to $30.3 million (77% of total revenues) for
the three months ended June 30, 1996, from $33.9 million for the three months
ended June 30, 1995 (89% of total revenues). Revenues from recorded music and
merchandising increased to $9.0 million (23% of total revenues) for the three
months ended June 30, 1996, from $4.2 million (11% of total revenues) for the
three months ended June 30, 1995.
The decrease in revenues from television operations of $3.6 million or
11% for the three months ended June 30, 1996, as compared with the three months
ended June 30, 1995 was due primarily to period to period reductions in
Baywatch revenues (primarily due to the availability of Baywatch for strip
syndication commencing in June 1995, with no comparable revenue recognized in
1996) and other television distribution revenues. These decreases were
partially offset by period to period increases in AAFII revenues and the
recognition of revenues from Mark Goodson Productions.
Revenues from Baywatch decreased by $8.2 million or 84% to $1.6
million for the three months ended June 30, 1996 from $9.7 million for the
three months ended June 30, 1995. This decrease in Baywatch revenues was
primarily due to the recognition of initial cash license fees of approximately
$7.0 million from the commencement of the strip syndication of Baywatch in June
1995, with no comparable revenue recognized in the 1996 period and to a lesser
extent, the loss of weekly second runs in certain key markets resulting in
lower ratings in the three months ended June 30, 1996 as compared with the
three months ended June 30, 1995 (the audience from such second runs are added
to the audience from the primary runs to result in an overall weekly rating for
the program). Additionally, other television distribution revenues (excluding
Baywatch, AAFII and Mark Goodson Productions) decreased by $7.6 million or 66%
for the three months ended June 30, 1996, as compared with the three months
ended June 30, 1995. The Company recognized television distribution revenues
of $3.9 million during the three months ended June 30, 1996, primarily from the
continued exploitation of The Richard Bey Show and the initial season of
Baywatch Nights, as compared to revenues of $11.5 million during the three
months ended June 30, 1995, primarily from the distribution of The Richard Bey
Show and prior first run syndicated programming (Family Feud, Sirens and
Acapulco H.E.A.T.).
The foregoing decreases in revenues were partially offset by an
increase in AAFII revenues of approximately $9.7 million or 77% for the three
months ended June 30, 1996 as compared with the three months ended June 30,
1995. The Company recognized AAFII revenues of $22.2 million for the three
months ended June 30, 1996 from the production and distribution of television
programming (primarily game shows), as compared with $12.6 million for the
three months ended June 30, 1995. This increase in revenues was led by: (i)
the German operations which contributed $16.1 million (72% of total AAFII
revenues) for the three months ended June 30, 1996, an increase of $6.8 million
compared to $9.3 million (74% of total AAFII revenues) for the three months
ended June 30, 1995; and (ii) the distribution of programming in France which
contributed $1.6 million for the three months ended June 30, 1996 as compared
to a nominal amount for the three months ended June 30, 1995. The Company also
recognized $3.2 million in revenues (before elimination of intercompany
revenues) from Mark Goodson Productions (the remaining 50% interest of which
was acquired as of January 1, 1996) for the three months ended June 30, 1996
compared to no such revenues in the prior period. The Price Is Right
contributed revenue of $2.4 million in the 1996 period. On a pro forma basis,
revenues from Mark Goodson Productions were comparable with revenues for the
year ago period.
Recorded music and merchandising revenues increased by $4.8 million or
116% to $9.0 million for the three months ended June 30, 1996, from $4.2
million for the three months ended June 30, 1995. This increase was primarily
attributable to the continued higher sales of new releases in the three months
ended June 30, 1996, led by the "platinum" selling new release, Bad Hair Day,
by artist "Weird Al" Yankovic, with 700,000 albums shipped in the quarter
(bringing total shipments to date to 1.1 million albums), as compared with no
comparable significant new releases in the three months ended June 30, 1995.
The Company does not have any major new recorded music releases scheduled
during the remainder of 1996.
Operating Expenses. Total operating expenses decreased by $0.5
million or 1% to $36.4 million for the three months ended June 30, 1996, from
$36.9 million for the three months ended June 30, 1995, due to a $4.2 million
reduction in television operating costs (corresponding to lower television
revenues), offset by increased costs in connection with increased recorded
music and merchandising revenues ($2.8 million), increased goodwill
amortization
18
<PAGE> 19
attributable to the Mark Goodson Acquisition (see "--Liquidity and Capital
Resources") ($0.6 million) and increased selling, general and administrative
expenses, including corporate overhead ($0.3 million).
Television expenses, before the inclusion of overhead and goodwill
amortization, decreased by $4.2 million or 16% to $22.1 million (73% of total
television revenues) for the three months ended June 30, 1996, from $26.3
million (78% of total television revenues) for the three months ended June 30,
1995. The decrease in television expenses as a percentage of total television
revenues is attributable to revenues recognized from programming (principally
related to Mark Goodson Productions and AAFII revenues from certain licensing
agreements) which has higher gross profit percentages than the overall mix of
the Company's other distributed programming in the prior period. Television
selling, general and administrative expenses during the three months ended June
30, 1996 were comparable with the three months ended June 30, 1995. Goodwill
amortization of $1.1 million for the three months ended June 30, 1996
increased, as a result of the Mark Goodson Acquisition, by $0.6 million from
$0.5 million for the three months ended June 30, 1995.
The Company's recorded music and merchandising expenses, before
selling, general and administrative expenses, increased $2.8 million or 73% to
$6.6 million (73% of total recorded music and merchandising revenues) for the
three months ended June 30, 1996, from $3.8 million (91% of total recorded
music and merchandising revenues) for the three months ended June 30, 1995.
The increase in expenses was primarily due to costs of $2.4 million incurred in
connection with the release of "Weird Al" Yankovic's new album.
Operating Income. Total operating income for the Company increased
nearly $1.8 million or 155% to $2.9 million for the three months ended June 30,
1996, from $1.2 million for the three months ended June 30, 1995, due to an
increase in recorded music and merchandising operating income and level
television operating income.
Operating income from recorded music and merchandising operations
increased $2.1 million to $0.9 million for the three months ended June 30, 1996
(after the inclusion of selling, general and administrative expenses of $1.6
million), from a loss of $1.2 million for the three months ended June 30, 1995
(after the inclusion of selling, general and administrative expenses of $1.6
million). This increase in recorded music and merchandising operating income
was primarily attributable to the revenue increases from new album releases
discussed above. The operating margins improved in 1996 due to the sale of
recorded music product with higher gross margins in the three months ended June
30, 1996 as compared with the three months ended June 30, 1995.
Television operating income was $3.5 million (after the inclusion of
goodwill amortization of $1.1 million and selling, general and administrative
expenses of $3.6 million) for the three months ended June 30, 1996, as compared
to $3.6 million (after the inclusion of goodwill amortization of $0.5 million
and selling, general and administrative expenses of $3.5 million) for the three
months ended June 30, 1995. On a pro forma basis, giving effect to the Mark
Goodson Acquisition as of January 1, 1995, television operating income
decreased by $3.7 million or 52% over the year ago period due to the decreases
in certain television distribution revenues discussed above.
Goodwill amortization for the quarter ended June 30, 1996 increased by
$0.6 million to $1.1 million, from $0.5 million for the three months ended June
30, 1995, due to the inclusion of amortization in connection with the Mark
Goodson Acquisition. The Company expects to report amortization expense of at
least $1.1 million on a quarterly basis as a result of prior acquisitions,
subject to increase based upon the amount of contingent purchase price payable
to the Sellers in the Mark Goodson Acquisition and the contingent payments, if
any, in connection with the acquisition of Orbis Entertainment Company, Inc.
(the "Orbis Acquisition" - see "-- Liquidity and Capital Resources"), or in the
event of future acquisitions.
Foreign Currency Exchange Gain or Loss. The Company recognized a
nominal foreign currency exchange loss for the three months ended June 30, 1996
as compared to a foreign currency exchange gain of nearly $0.1 million for the
three months ended June 30, 1995 which results from the settlement and
valuation of certain licensing agreements, denominated in foreign currencies,
into U.S. dollars as of June 30, 1996 and 1995, respectively. The Company has
historically experienced gains and losses as a result of fluctuations in
exchange rates. The Company has not entered into foreign currency swap
agreements. To the extent that the Company does not enter into foreign
currency swap agreements, the Company can expect to record foreign exchange
losses and gains in the future.
19
<PAGE> 20
Interest Expense. Interest expense, net of nominal capitalized
interest and interest income ($0.4 million), increased by $0.3 million to $2.7
million for the three months ended June 30, 1996, from $2.4 million, net of
interest capitalized ($0.3 million) and nominal interest income, for the three
months ended June 30, 1995, due to increased borrowings in connection with the
Mark Goodson 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, the Orbis Acquisition and continuing production and expansion.
Income Taxes. The Company recorded a tax provision for the three
months ended June 30, 1996 of $0.1 million and income tax benefits of $0.5
million during the three months ended June 30, 1995, representing an effective
tax rate of approximately 42%.
Net Income. The net income of approximately $0.2 million for the
three months ended June 30, 1996 compares with a net loss of $0.7 million for
the three months ended June 30, 1995. The variance is attributable to matters
discussed above. Earnings per share increased to $0.01 per primary and fully
diluted share for the three months ended June 30, 1996, as compared to a loss
of $(0.08) per primary and fully diluted share for the three months ended June
30, 1995, due to the quarter to quarter increase in net income (due to the
items discussed above) partially offset by an increase in the outstanding
number of weighted average common shares and common share equivalents. Such
increase in shares is due to the inclusion of the shares issued in connection
with the Company's Class B Common Stock offering in December 1995 as well as an
increase in the number of equivalent shares of outstanding options and warrants
determined using the modified treasury method.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996 AND 1995
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 six months ended June
30, 1996 and 1995:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------
1996 1995
------- -------
<S> <C> <C>
Revenues:
Television 81.9 % 90.4 %
Recorded music and merchandising 18.1 9.6
------- -------
Total 100.0 100.0
Operating expenses:
Television 58.8 72.4
Recorded music and merchandising 13.2 7.6
Selling, general and administrative 15.2 16.1
Goodwill amortization 2.5 1.4
------- -------
Total 89.7 97.5
Other expense, principally interest 5.9 6.1
------- -------
Income (loss) before income taxes 4.4 % (3.6) %
======= =======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Revenues. The Company's total revenues increased by $12.5 million or
17% to $87.5 million for the six months ended June 30, 1996, from $75.0 million
for the six months ended June 30, 1995. Revenues from television operations
increased to $71.7 million (82% of total revenues) for the six months ended
June 30, 1996, from $67.8 million (90% of total revenues) for the six months
ended June 30, 1995. Revenues from recorded music and merchandising increased
to $15.8 million (18% of total revenues) for the six months ended June 30,
1996, from $7.2 million (10% of total
20
<PAGE> 21
revenues) for the six months ended June 30, 1995.
Revenues from television operations increased by $3.9 million or 6%
for the six months ended June 30, 1996, as compared with the six months ended
June 30, 1995. This increase was due primarily to period to period increases
in AAFII revenues and the recognition of revenues from Mark Goodson
Productions. These increases were partially offset by period to period
reductions in Baywatch revenues (due to the availability of Baywatch for strip
syndication commencing in June 1995, with no comparable revenue recognized in
1996) and other television distribution revenues.
AAFII revenues increased $11.2 million or 31% to $46.9 million for the
six months ended June 30, 1996 from the production and distribution of
television programming (primarily game shows) as compared with $35.7 million
for the six months ended June 30, 1995. This increase in revenues was led by
the German operations which contributed $34.0 million (73% of total AAFII
revenues) for the six months ended June 30, 1996, up $8.3 million from $25.7
million (72% of total AAFII revenues) for the six months ended June 30, 1995
and the distribution of programming in France which contributed $5.9 million
for the six months ended June 30, 1996 as compared to $1.0 million for the six
months ended June 30, 1995. Additionally, television revenues were further
increased by the recognition (before elimination of intercompany revenues) of
$8.8 million in revenues from Mark Goodson Productions (the remaining 50%
interest of which was acquired as of January 1, 1996) for the six months ended
June 30, 1996. The Price Is Right contributed revenue of $6.4 million in the
1996 period. On a pro forma basis, revenues from Mark Goodson Productions were
comparable with revenues for the year ago period.
Partially offsetting the increases in AAFII and Mark Goodson
Productions revenues, Baywatch revenues decreased by $7.0 million or 59% to
$5.0 million for the six months ended June 30, 1996 from $12.0 million for the
six months ended June 30, 1995, due to the recognition of approximately $7.0
million in initial cash license fees from the commencement of the strip
syndication of Baywatch in June 1995, with no comparable cash license fees
recognized in the 1996 period. Additionally, certain other television
distribution revenues decreased by $6.9 million or 35% to $13.2 million for the
six months ended June 30, 1996, as compared with $20.1 million for the six
months ended June 30, 1995. The Company recognized television distribution
revenues during the 1996 period primarily from the continued exploitation of
The Richard Bey Show and exploitation of the initial season of Baywatch Nights,
as compared to revenues recognized during the 1995 period primarily from the
distribution of The Richard Bey Show and prior first run syndicated programming
(Family Feud, Sirens and Acapulco H.E.A.T.).
Recorded music and merchandising revenues increased by $8.6 million or
119% to $15.8 million for the six months ended June 30, 1996, from $7.2 million
for the six months ended June 30, 1995. This increase was primarily
attributable to the continued higher sales of new releases in the six months
ended June 30, 1996, led by the "platinum" selling new release, Bad Hair Day,
by artist "Weird Al" Yankovic, with 1.1 million albums shipped in the period,
as compared with no comparable significant new releases in the six months ended
June 30, 1995; and an increase in merchandising revenue of $0.7 million to $1.1
million for the six months ended June 30, 1996, from $0.4 million for the six
months ended June 30, 1995.
Operating Expenses. Total operating expenses increased by $5.4
million or 7% to $78.4 million for the six months ended June 30, 1996, from
$73.1 million for the six months ended June 30, 1995, due primarily to
increased costs in connection with increased recorded music and merchandising
revenues ($5.9 million), increased goodwill amortization attributable to the
Mark Goodson acquisition ($1.1 million) and increased selling, general and
administrative expenses, including corporate overhead ($1.2 million), offset by
a $2.8 million reduction in television operating costs (corresponding to lower
television revenues).
The Company's television division expenses, before overhead and
goodwill amortization, decreased by $2.8 million to $51.5 million (72% of
total television revenues) for the six months ended June 30, 1996, from $54.3
million (80% of total television revenues) for the six months ended June 30,
1995. The decrease in television expenses as a percentage of total television
revenues is attributable to revenues recognized from programming (principally
related to Mark Goodson Productions) which has a higher gross profit margin
than the overall mix of the Company's other distributed programming in the
prior period. Television selling, general and administrative expenses of $7.3
million during the six months ended June 30, 1996 increased by $0.6 million or
9% from $6.7 million the six months ended June 30, 1995, due primarily to the
increase in AAFII charges of $0.4 million to $3.1 million for the six months
ended June 30, 1996, as compared with $2.7 million for the six months ended
June 30, 1995. Goodwill amortization of $2.2 million for the
21
<PAGE> 22
six months ended June 30, 1996 increased, as a result of the Mark Goodson
Acquisition, by $1.1 million from $1.1 million for the six months ended June
30, 1995.
The Company's recorded music and merchandising expenses, before
selling, general and administrative expenses, increased $5.9 million or 104% to
$11.6 million (73% of total recorded music and merchandising revenues) for the
six months ended June 30, 1996, from $5.7 million (79% of total recorded music
and merchandising revenues) for the six months ended June 30, 1995. The
increase was primarily due to costs of $4.1 million incurred in connection with
the release of "Weird Al" Yankovic's new album and increased merchandising
costs of $0.5 million to $0.8 million for the six months ended June 30, 1996,
from $0.3 million for the six months ended June 30, 1995.
Operating Income. Total operating income for the Company increased
$7.1 million or 375% to $9.0 million for the six months ended June 30, 1996,
from $1.9 million for the six months ended June 30, 1995, due to increases in
television and recorded music and merchandising operating income.
Operating income from television operations increased $5.0 million or
86% to $10.7 million for the six months ended June 30, 1996 (after the
inclusion of goodwill amortization of $2.2 million and selling, general and
administrative expenses of $7.3 million), from $5.7 million for the six months
ended June 30, 1995 (after the inclusion of goodwill amortization of $1.1
million and selling, general and administrative expenses of $6.6 million).
This increase in television operating income was primarily attributable to
inclusion of operating income from Mark Goodson Productions of $5.6 million
(after the reduction for goodwill amortization of $1.1 million). On a pro
forma basis, giving effect to the Mark Goodson Acquisition as of January 1,
1995, television operating income decreased by $2.2 million or 17% over the
year ago period due to certain decreased television distribution revenues
discussed above. Goodwill amortization for the six months ended June 30, 1996
increased by nearly $1.1 million to $2.2 million, from $1.1 million for the six
months ended June 30, 1995, due to the inclusion of amortization in connection
with the Mark Goodson Acquisition of $1.1 million for six months in 1996 as
compared with no comparable amount in the 1995 period.
Recorded music and merchandising operations recognized operating
income of $1.0 million (after the inclusion of selling, general and
administrative expenses of $3.2 million) for the six months ended June 30,
1996, as compared to an operating loss of $1.5 million (after the inclusion of
selling, general and administrative expenses of $3.1 million) for the six
months ended June 30, 1995. Such increase in operating income was primarily
attributable to increased revenues as discussed above. The operating margins
improved due to the increased sales of recorded music product with higher gross
margins in the six months ended June 30, 1996 as compared with the six months
ended June 30, 1995.
Foreign Currency Exchange Gain or Loss. The Company recognized a
nominal foreign currency exchange loss for the six months ended June 30, 1996,
as compared to a foreign currency exchange gain of nearly $0.1 million for the
six months ended June 30, 1995, resulting from the settlement and valuation of
certain licensing agreements, denominated in foreign currencies, into U.S.
dollars as of June 30, 1996 and 1995. The Company has experienced in the past,
and may experience in the future, gains and losses as a result of fluctuations
in exchange rates. The Company has not entered into foreign currency swap
agreements. To the extent that 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 ($0.3
million) and interest income ($0.8 million), increased $0.4 million to $5.1
million for the six months ended June 30, 1996, from $4.7 million, net of
interest capitalized ($0.4 million) and nominal interest income, for the six
months ended June 30, 1995, due to increased borrowings in connection with the
Mark Goodson Acquisition and as a result of increased production activity.
Income Taxes. The Company recorded a tax provision for the six months
ended June 30, 1996 of $1.6 million and income tax benefits of $1.1 million
during the six months ended June 30, 1995, representing an effective tax rate
of approximately 42%.
Net Income. The net income of $2.2 million for the six months ended
June 30, 1996 compares with a net loss of $1.6 million for the six months ended
June 30, 1995. The variance is attributable to matters discussed above.
Earnings per share increased to $0.19 per primary and fully diluted share for
the six months ended June 30, 1996, as compared to a loss of $0.20 per primary
and fully diluted share for the six months ended June 30, 1995, due to the
period to period increase in net income (due to the items discussed above)
partially offset by an increase in the outstanding number of
22
<PAGE> 23
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
Company's Class B Common Stock offering in December 1995 as well as an increase
in the number of equivalent shares of outstanding options and warrants
determined using the modified 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,
1995.
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 and the Orbis Acquisition, to finance
the Company's operations, including the production of Baywatch and Baywatch
Nights, and to pay for general operating expenses.
As of July 19, 1996, the Company consummated a stock purchase
agreement ("Orbis Agreement") with Orbis Entertainment Company, Inc.
("Orbis"), a television production company, and the shareholders of Orbis (the
"Orbis Acquisition") to purchase all of the outstanding shares of Orbis for an
initial purchase price of $2.5 million, which has been paid. In addition to
the initial purchase price, the Orbis Agreement provides for a contingent earn
out payment equal to 50% of net cash flow, as defined, and an additional
contingent payment due after year five based on the cash flows of Orbis in
years four and five, also as defined. Following the acquisition, the name of
Orbis was changed to All American Orbis, Inc. ("AAO"). The Company has
accounted for the Orbis Acquisition under the purchase accounting method. As
of July 19, 1996, the Company entered into five year employment agreements with
the AAO executives.
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
assumed certain specified liabilities ( the "MG Acquisition") of Mark Goodson
Productions, L.P. and The Child's Play Company (collectively, the "Sellers").
The Sellers were not affiliated with the Company. The purchase price paid by
the Company for its undivided 50% interest of the Sellers' net assets acquired
consisted of a cash payment of $25.0 million, transaction costs of $0.8
million, and an as yet undetermined contingent purchase price. The contingent
purchase price, payable to the Sellers, is to be earned and paid based on the
income (as defined) resulting from a domestic television network contract and
the actual exploitation of certain other domestic television rights. The
contingent purchase price, in total, is limited to $48.5 million if paid
(whether earned or not) during the first five years following October 6, 1995.
Otherwise, the amount of contingent purchase price is unlimited to the extent
it is earned within the first ten years following October 6, 1995. At the end
of ten years, no additional contingent purchase price accrues. Substantially
all of the Company's $25.8 million portion of the initial purchase price was
allocated to goodwill and was originally reflected in "investment in
unconsolidated affiliate" in the condensed consolidated balance sheet at
December 31, 1995.
Interpublic and the Company, effective January 1, 1996, entered into
an agreement pursuant to which the Company purchased Interpublic's 50% interest
in the LLC (the "IPG/Goodson Agreement") for: (i) $12.5 million plus accrued
interest thereon at a rate of 7% per annum from January 1, 1996 to the closing
date, as defined (the "Closing Date"); (ii) the issuance of a subordinated note
in the amount of $12.5 million due 12 months from the Closing Date, subject to
acceleration upon either a "Change of Control" (as defined), or the
acceleration of the Tranche A term loan, plus accrued interest thereon at a
rate of 7% per annum from January 1, 1996; and (iii) the issuance of a
subordinated note in the amount of $2.8 million, yielding interest at the rate
of 7% per annum from January 1, 1996, and representing Interpublic's 50% share
of the LLC's earnings through December 31, 1995, as defined, with $0.7 million
due and paid 30 days from the Closing Date and the balance due 30 days after
maturity of the Tranche A term loan and subject to acceleration upon a "Change
of Control" (as defined) or the acceleration of the Tranche A term loan. The
remaining amounts due under the IPG/Goodson Agreement ($12.5 million plus
accrued interest is due in April 1997 and $2.1 million plus accrued interest is
due in December 1998) are expected to be paid from a combination of: (i) cash
flow from Mark Goodson Productions, (ii) borrowings under the Company's
borrowing facilities and or (iii) working capital. The
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<PAGE> 24
IPG/Goodson Agreement was in lieu of and replaced the Company's option to
acquire Interpublic's undivided 50% interest in the LLC commencing, and
effective only after, April 30, 1996 for $25.9 million in cash (increasing
during the option exercise period at a rate of 7% per annum). The IPG/Goodson
Agreement together with the MG Acquisition (collectively the "Mark Goodson
Acquisition") resulted in the Company's full direct or indirect ownership of
the net assets held by the LLC. As of January 1, 1996, the Company's initial
purchase price for the net assets of Mark Goodson Productions increased by
$27.8 million plus costs of $0.1 million to $53.7 million. Consistent with its
treatment of its undivided 50% interest, the Company has allocated
substantially all of the increased purchase price to goodwill which is being
amortized over 25 years from October 6, 1995, the date of the MG Acquisition.
The IPG/Goodson Agreement further results in the Company absorbing the full
share of the contingent purchase price, to the extent earned by the Sellers.
Such contingent purchase price, which may total $48.5 million by the fifth
anniversary of the MG Acquisition, will be treated as an increase in goodwill
and will be amortized coterminously with the original 25 year period. Through
June 30, 1996, the Company has recorded contingent purchase price totaling $4.4
million (excluding Interpublic's share through December 31, 1995 of $0.9
million). As of June 30, 1996, goodwill, including the total initial purchase
price of $53.7 million (before allocation of $2.9 million to identifiable net
assets) and contingent purchase price of $4.4 million, totals $55.2 million.
The Company has accounted for the Mark Goodson Acquisition under the purchase
accounting method effective January 1, 1996.
In December 1995, the Company sold 3.2 million newly issued shares of
Class B Common Stock through an underwritten stock offering (the "Stock
Offering"). The Class B Common Stock is identical to the Company's Class A
Common Stock, except that the Class B Common Stock is non- voting (other than
as required by law). The Class B Common Stock is convertible into Class A
Common Stock in the event of certain "Changes in Control" (as defined). Net
proceeds from the Stock Offering totaled $30.5 million after deducting the
underwriters' discount of $2.4 million and offering expenses of $1.2 million.
In July 1996, at the Company's Annual Meeting of Stockholders, the stockholders
voted to amend the Company's Restated Certificate of Incorporation to permit
holders of Class A Common Stock to convert Class A Common Stock into Class B
Common Stock on a one for one basis at the holders' option. This amendment and
the ability of Class A Common stockholders to convert Class A shares into Class
B shares is subject to NASDAQ approval of the proposed amendment to the
Restated Certificate of Incorporation.
In April 1995, the Company secured a $110.0 million, subsequently
increased to $135.0 million, senior credit facility (the "Senior Credit
Facility Agreement"), with a syndicate of lenders led by Chase Manhattan Bank.
This facility currently consists of five tranches: (i) a term loan of $30.0
million (the "Term Loan" or "Tranche A") which was utilized to refinance
existing bank debt incurred in connection with the AAFII acquisition; (ii) a
revolving credit facility of up to $20.0 million in the aggregate to be
utilized for production and distribution of Baywatch (the "Baywatch Production
Line" or "Tranche B"); (iii) a revolving credit facility of up to $20.0 million
in the aggregate for the production and distribution of Baywatch Nights (the
"Baywatch Nights Production Line" or "Tranche C"); (iv) a revolving credit
facility of up to $40.0 million to be utilized to finance certain working
capital needs of the Company (the "Working Capital Line" or "Tranche D"); and
(v) the $25.0 million Tranche E 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 "Chase Manhattan Bank
Facilities"). In connection with the MG Acquisition, the Company effected a
credit utilization of its working capital line in the form of a letter of
credit (the "Letter of Credit") from Chase Manhattan Bank to fund its initial
$25.0 million cash portion of the total purchase price. On November 13, 1995,
the Senior Credit Facility Agreement was amended to provide an additional $25.0
million term loan under this facility ("Tranche E"), which increased the total
facility to a maximum of $135.0 million, in order to refinance the Company's
reimbursement obligations under the Letter of Credit. On April 18, 1996 and May
15, 1996, the Company utilized the Working Capital Line to pay $12.5 million
(plus accrued interest) and $0.7 million (plus accrued interest), respectively
to Interpublic in connection with the Mark Goodson Acquisition. On July 19,
1996, the Company further utilized the Working Capital Line to pay $2.5
million in connection with the Orbis Acquisition. The obligations of
the Company under the Chase Manhattan Bank Facilities, the Tranche A
term loan and the Tranche E term loan are cross-collateralized. The
Tranche A term loan matures on December 31, 1998, the Tranche E term loan
matures on April 13, 1999 and the Chase Manhattan Bank Facilities are available
through and mature on April 13, 1999. Under the terms of the Senior Credit
Facility Agreement, the amounts which the Company may borrow under Tranches B,
C and D are 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) LIBOR plus 2% (7.44% as of July 31, 1996); or (ii) the Alternate
Base Rate (which is the greater of Chase Manhattan Bank's Prime Rate, its Base
CD Rate plus 1%, or the Federal Funds Effective Rate plus 1/2%) plus 1%
24
<PAGE> 25
(9.25% as of July 31, 1996), as reduced upon the Company's satisfaction of
certain financial ratios. As of July 31, 1996, the Company has outstanding
borrowings of $21.0 million under the Tranche A term loan, $23.4 million under
the Tranche E term loan, and $27.5 million under the Chase Manhattan Bank
Facilities, and approximately $26.0 million was available for borrowing under
the Chase Manhattan Bank Facilities. As an interim use, the Company
temporarily paid down certain amounts borrowed under the revolving Chase
Manhattan Bank Facilities from a portion of the net proceeds of the Stock
Offering. Amounts repaid under the Chase Manhattan Bank Facilities may be
reborrowed, subject to the Company having an adequate borrowing base and
meeting the conditions precedent to each borrowing.
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. In particular, consummation of acquisitions may be subject to
obtaining bank consent under the Senior Credit Facility Agreement. 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 1996/1997
broadcast season of Baywatch and Baywatch Nights. The Tranche E 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 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 Tranche E 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 Chase Manhattan Bank and
applied to the repayment of the Company's obligations under the Chase Manhattan
Bank Facilities. All of AAFII's cash collections are required to be paid into
accounts maintained by Chase Manhattan Bank and are applied, subject to certain
exceptions for working capital, to interest and principal amounts outstanding
under the Tranche A term loan until such time as it is repaid in full. As of
July 31, 1996, the Company has made quarterly principal installment payments
and prepayments totaling $9.0 million due through the September 1996 quarter.
The remaining balance of the Tranche A term loan is repayable in quarterly
principal installments as follows: December 1996, $3.0 million; March 1997,
$1.0 million; June 1997, $1.0 million; September 1997, $3.0 million; December
1997, $3.0 million; March 1998, $1.0 million; June 1998, $1.0 million;
September 1998, $4.0 million; and a final installment due on the last business
day of December 1998 (each such payment being subject to reduction from certain
prepayments). The amount which the Company is able to reborrow under the Chase
Manhattan 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 $25.0 million Tranche E term loan which refinanced the
initial cash portion of the purchase price paid by the Company in connection
with the Mark Goodson Acquisition, the borrower is All American Goodson, Inc.
("AAG"), a wholly-owned subsidiary of the Company and the licensee of the
world-wide distribution rights of the LLC (subject to certain existing
licenses). Under the Tranche E 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
and tax distributions to the LLC, to repay the Tranche E term loan.
In connection with the IPG/Goodson Agreement, the Company issued three
notes payable to Interpublic totaling $27.8 million as follows: (i) $12.5
million plus accrued interest thereon at a rate of 7% per annum from January 1,
1996 to the Closing Date (paid in April 1996 from borrowings under the Working
Capital Line); (ii) a subordinated note in the amount of $12.5 million due 12
months from the Closing Date, subject to acceleration upon either a "Change of
Control" (as defined) or the acceleration of the Tranche A term loan, plus
accrued interest thereon at a rate of 7% per annum from January 1, 1996; and
(iii) a subordinated note in the amount of $2.8 million, yielding interest at
the rate of 7% per annum from January 1, 1996, with $0.7 million due and paid
30 days from the Closing Date and the balance due 30 days after maturity of the
Tranche A term loan and subject to acceleration upon a "Change of Control" (as
defined) or the acceleration of the Tranche A term loan.
In October 1993, the Company issued its 6 1/2% Convertible
Subordinated Notes due 2003 (the "Notes") in the aggregate principal amount of
$60.0 million. The Company received net proceeds of approximately $56.8
million from the issuance of the Notes. A portion of the proceeds was used to
repurchase and retire all of the Company's issued and outstanding shares of
redeemable Series A Preferred Stock and redeemable Common Stock of the Company,
to
25
<PAGE> 26
temporarily repay all amounts outstanding under its commercial bank facilities,
and for general corporate purposes.
The Notes were issued pursuant to a Fiscal Agency Agreement, dated as
of October 6, 1993 (the "Fiscal Agency Agreement"), between the Company and
BankAmerica National Trust Company, as Fiscal Agent (the "Prior Fiscal Agent").
During 1995, the Prior Fiscal Agent's responsibilities under the Fiscal Agency
Agreement were transferred by the Prior Fiscal Agent to First Trust of New
York, N.A. The Notes bear interest from October 6, 1993 at the rate of 6 1/2%
per annum, payable semiannually in arrears on each April 1 and October 1.
Interest on the Notes is paid on the basis of a 360-day year of twelve 30-day
months. The Notes will mature on October 1, 2003.
The Notes are subordinated in right of payment to the prior payment in
full of all Senior Indebtedness (as defined in the Notes and the Fiscal Agency
Agreement) of the Company.
The Notes are convertible into Common Stock, initially at a conversion
rate of $11.50 per share (equivalent to 86.957 shares of Common Stock for each
$1,000 principal amount of Notes), prior to redemption or maturity. As of July
31, 1996, holders of $4.6 million principal amount of the Notes had converted
such Notes into 404,602 shares of Common Stock. The conversion price is
subject to adjustment in certain events as set forth in the Fiscal Agency
Agreement. The shares underlying certain of the Notes have been registered
with the Securities and Exchange Commission pursuant to an effective
registration statement.
The Notes may be redeemed, at the option of the Company, in whole or
in part, at any time after October 1, 1996, at redemption prices commencing at
104.6% of par and declining each subsequent year to 100% of par in 2001,
together with accrued but unpaid interest through the date of redemption. The
Notes may also be redeemed at any time, as a whole but not in part, in the
event of certain changes in U.S. tax laws. In case of any such redemption, the
redemption price will be 100% of the principal amount of the Notes, together in
each case with accrued interest to the date of redemption. The Notes are also
subject to mandatory payment at 101% of par if (i) the Common Stock is not
listed for trading on any exchange or NASDAQ for 10 consecutive trading days;
or (ii) any person, other than certain executive officers and directors of the
Company, acquires more than 50% of the total voting power of the Common Stock
(with certain exceptions).
During the six months ended June 30, 1996, the Company generated cash
of $24.2 million from its operations, compared with the use of $14.0 million for
the six months ended June 30, 1995. This positive cash flow from operations was
due primarily to the collection of accounts receivable of $43.8 million, offset
by net production spending of $20.7 million. The Company used $29.8 million in
investing activities during the six months ended June 30, 1996, primarily in
connection with the Mark Goodson Acquisition. The Company experienced a net
increase in cash flow from financing activities of $8.4 million during the first
six months of 1996, primarily due to an increase in borrowings in connection
with the Mark Goodson Acquisition and the Company's production and development
spending (including Baywatch, Baywatch Nights and Sinbad), offset by net
reductions of the Company's production and working capital loans. While cash
flows were positive in the first six months of 1996, the Company expects, from
time to time, to experience negative cash flow from operations. Any such uses
of cash flows are expected to be funded, pending receipt of anticipated
licensing revenues, from the Chase Manhattan Bank Facilities or from 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, the
continued release of recorded music requiring related marketing, promotion and
recording expenses and the repayment of certain notes payable. The expanded
production of television programming for the 1996/1997 broadcast season is
expected to require 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 and other available funding sources, will
be sufficient to meet its working capital needs for at least 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.
26
<PAGE> 27
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 recoup payments made under its guarantees
from licensing fees and sales of advertising time, the Company often is
required to make payments under such guarantees in advance of generating
revenues and 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 is no assurance that such amounts
will be recouped by the Company and, if not recouped, that such payments will
not have a material adverse effect on the Company. In addition, the Company's
working capital requirements in connection with its development and production
activities relating to potential television programming are expected to
substantially increase as a result of the Orbis Agreement and the Company's
agreement with The Gerber Company, which provides the services of television
producer David Gerber to the Company for the purpose of developing and
producing television programming. The cost of production of television
programming is typically partially offset by foreign, network or pre-sale
license fees.
The Company has reached an agreement with Atlantis Releasing B.V.
("Atlantis") whereby Atlantis will produce a minimum of 13 and a maximum of 22
one-hour live action episodes of a new series entitled Sinbad for the 1996/1997
broadcast season. In consideration for the Company providing the majority
(approximately $0.7 million per episode) of the approximately $0.9 million per
episode production budget, the Company will retain exclusive distribution
rights to Sinbad in the United States and Europe (including the United Kingdom
and excluding Scandinavia). The Company has an annual option, exercisable on
or before February 15 of each of the initial three potential broadcast seasons,
to cause Atlantis to produce up to 22 new episodes in each of the three
subsequent broadcast seasons. At the end of three years, if Atlantis does not
exercise its right to continue producing Sinbad, such right to produce the
series reverts to the Company. As of July 31, 1996, the Company has spent
approximately $6.6 million towards the production of Sinbad for the 1996/1997
broadcast season. The total commitment of up to approximately $15.3 million
for the 1996/1997 broadcast season is expected to be funded primarily through a
combination of: (i) borrowings under Tranche D of the Chase Manhattan Bank
Facilities; (ii) cash payments by international sub-licensees; and (iii)
working capital, pending receipt of license fees. Through July 31, 1996,
Sinbad has been cleared in 81% of the domestic television market for the
1996/1997 broadcast season and has been licensed to international licensees for
$8.2 million payable in installments based on the commencement of production
and delivery of each episode of the series.
The Company has commenced production on the 22 episodes of Baywatch
for the 1996/1997 broadcast season. As of July 31, 1996, the Company has spent
approximately $4.5 million towards the production of six episodes for the
1996/1997 broadcast season. The total production budget of approximately $22.0
million for the 1996/1997 broadcast season is expected to be funded primarily
through a combination of: (i) borrowings under Tranche B of the Chase Manhattan
Bank Facilities; (ii) cash payments by The Fremantle Corporation (an
unaffiliated company); and (iii) working capital, pending receipt of license
fees. Through July 31, 1996, Baywatch has been cleared in 89% of the domestic
television market for the 1996/1997 broadcast season and has been licensed to
international licensees for $14.8 million payable in installments based on
the commencement of production and delivery of each episode of the series.
Through July 31, 1996, the Company has spent approximately $8.2
million and completed principal photography on nine episodes of Baywatch Nights
for the 1996/1997 broadcast season. The total production budget of
approximately $20.0 million for the 1996/1997 broadcast season is expected to
be funded primarily through a combination of: (i) borrowings under Tranche C of
the Chase Manhattan Bank Facilities; (ii) cash payments received from
international sub-licensees; and (iii) working capital, pending receipt of
license fees. Through July 31, 1996, Baywatch Nights has been cleared in 85%
of the domestic television market for the 1996/1997 broadcast season and has
been licensed to international licensees for amounts totaling in excess of $9.9
million payable in installments based on the commencement of production and
delivery of each episode of the series.
27
<PAGE> 28
The Company presently has network or cable commitments in connection
with the production by the Company of two movies-of-the-week totaling $4.8
million. The preliminary budgets in connection with such commitments total $6.4
million. The total production budgets are expected to be funded primarily
through a combination of: (i) network or cable license fees; (ii) cash payments
from international licensees; and (iii) working capital, pending receipt of
license fees. There is no assurance that the Company will be successful in its
efforts to fully fund these productions through a combination of the network or
cable license fees and international sales.
Recorded Music Operations
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
require substantial capital.
The Company currently has a roster of 15 active recording 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. Artist advances, recording costs and other overhead and
marketing expenses are funded with cash flows from operations and by the
Company's working capital credit facility.
Minimum contractual commitments to existing artists totaled
approximately $0.4 million at July 31, 1996, and the Company will be required
to spend additional sums for recording and marketing expenses for several
artists in its current roster.
Inflation
The Company believes that the impact of inflation has not been
significant to its financial condition or results of operations.
28
<PAGE> 29
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.42 Stock Purchase Agreement, dated July
19, 1996, by and among All American
Communications, Inc., Orbis
Entertainment Company, Inc., Robert L.
Turner, Ethan J. Podell and Alexandra
Buhler Jewett (incorporated by
reference to Exhibit 10.42 to the Form
8-K as filed August 6, 1996).
27 Financial Data Schedule.
(b) Reports on Form 8-K
Current report on Form 8-K, filed May 3, 1996, regarding the Mark
Goodson Acquisition.
Current report on Form 8-K, filed June 14, 1996, regarding change in
accountants.
Current report on Form 8-K/A, filed June 21, 1996, regarding change in
accountants.
Current report on Form 8-K/A - Amendment number 1, filed June 28,
1996, regarding pro forma financial statements in connection with the
Mark Goodson Acquisition.
29
<PAGE> 30
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: August 13, 1996 By /s/ Anthony J. Scotti
------------------------------------
Anthony J. Scotti,
Chief Executive Officer
Date: August 13, 1996 By /s/ Thomas Bradshaw
------------------------------------
Thomas Bradshaw,
Chief Financial Officer and Treasurer
(Principal financial officer and
principal accounting officer)
30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1996 AND
THE THREE AND SIX MONTH PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 21,877
<SECURITIES> 0
<RECEIVABLES> 79,827
<ALLOWANCES> 5,267
<INVENTORY> 96,134
<CURRENT-ASSETS> 0
<PP&E> 9,660
<DEPRECIATION> 4,413
<TOTAL-ASSETS> 306,502
<CURRENT-LIABILITIES> 0
<BONDS> 143,352
0
0
<COMMON> 2
<OTHER-SE> 71,577
<TOTAL-LIABILITY-AND-EQUITY> 306,502
<SALES> 15,815
<TOTAL-REVENUES> 87,488
<CGS> 11,551
<TOTAL-COSTS> 76,309
<OTHER-EXPENSES> 2,186
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,933
<INCOME-PRETAX> 3,833
<INCOME-TAX> 1,610
<INCOME-CONTINUING> 2,223
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,223
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
