<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1996
REGISTRATION NO. 333-14901
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ALL AMERICAN COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7812; 3625 95-3803222
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
------------------------
808 WILSHIRE BOULEVARD
SANTA MONICA, CALIFORNIA 90401-1810
(310) 656-1100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
THOMAS BRADSHAW
SENIOR EXECUTIVE VICE PRESIDENT -- CHIEF FINANCIAL OFFICER
ALL AMERICAN COMMUNICATIONS, INC.
808 WILSHIRE BOULEVARD
SANTA MONICA, CALIFORNIA 90401-1810
(310) 656-1100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
BARRY L. DASTIN, ESQ.
KAYE, SCHOLER, FIERMAN, HAYS & HANDLER, LLP
1999 AVENUE OF THE STARS, SUITE 1600
LOS ANGELES, CALIFORNIA 90067
(310) 788-1000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
CROSS REFERENCE SHEET PURSUANT TO RULE 404(A) AND ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-4
<TABLE>
<C> <S> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................... Outside Front Cover Page; Cross
Reference Sheet; Inside Front Cover
Page
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front Cover Page; Outside Back
Cover Page
3. Risk Factors, Ratio of Earnings to Fixed Charges,
and Other Information............................ Summary; Risk Factors; Pro Forma
Financial Information; Selected
Financial Data
4. Terms of the Transaction......................... The Exchange Offer; Certain Federal
Income Tax Considerations;
Description of Exchange Notes
5. Pro Forma Financial Information.................. Pro Forma Financial Information
6. Material Contacts with the Company Being
Acquired......................................... Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters.... Not Applicable
8. Interests of Named Experts and Counsel........... Not Applicable
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... Not Applicable
10. Information with Respect to S-3 Registrants...... Not Applicable
11. Incorporation of Certain Information by
Reference........................................ Incorporation of Certain Documents by
Reference
12. Information with Respect to S-2 or S-3
Registrants...................................... Not Applicable
13. Incorporation of Certain Information by
Reference........................................ Not Applicable
14. Information with Respect to Registrants Other
Than S-3 or S-2 Registrants...................... Summary; The Exchange Offer;
Capitalization; Pro Forma Financial
Information; Selected Financial Data;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; Management;
Certain Transactions; Description of
Exchange Notes; Description of
Certain Indebtedness and Capital
Stock; Financial Statements
15. Information with Respect to S-3 Companies........ Not Applicable
16. Information with Respect to S-2 or S-3
Companies........................................ Not Applicable
17. Information with Respect to Companies Other Than
S-2 or S-3 Companies............................. Not Applicable
18. Information if Proxies, Consents or
Authorizations are to be Solicited............... Not Applicable
19. Information if Proxies, Consents or
Authorizations are not to be Solicited or in an
Exchange Offer................................... Management; The Exchange Offer;
Certain Transactions
</TABLE>
<PAGE> 3
ALL AMERICAN COMMUNICATIONS, INC.
OFFER TO EXCHANGE ITS
10 7/8% SENIOR SUBORDINATED NOTES DUE 2001, SERIES B
[LOGO] WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT FOR ANY AND ALL OF ITS OUTSTANDING
10 7/8% SENIOR SUBORDINATED NOTES DUE 2001, SERIES A
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON DECEMBER 11, 1996, UNLESS EXTENDED.
All American Communications, Inc., a Delaware corporation (the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus ("Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal" and, together with this Prospectus, the "Exchange
Offer"), to issue $1,000 principal amount (and integral multiples of $1,000 in
excess thereof) of the Company's 10 7/8% Senior Subordinated Notes due 2001,
Series B (the "Series B Notes"or "Exchange Notes"), in exchange for each
outstanding $1,000 principal amount (and integral multiples of $1,000 in excess
thereof) of its 10 7/8% Senior Subordinated Notes due 2001, Series A (the
"Original Notes"), of which $100.0 million in aggregate principal amount were
issued on October 11, 1996 and are outstanding on the date hereof. The Series B
Notes offered hereby are substantially identical to the currently outstanding
Original Notes, except that the Series B Notes have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and hence will not
bear legends restricting the transfer thereof. The Series B Notes will evidence
the same debt as the Original Notes and will be entitled to the benefits of the
same indenture (the "Indenture"). The Original Notes and the Exchange Notes are
sometimes referred to herein collectively as the "Notes." See "The Exchange
Offer" and "Description of the Exchange Notes."
The Company will accept for exchange any and all Original Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on December
11, 1996, unless extended (the "Expiration Date"). Tenders of Original Notes may
be withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Offer is subject to certain customary conditions.
See "The Exchange Offer." Original Notes may be tendered only in minimum
denominations of $1,000 and integral multiples of $1,000 in excess thereof.
The Notes are not redeemable at the Company's option prior to stated
maturity. Notwithstanding the foregoing, in the event the Company enters into a
letter of intent or makes a public announcement during the first 18 months after
October 11, 1996 with respect to the sale of all of the Company's capital stock
(whether by merger, consolidation or otherwise), or all or substantially all of
the Company's assets, the Company may, subsequent to the closing of such sale
transaction, redeem up to $100.0 million in principal amount of Notes at a
redemption price of 110.875% of the principal amount thereof, plus accrued and
unpaid interest and Special Interest, if any, thereon to the redemption date,
provided that the sale transaction closes within 120 days after the date of such
letter of intent or public announcement and, provided further, that such notice
of redemption shall be given within 30 days of the date of the closing of such
sale transaction. In addition, during the first 18 months after October 11,
1996, the Company may redeem up to $35.0 million in principal amount of Notes at
a redemption price of 110.875% of the principal amount thereof, plus accrued and
unpaid interest and Special Interest, if any, thereon to the redemption date,
with the net proceeds of a public offering of common stock of the Company,
provided that at least $65.0 million in aggregate principal amount of Notes
remain outstanding immediately after the occurrence of such redemption. Interest
on the Notes will be payable on April 15 and October 15 of each year, commencing
April 15, 1997. The Notes will mature on October 15, 2001. Upon the occurrence
of a Change of Control, each holder of Notes may require the Company to
repurchase all or a portion of such holder's Notes at a purchase price equal to
101% of the aggregate principal amount thereof plus accrued and unpaid interest
and Special Interest, if any, thereon, to the date of purchase. See "Description
of Exchange Notes."
The Notes will be general, unsecured obligations of the Company and will be
subordinated in right of payment to all Senior Debt of the Company. The Notes
will be effectively subordinated in right of payment to all existing and future
indebtedness of the Company's subsidiaries, including accrued liabilities and
trade payables. As of June 30, 1996, on a pro forma basis giving effect to the
Private Offering, the Company would have had Senior Debt of approximately $34.8
million and, through its subsidiaries, would have had additional liabilities
aggregating approximately $84.8 million. In addition, as of such date, the
Company would have had the right on a pro forma basis to borrow an additional
$89.4 million of Senior Debt under its Amended and Restated Credit, Security,
Guaranty and Pledge Agreement, dated April 13, 1995 as Amended and Restated as
of October 23, 1996 with a syndicate of lenders led by The Chase Manhattan Bank
(the "Restructured Credit Facility") (plus up to an additional $30.8 million of
Senior Debt which could have been incurred thereunder subject to borrowing base
availability). See "Capitalization" and "Description of Exchange Notes --
Subordination."
------------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH THE EXCHANGE OFFER AND AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS,"
BEGINNING ON PAGE 12.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS NOVEMBER 12, 1996.
<PAGE> 4
Prior to this offering, there has been no public market for the Notes. The
Company does not intend to list the Notes on any securities exchange or to seek
approval for quotation through any automated quotation system. There can be no
assurance that an active market for the Notes will develop. To the extent that a
market for the Notes does develop, the market value of the Notes will depend on
market conditions (such as yields on alternative investments), general economic
conditions, the Company's financial condition and certain other factors. Such
conditions might cause the Notes, to the extent that they are traded, to trade
at a significant discount from face value.
The Company will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection with
this Exchange Offer.
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in several no-action letters to third
parties, the Company believes that, except as noted below, the Series B Notes
issued pursuant to the Exchange Offer in exchange for the Original Notes may be
offered for resale, resold and otherwise transferred by holders thereof without
compliance with the registration and prospectus delivery provisions of the
Securities Act. However, any holder who is an "affiliate" of the Company or who
intends to participate in the Exchange Offer for the purpose of distributing the
Series B Notes (i) cannot rely on the interpretation by the staff of the
Commission set forth in the above referenced no-action letters, (ii) cannot
tender its Original Notes in the Exchange Offer, and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Original Notes, unless such sale or
transfer is made pursuant to an exemption from such requirements. See "Risk
Factors -- Failure to Exchange Original Notes." In addition, each broker-dealer
that receives Series B Notes pursuant to the Exchange Offer in exchange for
Original Notes that such broker-dealer acquired for its own account as a result
of market-making activities or other trading activities (other than Original
Notes acquired directly from the Company or its affiliates) must acknowledge
that it will deliver a prospectus in connection with any resale of such Series B
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. If the Company
receives certain notices in the Letter of Transmittal, this Prospectus, as it
may be amended or supplemented from time to time, may be used for the period
described below by a broker-dealer in connection with resales of Series B Notes
received in exchange for Original Notes where such Original Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities and not acquired directly from the Company. The Company has agreed
that if it receives certain notices in the Letter of Transmittal, for a period
one year after the date on which the Registration Statement, of which this
Prospectus is a part, becomes effective, it will make this Prospectus available
to any such broker-dealer for use in connection with any such resale. See "The
Exchange Offer -- Resale of the Exchange Notes" and "Terms of the Exchange
Offer." EXCEPT AS DESCRIBED IN THIS PARAGRAPH, THIS PROSPECTUS MAY NOT BE USED
FOR AN OFFER TO RESELL, RESALE OR OTHER TRANSFER OF SERIES B NOTES.
<PAGE> 5
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement") under the Securities Act, covering the Series
B Notes offered hereby.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with the
Exchange Act, the Company files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). The reports,
proxy statements and other information can be inspected and copied at the public
reference facilities that the Commission maintains at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at 7 World Trade Center, 13th Floor, New York, New York 10048, and Suite
1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661. Copies of these materials can be obtained at prescribed rates from the
Public Reference Section of the Commission at the principal offices of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Reports, proxy
materials and other information concerning the Company may also be inspected at
the offices of the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006 or by way of the Commission's Internet
address, http://www.sec.gov.
This Prospectus does not contain all of the information set forth in the
Registration Statement, of which this Prospectus is a part, including exhibits
and schedules to the Registration Statement. Statements contained herein
concerning the provisions of documents are necessarily summaries of such
documents, and such statement is qualified in its entirety by reference to the
applicable documents filed with the Commission. For further information with
respect to the Company and the Series B Notes offered hereby, reference is made
to the Registration Statement, including the exhibits and schedules thereto,
which may be inspected at the public reference facilities of the Commission
referred to above, and copies of which may be obtained therefrom upon payment of
the Commission's customary charges.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company with the
Commission and are incorporated by reference herein:
(a) Annual Report on Form 10-K for the fiscal year ended December 31, 1995,
as amended by Amendments on Form 10-K/A dated April 29, 1996 and June 18, 1996.
(b) Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(c) Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
(d) Current Reports on Form 8-K or 8-K/A filed on May 3, 1996, June 14,
1996, June 21, 1996, June 28, 1996, August 6, 1996, September 25, 1996, October
22, 1996 and November 6, 1996.
This Prospectus also incorporates all other documents filed by the Company
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to
the date of this Prospectus and prior to the later of (i) the termination of the
Exchange Offer, or (ii) if this Prospectus is to be delivered by certain
broker-dealers in connection with resales of Series B Notes as provided under
"Resale of the Exchange Notes," the earlier of (a) one year from the date the
Registration Statement was declared effective and (b) the date on which the
offering of such Series B Notes for resale is terminated. Any statement
contained in this Prospectus or in a document incorporated by reference in this
Prospectus will be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained in this Prospectus or in any
other subsequently filed document which is also incorporated by reference in
this Prospectus modifies or supersedes such statement. Any statement so modified
or superseded will not be deemed, except as modified or superseded, to
constitute a part of this Prospectus.
i
<PAGE> 6
Copies of all documents incorporated by reference (not including the
exhibits to such documents, unless any such exhibits are specifically
incorporated by reference in such documents) will be provided without charge
upon written request directed to Paul Westphal, Senior Executive Vice President,
Finance, All American Communications, Inc., 808 Wilshire Boulevard, Santa
Monica, California 90401-1810; telephone number (310) 656-1100. Statements
contained in such document as to the contents of any contract or other document
referred to therein are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed with the
Commission, each such statement being qualified in all respects by such
reference.
NO PERSON HAS BEEN AUTHORIZED, IN CONNECTION WITH THIS OFFERING, TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION THAT IS NOT CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITY OTHER THAN THE SERIES B NOTES OR AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY THE SERIES B NOTES IN ANY JURISDICTION IN
WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. EXCEPT WHERE OTHERWISE
INDICATED HEREIN, THIS PROSPECTUS SPEAKS AS OF ITS DATE, AND NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE, UNDER ANY
CIRCUMSTANCES, AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF.
ii
<PAGE> 7
SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. Reference is made to, and this Summary is qualified in its
entirety by, the more detailed information and consolidated financial data
appearing elsewhere in this Prospectus. All American Communications, Inc. owns
the following subsidiaries: All American Television Production, Inc. ("AATP"),
All American Television, Inc. ("AATV"), All American Entertainment, Inc.
("AAEI"), All American FDF Holdings, Inc. ("AAFH"), All American Fremantle
International, Inc. ("AAFI"), All American Orbis, Inc. ("AAO"), All American
Consumer Marketing Group, Inc. ("AACM") and All American Goodson, Inc. ("AAG").
Unless the context otherwise requires, references herein to the "Company" or
"All American" are to All American Communications, Inc. and its subsidiaries and
predecessors.
All American is a diversified worldwide entertainment company with
operations in television and recorded music production and distribution. The
Company is a leading independent producer and distributor of television
programming and believes that it is the largest supplier of game show
programming in multiple formats and languages worldwide. The Company's
programming includes the Baywatch franchise and 60 game show formats and other
television programming, created by the Company's subsidiary Mark Goodson
Productions, LLC, including The Price Is Right, the longest running game show in
the United States. The Company produces, distributes or owns television
programming consisting of 32 series, approximately 30,000 game show episodes,
165 motion pictures and a library of children's programming, documentaries and
specials.
Leading Game Show Supplier. The Company has substantially expanded and
diversified its television operations in the past two years through the
acquisitions of Mark Goodson Productions, LLC, the producer and worldwide
copyright owner and licensor of many of the most successful game show formats
ever developed, including The Price Is Right, Family Feud, Match Game, What's My
Line and Password; and Fremantle International, Inc., which pioneered the
international production and distribution of U.S. television game show formats
in all-new versions in local languages, both for Mark Goodson shows and shows
developed by other producers such as Let's Make a Deal and The Dating Game.
The Company's current game show line-up consists of The Price Is Right, in
its 25th consecutive season on CBS, and the development of updated versions of
three other Goodson game show formats for possible network exhibition or
first-run syndication in the 1997/1998 broadcast season, as well as local
versions, in certain cases renewed for multi-year periods, of The Price Is Right
and Family Feud in Germany and France. In addition, over 17,000 broadcast hours
of rerun game show programming produced by Mark Goodson Productions are licensed
to The Sony Game Show Channel through October 1997 when the licensing rights
revert to the Company. The Company has also recently expanded into the
production and distribution of local versions of U.S. style talk-shows in Europe
through its acquisition of Orbis Entertainment, Inc.
Baywatch Franchise. The Company's operations include the production and
domestic distribution of Baywatch, one of the highest rated one-hour series in
first-run syndication domestically and among the most widely exhibited U.S.
television programs worldwide, currently in its seventh season; the production
and worldwide distribution of Baywatch Nights, a spin-off series currently in
its second season; and the distribution through the end of the current broadcast
season of a strip syndication package of 111 Baywatch reruns. The Company has
entered into a license agreement with USA Networks providing for exclusive U.S.
exhibition of Baywatch reruns and certain other previously aired series on USA
Networks cable network through September 2000 (subject to certain renewal
options) in consideration for a minimum license fee of $30.4 million payable to
the Company in 36 equal monthly installments, commencing September 1997.
Other New Television Programming. In September 1996, the Company launched
The Adventures of Sinbad, a new one-hour series in first-run syndication for the
1996/1997 broadcast season. The series has been cleared on stations covering
more than 90% of the U.S. television market and has been presold in
substantially all the major foreign territories. In addition, the Company has
1
<PAGE> 8
expanded its television production operations to include programming for the
major broadcast and cable networks through the addition in July 1995 of a
production team led by David Gerber, former head of MGM Television. The Company
currently has network commitments for two movies-for-television, On the Line for
ABC and We The Jury for USA Networks as well as various additional long-form
programming in development. The Company also acts as third party distributor for
programming produced by third parties.
Library of Television Programming. The Company owns or has the rights to
license and distribute an extensive library of programming including series,
classic and contemporary motion pictures, documentaries, children's programming
and various network and cable and live-event specials.
Music Recording and Distribution. The Company's recorded music operations
consist of a roster of artists, including James Brown, Skee-Lo and "Weird Al"
Yankovic. In addition, the Company distributes and licenses a catalog of
recorded music, including approximately 75 catalog albums in active release by
artists currently on the roster, additional artists such as Count Basie, Sarah
Vaughn and Dizzie Gillespie, and soundtracks from motion pictures and television
shows. The Company distributes its music domestically through a division of Time
Warner, Inc. and internationally through various licensees.
STRATEGY
All American seeks to be a leading global provider of quality television
programming. Management believes that ownership of its programming combined with
its global production and worldwide distribution capabilities provide important
long-term competitive advantages. Opportunistic acquisitions and internal
development efforts are expected to remain important elements in the Company's
growth strategy.
Management believes that the Company is well positioned to take advantage
of current trends in the television industry and that recent regulatory changes,
local content requirements, and the proliferation of distribution channels via
satellite and cable television will increase the demand for programming content.
The Company's principal executive offices are located at 808 Wilshire
Boulevard, Santa Monica, California 90401-1810 and its telephone number is (310)
656-1100.
2
<PAGE> 9
THE EXCHANGE OFFER
The Exchange Offer......... The Company is hereby offering to exchange $1,000
(and integral multiples of $1,000 in excess
thereof) principal amount of Exchange Notes for
each $1,000 (and integral multiples of $1,000 in
excess thereof) principal amount of Original Notes
that are properly tendered and accepted. The
Original Notes were sold in transactions exempt
from registration under the Securities Act on
October 11, 1996 (the "Private Offering"). This
Registration Statement is intended to satisfy
certain of the Company's obligations under the
Registration Rights Agreement and Purchase
Agreement (as defined below) entered into in
connection with the Private Offering. The Company
will issue Exchange Notes on or promptly after the
Expiration Date. As of the date hereof, there are
$100.0 million aggregate principal amount of
Original Notes outstanding. See "The Exchange
Offer -- Purpose of the Exchange Offer."
Based on an interpretation by the staff of the
Securities and Exchange Commission (the
"Commission") set forth in several no-action
letters to third parties, the Company believes
that, except as noted below, the Series B Notes
issued pursuant to the Exchange Offer in exchange
for the Original Notes may be offered for resale,
resold and otherwise transferred by holders thereof
without compliance with the registration and
prospectus delivery provisions of the Securities
Act. However, any holder who is an "affiliate" of
the Company or who intends to participate in the
Exchange Offer for the purpose of distributing the
Series B Notes (i) cannot rely on the
interpretation by the staff of the Commission set
forth in the above-referenced no-action letters,
(ii) cannot tender its Original Notes in the
Exchange Offer, and (iii) must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any sale
or transfer of the Original Notes, unless such sale
or transfer is made pursuant to an exemption from
such requirements. See "Risk Factors -- Failure to
Exchange Original Notes." In addition, each broker-
dealer that receives Series B Notes pursuant to the
Exchange Offer in exchange for Original Notes that
such broker-dealer acquired for its own account as
a result of market-making activities or other
trading activities (other than Original Notes
acquired directly from the Company or its
affiliates) must acknowledge that it will deliver a
prospectus in connection with any resale of such
Series B Notes. See "The Exchange Offer -- Resale
of the Exchange Notes."
Registration Rights
Agreement................ The Original Notes were sold by the Company on
October 11, 1996 to Goldman, Sachs & Co. and Chase
Securities, Inc. (the "Initial Purchasers")
pursuant to a Purchase Agreement, dated October 4,
1996, by and among the Company and the Initial
Purchasers (the "Purchase Agreement"). Pursuant to
the Purchase Agreement, the Company and the Initial
Purchasers entered into a Registration Rights
Agreement, dated as of October 11, 1996 (the
"Registration Rights Agreement"), which grants the
holders of the Original Notes certain exchange and
3
<PAGE> 10
registration rights. The Exchange Offer is intended
to satisfy certain of such rights. See "The
Exchange Offer -- Termination of Certain Rights."
Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New
York City time, on December 11, 1996, unless the
Exchange Offer is extended by the Company in its
sole discretion, in which case the term "Expiration
Date" shall mean the latest date and time to which
the Exchange Offer is extended. See "The Exchange
Offer -- Expiration Date; Extensions; Amendments."
Accrued Interest on the
Exchange Notes and the
Original Notes........... The Exchange Notes will bear interest from and
including the date of issuance of the Original
Notes (October 11, 1996). Holders whose Original
Notes are accepted for exchange will be deemed to
have waived the right to receive any interest
accrued on the Original Notes. See "The Exchange
Offer -- Interest on the Exchange Notes."
Conditions to the Exchange
Offer.................... The Exchange Offer is subject to certain customary
conditions that may be waived by the Company. The
Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Original Notes being
tendered for exchange. See "The Exchange
Offer -- Conditions."
Procedures for Tendering
Original Notes........... Each holder of Original Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with such Original Notes and any other required
documentation to U.S. Trust Company of California,
N.A., as exchange agent (the "Exchange Agent"), at
the address set forth herein. By executing the
Letter of Transmittal, the holder will represent to
and agree with the Company that, among other
things, (i) the Exchange Notes to be acquired by
such holder of Original Notes in connection with
the Exchange Offer are being acquired by such
holder in the ordinary course of its business, (ii)
if such holder is not a broker-dealer, such holder
is not currently participating in, does not intend
to participate in, and has no arrangement or
understanding with any person to participate in a
distribution of the Exchange Notes, (iii) if such
holder is a broker-dealer registered under the
Exchange Act or is participating in the Exchange
Offer for the purposes of distributing the Exchange
Notes, such holder will comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with a
secondary resale transaction of the Exchange Notes
acquired by such person and cannot rely on the
position of the staff of the Commission set forth
in no-action letters (see "The Exchange
Offer -- Resale of the Exchange Notes"), (iv) such
holder understands that a secondary resale
transaction described in clause (iii) above and any
resales of Exchange Notes obtained by such holder
in exchange for Original Notes acquired by such
holder directly from the Company should be
4
<PAGE> 11
covered by an effective registration statement
containing the selling security holder information
required by Item 507 or Item 508, as applicable, of
Regulation S-K of the Commission and (v) such
holder is not an "affiliate," as defined by Rule
405 under the Securities Act, of the Company. If
the holder is a broker-dealer that will receive
Exchange Notes for its own account in exchange for
Original Notes that were acquired as a result of
market-making activities or other trading
activities, such holder will be required to
acknowledge in the Letter of Transmittal that such
holder will deliver a prospectus in connection with
any resale of such Exchange Notes; however, by so
acknowledging and by delivering a prospectus, such
holder will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities
Act. See "The Exchange Offer -- Procedures for
Tendering."
Special Procedures for
Beneficial Owners........ Any beneficial owner whose Original Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender such Original Notes in the
Exchange Offer should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such
beneficial owner's own behalf, such beneficial
owner must, prior to completing and executing the
Letter of Transmittal and delivering such
beneficial owner's Original Notes, either make
appropriate arrangements to register ownership of
the Original Notes in such beneficial owner's name
or obtain a properly completed bond power from the
registered holder. The transfer of registered
ownership may take considerable time and may not be
able to be completed prior to the Expiration Date.
See "The Exchange Offer -- Procedures for
Tendering."
Guaranteed Delivery
Procedures............... Holders of Original Notes who wish to tender their
Original Notes and whose Original Notes are not
immediately available or who cannot deliver their
Original Notes, the Letter of Transmittal or any
other documentation required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Original Notes
according to the guaranteed delivery procedures set
forth under "The Exchange Offer -- Guaranteed
Delivery Procedures."
Acceptance of the Original
Notes and Delivery of the
Exchange Notes........... Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company will
accept for exchange any and all Original Notes that
are properly tendered in the Exchange Offer prior
to the Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered on
the earliest practicable date following the
Expiration Date. See "The Exchange Offer -- Terms
of the Exchange Offer."
Withdrawal Rights.......... Tenders of Original Notes may be withdrawn at any
time prior to the Expiration Date. See "The
Exchange Offer -- Procedures for Tendering;
Withdrawal of Tenders."
5
<PAGE> 12
Exchange Agent............. U.S. Trust Company of California, N.A. is serving
as the Exchange Agent in connection with the
Exchange Offer.
THE EXCHANGE NOTES
The Exchange Notes......... The Exchange Offer applies to $100.0 million
aggregate principal amount of the Original Notes.
The form and terms of the Exchange Notes are the
same as the form and terms of the Original Notes
except that (i) the Exchange Notes will bear the
Series B designation, (ii) the Exchange Notes will
have been registered under the Securities Act and,
therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (iii) holders
of the Exchange Notes will not be entitled to
certain rights of holders of the Original Notes
under the Registration Rights Agreement, which
rights will terminate upon consummation of the
Exchange Offer. The Exchange Notes will evidence
the same indebtedness as the Original Notes (which
they replace) and will be issued under, and be
entitled to the benefits of, the Indenture. For
further information and for definitions of certain
capitalized terms used below, see "Description of
Exchange Notes."
Securities Offered......... $100.0 million aggregate principal amount of
10 7/8% Senior Subordinated Notes due 2001, Series
B.
Issuer..................... All American Communications, Inc.
Maturity Date.............. October 15, 2001
Interest Payment Dates..... Interest accrues from the date of issuance of
Original Notes and is payable on April 15 and
October 15 of each year, commencing April 15, 1997.
Ranking.................... The Exchange Notes will be general, unsecured
obligations of the Company and will be subordinated
in right of payment to all Senior Debt of the
Company. The Exchange Notes will be effectively
subordinated in right of payment to all existing
and future indebtedness of the Company's
subsidiaries, including lease obligations and trade
payables. The claims of the holders of the Exchange
Notes will be subordinated to all Senior Debt,
which as of June 30, 1996, on a pro forma basis
giving effect to the Private Offering, and the
anticipated use of net proceeds thereof, would have
been approximately $34.8 million and the Company's
subsidiaries would have had total aggregate
liabilities of approximately $84.8 million. See
"Capitalization" and "Description of Exchange
Notes -- Subordination." The Indenture governing
the Exchange Notes permits the Company to incur
additional indebtedness. As of June 30, 1996, on a
pro forma basis after giving effect to the Private
Offering, and the anticipated use of proceeds
thereof, the Company would have had the right to
borrow an additional $89.4 million of Senior Debt
under the Restructured Credit Facility (plus up to
an additional $30.8 million of Senior Debt which
could have been incurred thereunder subject to
borrowing base availability). See "Management's
Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital
Resources."
6
<PAGE> 13
Form and Denomination...... The Exchange Notes will be fully registered as to
principal and interest in minimum denominations of
$1,000 (and in integral multiples of $1,000 in
excess thereof). The Exchange Notes will be
represented by one Global Note in fully registered
form, deposited with a custodian for and registered
in the name of a nominee of The Depository Trust
Company (the "Depository"). Beneficial interests in
the Global Note representing the Exchange Notes
will be shown on, and transfers thereof will be
effected only through, records maintained by the
Depository and its participants. Except as
described herein, Exchange Notes in certificated
form will not be issued in exchange for the Global
Note or interests therein. See "Description of
Exchange Notes -- Depository Procedures."
Mandatory Redemption....... None.
Optional Redemption........ The Exchange Notes are not redeemable at the
Company's option prior to stated maturity.
Notwithstanding the foregoing, in the event (a
"Sale Transaction Triggering Event") the Company
enters into a letter of intent or makes a public
announcement during the first 18 months after
October 4, 1996 with respect to the sale of all of
the Company's capital stock (whether by merger,
consolidation or otherwise), or all or
substantially all of the Company's assets (a "Sale
Transaction"), the Company may, subsequent to the
closing of such Sale Transaction, redeem up to
$100.0 million in principal amount of Exchange
Notes at a redemption price of 110.875% of the
principal amount thereof, plus accrued and unpaid
interest and Special Interest, if any, thereon to
the redemption date, provided that the Sale
Transaction closes within 120 days after the date
of such letter of intent or public announcement
and, provided further, that notice of such
redemption shall be given within 30 days of the
date of the closing of such Sale Transaction. In
addition, during the first 18 months after October
4, 1996, the Company may redeem up to $35.0 million
in principal amount of Exchange Notes at a
redemption price of 110.875% of the principal
amount thereof, plus accrued and unpaid interest
and Special Interest, if any, thereon to the
redemption date, with the net proceeds of a public
offering of common stock of the Company, provided
that at least $65.0 million in aggregate principal
amount of Exchange Notes remain outstanding
immediately after the occurrence of such redemption
and, provided further, that notice of such
redemption shall be given within 30 days of the
date of the closing of such public offering. See
"Description of Exchange Notes -- Redemption of
Notes."
Change of Control.......... Following a Change of Control, the Company will be
required to offer to purchase all or any part of
the Exchange Notes tendered at the option of the
holders thereof at 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest
and Special Interest, if any, thereon to the date
of repurchase. There is no assurance, however, that
the Company will have sufficient funds to purchase
the Exchange Notes at that time, and certain
provisions of the Company's other debt agreements
may further limit the Company's ability to make
such purchases. See "Risk
7
<PAGE> 14
Factors -- Subordination of the Notes" and
"Description of Exchange Notes -- Subordination."
Certain Covenants.......... The Exchange Notes will be issued pursuant to the
Indenture which contains certain covenants that,
among other things, limit the ability of the
Company to incur or guarantee additional
indebtedness, pay dividends on and redeem capital
stock, sell assets and capital stock of
subsidiaries, enter into transactions with
affiliates, create liens, engage in certain mergers
and consolidations or transfer substantially all of
its assets to another person. See "Description of
Exchange Notes -- Certain Covenants."
RISK FACTORS
THE NOTES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 12 HEREOF.
8
<PAGE> 15
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA(1)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The summary selected consolidated financial data set forth below as of and
for each of the five years in the period ended December 31, 1995 have been
derived from the Company's audited Consolidated Financial Statements. The
Company has approved the engagement of Price Waterhouse LLP as its independent
accountants for the year ending December 31, 1996. The five years ending
December 31, 1995 were audited by another firm of independent accountants. See
"Independent Auditors." The summary selected consolidated financial data of the
Company as of and for the six-month periods ended June 30, 1996 and 1995 have
been derived from the unaudited condensed consolidated financial statements of
the Company which, in the Company's opinion, include all adjustments (consisting
of only normal recurring adjustments) necessary for a fair presentation of the
information set forth therein. The results of operations for the six months
ended June 30, 1996 are not necessarily indicative of the results for the year.
The following data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and the
Consolidated Financial Statements and the notes thereto included elsewhere, or
incorporated by reference, in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- ----------------------------------------------------------
1996 1995(2) 1995(2) 1994 1993 1992 1991
-------- -------- -------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Television................... $ 71,673 $67,819 $206,734 $ 98,771 $ 57,407 $45,302 $25,173
Recorded music and
merchandising.............. 15,815 7,208 22,026 16,130 13,215 12,616 7,758
-------- -------- -------- -------- -------- ------- -------
87,488 75,027 228,760 114,901 70,622 57,918 32,931
-------- -------- -------- -------- -------- ------- -------
Expenses:
Television................... 51,465 54,308 164,764 75,196 42,560 32,078 18,337
Recorded music and
merchandising.............. 11,551 5,663 15,803 10,750 9,780 9,250 4,885
Selling, general &
administrative............. 13,293 12,094 24,102 21,523 16,074 13,471 9,543
Goodwill amortization........ 2,186 1,070 2,399 971 133 138 67
-------- -------- -------- -------- -------- ------- -------
78,495 73,135 207,068 108,440 68,547 54,937 32,832
-------- -------- -------- -------- -------- ------- -------
Operating income............... $ 8,993 $ 1,892 $21,692 $ 6,461 $ 2,075 $ 2,981 $ 99
========= ========= ========= ========= ========= ======== ========
Interest (income) expense,
net.......................... $ 5,134 $ 4,728 $ 9,290 $ 5,725 $ 1,597 $ 387 $ (35)
========= ========= ========= ========= ========= ======== ========
Income (loss) from continuing
operations................... $ 2,223 $(1,571 ) $ 7,248 $ 455 $ 380 $ 1,863 $ 145
========= ========= ========= ========= ========= ======== ========
Net income (loss) per share
applicable to common
stockholders from continuing
operations(3):
Primary...................... $ 0.19 $ (0.20 ) $ 0.87 $ 0.07 $ 0.87(4) $ (0.18)(5) $ (0.49)(5)
========= ========= ========= ========= ========= ======== ========
Fully diluted................ $ 0.19 $ (0.20 ) $ 0.71 $ 0.07 $ 0.78(4) $ (0.18)(5) $ (0.49)(5)
========= ========= ========= ========= ========= ======== ========
OTHER OPERATING DATA
(UNAUDITED)
EBITDA(6)...................... $ 12,134 $ 3,222 $25,014 $ 7,911 $ 2,529 $ 3,516 $ 409
Depreciation and
amortization................. $ 3,141 $ 1,330 $ 3,322 $ 1,450 $ 454 $ 535 $ 310
Accrued earn-out payments(6)... $ 3,460 $ -- $ 935 $ -- $ -- $ -- $ --
Ratio of earnings to fixed
charges(7)................... 1.5x (8 ) 2.0x 1.1x 1.3x 3.2x 1.3x
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
CERTAIN PRO FORMA DATA (UNAUDITED)
Pro forma EBITDA(6)(9)............................................................................. $ 42,906
Ratio of pro forma EBITDA to pro forma interest expense(6)(9)(10).................................. 2.4x
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
-------------------- --------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and restricted cash......... $ 21,877 $ 10,126 $ 20,094 $ 11,908 $ 3,404 $ 572 $ 793
Television program costs, net.... 95,392 88,109 74,644 68,437 52,381 33,993 19,293
Total assets..................... 306,502 228,514 301,582 208,007 112,521 74,130 46,856
Notes payable.................... 143,352 127,475 134,982 115,343 60,424 11,234 10,419
Total liabilities................ 234,923 201,529 233,302 179,924 104,768 51,084 29,301
Total stockholders' equity
(deficit)...................... 71,579 26,985 68,280 28,083 7,503(11) 2,681(11) (882)(11)
</TABLE>
9
<PAGE> 16
- ---------------
(1) Includes (a) for periods subsequent to February 1991 the combined
operations of All American Entertainment, Inc. (formerly known as Scotti
Brothers Entertainment Industries, Inc. ("SBEI")), and All American
Television, Inc., (b) for periods subsequent to February 1993 and August
1994, respectively, the combined operations of the Company including LBS
Communications, Inc. and Fremantle, following their respective dates of
purchase by the Company and (c) from October 1995, the date of the Mark
Goodson Acquisition, to December 31, 1995, the acquisition by the Company
of its initial 50% equity interest in Mark Goodson Productions, LLC (the
remaining 50% interest of which was acquired as of January 1996).
(2) Earnings in 1995 include the recognition of earnings relating to strip
syndication of Baywatch. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(3) Adjusted to give retroactive effect to a one-for-four reverse stock split
effected on March 20, 1992.
(4) Per share income from continuing operations applicable to common
stockholders for the year ended December 31, 1993 includes a gain of $3.9
million, which represents the excess carrying value of redeemable preferred
and common stock formerly outstanding over the price paid for its purchase,
net of accretion and dividends on such redeemable stock.
(5) Per share income from continuing operations applicable to common
stockholders for the years ended December 31, 1992 and December 31, 1991
includes the effect of $2.7 million and $2.1 million, respectively, of
accretion and dividends on redeemable stock.
(6) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is a commonly used financial measure but should not be construed as an
alternative to operating income or cash flows from operating activities (as
determined in accordance with generally accepted accounting principles
("GAAP")). EBITDA does not reflect cash necessary or available to fund cash
requirements. In addition, through June 30, 1996, the Company has accrued
contingent purchase price (earn-out payments) totaling $4.4 million
(excluding additional contingent purchase price of $0.9 million allocated
to a third party in 1995 prior to the Company's ownership of 100% of Mark
Goodson Productions, LLC) which is not deducted from EBITDA. See
"Business -- Acquisitions."
(7) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income before the provision for income taxes plus fixed
charges. Fixed charges consist of interest expense, amortization of
financing costs and the portion of rental expense on operating leases which
the Company estimates to be representative of the interest factor
attributable to rental expense. On a pro forma basis, giving effect to the
Private Offering and the anticipated retirement of approximately $35.5
million of the Company's outstanding Convertible Notes and the repayment of
$58.8 million of outstanding revolving debt under the Credit, Security,
Guaranty and Pledge Agreement, dated as of April 13, 1995, with a syndicate
of lenders led by Chemical Bank (now known as The Chase Manhattan Bank)
(the "Former Credit Facility"), the ratio of earnings to fixed charges
would have been 1.2x and 1.5x for the six months ended June 30, 1996 and
the year ended December 31, 1995, respectively.
(8) Earnings were not sufficient to cover fixed charges for the six months
ended June 30, 1995. Additional earnings of $3.0 million would have been
required to cover fixed charges for such period.
(9) Includes the results from operations of Mark Goodson Productions, L.P. and
The Child's Play Company giving effect to the Mark Goodson Acquisition as
if the Mark Goodson Acquisition had occurred on January 1, 1995. These
results do not include pro forma contingent purchase price (earn-out)
payments. See "Business -- Acquisitions" and "Pro Forma Financial
Information." The EBITDA calculation has not been reduced for $8.4 million
of pro forma earn-out payments.
10
<PAGE> 17
(10) Pro forma interest expense gives effect to the net increase in interest
expense resulting from the issuance of the Notes (using an interest rate of
10.875%) and the assumed retirement of approximately $35.5 million of the
Company's outstanding Convertible Notes and the repayment of $58.8 million
of outstanding revolving debt under the Former Credit Facility as if this
issuance and retirement occurred on January 1, 1995. Further, pro forma
interest expense gives effect to the Mark Goodson Acquisition as if debt
incurred in connection with acquiring 100% of Mark Goodson Productions,
L.P. had been incurred as of January 1, 1995. See
"Business -- Acquisitions" and "Pro Forma Financial Information."
(11) The Company charged approximately $1.5 million during each of the years
ended December 31, 1992 and December 31, 1991 against retained earnings for
accretion on redeemable stock and dividends on preferred stock. The gain of
$3.9 million recorded during the year ended December 31, 1993 (see Note (4)
above) was credited to additional paid in capital.
11
<PAGE> 18
RISK FACTORS
Prospective purchasers of the Notes offered hereby should consider the
following risk factors, as well as other information contained, or incorporated
by reference, in this Prospectus. This Prospectus contains certain forward
looking statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. Actual results could differ materially from
those projected in the forward looking statements as a result of certain factors
and uncertainties set forth below and elsewhere in this Prospectus.
FAILURE TO EXCHANGE ORIGINAL NOTES
Exchange Notes will be issued in exchange for Original Notes only after
timely receipt by the Exchange Agent of such Original Notes, a properly
completed and duly executed Letter of Transmittal and all other required
documentation. Therefore, holders of Original Notes desiring to tender such
Original Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor the Company is under any
duty to give notification of defects or irregularities with respect to tenders
of Original Notes for exchange. Original Notes that are not tendered or are
tendered but not accepted will, following consummation of the Exchange Offer,
continue to be subject to the existing restrictions upon transfer thereof. In
addition, any holder of Original Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes will be
required to comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. Each broker-dealer
that receives Exchange Notes for its own account in exchange for Original Notes,
where such Original Notes were acquired by such broker-dealer as a result of
market-making activities or any other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. To the extent that Original Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Original Notes could be adversely affected due to the limited amount, or
"float," of the Original Notes that are expected to remain outstanding following
the Exchange Offer. Generally, a lower "float" of a security could result in
less demand to purchase such security and could, therefore, result in lower
prices for such security. For the same reason, to the extent that a large amount
of Original Notes are not tendered or are not accepted in the Exchange Offer,
the trading market for the Exchange Notes could be adversely affected. See "Plan
of Distribution" and "The Exchange Offer."
LEVERAGE
The Company has the potential ability to substantially increase its
leverage because of the Private Offering and the Restructured Credit Facility.
The Company had notes payable totalling approximately $135.0 million and $143.3
million at December 31, 1995 and June 30, 1996, respectively, and such
indebtedness represented approximately 66.4% and 66.7% of total consolidated
capitalization at such dates. On a pro forma basis, giving effect to the Private
Offering and the use of proceeds therefrom, the Company's notes payable would
have been approximately $149.4 million at June 30, 1996, or approximately 68.3%
of its capitalization. In addition, as of June 30, 1996, on a pro forma basis,
the Company would have had the right to borrow an additional $89.0 million of
Senior Debt under the Restructured Credit Facility (plus up to an additional
$30.8 million of Senior Debt which could have been incurred thereunder subject
to borrowing base availability). See "Capitalization" and "Description of
Certain Indebtedness and Capital Stock."
The Company's degree of leverage may place it at a competitive disadvantage
with respect to its less leveraged competitors. This leverage may impair the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or other purposes. See
"Capitalization", "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Description of Exchange Notes -- Certain
Covenants -- Limitations on Additional Indebtedness."
12
<PAGE> 19
The Company's ability to service its debt, including the Exchange Notes,
will depend on the Company's future operating performance, which is subject to
financial, business, regulatory and other factors that are beyond the Company's
control. Based upon the current level of operations and anticipated growth, the
Company believes that its available cash and other sources of liquidity will be
adequate to meet the Company's anticipated requirements for working capital,
capital expenditures, interest payments and scheduled principal payments for at
least the next twelve months. There is no assurance, however, that the Company's
business will continue to generate sufficient cash flow from operations in the
future to service its debt and make necessary capital expenditures, in which
case the Company may seek additional financing, dispose of certain assets and/or
seek to refinance some or all of its debt. There is no assurance that any of
these alternatives could be effected, if at all, on satisfactory terms. See
"-- Liquidity and Financing Resources; Negative Cash Flows."
Additionally, if the Company were to sustain a decline in its operating
results or available cash, it could experience difficulty in complying with the
covenants contained in its Restructured Credit Facility or any other agreements
governing future indebtedness of the Company. The failure to comply with such
covenants could result in an event of default under these agreements thereby
permitting acceleration of such indebtedness as well as indebtedness under other
instruments that contain cross-acceleration and cross-default provisions,
including the Indenture. See "-- Holding Company Structure" and
"-- Subordination of the Notes."
HOLDING COMPANY STRUCTURE
The Company is a holding company that conducts substantially all of its
business through its subsidiaries. The Company may loan or contribute a
substantial portion of its working capital from time to time to certain of its
subsidiaries. The Company's ability to pay interest and principal when due and
Special Interest, if any, or other amounts due to holders of the Notes is
dependent upon the receipt of sufficient funds from dividends or other
intercompany transfers from its direct and indirect subsidiaries. The
subsidiaries will have no obligation, contingent or otherwise, to make any funds
available to the Company for the payment of principal or of interest or Special
Interest, if any, on the Notes. The ability of the subsidiaries to make such
payments will be subject to, among other things, applicable laws of the
respective state or foreign jurisdiction of organization. As a result of this
structure, the Notes will be structurally subordinated as to the assets and cash
flow of its subsidiaries to all existing and future indebtedness and other
obligations, including trade payables, of such subsidiaries. Also, the Company's
rights and the rights of the Company's creditors, including the holders of the
Notes, to participate in the assets of any liquidation, dissolution or
reorganization of any direct or indirect subsidiary will be subordinated to the
prior claims of the creditors, including the trade creditors, of such
subsidiaries, except to the extent that the Company or the holders of a Note may
itself be a creditor with recognized claims against such subsidiaries. As a
result, holders of the Notes may recover less ratably than the creditors of such
subsidiaries in the event of the liquidation, dissolution or reorganization of
such subsidiaries. However, the Company has agreed that indebtedness of
Restricted Subsidiaries (other than trade payables and general liabilities) will
be limited to indebtedness under the Restructured Credit Facility, indebtedness
owed to the Company or another Restricted Subsidiary, certain Acquired Debt (as
defined) and certain other permitted indebtedness, to the extent permitted under
the Indenture. See "Description of Exchange Notes." As of June 30, 1996, after
giving pro forma effect to the Offering and the use of proceeds therefrom, the
Company, through its subsidiaries, would have had total aggregate indebtedness
of approximately $84.8 million.
SUBORDINATION OF THE NOTES
The Notes will be subordinated in right of payment to all existing and
future Senior Debt of the Company, which includes all indebtedness under the
Restructured Credit Facility. As of June 30, 1996, after giving pro forma effect
to the Private Offering and the application of the proceeds
13
<PAGE> 20
therefrom, the Company would have had the right to borrow an additional $89.4
million under its Restructured Credit Facility (plus up to an additional $30.8
million of Senior Debt which could have been incurred thereunder subject to
borrowing base availability). The Restructured Credit Facility contains a number
of significant covenants, the breach of which could result in a default under
such credit facility and acceleration of the Senior Debt. If the indebtedness
under the Senior Debt were to be accelerated, or in the event of a liquidation,
dissolution, reorganization, bankruptcy or any similar proceeding involving the
Company, the assets of the Company and its subsidiaries will be available to pay
obligations on the Notes only after the Senior Debt has been paid in full.
Accordingly, there may not be sufficient funds remaining to pay amounts due on
all or any of the Notes. See "Description of Exchange Notes -- Subordination."
In addition, under certain circumstances, the Company may not pay principal of,
or interest and Special Interest, if any, on, or any other amounts owing in
respect of, the Notes, if a payment default or a non-payment default exists with
respect to certain Senior Debt, including the Senior Debt under the Restructured
Credit Facility and, in the case of a non-payment default, a payment blockage
notice has been received by the Trustee. See "Description of Exchange
Notes -- Subordination."
DEPENDENCE ON A LIMITED NUMBER OF PROJECTS; NATURE OF THE ENTERTAINMENT INDUSTRY
The Company's revenues have been derived principally from a relatively
small number of television productions and recorded music releases. The loss of
a major project in any period, unless replaced by new projects, could have an
adverse effect on the Company's results of operations. The agreements between
the Company and the various domestic television stations which broadcast
Baywatch, Baywatch Nights, The Price Is Right and The Adventures of Sinbad do
not have automatic renewal provisions and typically expire at the end of each
broadcast year. The decision of each broadcaster to renew a particular project
is made during the prior broadcast year and is based on a number of factors,
including ratings, availability of key talent and estimated clearances from
local television stations. Baywatch accounted for approximately 6% and 29% of
the Company's revenues during the six-month period ended June 30, 1996, and the
fiscal year ended December 31, 1995, respectively. As a result of the loss of
weekly second runs in certain key markets Baywatch has experienced lower
ratings. In addition, three of the Company's game shows, The Price Is Right
(United States), Let's Make a Deal (Germany) and The Price Is Right (France)
accounted in the aggregate for 21.0% and 14.0% of the Company's revenues during
such respective periods. There is no assurance that Baywatch or any other
program will continue its prior level of success in the 1996/1997 television
season or that any program will be renewed for any future seasons, except in the
case of certain foreign programming subject to multi-year contracts. In
addition, there is no assurance that the Company's new first-run series, The
Adventures of Sinbad, will be successful. While the Company continually
endeavors to develop new programming, there is no assurance that revenue from
existing or future programming will replace a possible loss of revenue
associated with the reduction in ratings, the future unavailability of key
talent or the nonrenewal of broadcast agreements with respect to any particular
program. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview."
The television and recorded music industries are highly speculative and
historically have involved a substantial degree of risk. The success of an
individual television program or musical recording depends upon unpredictable
and changing factors, such as personal tastes of the public and critics.
Therefore, there is a substantial risk that any of the Company's projects will
not be successful, resulting in costs not being recouped and anticipated profits
not being realized. Although the Company attempts to limit the risks involved
with television production through various activities including obtaining
insurance and completion bonds and entering into co-production and presale
arrangements in selected projects and in its distribution activities the Company
expects to continue to take significant financial risks in return for more
favorable participation in potential revenues over the life of the programs.
Public taste is unpredictable and a shift in demand could cause the Company's
television programming to lose its appeal. The Company's television syndication
barter business also is impacted by advertising rates, which to the extent they
may decline,
14
<PAGE> 21
could have a material adverse effect on the Company's financial condition or
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview." In addition, because the
success of recording artists and releases is highly dependent upon consumer
taste and critical response, as well as public awareness of recording artists,
the level of marketing and promotional activities and expenses necessary in any
particular instance cannot be predicted with certainty.
FLUCTUATIONS IN RESULTS OF OPERATIONS
A large percentage of a television program's revenues is recognized when
the program is delivered pursuant to a non-cancelable agreement, provided the
applicable broadcast season has commenced. Broadcasters typically make most of
their annual programming commitments in the first and second quarters of any
calendar year so that new programs will be ready for delivery in the third and
fourth quarters of that year, typically the commencement of the broadcast
season. Minimum guaranteed revenues from domestic cash license agreements
typically are recognized when the license period begins and the program is
delivered. Advertising revenues (i.e., sales of advertising time received by the
Company in lieu of cash license fees for the sale of program broadcast rights to
a broadcast station ("barter syndication")) are recognized upon the commencement
of the license period of the respective program pursuant to non-cancelable
agreements, provided that the program has been delivered. Minimum guaranteed
revenues from foreign license agreements typically are recognized on the date of
the license agreement. Revenues from subsequent licensing of delivered product,
including rerun strip syndication (i.e., sales of previously aired episodes
licensed for broadcast in a five-day-a-week format) are recognized on the
commencement of the license period. As a result, significant fluctuations in the
Company's total revenues and net income can occur from period to period
depending on, among other things, the delivery or availability dates of
programs. The Company's television revenues have historically been higher in the
third and fourth quarters. The Company's recorded music operations also are
subject to fluctuations due to the timing of certain album releases (which may
generate significant revenues in the period in which the release occurs) and to
the timing of the recognition of artist cost expense (which may occur during a
period prior to determination of actual sales of an album).
Television program costs (e.g., direct production costs, production
overhead, interest and certain exploitation costs) are capitalized during the
period of production of a respective program. Such capitalized costs, together
with estimated total costs of participations and residuals, are amortized based
upon the ratio of revenue received during the current period to management's
estimate of the remaining gross revenue to be recognized in connection with the
respective program. To the extent that such estimates differ from the actual
results, there could be a material adverse effect on the Company's financial
condition or results from operations. Such estimates are evaluated quarterly and
estimated losses, if any, are provided for in full.
From the quarter ended March 31, 1994 through the quarter ended June 30,
1996, the Company's quarterly revenues have ranged from $7.6 million to $85.2
million, and quarterly operating income has ranged from a net loss of $2.7
million to a net profit of $11.5 million. Year to year comparisons of quarterly
results may not be meaningful and quarterly operating results during the course
of a fiscal year may not be indicative of results that may be expected for the
entire fiscal year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Results of Operations" and the
Consolidated Financial Statements and the notes thereto included elsewhere
herein.
LIQUIDITY AND FINANCING RESOURCES; NEGATIVE CASH FLOWS
The Company's television and recorded music operations require significant
cash outlays. The Company experienced positive cash flows from operations of
$24.2 million in the six month period ended June 30, 1996; however the Company
experienced negative cash flows from operations of $17.0 million and $14.7
million in the years ended December 31, 1995 and 1994, respectively. The
15
<PAGE> 22
Company attempts to defray the production costs of its television programming by
obtaining, prior to commencement of production, one or more of the following:
(i) television license fees for exploitation of the project in the United States
and foreign markets; (ii) financial contributions by co-producers, if any; and
(iii) pre-sales of television, home video and other ancillary rights. However,
the Company is generally required to fund a significant portion of television
production and recorded music costs, pending receipt of anticipated license
fees, and recorded music sales out of its line of credit or working capital.
Risks such as production delays, higher talent costs, increased subcontractor
costs, political instability overseas, and other unanticipated events may
substantially increase production costs and delay completion of the production
of any one or more of the Company's programs.
Substantially all of the Company's revenue from domestic syndication is
derived from advertising revenue which is based upon the ratings and viewer
demographics of each respective program. See "-- Dependence on a Limited Number
of Projects; Nature of the Entertainment Industry." Typically, payment for the
license and distribution of a particular program follows the broadcast of such
program and the determination of the program's respective ratings. Accordingly,
the Company receives cash payments in connection with licensing and distribution
revenues after the broadcast of each respective episode throughout the broadcast
season. Consequently, cash flows may fluctuate from quarter to quarter depending
upon the ratings for each particular program's broadcast and generally do not
correlate with the recognition of revenue which is made at the time the
respective programs are delivered and made available for broadcast. In addition,
revenues from rerun strip syndication are recognized on the date of the
respective syndication agreement, while collection of the related accounts
receivable will typically occur over the period during which the programs are
broadcast, even if such agreement covers more than the current broadcast season.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company believes that its existing working capital, together with the
proceeds of the Private Offering, the amount of available borrowings under the
Restructured Credit Facility and anticipated cash flows from operations, will be
sufficient to satisfy the Company's operating requirements for at least the next
twelve months. However, as a result of (i) the timing differences between the
recognition of revenue and the collection of the related accounts receivable in
connection with revenues from licensing activities and barter syndication, (ii)
capitalized program costs and (iii) the operating risks identified above, the
Company may continue to experience negative cash flows from operations, from
time to time, in the future, even though the Company may report net income for
financial reporting purposes during the respective period. Any inability of the
Company to obtain adequate financing for operating activities, including the
financing of programming production, could delay or cancel the production and
delivery of television programming in time for the applicable television
broadcast season which could have a material adverse effect on the financial
condition or results of operations of the Company.
From the quarter ended March 31, 1994 through the quarter ended June 30,
1996, the Company's net cash provided by operating activities has ranged, on a
quarterly basis, from a use of funds of $14.0 million to a provision of funds of
$20.7 million. Year to year comparisons of quarterly results may not be
meaningful and quarterly operating results during the course of a fiscal year
may not be indicative of results that may be expected for the entire fiscal
year. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quarterly Results of Operations" and the Consolidated
Financial Statements and the notes thereto included elsewhere herein.
EXPANSION RISKS
The Company has experienced significant revenue growth since 1991, in
substantial part due to acquisitions, and the Company continues to regularly
evaluate potential acquisitions of program rights and the expansion of its
business through the acquisition of businesses complementary to the
16
<PAGE> 23
current operations of the Company. Consummation of any such acquisitions or
other expansion of the business conducted by the Company, if beyond its capital
resources, would be subject to the Company securing additional financing. The
Company's ability to achieve its expansion plans will depend on a variety of
factors, including its ability to identify and negotiate satisfactory terms with
acquisition targets, obtain additional capital on satisfactory terms, operate
its business profitably and attract and retain qualified and experienced
personnel. There is no assurance that the Company will consummate any
acquisition, that any acquisition will be financed on terms favorable to the
Company or that any future acquisitions will be profitable.
FOREIGN ECONOMIES; FOREIGN CURRENCY FLUCTUATION
Approximately 36% of the Company's revenue for the year ended December 31,
1995 was derived from the Company's foreign operations, substantially all of
which were based in Europe; and an additional 13% of revenue was derived from
licensing rights of domestic productions to licensees outside the United States.
The Company anticipates that it will continue to be substantially dependent on
revenue derived from outside the United States in the future. The Company's
ability to maintain or expand its international business (as well as its ability
to contract upon favorable terms with international broadcasters and other
licensees), and conduct foreign production activities depends, in part, on the
local economic conditions, currency fluctuations, local changes in regulatory
requirements, compliance with a variety of foreign laws and regulations,
inflation, interest rates, and cultural barriers. In addition, political
instability in a foreign nation may adversely affect the ability of the Company
to distribute its product in that country. As a result of the foregoing, as well
as the many other factors affecting domestic businesses, there is no assurance
that the Company's international operations will continue to be successful.
COMPETITION
Competition is intense within the television and recorded music industries
and between each of these industries and other entertainment media. The
Company's television programming competes with other first-run programming,
network programming and reruns and programs produced by local television
stations. The Company also competes with many other companies that have been
acquiring, producing and distributing programs longer than the Company, most of
which have greater financial resources than the Company. In addition, vertical
integration of the television broadcast market and the creation and expansion of
new "networks" which create a substantial portion of their own programming, such
as UPN (United Paramount Network) and WB (Warner Brothers, Inc.), have decreased
the number of available time slots for, and thereby increased the competition
among, programs marketed for first-run syndication by independent syndicators
like the Company. There is no assurance that the Company will continue to
acquire rights to additional successful properties or enter into agreements for
the financing, production or licensing of television programs or musical
recordings on terms favorable to the Company. See "Business -- Library --
Concentration and Competition."
CONTROL BY MANAGEMENT
Upon consummation of the Exchange Offering (based on holdings as of
September 12, 1996 and assuming no additional conversion of the Convertible
Notes into Common Stock prior to their redemption), approximately 71% of the
outstanding shares of the Company's voting common stock (the "Common Stock")
will be beneficially held by Anthony J. Scotti and Benjamin J. Scotti, the
Company's Chief Executive Officer and Senior Executive Vice President,
respectively. Anthony J. Scotti and Benjamin J. Scotti will continue to be in a
position to elect at least a majority of the Board of Directors of the Company
and control the vote on all matters considered by the Board of Directors or
submitted to a vote of the Company's stockholders. The Board of Directors and
the stockholders of the Company have approved an amendment to the Company's
charter, subject to NASDAQ approval, which would enable holders of the Common
Stock to convert such shares into the Company's non-voting Class B Common Stock.
To the extent non-management holders of the
17
<PAGE> 24
Common Stock choose to convert such shares, the management holders will have an
increased concentration of voting control of the Company.
In the event of a "change in control" of the Company, as variously defined
in particular contractual provisions (generally the sale of the Company or the
acquisition by persons other than Anthony J. Scotti and related persons of more
than 50% of the outstanding Common Stock or the beneficial ownership by Anthony
J. Scotti and related persons of less than a specified percentage of the Common
Stock), various potentially adverse consequences could occur. Such consequences
include the potential acceleration of the Company's Senior Debt, loss of the
right to use the name "Scotti" and the automatic conversion of the non-voting
Class B Common Stock into Common Stock, which could further impact the control
of the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The cumulative impact of such provisions, combined
with the concentration of ownership among the Company's senior management, may
have the effect of delaying, deferring or preventing a change in control of the
Company, discouraging tender offers for the Company and inhibiting certain
equity issuances.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts and abilities of certain of its
senior management, particularly those of Anthony J. Scotti. In addition, the
Restructured Credit Facility permits the lenders to terminate the commitments
and/or declare all outstanding principal and interest amounts forthwith due and
payable if Anthony J. Scotti or all three of the following: Thomas Bradshaw,
Myron Roth and Lawrence Lamattina cease to be active in the businesses of the
Company. The Company has entered into employment agreements with each of Messrs.
Scotti, Bradshaw and Lamattina. The loss of the services of any key executive
could have a material adverse effect on the financial condition or results of
operations of the Company. See "Management."
FRAUDULENT CONVEYANCE CONSIDERATIONS
Substantially all of the net proceeds from the Private Offering were used
by the Company to repay and redeem certain indebtedness. Under applicable
provisions of federal bankruptcy law and state fraudulent transfer or conveyance
laws, if: (i) the Notes were incurred by the Company with the intent to hinder,
delay or defraud any present or future creditor of the Company, or if the
Company contemplated insolvency with a design to prefer one or more creditors to
the exclusion in whole or in part of others; or (ii) at the time the Notes were
issued, the Company received less than reasonably equivalent value or fair
consideration, and (a) was insolvent or rendered insolvent by reason of such
incurrence, (b) was engaged in a business or transaction for which the remaining
assets of the Company constituted unreasonably small capital, or (c) intended to
incur, or believed that it would incur, debts beyond its ability to pay such
debts as they mature, the obligations of the Company under the Notes could be
avoided, or claims in respect of the Notes could be subordinated to all existing
and future debts of the Company.
The Company believes that at the time of the issuance of the Notes, it will
not be insolvent under any of the foregoing tests, that the Company will have
sufficient capital to carry on its business and that the Company will be able to
pay its debts as they mature. These beliefs are based on the Company's operating
history, analysis of internal cash flow projections and estimated values of
assets and liabilities of the Company at the time of the Private Offering and
after giving pro forma effect to the use of net proceeds thereof. The Company
believes in any event that it will receive reasonably equivalent value or fair
consideration in connection with the issuance of the Original Notes. There is no
assurance, however, that a court passing on such issues would agree. See
"Selected Financial Data."
In rendering its opinion on the validity of the Exchange Notes, Kaye,
Scholer, Fierman, Hays & Handler, LLP, counsel for the Company, will express no
opinion as to federal or state laws relating to fraudulent transfers or
conveyances.
18
<PAGE> 25
GOVERNMENT REGULATION
The Company is subject to various federal and local (including foreign)
regulations, particularly by the Federal Communications Commission which
regulates program content, competition among broadcasters and the availability
and broadcast programming. The Company cannot predict how existing laws and
regulations will be interpreted, whether additional laws and regulations will be
adopted, or the effect such changes may have on the Company's financial
condition or results of operations. See "Business -- Government Regulation."
LACK OF PUBLIC MARKET FOR THE NOTES; RESTRICTIONS ON RESALE
There is no existing trading market for the Notes, and there is no
assurance regarding the future development of a market for the Exchange Notes,
or the ability of holders of the Notes to sell their Notes or the price at which
such holders may be able to sell their Notes. If such a market were to develop,
the Notes could trade at prices that may be higher or lower than the initial
offering price depending on many factors, including prevailing interest rates,
the Company's operating results and the market for similar securities. The
Initial Purchasers have advised the Company that they currently intend to make a
market in the Notes. The Initial Purchasers are not obligated to do so, however,
and any market-making with respect to the Notes may be discontinued at any time
without notice. Therefore, there is no assurance as to the liquidity of any
trading market for the Notes or that an active public market for the Notes will
develop. The Company does not intend to apply for listing or quotation of the
Notes on any securities exchange or stock market.
Historically, the market for noninvestment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There is no assurance that the market for the Notes will not be
subject to similar disruptions. Any such disruptions may have an adverse effect
on the value of the Notes.
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Original Notes were sold by the Company on October 11, 1996 (the
"Closing Date") to the Initial Purchasers pursuant to the Purchase Agreement.
The Initial Purchasers subsequently sold the Original Notes to (i) "qualified
institutional buyers" ("QIBs"), as defined in Rule 144A under the Securities Act
("Rule 144A") in reliance on Rule 144A, (ii) a limited number of institutional
"accredited investors" ("Accredited Institutions"), as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act and (iii) to foreign private
investors under Regulation S promulgated under the Securities Act ("Reg S"). As
a condition to the sale of the Original Notes, the Company and the Initial
Purchasers entered into the Registration Rights Agreement on October 11, 1996.
Pursuant to the Registration Rights Agreement, the Company agreed that it would
(i) file with the Commission a Registration Statement under the Securities Act
with respect to the Exchange Notes within 30 days after the Closing Date and
(ii) use its best efforts to cause such Registration Statement to become
effective under the Securities Act as soon as practicable thereafter. The
Company further agreed to commence the Exchange Offer promptly after the
Registration Statement becomes effective, to hold the offer open for at least 20
business days and to exchange Exchange Notes for all Original Notes validly
tendered and not withdrawn before expiration of the Exchange Offer. A copy of
the Registration Rights Agreement has been filed as an exhibit to the Company's
Current Report on Form 8-K filed on October 22, 1996.
Under existing Commission interpretations, the Exchange Notes would in
general be freely transferable after the Exchange Offer without further
registration under the Securities Act, except that broker-dealers
("Participating Broker-Dealers") receiving Exchange Notes in the Exchange Offer
will be subject to a prospectus delivery requirement with respect to resale of
those Exchange Notes. The Commission has taken the position that Participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to the Exchange Notes (other than a resale of any
19
<PAGE> 26
unsold allotment from the original sale of the Notes) by delivery of the
prospectus contained in the Registration Statement. Under the Registration
Rights Agreement, the Company is required to allow Participating Broker-Dealers
and other persons, if any, subject to similar prospectus delivery requirements
to use the prospectus contained in the Registration Statement (as supplemented
or amended from time to time) in connection with the resale of such Exchange
Notes. The Registration Statement will be kept effective for a period of up to
one year after the Exchange Offer has been consummated in order to permit
resales of Exchange Notes acquired by broker-dealers in after-market
transactions. Each Holder of Original Notes (other than certain specified
Holders) who wishes to exchange Original Notes for Exchange Notes in the
Exchange Offer will be required to represent that any Exchange Notes to be
received by it will be acquired in the ordinary course of its business, that at
the time of the commencement of the Exchange Offer it has no arrangement with
any person to participate in the distribution (within the meaning of the
Securities Act) of the Exchange Notes and that it is not an Affiliate of the
Company.
If (i) the Company is not required to file the Registration Statement or
permitted to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy or (ii) any Holder of Notes
notifies the Company within the specified time period that (A) it alone or
together with such other Holders who hold in the aggregate at least $1.0 million
principal amount of Notes is prohibited by law or Commission policy from
participating in the Exchange Offer or may not resell the Exchange Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (B) it is a
broker-dealer and owns Notes acquired directly from the Company or an affiliate
of the Company, the Company will file with the Commission a registration
statement under the Securities Act relating to a shelf registration of the Notes
for resale by Holders (the "Shelf Registration Statement") on or before the 30th
day after the date the Company makes the determination set forth in clause (i)
above, or the notice described in clause (ii) is received by the Company (the
"Shelf Filing Deadline"), and use its best efforts to cause the Shelf
Registration Statement to be declared effective by the Commission on or before
the 90th day after the date on which the Company becomes obligated to file such
Shelf Registration Statement and to remain effective for a period of three years
after the effective date thereof (or such shorter period of time after which the
Notes may be sold pursuant to Rule 144(k), as amended from time to time), or, in
the event the Shelf Registration Statement is filed solely at the request of a
broker-dealer who owns Notes acquired directly from the Company or an affiliate
of the Company, one year. The Company will, in the event of the Shelf
Registration Statement, provide to the Holders of the Notes copies of the
prospectus that is a part of the registration statement filed in connection with
the Shelf Registration Statement, notify such Holders when the Shelf
Registration Statement for the Notes has become effective and take certain other
actions as are required to permit unrestricted resales of the Notes. A Holder of
Notes that sells such Notes pursuant to the Shelf Registration Statement
generally would be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the Registration Rights
Agreement that are applicable to such a Holder (including certain
indemnification obligations).
The Registration Statement is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement and the Purchase Agreement.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder (other than (i) a broker-dealer who
purchases such Exchange Notes directly from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or (ii) any
such holder that is an "affiliate" of the Company within the meaning of Rule 405
under
20
<PAGE> 27
the Securities Act) who exchanges Original Notes for Exchange Notes in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement with any person to participate, in a
distribution of the Exchange Notes, will be allowed to resell Exchange Notes to
the public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. However, if any holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing or
participating in the distribution of the Exchange Notes or is a broker-dealer,
such holder cannot rely on the position of the staff of the Commission
enumerated in certain no-action letters issued to third parties and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction, unless an exemption from registration
is otherwise available. Each broker-dealer that receives Exchange Notes for its
own account in exchange for Original Notes, where such Original Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Original Notes where such Original Notes
were acquired by such broker-dealer as a result of market-making or other
trading activities. Pursuant to the Registration Rights Agreement, the Company
has agreed to make this Prospectus, as it may be amended or supplemented from
time to time, available to broker-dealers for use in connection with any resale
for a period of one year after the date the Registration Statement is declared
effective. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Original
Notes validly tendered and not withdrawn prior to the Expiration Date. The
Company will issue $1,000 (and integral multiples of $1,000 in excess thereof)
principal amount of Exchange Notes in exchange for each $1,000 (and integral
multiples of $1,000 in excess thereof) principal amount of outstanding Original
Notes surrendered pursuant to the Exchange Offer. Original Notes may be tendered
only in denominations of $1,000 (and in integral multiples of $1,000 in excess
thereof).
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes except that (i) the Exchange Notes will bear a Series B
designation, (ii) the Exchange Notes will have been registered under the
Securities Act and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (iii) holders of the Exchange Notes will
not be entitled to any of the rights of holders of Original Notes under the
Registration Rights Agreement, which rights will terminate upon the consummation
of the Exchange Offer. The Exchange Notes will evidence the same indebtedness as
the Original Notes (which they replace) and will be issued under, and be
entitled to the benefits of, the Indenture, which also authorized the issuance
of the Original Notes, such that both series of Notes will be treated as a
single class of debt securities under the Indenture.
Only a registered holder of the Original Notes (or such holder's legal
representative or attorney-in-fact) as reflected on the records of the Trustee
under the Indenture may participate in the Exchange Offer. There will be no
fixed record date for determining registered holders of the Original Notes
entitled to participate in the Exchange Offer.
Holders of the Original Notes do not have any appraisal or dissenters'
rights under the Indenture in connection with the Exchange Offer. The Company
intends to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the Securities
Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations of the Commission thereunder.
21
<PAGE> 28
The Company shall be deemed to have accepted validly tendered Original
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders of Original Notes for the purposes of receiving the Exchange Notes from
the Company.
Holders who tender Original Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
Original Notes pursuant to the Exchange Offer. The Company will pay all charges
and expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSION; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
December 11, 1996, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
The Company reserves the right, in its sole discretion, (i) to extend the
period of time during which the Exchange Offer is open and thereby delay
acceptance of any Original Notes, by giving oral or written notice of such
extension to the Exchange Agent, (ii) to amend the Exchange Offer to the extent
permitted in the Registration Rights Agreement by giving oral or written notice
of such amendment to the Exchange Agent or (iii) if any conditions set forth
below under "-- Conditions" shall not have been satisfied, to terminate the
Exchange Offer by giving oral or written notice of such nonsatisfaction to the
Exchange Agent. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written notice
thereof to the registered holders.
If the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, the Company will promptly disclose such amendment
by means of a prospectus supplement that will be distributed to the registered
holders, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the amendment and the
manner of disclosure to the registered holders, if the Exchange Offer would
otherwise expire during such five to ten business day period.
If the Company extends the Exchange Offer, or if (whether before or after
any Original Notes have been accepted for exchange) the exchange for Exchange
Notes is delayed or the Company is unable to exchange Exchange Notes for
Original Notes pursuant to the Exchange Offer for any reason, then, without
prejudice to the Company's rights under the Exchange Offer, the Exchange Agent
may retain tendered Original Notes on behalf of the Company, and such Original
Notes may not be withdrawn except to the extent tendering Holders are entitled
to withdrawal rights as described below under "-- Withdrawal of Tenders."
However, the ability of the Company to delay the exchange of Original Notes that
the Company has accepted for exchange is limited by Rule 14e-1(c) under the
Exchange Act, which requires that a bidder pay the consideration offered or
return the securities deposited by or on behalf of holders of securities
promptly after the termination or withdrawal of a tender offer.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate equal to 10 7/8% per annum.
Interest on the Exchange Notes will be payable semiannually in arrears on each
April 15 and October 15, commencing April 15, 1997. Holders of Exchange Notes
will receive interest on April 15, 1997 from the date of initial issuance of the
Exchange Notes, plus an amount equal to the accrued interest on the Original
Notes from the date of initial delivery to the date of exchange thereof for
Exchange Notes. Holders of Original Notes that are accepted for exchange will be
deemed to have waived the right to receive any interest accrued on the Original
Notes.
22
<PAGE> 29
PROCEDURES FOR TENDERING
Only a registered holder of Original Notes may tender such Original Notes
in the Exchange Offer. To tender in the Exchange Offer, a holder of Original
Notes must complete, sign and date the Letter of Transmittal, or a facsimile
thereof, have the signatures thereon guaranteed if required by the Letter of
Transmittal, and mail or otherwise deliver such Letter of Transmittal or such
facsimile to the Exchange Agent at the address set forth below under "-- The
Exchange Agent" for receipt prior to the Expiration Date. In addition, either
(i) certificates for such Original Notes must be received by the Exchange Agent
along with the Letter of Transmittal, (ii) a timely confirmation of a book-entry
transfer (a "Book-Entry Confirmation") of such Original Notes, if such procedure
is available, into the Exchange Agent's account at the Depository pursuant to
the procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date or (iii) the holder must comply with
the guaranteed delivery procedures described below.
The tender by a holder that is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF ORIGINAL NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR ORIGINAL NOTES SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Original Notes whose Original Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender
should contact the registered holder promptly and instruct such registered
holder to tender on such beneficial owner's behalf. If such beneficial owner
wishes to tender on such owner's own behalf, such owner must, prior to
completing and executing the Letter of Transmittal and delivering such owner's
Original Notes, either make appropriate arrangements to register ownership of
the Original Notes in such owner's name or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "-- Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined below) unless the Original Notes tendered
pursuant thereto are tendered (i) by a registered holder who has not completed
the box titled "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be made by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of
the recognized signature guarantee programs identified in the Letter of
Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Original Notes listed therein, such Original Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Original
Notes.
If the Letter of Transmittal or any Original Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a
23
<PAGE> 30
fiduciary or representative capacity, such persons should so indicate when
signing, and unless waived by the Company, evidence satisfactory to the Company
of their authority to so act must be submitted with the Letter of Transmittal.
The Exchange Agent and the Depository have confirmed that any financial
institution that is a participant in the Depository's system may utilize the
Depository's Automated Tender Offer Program to tender Original Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Original Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Original Notes not properly tendered or any Original Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Original Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Original Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Original Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Original Notes will not be deemed
to have been made until such defects or irregularities have been cured or
waived.
While the Company has no present plan to acquire any Original Notes that
are not tendered in the Exchange Offer or to file a registration statement to
permit resales of any Original Notes that are not tendered pursuant to the
Exchange Offer, the Company reserves the right in its sole discretion to
purchase or make offers for any Original Notes that remain outstanding
subsequent to the Expiration Date or, as set forth below under "-- Conditions,"
to terminate the Exchange Offer and to the extent permitted by applicable law,
purchase Original Notes in the open market, in privately negotiated transactions
or otherwise. The terms of any such purchases or offers could differ from the
terms of the Exchange Offer.
By tendering, each holder of Original Notes will represent to the Company
that, among other things, (i) Exchange Notes to be acquired by such holder of
Original Notes in connection with the Exchange Offer are being acquired by such
holder in the ordinary course of business of such holder, (ii) such holder has
no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iii) such holder acknowledges and agrees
that any person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purposes of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on the
position of the staff of the Commission set forth in certain no-action letters,
(iv) such holder understands that a secondary resale transaction described in
clause (iii) above and any resales of Exchange Notes obtained by such holder in
exchange for Original Notes acquired by such holder directly from the Company
should be covered by an effective registration statement containing the selling
security holder information required by Item 507 or Item 508, as applicable, of
Regulation S-K of the Commission and (v) such holder is not an "affiliate," as
defined in Rule 405 under the Securities Act, of the Company. If the holder is a
broker-dealer that will receive Exchange Notes for such holder's own account in
exchange for Original Notes that were acquired as a result of market-making
activities or other trading activities, such holder will be required to
acknowledge in the Letter of Transmittal that such holder will deliver a
prospectus in connection with any resale of such Exchange Notes; however, by so
acknowledging and by delivering a prospectus, such holder will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
24
<PAGE> 31
RETURN OF ORIGINAL NOTES
If any tendered Original Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Original Notes are
withdrawn or are submitted for a greater principal amount than the holders
desire to exchange, such unaccepted, withdrawn or non-exchanged Original Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Original Notes tendered by book-entry transfer into the Exchange Agent's
account at the Depository pursuant to the book entry transfer procedures
described below, such Original Notes will be credited to an account maintained
with the Depository) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Original Notes at the Depository for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depository's systems may make
book-entry delivery of Original Notes by causing the Depository to transfer such
Original Notes into the Exchange Agent's account at the Depository in accordance
with the Depository's procedures for transfer. However, although delivery of
Original Notes may be effected through book-entry transfer at the Depository,
the Letter of Transmittal or facsimile thereof, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at the address set forth below under
"-- The Exchange Agent" on or prior to the Expiration Date or pursuant to the
guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Notes and (i) whose Original
Notes are not immediately available or (ii) who cannot deliver their Original
Notes, the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder, the certificate number(s) of such Original Notes and
the principal amount of Original Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within five New York Stock
Exchange trading days after the Expiration Date the Letter of Transmittal
(or a facsimile thereof), together with the certificate(s) representing the
Original Notes in proper form for transfer or a Book-Entry Confirmation, as
the case may be, and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile
thereof), as well as the certificate(s) representing all tendered Original
Notes in proper form for transfer and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within five New
York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Original Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Notes may be
withdrawn at any time prior to the Expiration Date.
25
<PAGE> 32
To withdraw a tender of Original Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Original Notes to be withdrawn (the "Depositor"), (ii) identify the Original
Notes to be withdrawn (including the certificate number or numbers and principal
amount of such Original Notes) and (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such
Original Notes were tendered (including any required signature guarantees). If
Original Notes have been delivered pursuant to the procedures for book-entry
transfer set forth in "-- Book-Entry Transfer," any notice of withdrawal must
specify the name and number of the account at the appropriate book-entry
transfer facility to be credited with such withdrawn Original Notes and must
otherwise comply with such book-entry transfer facility's procedures. If the
Original Notes to be withdrawn have been delivered or otherwise identified to
the Exchange Agent, a signed notice of withdrawal meeting the requirements above
is effective immediately upon written or facsimile notice of withdrawal even if
physical release is not yet effected. A withdrawal of Original Notes can only be
accomplished in accordance with the foregoing procedures. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company in its sole discretion, whose determination
shall be final and binding on all parties. Any Original Notes so withdrawn will
be deemed not to have been validly tendered for purposes of the Exchange Offer
and no Exchange Notes will be issued with respect thereto unless the Original
Notes so withdrawn are validly retendered. Properly withdrawn Original Notes may
be retendered by following one of the procedures described above under
"Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Original Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of such Original Notes, if the Exchange Offer violates applicable
law, rules or regulations or an applicable interpretation of the staff of the
Commission.
If the Company determines in its sole discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Original
Notes and return all tendered Original Notes to the tendering holders, (ii)
extend the Exchange Offer and retain all Original Notes tendered prior to the
expiration of the Exchange Offer, subject however, to the rights of holders to
withdraw such Original Notes (see "-- Withdrawal of Tenders") or (iii) waive
such unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Original Notes that have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders of the Original Notes, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the waiver and the manner of disclosure to
the registered holders, if the Exchange Offer would otherwise expire during such
five to ten business day period.
TERMINATION OF CERTAIN RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of holders of the Original Notes eligible to participate in the Exchange
Offer will terminate upon consummation of the Exchange Offer except with respect
to the Company's continuing obligations (i) to indemnify such holders (including
any broker-dealers) and certain parties related to such holders against certain
liabilities (including liabilities under the Securities Act), (ii) to provide,
upon the request of any holder of a transfer-restricted Original Note, the
information required by Rule 144A(d)(4) under the Securities Act in order to
permit resales of such Original Notes pursuant to Rule 144A, (iii) to use its
best efforts to keep the Registration Statement effective to the extent
necessary to
26
<PAGE> 33
ensure that it is available for resales of transfer-restricted Original Notes by
broker-dealers for a period of up to one year from the date the Registration
Statement is declared effective, (iv) to provide copies of the latest version of
the Prospectus to broker-dealers upon their request for a period of up to one
year from the date the Registration Statement is declared effective and (v) to
file a Shelf Registration Statement in certain circumstances as described under
"Description of Exchange Notes -- Registration Rights Agreement."
ADDITIONAL INTEREST
In the event that (i) if applicable, the Company has not filed the Shelf
Registration Statement on or before the required filing date, (ii) if
applicable, the Shelf Registration Statement has not become effective within 120
days following the required filing date, (iii) the Exchange Offer has not been
consummated within 30 days after the effective date of the Registration
Statement or (iv) any required registration statement is filed and effective but
thereafter appears to be effective without being succeeded immediately by an
additional registration statement filed and declared effective (each of the
foregoing events is a "Registration Default"), then special interest ("Special
Interest") will accrue and be payable on the Notes, either temporarily or
permanently, at a rate of 0.50% per annum on the principal amount of the Notes,
determined daily for the period from the occurrence of such Registration Default
until such time as no such Registration Default is in effect. If the Company has
not consummated the Exchange Offer within 240 days following the closing of the
Private Offering (or such Shelf Registration Statement has not been declared
effective within 210 days following the required filing date), then the per
annum rate of such Special Interest will increase by an additional 0.50%,
payable until the Exchange Offer is completed (or a "Shelf Registration
Statement becomes effective). See "Description of Notes -- Registration Rights
Agreement."
THE EXCHANGE AGENT
US Trust Company of California, N.A. has been appointed as Exchange Agent
of the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent as follows:
<TABLE>
<S> <C>
By Registered Mail: By Overnight or Hand Delivery:
U.S. TRUST COMPANY OF CALIFORNIA, in care of
N.A. United States Trust Company
in care of of New York
United States Trust Company 770 Broadway, 13th Floor
of New York New York, NY 10003
770 Broadway, 13th Floor Attn: Corporate Trust Department
New York, NY 10003
Attn: Corporate Trust Department
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
27
<PAGE> 34
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$200,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Original Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Original Notes pursuant to
the Exchange Offer, then the amount of such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
CONSEQUENCE OF FAILURES TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Original
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
The Original Notes that are not exchanged for the Exchange Notes pursuant
to the Exchange Offer will remain restricted securities. Accordingly, such
Original Notes may be resold only (i) to a person whom the seller reasonably
believes is a QIB in a transaction meeting the requirements of Rule 144A, (ii)
in a transaction meeting the requirements of Rule 144 under the Securities Act,
(iii) outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, (iv) in accordance with
another exemption from the registration requirements of the Securities Act (and
based upon an opinion of counsel if the Company so requests), (v) to the Company
or (vi) pursuant to an effective registration statement and, in each case, in
accordance with any applicable securities laws of any state of the United States
or any other applicable jurisdiction.
28
<PAGE> 35
THE COMPANY
All American is a diversified worldwide entertainment company with
operations in television and recorded music production and distribution. The
Company is a leading independent producer and distributor of television
programming and believes that it is the largest supplier of game show
programming in multiple formats and languages worldwide. The Company's
programming includes the Baywatch franchise and 60 game show formats and other
television programming created by the Company's subsidiary Mark Goodson
Productions, LLC, including The Price Is Right, the longest running game show in
the United States. The Company produces, distributes or owns television
programming consisting of 32 series, approximately 30,000 game show episodes,
165 motion pictures and a library of children's programming, documentaries and
specials.
The Company is a holding company formed in February 1991. Through certain
of its subsidiaries and predecessors, the Company has been active in the
television programming and recorded music businesses for over 15 years. The
Company conducts substantially all of its business through its subsidiaries. In
August 1994, the Company acquired substantially all of the assets and common
stock of Fremantle International, Inc. In October 1995, the Company acquired a
50% interest in Mark Goodson Productions, LLC, which acquired all of the assets
of Mark Goodson Productions, L.P. and a related company. The Company acquired
the remaining 50% interest in Mark Goodson Productions, LLC as of January 1996.
In July 1996, the Company acquired all of the outstanding capital stock of Orbis
Entertainment, Inc., which was renamed All American Orbis, Inc. See "Business --
Acquisitions."
The Company's principal executive offices are located at 808 Wilshire
Boulevard, Santa Monica, California 90401-1810 and its telephone number is (310)
656-1100.
USE OF PROCEEDS
The net proceeds of the sale of the Original Notes were approximately $96.0
million. Approximately $88.0 million of such proceeds were used to temporarily
pay down the Former Credit Facility, approximately $5.0 million of such proceeds
were used to repurchase Class B Common Stock of the Company, and approximately
$3.0 million of such proceeds were used to repurchase 6 1/2% Convertible
Subordinated Notes due 2003 (the "Convertible Notes") of the Company and for
general corporate purposes. The Former Credit Facility has been amended and
restated by the Restructured Credit Facility. The Company intends to borrow
approximately $37.5 million under the Restructured Credit Facility to redeem the
remaining outstanding Convertible Notes.
29
<PAGE> 36
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company as of June 30, 1996 (i) on an actual basis, (ii) as adjusted to give
effect to the sale of Notes in the Private Offering and the application of the
estimated net proceeds therefrom and (iii) as further adjusted to give effect to
the consummation of the Restructured Credit Facility and the application of the
initial borrowings thereunder. See "Use of Proceeds." This table should be read
in conjunction with the Consolidated Financial Statements and related notes
thereto, the information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and other financial
information contained elsewhere, or incorporated by reference, in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996 (UNAUDITED)
-------------------------------------------
AS FURTHER
ACTUAL AS ADJUSTED(1) ADJUSTED(2)
-------- -------------- -----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Cash and restricted cash............................ $ 21,877 $ 21,877 $ 21,877
=======
Notes payable:
Former credit facility............................ $ 73,410 $ 34,828 --
Restructured Credit Facility...................... -- -- 51,673
Notes payable -- IPG.............................. 14,595 14,595 --
6 1/2% Convertible Subordinated Notes due 2003.... 55,347(3) -- --
10 7/8% Senior Subordinated Notes due 2001........ -- 100,000 100,000
-------
Total notes payable................................. 143,352 149,423 151,673
-------
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares, none
issued......................................... -- -- --
Common stock, voting, $.0001 par value, authorized
20,000,000 shares; 5,876,173 shares issued and
outstanding (including 30,000 treasury
shares)(4)..................................... 1 1 1
Common stock, Class B non-voting, $.0001 par
value, authorized 20,000,000 shares; 5,720,000
issued and outstanding(4)...................... 1 1 1
Additional paid-in capital........................ 63,304 63,304 63,304
Retained earnings................................. 9,162 7,062(5) 7,062(5)
Other............................................. (889) (889) (889)
-------
Total stockholders' equity................ 71,579 69,479 69,479
-------
Total capitalization.............................. $214,931 $218,902 $ 221,152
=======
</TABLE>
- ---------------
(1) Adjusted to give effect to the anticipated use of net proceeds of the
Private Offering to repurchase or redeem the Convertible Notes and to
reduce, on an interim basis, amounts outstanding under the Former Credit
Facility. Assumes redemption in full of the outstanding Convertible Notes
without any conversion into shares of Common Stock or any prospective
purchases in private transactions. Upon such repurchase and redemption, the
Company will recognize a net extraordinary after tax loss, resulting from
unamortized debt issuance cost and redemption premium expense, of
approximately $2.1 million.
(2) As further adjusted to give effect to the consummation of the Restructured
Credit Facility and the application of the initial borrowings thereunder,
including debt issuance costs of $2.3 million. The Company intends to use a
portion of the initial borrowings under the Restructured Credit Facility to
repay certain notes payable to IPG. See "Description of Certain Indebtedness
and Capital Stock -- Restructured Credit Facility."
(3) Includes approximately $20.7 million principal amount of Convertible Notes
acquired by the Company after June 30, 1996.
(4) On September 17, 1996 the Board of Directors of the Company authorized an
equity repurchase program pursuant to which the Company may repurchase up to
1,000,000 shares of its common stock. As of October 24, 1996, approximately
528,200 shares of Class B Common Stock had been repurchased by the Company.
(5) Reflects the impact of the net extraordinary after tax loss incurred in
connection with the repurchase and redemption of the Convertible Notes.
30
<PAGE> 37
PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 1995 is derived from (i) the
historical financial statements of the Company for the year ended December 31,
1995, (ii) the unaudited historical financial statements of Mark Goodson
Productions, L.P. and The Child's Play Company for the period from January 1,
1995 to September 30, 1995 and (iii) the historical financial statements of the
Combined Business of Mark Goodson Productions, L.P. and The Child's Play Company
for the period from October 6, 1995 to December 31, 1995, giving effect to the
Mark Goodson Acquisition under the purchase method of accounting and the
assumptions and adjustments in the accompanying notes. The information has been
prepared as if the Mark Goodson Acquisition had occurred at January 1, 1995. See
"Business -- Acquisitions."
The pro forma information may not be indicative of the results that would
have occurred if the Mark Goodson Acquisition had been in effect on the date
indicated or which may be obtained in the future. The pro forma financial
information should be read in conjunction with the Consolidated Financial
Statements and notes thereto included elsewhere, or incorporated by reference,
in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------------------------------
HISTORICAL
--------------------------------------------------
COMBINED BUSINESS
MARK GOODSON OF MARK GOODSON
PRODUCTIONS, L.P. PRODUCTIONS, L.P.
AND THE CHILD'S AND THE CHILD'S
PLAY COMPANY FOR PLAY COMPANY FOR
THE PERIOD FROM THE PERIOD FROM
JANUARY 1, 1995 TO OCTOBER 6, 1995 TO PRO FORMA PRO FORMA
COMPANY SEPTEMBER 30, 1995 DECEMBER 31, 1995 ADJUSTMENTS CONSOLIDATED(8)
-------- ------------------ ------------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues.................. $228,760 $ 21,319 $8,282 $ (3,603)(2) $ 244,413
(10,345)(1)
Cost of sales............. 180,567 7,030 1,063 (10,345)(1) 178,315
Selling, general and
administrative.......... 24,102 7,149 13 (7,149)(4) 24,154
39(5)
Goodwill amortization..... 2,399 -- -- 2,305(5) 4,446
(258)(3)
-------- ------- ------ -------- --------
Operating income.......... 21,692 7,140 7,206 1,460 37,498
Other income, net......... 95 -- -- 95
Interest expense, net..... (9,290) -- -- (4,000)(6) (12,972)
318(3)
-------- ------- ------ -------- --------
Income before taxes....... 12,497 7,140 7,206 (2,222) 24,621
Provision for taxes....... 5,249 -- -- 5,092(7) 10,341
-------- ------- ------ -------- --------
Net income................ $ 7,248 $ 7,140 $7,206 $ (7,314) $ 14,280
======== ======= ====== ======== ========
Earnings per share --
primary:
net earnings............ $ 0.87 $ 1.71
======== ========
Weighted average number of
common shares
outstanding............. 8,330 8,330
======== ========
Earnings per share --
fully diluted:
net earnings............ $ 0.71 $ 1.22
======== ========
Weighted average number of
common shares
outstanding............. 13,635 13,635
======== ========
</TABLE>
31
<PAGE> 38
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
(UNAUDITED)
(1) Elimination of consolidating intercompany account activity and balances.
(2) Elimination of the Company's share of equity in earnings of Mark Goodson
Productions, LLC as included in the Company's historical results (earned
through December 31, 1995) under the equity method of accounting.
(3) Elimination of goodwill amortization and interest expense related to the
Company's 50% interest in Mark Goodson Productions, LLC as included in the
Company's historical results.
(4) Elimination of Mark Goodson Productions, L.P. historical selling, general
and administrative costs which would not have been incurred, as the Mark
Goodson Productions, L.P. day-to-day operations were absorbed into the
Company's existing operations.
(5) Reflects depreciation expense and goodwill amortization (over 25 years) as
if the acquisition of 100% of Mark Goodson Productions, L.P. had occurred
January 1, 1995.
(6) Reflects interest expense as if the acquisition of 100% of Mark Goodson
Productions, L.P. had occurred January 1, 1995.
(7) Reflects income tax effect of the pro forma adjustments.
(8) The pro forma condensed consolidated statement of operations excludes the
results from operations of Mark Goodson Production, L.P. and The Child's
Play Company for the period from October 1, 1995 to October 6, 1995 (the
date the Company consummated the Mark Goodson Acquisition). See
"Business -- Acquisitions." Management believes that results from operations
for this period were de minimus.
32
<PAGE> 39
SELECTED FINANCIAL DATA(1)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The selected consolidated financial data set forth below as of and for each
of the five years in the period ended December 31, 1995 have been derived from
the Company's audited Consolidated Financial Statements. The Company has
approved the engagement of Price Waterhouse LLP as its independent accountants
for the fiscal year ending December 31, 1996. The five years ending December 31,
1995 were audited by another firm of independent accountants. See "Independent
Auditors." The selected consolidated financial data of the Company as of and for
the six-month periods ended June 30, 1995 and 1996 have been derived from the
unaudited condensed consolidated financial statements of the Company which, in
the Company's opinion, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the information set
forth therein. The results of operations for the six months ended June 30, 1996
are not necessarily indicative of the results for the year. The following data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the Consolidated Financial
Statements and the notes thereto included elsewhere, or incorporated by
reference, in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- ----------------------------------------------------------
1996 1995(2) 1995(2) 1994 1993 1992 1991
-------- -------- -------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Television................................ $ 71,673 $ 67,819 $206,734 $ 98,771 $ 57,407 $45,302 $25,173
Recorded music and
merchandising........................... 15,815 7,208 22,026 16,130 13,215 12,616 7,758
-------- -------- -------- -------- -------- ------- -------
87,488 75,027 228,760 114,901 70,622 57,918 32,931
-------- -------- -------- -------- -------- ------- -------
Expenses:
Television................................ 51,465 54,308 164,764 75,196 42,560 32,078 18,337
Recorded music and
merchandising........................... 11,551 5,663 15,803 10,750 9,780 9,250 4,885
Selling, general &
administrative.......................... 13,293 12,094 24,102 21,523 16,074 13,471 9,543
Goodwill amortization..................... 2,186 1,070 2,399 971 133 138 67
-------- -------- -------- -------- -------- ------- -------
78,495 73,135 207,068 108,440 68,547 54,937 32,832
-------- -------- -------- -------- -------- ------- -------
Operating income............................ $ 8,993 $ 1,892 $ 21,692 $ 6,461 $ 2,075 $ 2,981 $ 99
========= ========= ========= ========= ========= ======== ========
Interest (income) expense, net.............. $ 5,134 $ 4,728 $ 9,290 $ 5,725 $ 1,597 $ 387 $ (35)
========= ========= ========= ========= ========= ======== ========
Income (loss) from continuing operations.... $ 2,223 $ (1,571) $ 7,248 $ 455 $ 380 $ 1,863 $ 145
========= ========= ========= ========= ========= ======== ========
Net income (loss) per share applicable to
common stockholders from continuing
operations(3):
Primary................................... $ 0.19 $ (0.20) $ 0.87 $ 0.07 $ 0.87(4) $ (0.18)(5) $ (0.49)(5)
========= ========= ========= ========= ========= ======== ========
Fully diluted............................. $ 0.19 $ (0.20) $ 0.71 $ 0.07 $ 0.78(4) $ (0.18)(5) $ (0.49)(5)
========= ========= ========= ========= ========= ======== ========
OTHER OPERATING DATA (UNAUDITED)
EBITDA(6)................................... $ 12,134 $ 3,222 $ 25,014 $ 7,911 $ 2,529 $ 3,516 $ 409
Depreciation and amortization............... $ 3,141 $ 1,330 $ 3,322 $ 1,450 $ 454 $ 535 $ 310
Accrued earn-out payments(6)................ $ 3,460 $ -- $ 935 $ -- $ -- $ -- $ --
Ratio of earnings to fixed
charges(7)................................ 1.5x (8) 2.0x 1.1x 1.3x 3.2x 1.3x
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
CERTAIN PRO FORMA DATA (UNAUDITED)
Pro forma EBITDA(6)(9)......................................................................................... $ 42,906
Ratio of pro forma EBITDA to pro forma interest expense(6)(9)(10).............................................. 2.4x
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
-------------------- --------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and restricted cash..................... $ 21,877 $ 10,126 $ 20,094 $ 11,908 $ 3,404 $ 572 $ 793
Television program costs, net................ 95,392 88,109 74,644 68,437 52,381 33,993 19,293
Total assets................................. 306,502 228,514 301,582 208,007 112,521 74,130 46,856
Notes payable................................ 143,352 127,475 134,982 115,343 60,424 11,234 10,419
Total liabilities............................ 234,923 201,529 233,302 179,924 104,768 51,084 29,301
Total stockholders' equity
(deficit).................................. 71,579 26,985 68,280 28,083 7,503(11) 2,681(11) (882)(11)
</TABLE>
33
<PAGE> 40
- ---------------
(1) Includes (a) for periods subsequent to February 1991 the combined
operations of All American Entertainment, Inc. (formerly known as Scotti
Brothers Entertainment Industries, Inc. ("SBEI")), and All American
Television, Inc., (b) for periods subsequent to February 1993 and August
1994, respectively, the combined operations of the Company including LBS
Communications, Inc. and Fremantle, following their respective dates of
purchase by the Company and (c) from October 1995, the date of the Mark
Goodson Acquisition, to December 31, 1995, the acquisition by the Company
of its initial 50% equity interest in Mark Goodson Productions, LLC (the
remaining 50% interest of which was acquired as of January 1996).
(2) Earnings in 1995 include the recognition of earnings relating to strip
syndication of Baywatch. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(3) Adjusted to give retroactive effect to a one-for-four reverse stock split
effected on March 20, 1992.
(4) Per share income from continuing operations applicable to common
stockholders for the year ended December 31, 1993 includes a gain of $3.9
million, which represents the excess carrying value of redeemable preferred
and common stock formerly outstanding over the price paid for its purchase,
net of accretion and dividends on such redeemable stock.
(5) Per share income from continuing operations applicable to common
stockholders for the years ended December 31, 1992 and December 31, 1991
includes the effect of $2.7 million and $2.1 million, respectively, of
accretion and dividends on redeemable stock.
(6) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is a commonly used financial measure but should not be construed as an
alternative to operating income or cash flows from operating activities (as
determined in accordance with generally accepted accounting principles
("GAAP")). EBITDA does not reflect cash necessary or available to fund cash
requirements. In addition, through June 30, 1996, the Company has accrued
contingent purchase price (earn-out payments) totaling $4.4 million
(excluding additional contingent purchase price of $0.9 million allocated
to a third party in 1995 prior to the Company's ownership of 100% of Mark
Goodson Productions, LLC) which is not deducted from EBITDA. See
"Business -- Acquisitions."
(7) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income before the provision for income taxes plus fixed
charges. Fixed charges consist of interest expense, amortization of
financing costs and the portion of rental expense on operating leases which
the Company estimates to be representative of the interest factor
attributable to rental expense. On a pro forma basis, giving effect to the
Private Offering and the anticipated retirement of approximately $35.5
million of the Company's outstanding Convertible Notes and the repayment of
$58.8 million of outstanding revolving debt under the Former Credit
Facility, the ratio of earnings to fixed charges would have been 1.2x and
1.5x for the six months ended June 30, 1996 and the year ended December 31,
1995, respectively.
(8) Earnings were not sufficient to cover fixed charges for the six months
ended June 30, 1995. Additional earnings of $3.0 million would have been
required to cover fixed charges for such period.
(9) Includes the results from operations of Mark Goodson Productions, L.P. and
The Child's Play Company giving effect to the Mark Goodson Acquisition as
if the Mark Goodson Acquisition had occurred on January 1, 1995. These
results do not include pro forma contingent purchase price (earn-out)
payments. See "Business -- Acquisitions" and "Pro Forma Financial
Information." The EBITDA calculation has not been reduced for $8.4 million
of pro forma earn-out payments.
(10) Pro forma interest expense gives effect to the net increase in interest
expense resulting from the issuance of the Notes (using an interest rate of
10.875%) and the assumed retirement of
34
<PAGE> 41
approximately $35.5 million of the Company's outstanding Convertible Notes
and the repayment of $58.8 million of outstanding revolving debt under the
Former Credit Facility as if this issuance and retirement occurred on
January 1, 1995. Further, pro forma interest expense gives effect to the
Mark Goodson Acquisition as if debt incurred in connection with acquiring
100% of Mark Goodson Productions, L.P. had been incurred as of January 1,
1995. See "Business -- Acquisitions" and "Pro Forma Financial Information."
(11) The Company charged approximately $1.5 million during each of the years
ended December 31, 1992 and December 31, 1991 against retained earnings for
accretion on redeemable stock and dividends on preferred stock. The gain of
$3.9 million recorded during the year ended December 31, 1993 (see Note (4)
above) was credited to additional paid in capital.
35
<PAGE> 42
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) exhibition, involving the domestic or international
airing or broadcast 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." 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
license 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, Kellogg Company, 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 stations, independent stations and cable and satellite television
operators. The Company produces and distributes all-new "local" content
programming internationally through All American Fremantle International, Inc.
("AAFI"), principally using game and variety show formats acquired as part of
the Mark Goodson Acquisition or from third parties, and through All American
Orbis, Inc. 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 plus production and format fees. While the Company has international
production facilities in several countries, AAFI's production activities occur
primarily in Germany and the United Kingdom.
36
<PAGE> 43
The international distribution and exploitation of Baywatch Nights
(worldwide), The Adventures of 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 AAFI. In
addition to producing and distributing Company owned product, AAFI 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 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 predetermined 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 with respect to The Adventures
of Sinbad.
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 six months 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.
CERTAIN ACCOUNTING PRACTICES
A large percentage of a television program's revenues is recognized when
the program is delivered pursuant to a non-cancelable agreement, provided the
applicable broadcast season has commenced. Broadcasters typically make most of
their annual programming commitments in the first and second quarters of any
calendar year so that new programs will be ready for delivery in the third and
fourth quarters of that year, typically the commencement of the broadcast
season. Minimum guaranteed revenues from domestic cash license agreements
typically are recognized when the license period begins and the program is
delivered. Advertising revenues (i.e., sales of advertising time received by the
Company in lieu of cash license fees for the sale of program broadcast rights to
a broadcast station ("barter syndication")) are recognized upon the commencement
of the license period of the respective program pursuant to non-cancelable
agreements, provided that the program has been delivered. Minimum guaranteed
revenues from foreign license agreements typically are recognized on the date of
the license agreement. Revenues from subsequent licensing of delivered product,
including rerun strip syndication (i.e., sales of previously aired episodes
licensed for broadcast in a five-day-a-week format) are recognized on the
commencement of the license period. As a result, significant fluctuations in the
Company's total revenues and net income can occur from period to period
depending on, among other things, the delivery or availability dates of
programs. The Company's television revenues have historically been higher in the
third and fourth quarters. The Company's recorded music operations also are
subject to fluctuations due to the timing of certain album releases (which may
generate significant revenues
37
<PAGE> 44
in the period in which the release occurs) and to the timing of the recognition
of artist cost expense (which may occur during a period prior to determination
of actual sales of an album).
Television program costs (e.g., direct production costs, production
overhead, interest and certain exploitation costs) are capitalized during the
period of production of a respective program. Such capitalized costs, together
with estimated total costs of participations and residuals, are amortized based
upon the ratio of revenue received during the current period to management's
estimate of the remaining gross revenue to be recognized in connection with the
respective program. To the extent that such estimates differ from the actual
results, there could be a material adverse effect on the Company's financial
condition or results from operations. Such estimates are evaluated quarterly and
estimated losses, if any, are provided for in full.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1996 AND 1995
The following 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 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 AAFI
revenues and the recognition of revenues from Mark Goodson Productions, LLC.
These increases were partially offset by period to period reductions in Baywatch
revenues (due to the availability of Baywatch for strip syndication commenc-
38
<PAGE> 45
ing in June 1995, with no comparable revenue recognized in 1996) and other
television distribution revenues.
AAFI 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 AAFI revenues) for the
six months ended June 30, 1996, up $8.3 million from $25.7 million (72% of total
AAFI 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, LLC (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 AAFI 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 rerun 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
39
<PAGE> 46
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 AAFI 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 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
40
<PAGE> 47
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
attributable to the matters discussed above.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1994
Revenues
The Company's total revenues increased by $113.9 million, or 99%, to $228.8
million for the year ended December 31, 1995, from $114.9 million for the year
ended December 31, 1994. Revenues from television operations increased by $107.9
million, or 109%, to $206.7 million for the year ended December 31, 1995, from
$98.8 million for the year ended December 31, 1994. This increase was due
primarily to: (i) the inclusion of AAFI revenues of $82.5 million for the year
ended December 31, 1995 compared to $31.8 million for five months (from the date
of the Fremantle International Acquisition) through December 31, 1994; (ii) the
recognition of Baywatch strip syndication revenue of $33.0 million; (iii) the
recognition of $19.8 million from the new one-hour series Baywatch Nights,
reflecting the delivery of 17 of the 22 episodes for the 1995/1996 broadcast
season; and (iv) the recognition of $3.6 million, representing the Company's
share of earnings relating to the Mark Goodson Acquisition for the period
commencing October 6, 1995 through year-end, before amortization of goodwill and
interest charges. AAFI revenues from the production and distribution of
television programming in Germany contributed $58.9 million, or 71%, of AAFI
revenues. On a pro forma basis, AAFI revenues, assuming a full 1994 year,
increased by $20.1 million, or 32%, to $82.5 million for the year ended December
31, 1995, due principally to the commencement of additional production
operations in Germany during the year and the increased participation of AAFI in
the purchase of prize merchandising for its programming.
Recorded music and merchandising revenues increased by $5.9 million, or
37%, to $22.0 million during the year ended December 31, 1995, from $16.1
million for the year ended December 31, 1994. This increase was primarily
attributable to: (i) higher sales of new releases, led by the new artist
Skee-Lo's "gold-selling" album entitled I Wish;(ii) the recognition of a $3.0
million non-refundable, non recoupable advance receivable from WEA (a division
of Time Warner, Inc.) upon the signing of a new domestic distribution agreement;
and (iii) merchandising revenues of $1.8 million for the year ended December 31,
1995, compared to $0.4 million for the year ended December 31, 1994. Partially
offsetting these revenue increases was a decrease in foreign licensing advances
received for the year ended December 31, 1995, compared with the year ended
December 31, 1994.
41
<PAGE> 48
Operating Expenses
Total operating expenses increased by $98.7 million, or 91%, to $207.1
million for the year ended December 31, 1995, from $108.4 million for the year
ended December 31, 1994. This increase was due primarily to: (i) the inclusion
of AAFI operating expenses which increased by $48.5 million, or 195%, to $73.4
million (89% of AAFI revenues) for the year ended December 31, 1995 (including
AAFI overhead and $2.0 million of goodwill amortization), from $24.9 million
(78% of AAFI revenues) for the five months (from the date of the Fremantle
International Acquisition) through December 31, 1994; and (ii) amortization of
television program costs of $90.4 million for the year ended December 31, 1995,
an increase of $57.9 million (including an increase of $9.0 million in
amortization included in AAFI operating expenses above), or 178%, from $32.5
million for the year ended December 31, 1994, due to the higher television
revenues. Selling, general and administrative expenses, including corporate
overhead and goodwill amortization, increased by $4.0 million, or 18%, to $26.5
million for the year ended December 31, 1995, from $22.5 million for the year
ended December 31, 1994. This increase was due principally to the inclusion of
AAFI overhead, including goodwill amortization, for the full year in 1995
compared with five months in 1994.
The Company's television expenses increased by $89.6 million, or 119%, to
$164.8 million (80% of total television revenues) for the year ended December
31, 1995, from $75.2 million (76% of total television revenues) for the year
ended December 31, 1994. The increase was primarily due to the increase in AAFI
expenses described above, increased amortization of television program costs
attributable to increased revenues and increased distribution expenses in
connection with the first run and strip syndication of Baywatch. Television
selling, general and administrative expenses for the year ended December 31,
1995 increased by $3.1 million, or 31%, to $13.2 million from $10.1 million for
the year ended December 31, 1994, due primarily to the $3.1 million increase in
AAFI charges of $5.5 million for the year ended December 31, 1995, from $2.4
million for five months (from the date of the Fremantle International
Acquisition) through December 31, 1994. On a pro forma basis, AAFI expenses,
assuming a full year, increased by $19.2 million, or 35%, to $73.4 million for
the year ended December 31, 1995, from $54.2 million for the pro forma year
ended December 31, 1994. Such increase was related to the commencement of
additional production operations in Germany during the year and the increased
participation of AAFI in the purchase of prize merchandising for its
programming.
Goodwill amortization for the year ended December 31, 1995 increased by
$1.4 million, or 140%, to $2.4 million from $1.0 million for the year ended
December 31, 1994, due to the inclusion of goodwill amortization related to the
Fremantle International Acquisition of $2.0 million for the year ended December
31, 1995, an increase of $1.2 million, or 150%, from $0.8 million for the five
months (from the date of the Fremantle International Acquisition) ended December
31, 1994. As a result of the agreement by the Company to acquire the balance of
the equity of Mark Goodson Productions, LLC effective January 1, 1996, in
consideration for $27.8 million in cash and notes, which includes approximately
$2.8 million for Interpublic's share of earnings through December 31,1995,
additional goodwill amortization of $1.0 million will be recognized per year
before consideration of contingent earnout amounts (for which the Company will
recognize 100% of the increased amortization). Corporate overhead of $4.7
million for the year ended December 31, 1995 decreased by $0.9 million, or 16%,
from $5.6 million for the year ended December 31, 1994, due primarily to charges
for certain one-time employment terminations taken in 1994.
The Company's recorded music and merchandising expenses increased $5.0
million, or 47%, to $15.8 million (72% of recorded music and merchandising
revenues) for the year ended December 31, 1995, from $10.8 million (67% of music
and merchandising revenues) for the year ended December 31, 1994. This increase
was primarily due to an increase of $3.7 million in artist related costs to
$14.5 million for the year ended December 31, 1995, from $10.8 million for the
year ended December 31, 1994, and merchandising costs of $1.3 million compared
with no costs in the comparable prior period.
42
<PAGE> 49
Operating Income
Total operating income for the Company increased $15.2 million, or 236%, to
$21.7 million for the year ended December 31, 1995, from $6.5 million for the
year ended December 31, 1994, due principally to increases in television
operating income. Operating income from television operations increased by $13.9
million, or 111%, to $26.4 million for the year ended December 31, 1995, from
operating income of $12.5 million for the year ended December 31, 1994. Such
increase in television operating income, which was primarily attributable to the
increases in revenues and expenses discussed above, was partially offset by
increases in amortization of goodwill and overhead.
The Company's recorded music division recognized operating income of $0.01
million (after inclusion of selling, general and administrative expenses of $6.2
million), for the year ended December 31, 1995, compared to an operating loss of
$0.5 million (after inclusion of selling, general and administrative expenses of
$5.8 million) for the year ended December 31, 1994. Such increase was primarily
attributable to the increased revenue discussed above.
Foreign Currency Exchange Gain
The Company recognized a foreign currency exchange gain of $0.3 million for
the year ended December 31, 1995, compared to a foreign currency exchange gain
of $0.1 million at December 31, 1994 which results from the settlement and
valuation of certain licensing agreements, denominated in foreign currencies,
into U.S. Dollars as of December 31, 1995 and 1994, respectively. The Company
has not entered into any foreign currency swap agreements or any other foreign
currency hedging activities. The Company has experienced in the past, and may
experience in the future, gains and losses as a result of fluctuations in
exchange rates.
Interest Expense
Interest expense, net of interest capitalized ($1.2 million) and interest
income ($0.7 million), increased by $3.6 million, or 63%, to $9.3 million for
the year ended December 31, 1995, from $5.7 million, net of interest capitalized
($0.4 million) and interest income ($0.2 million), for the year ended December
31, 1994, due to increased borrowings in connection with the Fremantle
International Acquisition and as a result of increased production activities.
The Company expects that the trend of increased interest costs will continue in
part as a result of increased borrowings in connection with the Mark Goodson
Acquisition and the purchase of the balance of the equity of Mark Goodson
Productions, LLC.
Income Taxes
The Company recorded a tax provision for the years ended December 31, 1995
and 1994 in the amount of $5.2 million and $0.3 million, respectively, which
reflects an expected effective tax rate for both 1995 and 1994 of 42%.
Net Income
Net income increased by $6.7 million to $7.2 million for the year ended
December 31, 1995, from a net income of $0.5 million for the year ended December
31, 1994, as a result of factors discussed above.
FISCAL YEAR ENDED DECEMBER 31, 1994 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1993
Revenues
The Company's total revenues increased by $44.3 million, or 63%, to $114.9
million for the year ended December 31, 1994, from $70.6 million for the year
ended December 31, 1993. Revenues from television operations increased by $41.4
million, or 72%, to $98.8 million for the year ended
43
<PAGE> 50
December 31, 1994, from $57.4 million for the year ended December 31, 1993. The
growth in revenues from television operations was primarily due to the Fremantle
International Acquisition, which contributed $31.8 million in revenues from the
date of acquisition (August 3, 1994) through December 31, 1994, and an increase
in the number of Baywatch episodes delivered during 1994 from 22 in 1993 to 28
in 1994. The Company delivered 22 new one-hour episodes of Baywatch for the
1994/1995 television broadcast season in 1994. Additionally, six episodes of the
1993/1994 television broadcast season were delivered in the first quarter of
1994.
Recorded music revenues increased by $2.9 million, or 22%, to $16.1 million
for the year ended December 31, 1994, from $13.2 million during the year ended
December 31, 1993. This increase was due in part to an increase in units sold in
1994 from 1993, principally attributable to sales of the new artist 12 Gauge.
During the year ended December 31, 1994, the Company sold approximately 240,000
albums and 767,000 singles of the new artist 12 Gauge. The increase in revenues
for 1994 was partially offset by a decline in the number of units sold of "Weird
Al" Yankovic, who released compilation material in 1994 compared to an album
containing primarily new original compositions in 1993, and a decline in the
amount of publishing revenue recognized, due to the partial sale and
administration transaction relating to Baywatch publishing rights, from $1.0
million in 1993 to $0.5 million in 1994.
Operating Expenses
Total operating expenses increased by $39.9 million, or 58%, to $108.4
million for the year ended December 31, 1994, from $68.5 million for the year
ended December 31, 1993. AAFI contributed $24.9 million to such increase with
respect to the period from August 3, 1994 through December 31, 1994. Selling,
general and administrative expenses increased $5.4 million, or 34%, to $21.5
million for the year ended December 31, 1994, from $16.1 million for the year
ended December 31, 1993 due to the additional overhead related to the operations
of AAFI which were acquired during the third quarter of 1994 and certain
increases in corporate overhead.
Television expenses increased by $32.6 million, or 77%, to $75.2 million
(76% of total television revenues) for the year ended December 31, 1994, from
$42.6 million (74% of total television revenues) for the year ended December 31,
1993. This increase was primarily due to (i) the inclusion of AAFI operating
expenses of $21.7 million (68% of AAFI revenues) from the date of the Fremantle
International Acquisition; (ii) an increase in revenues from certain delivered
programming which had lower gross profit percentages than the overall mix of the
Company's other distributed programming; (iii) lower than expected revenues from
Sirens; and (iv) lower than expected ratings on one of the Company's daily
series.
Recorded music expenses increased $1.0 million, or 10%, to $10.8 million
(67% of total recorded music revenues) for the year ended December 31, 1994,
from $9.8 million (74% of total recorded music revenues) for the year ended
December 31, 1993. The increase in recorded music expenses corresponds to
increases in revenues for the year.
Corporate overhead increased by $1.6 million, or 41%, to $5.6 million for
the year ended December 31, 1994, from $4.0 million for the year ended December
31, 1993. Such increase was primarily attributable to charges related to certain
employment terminations and an increase in certain consulting and professional
fees. Approximately $2.5 million of overhead was capitalized to productions in
each of 1994 and 1993.
Goodwill amortization increased by $0.9 million to $1.0 million for the
year ended December 31, 1994, from $0.1 million for the year ended December 31,
1993, due to the commencement, following the Fremantle International
Acquisition, of amortization of goodwill of $50.3 million attributable to such
Fremantle International Acquisition. Such goodwill is being amortized over 25
years and, during 1994, amortization expense of $0.8 million has been recorded
from the date of acquisition (August 3, 1994) through December 31, 1994.
44
<PAGE> 51
Operating Income
Total operating income for the Company increased by $4.4 million to $6.5
million for the year ended December 31, 1994, from $2.1 million for the year
ended December 31, 1993, due primarily to the inclusion of AAFI results from the
date of the Fremantle International Acquisition.
Operating income from television increased $5.5 million, or 79%, to $12.5
million for the year ended December 31, 1994, from $7.0 million for the year
ended December 31, 1993. This increase is attributable to the inclusion of AAFI
results from the date of acquisition and increased earnings from the Company's
series Baywatch offset by increased television expenses as discussed above.
The recorded music division recognized an operating loss of $0.5 million
for the year ended December 31, 1994 compared to an operating loss of $0.9
million for the year ended December 31, 1993. The decrease in the operating loss
was primarily due to increased revenues as discussed above.
Interest Expense
Interest expense increased $4.2 million to $5.9 million for the year ended
December 31, 1994, from $1.7 million for the year ended December 31, 1993, due
to the effect of higher average borrowings including the inclusion of the
Convertible Notes, issued in October 1993, for a full year, and higher average
borrowings under the Company's credit facilities, including increased borrowings
in connection with the Fremantle International Acquisition.
Income Taxes
The provision for income taxes was $0.3 million (42% of pre-tax income) and
$0.2 million (32% of pre-tax income) for the years ended December 31, 1994 and
1993, respectively. The increase in 1994 was partially attributed to higher
foreign tax withholding resulting from the inclusion of AAFI.
Net Income
Net income decreased to $0.5 million for the year ended December 31, 1994,
from $4.2 million for the year ended December 31, 1993 due to the factors
described above.
45
<PAGE> 52
QUARTERLY RESULTS OF OPERATIONS
Significant fluctuations in the Company's total revenues and net income can
occur from period to period depending on the delivery or availability dates of
programs. 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 broadcast season in the fall of each year. Pursuant to the Company's
accounting policy, as required under generally accepted accounting principles,
capitalized television program costs are reviewed on a quarterly basis and any
portion of such costs that appear not to be fully recoverable from future
revenues are charged to expense during the period in which the loss becomes
evident. The Company's recorded music operations are also subject to
fluctuations due to the timing of album releases (which may generate significant
revenues in the period in which the release occurs) and to the timing of the
recognition of artist cost expense (which may occur during a period prior to
determination of actual sales of an album).
The following table sets forth selected data by quarter included in the
Company's Consolidated Financial Statements of Operations (unaudited), and does
not give effect on a pro forma basis to the Fremantle Acquisition nor the Mark
Goodson Acquisition. See "Business -- Acquisitions."
<TABLE>
<CAPTION>
QUARTERS ENDED IN
1996 QUARTERS ENDED IN 1995 QUARTERS ENDED IN 1994
----------------- ----------------------------------------- ----------------------------------------
JUNE MARCH DECEMBER SEPTEMBER JUNE MARCH DECEMBER SEPTEMBER JUNE MARCH
30, 31, 31, 30, 30, 31, 31, 30, 30, 31,
------- ------- -------- --------- -------- ------- -------- --------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Television........... $30,316 $41,357 $62,097 $76,818 $ 33,875 $33,944 $44,000 $ 34,570 $ 4,103 $16,098
Recorded music and
merchandising...... 9,029 6,786 6,486 8,332 4,190 3,018 5,183 3,541 3,502 3,904
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
39,345 48,143 68,583 85,150 38,065 36,962 49,183 38,111 7,605 20,002
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Expenses:
Television........... 22,107 29,358 49,784 60,672 26,259 28,049 33,902 25,682 3,630 11,982
Recorded music and
merchandising...... 6,573 4,978 3,702 6,438 3,799 1,864 3,648 2,366 2,275 2,461
Selling, general and
administrative..... 6,631 6,662 6,008 6,000 6,326 5,768 6,031 6,677 4,386 4,429
Goodwill
amortization....... 1,101 1,085 793 536 530 540 561 364 23 23
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
36,412 42,083 60,287 73,646 36,914 36,221 44,142 35,089 10,314 18,895
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)............... 2,933 6,060 8,296 11,504 1,151 741 5,041 3,022 (2,709) 1,107
Other expenses......... 2,671 2,489 2,794 1,800 2,317 2,284 1,724 1,828 1,065 1,059
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
continuing operations
before income
taxes................ $ 262 $ 3,571 $ 5,502 $ 9,704 $ (1,166) $(1,543) $ 3,317 $ 1,194 $(3,774) $ 48
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Cash Flows:
Net cash provided
(used) by operating
activities......... $ 3,507 $20,728 $ (793 ) $(2,141) $(13,989) $ (48) $(6,001 ) $(11,534 ) $(2,302) $ 5,163
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
46
<PAGE> 53
LIQUIDITY AND CAPITAL RESOURCES
This discussion should be read in conjunction with the other information
set forth herein in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
notes thereto included, or incorporated by reference, in this Prospectus.
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 Fremantle International Acquisition, the Mark Goodson Acquisition and the
Orbis Acquisition, to finance the Company's operations, including the production
of Baywatch, Baywatch Nights and The Adventures of Sinbad, and to pay for
general operating expenses. See "Business -- Acquisitions."
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 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 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 Common Stock to convert Common
Stock into Class B Common Stock on a one for one basis at the holders' option.
This amendment and the ability of the Common stockholders to convert shares of
Common Stock into shares of Class B Common Stock is subject to NASDAQ approval
of the proposed amendment to the Restated Certificate of Incorporation.
In October 1996, the Company secured a $155 million Restructured Credit
Facility with a four-year term, with a syndicate of lenders led by The Chase
Manhattan Bank. Under the terms of the Restructured Credit Facility, the amounts
which the Company may borrow on a revolving basis are based upon the value of
the collateral in the borrowing base, which consists principally of accounts
receivable of the Company and its subsidiaries. Borrowings under the
Restructured Credit Facility bear interest, at the Company's option, at either;
(i) LIBOR plus 1 1/2% (6.88% as of November 8, 1996); or (ii) the Alternate Base
Rate (which is the greater of The Chase Manhattan Bank's Prime Rate, its Base CD
Rate plus 1%, or the Federal Funds Effective Rate plus 1/2%) plus 1/2% (8 3/4%
as of November 8, 1996), subject to increase by 1/2 of 1% in the event of the
Company's failure to satisfy certain financial ratios. As of November 8, 1996,
the Company has outstanding borrowings of $30.0 million, and approximately
$103.0 million was available for borrowing. Amounts repaid under the
Restructured Credit Facility may be reborrowed, subject to the Company having an
adequate borrowing base and meeting the conditions precedent to each borrowing.
The Restructured Credit Facility imposes a number of financial and other
conditions upon the Company, including limitations on indebtedness and changes
in lines of business, restrictions on the disposition of assets, restrictions on
making certain payments (including dividends), restrictions on acquisitions and
certain financial tests, including a minimum net worth, a leverage test and an
interest coverage ratio (each as defined in the Restructured Credit Facility).
In particular, consummation of significant acquisitions may be subject to
obtaining bank consent under the Restructured Credit Facility. Furthermore,
certain conditions must be satisfied before funding of each season of the
respective series, and such conditions had been previously met for the 1996/1997
broadcast season of Baywatch, Baywatch Nights and The Adventures of Sinbad.
Loans under the Restructured Credit Facility may be made as "Domestic Loans" to
All-American Communications, Inc. or as "Foreign Loans" to All-American
Netherlands B.V., a newly-formed foreign subsidiary, subject to borrowing base
availability. Substantially all of the Company's assets (other than real
property) are pledged under the Restructured Credit Facility.
47
<PAGE> 54
In October 1993, the Company issued its 6 1/2% Convertible Subordinated
Notes due 2003 (the "Convertible 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 Convertible 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 temporarily repay all amounts outstanding under its commercial bank
facilities, and for general corporate purposes. The Convertible 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
Convertible Notes is paid on the basis of a 360-day year of twelve 30-day
months. Subject to the prior redemption thereof, the Convertible Notes will
mature on October 1, 2003. The Company has given notice to the Fiscal Agent of
its intent to redeem all of the outstanding Convertible Notes on November 27,
1996. The Company expects to utilize $37.5 million of the Restructured Credit
Facility in connection with such redemption. Such amount is in addition to $20.3
million previously expended by the Company for the repurchase of $20.7 million
principal amount of the Convertible Notes. See "Description of Certain
Indebtedness and Capital Stock -- 6 1/2% Convertible Subordinated Notes" and
"Use of Proceeds."
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 The Adventures of 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 Restructured Credit Facility, 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, including the net
proceeds of the Private Offering, 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.
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
48
<PAGE> 55
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
television producer David Gerber 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 The Adventures of 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 The Adventures of 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 such subsequent broadcast seasons. At the end of three years, if
Atlantis does not exercise its right to continue producing The Adventures of
Sinbad, such right to produce the series reverts to the Company. As of November
4, 1996, the Company has spent approximately $8.8 million towards the production
of 15 episodes of The Adventures 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 the Restructured Credit Facility; (ii) cash payments by
international sub-licensees; and (iii) working capital, pending receipt of
license fees. Through November 4, 1996, The Adventures of Sinbad had been
cleared in more than 90% 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 November 4, 1996, the Company has spent
approximately $19.5 million towards the production of 22 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 the Restructured Credit Facility;
(ii) cash payments by The Fremantle Corporation (an unaffiliated company); and
(iii) working capital, pending receipt of license fees. Through November 4,
1996, Baywatch had been cleared in more than 97% 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 November 4, 1996, the Company has spent approximately $8.6 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 the Restructured Credit Facility;
(ii) cash payments received from international sub-licensees; and (iii) working
49
<PAGE> 56
capital, pending receipt of license fees. Through November 4, 1996, Baywatch
Nights had been cleared in more than 92% of the domestic television market for
the 1996/1997 broadcast season and has been licensed to international licensees
for amounts totaling in excess of $10.7 million 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 $4.8 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 12 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 September 16, 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.
50
<PAGE> 57
BUSINESS
GENERAL
All American is a diversified worldwide entertainment company with
operations in television and recorded music production and distribution. The
Company is a leading independent producer and distributor of television
programming and believes that it is the largest supplier of game show
programming in multiple formats and languages worldwide. The Company's
programming includes the Baywatch franchise and 60 game show formats and other
television programming created by the Company's subsidiary Mark Goodson
Productions, including The Price Is Right, the longest running game show in the
United States. The Company produces, distributes or owns television programming
consisting of 32 series, approximately 30,000 game show episodes, 165 motion
pictures and a library of children's programming, documentaries and specials.
All American seeks to be a leading global provider of quality television
programming. Management believes that ownership of its programming combined with
its global production and worldwide distribution capabilities provide important
long-term competitive advantages. Opportunistic acquisitions and internal
development efforts are expected to remain important elements in the Company's
growth strategy.
Management believes that the Company is well positioned to take advantage
of current trends in the television industry and that recent regulatory changes,
local content requirement, and the proliferation of distribution channels via
satellite and cable television will increase the demand for programming content.
TELEVISION OPERATIONS
The Television Industry
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) exhibition, involving the airing or broadcast of
programming over network affiliated stations, independent stations and cable or
satellite television. The U.S. television market is the largest in the world,
consisting of the principal broadcast networks and their affiliates, independent
television stations and cable television networks. Expanding international
television broadcast, cable and satellite delivery systems offer further
opportunities for the exploitation of television programming.
Domestic Market. The U.S. market for television programming primarily is
composed of four submarkets: the broadcast television networks (ABC, CBS, NBC
and Fox and emerging networks consisting of UPN and WB), pay cable services
(such as HBO, The Disney Channel and Showtime/The Movie Channel, Inc.), basic
cable services (such as USA Networks, the Arts & Entertainment Network,
Lifetime, The Family Channel and Turner Broadcasting Network) and syndicators of
first-run programming (such as the Company, King World Productions, Inc. and
Multimedia, Inc.). The U.S. television market currently is dominated by the
three major networks, each of which has approximately 200 affiliated stations
and the Fox network, which has approximately 125 affiliated stations. The
affiliates broadcast network-supplied programming and national commercials in
return for payments by the major networks. This relationship results in the
networks being able to reach virtually all of the significant television markets
in the United States. There are also a significant number of independent
commercial television stations in the United States. These stations offer an
alternative to network distribution through syndication. The network schedule
provides affiliates with only a portion of their daily program schedule, and the
balance of the time is filled with programs acquired through television
syndication companies or produced locally by the station. Cable services
generally are classified as being in one of four categories: telephone delivery
(e.g., Disney TeleVentures arrangement with four phone companies to deliver
programming over telephone lines), superstations (e.g., Turner Broadcasting
Network), pay cable services (e.g., HBO) and
51
<PAGE> 58
basic cable networks (advertiser-supported, e.g., The Family Channel). The most
successful cable networks reach more than 60% of the U.S. television households.
Recently developed digital compression technology combined with fiber optics or
small-sized satellite dishes may permit cable companies, telephone companies or
direct broadcast satellite systems to expand the domestic television market up
to 500 or more channels.
Domestic Syndication. Independent television stations, during both prime
time hours (primarily 8:00 P.M. to 11:00 P.M., in the Eastern and Pacific time
zones and 7:00 P.M. to 10:00 P.M. in the Central and Mountain time zones) and
non-prime time, telecast self produced programming, off-network programming or
first-run programming from independent producers or "syndicators". In non-prime
time, network affiliates telecast network programming, off-network programming
(reruns), first-run programming (programming produced for distribution on a
syndicated basis), and local programming produced by the local stations
themselves. 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. 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
license 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, Kellogg Company, 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.
International Markets. The number of outlets for television programming
outside the U.S. has been increasing with the worldwide proliferation of
broadcast, cable and satellite delivery systems. Over the last ten years,
European governments have privatized television systems in several countries,
including Germany, Italy, France and Spain. The Company believes privatized
systems are more likely to broadcast U.S. programming than government-owned
networks. In addition, both the number of pay and satellite television systems
in Europe and the number of subscribers to these systems have increased. Pay
television and satellite distribution systems also are developing in other
geographic areas, including many Asian and South American countries. In
international markets, suppliers of programming may be subject to local content
and quota requirements which prohibit or limit the amount of U.S. programming in
particular markets.
Domestic Television Production
In May 1991, the Company acquired the rights to produce the weekly action
drama series Baywatch, starring David Hasselhoff. Baywatch is currently one of
the highest rated one hour series in first-run syndication in the United States.
In December 1991, the Company also acquired the domestic rights to distribute
the original episodes on a strip basis (i.e., Monday through Friday). The
original 23 episodes were produced by a third party and aired on the NBC network
during the 1989/1990 broadcast season. Broadcast of the Baywatch episodes
produced by the Company
52
<PAGE> 59
commenced in the United States in September 1991. Since it began producing
Baywatch for the 1991/1992 broadcast season, the Company has produced and
delivered an aggregate of 110 episodes of Baywatch through the 1995/1996
broadcast season. The Company has committed to produce 22 episodes of Baywatch
for the 1996/1997 broadcast season and, through November 4, 1996, had commenced
principal photography on 22 such episodes.
Based upon the success of its Baywatch series and the popularity of its
star, David Hasselhoff, the Company has been producing a Baywatch spin-off,
Baywatch Nights, for exhibition in first-run syndication. Currently in its
second season, Baywatch Nights has been licensed for the 1996/1997 broadcast
season to television stations covering more than 92% of the U.S. market, and the
Company is the exclusive domestic and, through AAFI, the exclusive international
distributor of the series. The Company has committed to produce 22 episodes of
Baywatch Nights for the 1996/1997 broadcast season and, through September 16,
1996, had completed principal photography on nine such episodes.
The Company and Atlantis Releasing B.V. ("Atlantis") will produce a minimum
of 13 and a maximum of 22 one-hour live action episodes of a new series entitled
The Adventures of Sinbad for the 1996/1997 broadcast season, and principal
photography had, in fact, commenced on 15 of such episodes as of November 4,
1996. In consideration for the Company providing $0.7 million of the $0.9
million per episode production budget, the Company will retain exclusive
distribution rights to The Adventures of Sinbad in the United States and Europe
(including the United Kingdom and excluding Scandinavia). The Company, under
certain circumstances, has an annual option, exercisable on or before February
15 of each of such subsequent 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
The Adventures of Sinbad, the right to produce the series reverts to the
Company.
In July 1995, the Company entered into an arrangement with The Gerber
Company ("TGC") pursuant to which the operations of TGC have been provided to
the Company's television development and production operations for a two-year
term through August 1997, subject to a one-year renewal option in favor of the
Company. Pursuant to this arrangement, David Gerber renders exclusive services
to the Company, subject only to his involvement with certain pre-existing
projects. Mr. Gerber, formerly a senior executive of both Columbia Pictures
Television and MGM Television, has assumed the position of President, All
American Television Production, Inc., a wholly-owned subsidiary of the Company.
Mr. Gerber is responsible for developing programming for both network television
and, to a lesser extent, first-run syndication. While head of television
programming at a major studio, Mr. Gerber was responsible for television
projects such as thirtysomething and In The Heat of the Night. Mr. Gerber is
currently developing movies-for-television and episodic series for potential
network and first-run syndication exhibition.
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.
Domestic Television Distribution
In addition to producing Baywatch, the Company distributes the show
domestically to independent broadcast stations. The 1996/1997 broadcast season
represents the sixth consecutive season for which the Company has produced and
domestically distributed the show and the seventh season of the series. Through
November 4, 1996, Baywatch had been licensed for the 1996/1997 broadcast season
to television stations covering more than 97% of the U.S. television market.
53
<PAGE> 60
In addition to producing Baywatch Nights, the Company is distributing the
show domestically and internationally. The Company has entered into a
sublicensing agreement for the distribution of the show throughout Continental
Europe. The Company is currently in the process of distributing Baywatch Nights
for the 1996/1997 broadcast season, both domestically and internationally. As of
November 4, 1996, Baywatch Nights had been licensed for the 1996/1997 broadcast
season to television stations covering more than 92% of the U.S. television
market.
Through November 4, 1996, The Adventures of Sinbad had been licensed for
the 1996/1997 broadcast season to television stations covering more than 90% of
the U.S. television market, including an agreement with the Tribune
Entertainment Company ("Tribune") whereby Tribune has agreed to clear The
Adventures of Sinbad on its owned and operated television stations including
those in New York, Los Angeles, Chicago, Philadelphia and Houston, representing
more than 28% of the U.S. television market. In consideration for clearing The
Adventures of Sinbad on its stations, Tribune retains the right to sell the
national advertising time in each weekly telecast of The Adventures of Sinbad
for a specified fee.
The Company has launched a domestic rerun ("strip") syndication package of
111 previously aired Baywatch episodes for broadcast during the 1995/1996 and
1996/1997 broadcast seasons ending September 1997 (at which time such episodes
are licensed to USA Networks pursuant to the license described below). Domestic
rerun syndication typically involves the exhibition of programming five days a
week on local television stations and/or cable services after first-run
exhibition. Typically, to be successful in rerun syndication, a television
series must have at least 66 episodes (the equivalent of three full television
seasons). Through November 4, 1996, the rerun syndication package had been
licensed to television stations covering more than 94% of the U.S. television
market on a cash and barter basis, and the Company continues to actively market
the package. As of June 30, 1996, the Company had generated approximately $19.5
million of cash sales (i.e., excluding barter) related to the domestic strip
licensing of Baywatch and, in addition, will generally retain three minutes of
advertising time per telecast. The cash sales will be collected ratably over the
term of the strip license period; the related revenues will be recognized at the
commencement of the license period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Accounting Practices."
In May 1995, the Company entered into an exclusive license agreement with
USA Networks in regard to the licensing of 110 episodes of Baywatch, 22 episodes
of Sirens, 22 episodes of Acapulco H.E.A.T. and, under certain circumstances, up
to 22 episodes of Baywatch Nights. As a result of the Company's production of
Baywatch Nights for the 1996/1997 broadcast season, Baywatch Nights is now
excluded from this agreement. The license agreement is exclusive in the United
States, its territories and possessions (including Puerto Rico) over all forms
of transmission by all means (including, without limitation, free over-the-air
broadcasts, basic and pay cable, or via video on demand), other than via
continuous first-run syndication and other than the rerun strip syndication of
the first episodes of Baywatch during the period commencing June 26, 1995
through September 19, 1997. The initial term of the license agreement commenced
in May 1995 for Acapulco H.E.A.T. and October 1995 for Sirens, and will commence
in September 1997 for Baywatch, with a common termination date of September 2000
for all three shows. Revenue will be recognized on commencement of the license
period for each show. The minimum license fee aggregates $25.3 million for 110
episodes of Baywatch, 22 episodes of Sirens and 22 episodes of Acapulco
H.E.A.T., payable in 36 equal monthly installments of approximately $0.7 million
commencing September 1997 through August 2000. The license agreement also
provides that if Baywatch is produced for first-run syndication during the
1996/1997 or the 1997/1998 broadcast seasons and certain conditions concerning
the availability of the leading performers (including David Hasselhoff who is
currently committed to the series through the end of the 1996/1997 season) of
the series are met (or waived by USA Networks), USA Networks is obligated to
extend the license to include such broadcast seasons, and the minimum license
fee is increased by specified amounts. As a result of the production of Baywatch
for the 1996/1997 broadcast season, the Company expects that the
54
<PAGE> 61
minimum license fee will be increased by approximately $5.1 million. USA
Networks also has certain options to extend the term of the license for up to
four years for additional specified consideration.
GAME SHOWS
The Company believes that it is the largest supplier of game show
programming in multiple formats and languages worldwide.
The Company has substantially expanded and diversified its television
operations in the past two years through the acquisitions of Mark Goodson
Productions, the producer and worldwide copyright owner and licensor of many of
the most successful game show formats ever developed, including The Price Is
Right, Family Feud, Match Game, What's My Line and Password; and Fremantle
International, Inc., which pioneered the international production of American
television game show formats in local versions and languages, both for Mark
Goodson shows and shows developed by other producers such as Let's Make a Deal
and The Dating Game. These two acquisitions represent an aggregate investment by
the Company of over $100.0 million in total consideration (plus, in the case of
the Mark Goodson Acquisition, a contingent earn-out of up to an additional $48.5
million based on a portion of domestic net profits in the five-year period
ending October 2000; this period is subject to extension for an additional five
years if total earn-out payments do not equal $48.5 million, in which case the
earn-out shall be payable in neither a minimum nor maximum amount).
The Company's current game show line-up consists of The Price Is Right, in
its 25th consecutive season on CBS, and the development of updated versions of
three other Goodson game show formats for possible network exhibition or
first-run syndication in the 1997/1998 broadcast season, as well as local
versions, in certain cases renewed for multi-year periods, of The Price Is Right
and Family Feud in Germany and France. In addition, over 17,000 broadcast hours
of rerun game show programming produced by Mark Goodson Productions are licensed
to The Sony Game Show Channel through October 1997 when the licensing rights
revert to the Company. The Company has also recently expanded into the
production and distribution of local versions of U.S. style talk-shows in Europe
through the acquisition of Orbis Entertainment, Inc.
Copyright Ownership of Game Show Formats
By way of the Mark Goodson Acquisition, the Company acquired the formats to
some of the historically most popular game shows. Since 1946, Goodson has
produced approximately 30,000 episodes of television programming, totaling over
17,000 broadcast hours. Goodson was the creator of and, pursuant to the Mark
Goodson Acquisition, has transferred ownership rights to its popular game show
formats to the Company. The game show formats owned by the Company include:
<TABLE>
<S> <C> <C> <C>
Beat the Clock Get the Message Password Plus The Better Sex
Blockbusters He Said, She Said Play Your Hunch The Match Game
Body Language Hit the Jackpot Rate Your Mate The Name's The Same
By Popular Demand It's News To Me Say When! The Price Is Right
Call My Bluff! Judge For Yourself Showoffs To Tell The Truth
Card Sharks Make The Connection Snap Judgment Trivia Trap
Child's Play Mindreaders Split Personality Two For The Money
Choose Up Sides Missing Links Spin To Win Winner Take All
Double Dare Now You See It Super Password What's My Line?
Family Feud Number Please Tattletales What's Going On
New Family Feud Password That's My Line
</TABLE>
55
<PAGE> 62
International Production and Distribution
Through AAFI, the Company currently distributes, and, in some cases,
locally produces game shows throughout Europe, Asia, Australia and South
America. The Company believes that it is one of the world's largest suppliers of
television game shows outside of the United States, producing and distributing
more than 90 game shows in 29 countries. The Company's programming outside the
United States has expanded to include the distribution of the Mark Goodson
Productions game show formats which it owns, as well other shows, including
Let's Make A Deal, The $25,000 Pyramid and The Dating Game. AAFI has become one
of the leading producers of day-time entertainment in Germany, with three shows
(including The Price Is Right and Family Feud) airing on the RTL broadcast
network and an additional three shows broadcast on SAT 1. AAFI's franchise is
also strong in the United Kingdom and France, and the Company has operations or
is expanding its presence into the Netherlands, Greece, India, Asia and Latin
America.
The Company distributes and, in some cases, produces, game shows pursuant
to licensing contracts ("producer contracts") with various producers who control
the rights to specific game show formats. The Company licenses the right to
create and/or distribute game shows on a local basis in various international
territories to terrestrial as well as satellite broadcasters using the
successful U.S. format. Thus, for example, the Company produces German language
versions of The Price Is Right , known as Der Press Ist Heiss. The Company
licenses the right to produce The Price Is Right in France, where it is known as
Le Juste Prix, and Spain, where the show is called El Precio Justo. The rights
derived from the producer contracts are sub-licensed to broadcast outlets in
mostly Western European territories ("sublicense contracts") with major
television exhibitors. These sub-license contracts have terms which generally
range from one to three years with renewal options. While the sublicense
contracts are generally of a short term nature, the risk of their non-renewal
is, as historically determined, largely a function of ratings performance. In a
number of cases, the Company's programs are among the top rated programs in
their time slots in their markets. There is no assurance that the Company can
continue to achieve the ratings necessary to cause the programs to be renewed or
that the programs will be renewed. The producer contracts generally include
"tail" provisions or are subject to a course of dealing which allow AAFI or the
Company to retain distribution rights after the term of the contract (except in
certain circumstances where there is a specific outside term) on stations in
those territories in which the show is already being broadcast. In such a case,
the Company would not have the right to sell the show into new territories
unless a new contract was negotiated, thereby limiting certain growth
opportunities.
On or about August 19, 1996, the Company's Subsidiary, Mark Goodson
Productions, LLC ("Goodson") filed an arbitration claim against Grundy
International Operations Limited ("Grundy"), with the American Arbitration
Association in New York, Case No. 13 T 153 00742 96. Goodson is the
successor-in-interest under a license agreement (the "Agreement") with Grundy
whereby Goodson's predecessor licensed to Grundy the rights in certain
territories to various television game shows and game show formats. The initial
term of the Agreement expired on June 28, 1996, subject to a contractual
provision in the Agreement requiring the parties to negotiate in good faith
about a possible two year extension of the Agreement during the six months prior
to such expiration date. No such extension was agreed upon by the parties during
such period. Goodson has declared a default in connection with Grundy entering
into various license agreements without obtaining Goodson's prior consultation
and approval as required under the Agreement, and Grundy has taken the position
that such license agreements were not subject to the consultation and approval
provisions of the Agreement and that Goodson did not fulfill the foregoing good
faith requirement. Goodson is seeking a declaration of rights, an accounting of
all monies Grundy received by Grundy under the licenses and all other
appropriate relief. While Goodson intends to vigorously prosecute the
arbitration, there is no assurance that Goodson will ultimately prevail in this
matter.
Developing strong international distribution capabilities has complemented
the Company's existing production business. For example, the Company is
distributing Baywatch Nights and The
56
<PAGE> 63
Adventures of Sinbad in both the domestic and international marketplace. AAFI's
management is broadly experienced in the various facets of international
television production and distribution, and it has strong links with the
advertising community.
U.S. Production and Distribution
Currently, the Company's only game show in initial network exhibition is
The Price Is Right, its 25th consecutive season, hosted by Bob Barker and
exhibited on the CBS network as a day-time program. The network has extended the
series for a period of fifty-two additional weeks through the 1996/1997
broadcast season and the Company has agreed that the network will have four
annual renewal options, exercisable on or prior to March 1 preceding the ensuing
broadcast season, to further extend the term of the series. The network has
reserved the right, in the event of the unavailability of Bob Barker to serve as
host for any reason or cause, to convert the then term of the series to a
twenty-six week period, although discussions are still pending as to whether
such twenty-six week period begins following such unavailability or
retroactively during the cycle then in progress. In such event, the parties have
agreed to negotiate in good faith with respect to the extension of the term, the
program mix of new and repeat weeks to be applicable in each cycle, and any
other applicable terms and conditions.
The Company is also developing updated versions of three other Mark Goodson
Productions game show formats for possible network exhibition or first-run
syndication in the 1997/1998 broadcast season, The Company has hired Robert
Noah, a former key executive of Mark Goodson Productions, L.P. to help the
Company exploit the assets it acquired in the Mark Goodson Acquisition, as well
as new game show formats, in the United States.
In addition to rights to the use of its formats for new production, Mark
Goodson Productions L.P. also transferred ownership to the Company of a library
of tapes of previous game show episodes. This library, which includes over
17,000 broadcast hours of programming and approximately 30,000 episodes, is one
of the largest game show libraries in the world. Goodson has maintained
high-quality tapes covering a substantial proportion of its production. Prior to
the Mark Goodson Acquisition, Goodson entered into a license agreement with The
Sony Game Show Channel (the "Channel"), which license has been assigned to the
LLC. The Channel is a cable service dedicated to the broadcast of game show
material. For existing episodes, the Goodson license to the Channel provides for
certain exclusivity rights in the United States and Canada in favor of the
Channel other than for standard broadcast television. The license also covers
new episodes produced by third parties under format licenses. For certain other
new game show series, the Channel has certain first negotiation rights. The term
of the license expires on October 11, 1997 unless extended or renewed. See
"-- Acquisitions" for a description of the Mark Goodson Acquisition.
International Production and Distribution of Talk Shows.
Through its recent acquisition of Orbis Entertainment, Inc., the Company is
seeking to expand the international game show franchise established by AAFI into
the talk show area, by creating local versions in local languages of U.S. style
talk shows abroad. All American Orbis, Inc. is developing a talk show in France
for a major terrestial network, a reality show in Germany for satellite
exhibition and projects in other European and Asian countries. All American
Orbis, Inc. is subject to certain exclusivity provisions with respect to talk
shows in favor of Proctor & Gamble France SNC within certain territories subject
to the satisfaction of certain contractual thresholds. See "-- Acquisitions."
LIBRARY
The Company has been building an extensive library of television
programming to support its distribution activities. The Company currently
distributes, represents or owns participation interests in 165 motion pictures
and 32 television series, and a variety of children's programming and live-event
specials. The Company distributes All American Feature Theater, a package of
feature length
57
<PAGE> 64
motion pictures acquired by the Company in separate agreements with Vision
International, Skouras Pictures and Live Entertainment, among others. The
Company also distributes other programming, including a mini-series titled
Sherlock Holmes: Incident at Victoria Falls, and documentary series. In
addition, the Company acquired certain programming rights from Blair
Entertainment Corporation and John Blair Communications, Inc. in June 1992,
including distribution rights to Divorce Court.
The Company distributes children's television programming consisting of
both television series and animated feature films, including Heathcliff and
Inspector Gadget. In February 1993, the Company entered into a long term
(through 2004) sublicense agreement with The Family Channel for the animated
series Heathcliff for the domestic cable and syndication markets.
The distribution terms and rights vary as to media and geographic area for
each program, but are generally for representation or distribution throughout
the United States except for the game shows, which are for distribution both
domestically and internationally. Extension of terms may be available in certain
cases if the Company meets pre-defined performance standards. The Company
intends to seek extensions of the distribution periods for these properties on
satisfactory economic terms, although there is no assurance that the Company
will be able to do so. The table below sets forth certain of these properties as
of September 12, 1996:
<TABLE>
<S> <C>
SERIES Baywatch, Baywatch Nights, Acapulco H.E.A.T., America's Top Ten,
BeachClash, Divorce Court, Sirens, Stuntmasters, Tales From The
Darkside
CHILDREN'S SERIES Bots Master, Heathcliff, Inspector Gadget
MOTION PICTURES Bad Influence, Care Bears Movie, Care Bears Movie II, Eddie and the
Cruisers II, Eye of the Tiger, Freeze Frame, Ghostwriter, Hansel
and Gretel, He's My Girl, It Nearly Wasn't Christmas, Lady Beware,
Wild Orchid
BOB HOPE CLASSIC FILMS Cancel My Reservation, The Great Lover, How to Commit Marriage, The
Lemon Drop Kid, My Favorite Brunette, Paris Holiday, The Private
Navy of Sgt. O'Farrell, Road to Bali, Road to Rio, Seven Little
Foys, Son of Paleface
SPECIALS The Boy King, Christmas at the Movies, The Elvis Files, Exploring
Psychic Powers, The JFK Conspiracy, The Kennedy Assassinations,
Madonna Exposed, Mysteries of the Pyramids, Remembering Marilyn,
Return to the Titanic, The Royal Family -- In Crisis
MINI-SERIES Around the World in 80 Days, Sherlock Holmes: Incident at Victoria
Falls, Sherlock Holmes and the Leading Lady
</TABLE>
Acquisition of Properties for Distribution
The Company generally acquires properties for television distribution by
entering into agreements with producers/owners or by producing or co-producing
its own programs. The Company distribution agreements generally provide that the
revenues derived from the program are allocated between the producer and the
Company on a pre-negotiated basis. Acquisitions are based on projected station
demand and acceptance as well as expected advertiser sponsorship.
Under some arrangements, the Company will guarantee that the producer's
share of the revenue will not be less than a specified dollar amount. In other
instances, the Company will provide the producer with a production advance, in
which case the Company usually recoups such advance before making any remittance
of the producer's share of revenues. Where possible, the Company has endeavored
to limit its risk by arranging for other distribution or major station groups to
provide production, financing and/or distribution services in exchange for a
portion of the Company's fees.
58
<PAGE> 65
In addition to U.S. television broadcast rights, the Company also acquires,
where available on acceptable terms, world-wide broadcast television and
non-standard television distribution rights (such as cable and videocassette
rights) to the programs which it distributes. These acquisitions are typically
on a long term exclusive basis, often between three and twelve years, in some
cases with various renewal options, and may provide that the Company has the
right to undertake production of the program if the producer fails to deliver
the contracted programming.
Concentration and Competition
Competition in the production and distribution of television programming is
intense. The Company's programming competes with other first-run programming,
network programming reruns, and programs produced by local television stations.
The Company competes with many other companies that have been acquiring,
producing and distributing programs longer than the Company, most of which have
greater financial resources than the Company. These competitors include large
television and film studios such as The Walt Disney Company, Paramount
Communications Inc., Columbia Pictures Television, 20th Century Fox Film Corp.,
MCA Inc., and Warner Bros. Inc., as well as other television distribution
companies such as King World Productions, Inc. and Viacom, Inc. In addition,
vertical integration of the television broadcast market and the creation and
expansion of new "networks" which create a substantial portion of their own
programming, such as UPN (United Paramount Network) and WB (Warner Brothers,
Inc.) have decreased the number of available time slots for, and thereby
increase the competition among, programs marketed for first-run syndication by
independent syndicators like the Company. The Company also competes with
companies for the sale of television advertising time, including Tribune
Broadcasting Co., Viacom, Inc. and King World Productions, Inc.
The Company's success is highly dependent upon such various unpredictable
factors as the viewing preferences of television audiences. Public taste is
unpredictable, and a shift in demand could cause the Company's programming to
lose its appeal. Television programming also competes for audiences with many
other forms of entertainment and leisure time activities, some of which include
new areas of technology (e.g., video games and home video), the impact of which
on the Company's operations cannot be predicted.
For the Company to successfully place its syndicated television programming
with independent television stations, the Company must generally enter into an
agreement with station groups which own stations in the New York, Los Angeles
and Chicago markets. The largest of these station groups include Chris Craft and
Tribune which own or operate stations covering 19.4% and 28.4% of the domestic
television market, respectively.
During the years ended December 31, 1995, 1994 and 1993, The Fremantle
Corporation, a corporation not affiliated with the Company, accounted for 6%,
13% and 17% of consolidated revenues, respectively. As of October 1995, in
connection with the Mark Goodson Acquisition, a wholly-owned subsidiary of the
Company obtained world-wide distribution rights to the formats and tapes in the
Goodson library, subject to certain existing licenses. Such distribution rights
are granted in perpetuity. See "-- Acquisitions". In 1995, licensing
arrangements with three producers represented 77% of gross revenues of AAFI: the
Goodson license represented 40% of such gross revenues; the Hatos Hall license,
the term of which ended in March 1996, subject to a "tail" provision of the type
described above, represented 31% of such gross revenues (the Company is
presently in discussions regarding the renewal of this license); and the
Columbia license, the term of which ended in 1992, also subject to a "tail"
provision, represented 6% of such gross revenues.
RECORDED MUSIC OPERATIONS
The Recorded Music Industry
According to statistics released by the Recording Industry Association of
America, Inc., sales in the U.S. recorded music industry increased 2% during
1995 to $12.3 billion, based in part on the
59
<PAGE> 66
shipment of 1.1 billion units of records, tapes, compact discs ("CDs") and music
videos. Industry wide unit shipments of CDs grew 9.9% as compared to new
shipments in 1994. CDs also generally have a higher wholesale price and per unit
gross profit margin than vinyl records and tapes. However, recordable CDs,
digital audio tape ("DAT") and digital compact cassette ("DCC") technology have
recently been introduced into the marketplace and enables consumers to make high
quality duplicates from original CDs and DATs. In the absence of adequate
copyright protection, recordable CD, DAT and DCC technology may affect industry
sales of CDs, DATs and DCCs. It is not possible to predict the extent to which
sales will be affected.
Recorded Music Artists and Catalog
The Company's recorded music division has been in business for
approximately 15 years, nine years as a custom label and approximately the last
five years as a full service operation. During this period, the Company has
released approximately 140 albums of individual artists, groups and motion
picture soundtracks, and special projections and compilations. The Company's
current roster is comprised of 12 active artists, including James Brown, Skee-Lo
and "Weird Al" Yankovic, whose recently released album, entitled Bad Hair Day,
went "platinum". The Company's music catalog currently has approximately 75
catalog albums in active release. The following table sets forth certain albums
in the Company's catalog:
<TABLE>
<S> <C>
"WEIRD AL" YANKOVIC Alapalooza, Bad Hair Day, Dare to be Stupid, Even Worse, The Food
Album, Greatest Hits, Greatest Hits Vol. II, In 3-D, Off the Deep
End, Permanent Record (Box Set), Polka Party
JAMES BROWN Gravity, Greatest Hits of the Fourth Decade, Greatest Hits-Live,
I'm Real, Live at the Apollo, Living in America, Love Overdue,
Universal James
SKEE-LO I Wish
SURVIVOR Caught in the Game, Eye of the Tiger, Greatest Hits, Moment of
Truth, Premonition, Vital Signs, When Seconds Count
E.L.O. PART II Electric Light Orchestra Part 2, Greatest Hits-Live
THE NYLONS Because, Four on the Floor, Harmony, The Christmas LP, Live to Love
SWEET SABLE Old Time's Sake
12 GAUGE 12 Gauge, Let Me Ride Again
FREDDIE JACKSON Private Party
COUNT BASIE, Jazz Fest Masters
SARAH VAUGHN,
DIZZY GILLESPIE
EDDIE & THE CRUISERS Eddie: The Unreleased Tapes
JOHN CAFFERTY & THE Roadhouse, Tough All Over
BEAVER BROWN BAND
SOUNDTRACKS Another 48 Hours, Baywatch, Cliffhanger, Cobra, Eddie & The
Cruisers, Eddie & The Cruisers II: Eddie Lives, Never Talk to
Strangers, Rambo III, Revenge of the Nerds, Rocky IV, The
Transformers, UHF
</TABLE>
Music Distribution
Music distribution includes the sale and physical delivery of product to
retailers and the collection of the related receivables. Generally, the recorded
music industry attempts to restrict the return to the distributor of products
that remain unsold through the use of penalties on the percentage of delivered
products that are returned.
The Company has operated its recorded music division as a full service
label since September 30, 1990, and had obtained certain distribution services,
primarily physical delivery of the
60
<PAGE> 67
product, collection of receivables and certain sales functions, from one of the
major record distributors. Commencing January 1, 1996, Warner/Elektra/Atlantic
Corporation, a division of Time Warner, Inc. ("WEA"), assumed responsibility for
these distribution functions in the domestic market pursuant to a distribution
agreement with an initial term of five years, under which WEA receives a
distribution fee. David Mount, a director of the Company, is an executive
officer of WEA. The Company is responsible for all other activities, including
producing, marketing, promoting and manufacturing recorded music product for
domestic distribution. These arrangements require the Company to fund various
costs resulting in more risk to the Company, as opposed to a "custom label"
arrangement where, for a larger distribution fee, the distributor assumes
responsibility for substantially all of the activities currently handled by the
Company. The WEA distribution agreement provided a $3.0 million non-refundable,
non recoupable payment to the Company as consideration for the Company's
entering into the agreement. This agreement may be extended, at WEA's option, if
at the end of the initial five year term net sales of the Company's product
through WEA have not reached $150 million. Such extension shall only continue
until cumulative net sales reach $150 million. During the six months ended June
30, 1996 and the years ended December 31, 1995, 1994 and 1993, total recorded
music and merchandising sales accounted for approximately 18%, 10%, 14% and 19%
of consolidated revenues, respectively.
The Company has extended, effective July 1, 1995, its existing foreign
distribution agreement with PolyGram S. A. ("PolyGram") solely with respect to
its current catalog product for five years, expiring June 30, 2000. PolyGram
provides the Company with distribution and collection of recorded music sales
for which the Company earns a royalty based on recorded music product sold
throughout the world (net of reserves for returns), excluding the United States,
Canada and Japan. PolyGram is responsible for all costs and expenses in
connection with manufacturing, marketing, promotion and distribution in its
territories.
The Company has also entered into arrangements with other companies for
distribution of the Company's recorded music products in Canada (Attic) and
Japan (Pony/Canyon, Inc.). These arrangements provide for advances to the
Company against royalties to be earned by the Company on recordings sold. The
Company is in discussion with other companies concerning the distribution of its
new product in the former PolyGram territories.
The Company owns 64-track digital and 24-track recording facilities which
enable the Company to produce recordings at a reduced cost in comparison to the
cost of using outside facilities.
Marketing and Promotion
Marketing involves advertising and otherwise gaining exposure for
recordings and artists through public performances and magazines, radio and
television, other media and point-of-sale material. Promotion consists of
efforts to obtain air play by radio stations of the recordings in coordination
with the marketing and distribution programs. Under its WEA distribution
agreement, the Company is responsible for all such domestic activities and
expenses.
Because the success of recording artists and releases is highly dependent
upon consumer tastes and critical response, as well as public awareness of
recording artists, the level of marketing and promotional activities and
expenses necessary in any particular instance cannot be predicted with
certainty.
The production and distribution of music videos to accompany certain major
record releases have become a promotional necessity and an additional financial
burden to the releasing company. These videos may significantly increase the
losses on any individual release should such recording not be successful, or
increase revenues on a successful recording.
61
<PAGE> 68
Concentration and Competition
There are six major recorded music distribution companies: WEA, Sony Music,
BMG, PolyGram, Capitol Records/EMI (CEMA) and MCA Records, Inc. (UNI). The
combined sales of these companies (with the inclusion of their independent
distribution) represent substantially all of the sales in the recording
industry. Significant consolidation has occurred through the acquisition by
these major companies of smaller recorded music companies, such as the
acquisitions by PolyGram of A&M, Island Records and Motown Record Corp.
The success of any musical release depends upon unpredictable and changing
factors such as the individual tastes of critics and consumers. The capital
resources, artist rosters and retail penetration of the "major" recorded music
companies are significantly greater than those of the Company. The greater
capital resources of the "majors" permit them to withstand longer periods of low
rates of successful releases.
The relatively large number of artists under contract with a "major" could
tend to increase the absolute number of profitable records produced by such a
company; however, there are also inherent risks of producing relatively large
numbers of unsuccessful products. While the Company has several successful
artists under contract, each of the "majors" has far larger numbers of such
artists under contract and may therefore be less affected than the Company by a
single success or failure.
Through the Company's arrangement for distribution with WEA and PolyGram
(as to catalogue items), the Company seeks to take advantage of the distribution
facilities of two of the "majors" and their inherently greater market
penetration.
ANCILLARY BUSINESSES
The Company generates additional revenue by merchandising certain of its
television properties, principally Baywatch, and by developing on-line and
interactive applications. The Company also retains music publishing rights with
respect to its television and recorded music products to the extent possible.
ACQUISITIONS
The Company from time to time considers the acquisition of program rights
and the expansion of its business through the acquisition of assets or business
of other entities engaged in businesses complementary to the current operations
of the Company. This growth through acquisition strategy has contributed
significantly to the Company's success. As part of the implementation of its
strategy to acquire assets or businesses that increase production and
distribution capabilities, the Company significantly expanded its international
television production and distribution operations with the acquisition of
certain assets of Fremantle International, Inc. in August 1994 (the "Fremantle
International Acquisition") and the Mark Goodson Acquisition in October 1995
(completed as to the remaining 50% interest as of January 1996).
The price for the Fremantle International Acquisition consisted of $31.5
million in cash, 630,000 shares of Common Stock and 25,200 shares of newly
created Series B Convertible Preferred Stock (which were subsequently converted
into 2,520,000 shares of Class B Common Stock). Additionally, the Company
incurred transaction costs of $1.0 million. Upon consummation of the Fremantle
International Acquisition, certain international programming rights (excluding
programming rights under the Goodson contract) were transferred to the Company,
and 100% of the non-voting equity of Fremantle International, Inc. (representing
99% of the total outstanding equity) was transferred to the Company. The Company
has given notice to the other shareholder as to its conversion of non-voting
shares to voting shares representing approximately 78.5% of the voting stock of
Fremantle International Inc.
62
<PAGE> 69
As of October 6, 1995, the Company consummated the Mark Goodson
Acquisition, pursuant to which Mark Goodson Productions, LLC acquired
substantially all of the assets (excluding those relating to the lottery
business) and assumed certain specified liabilities (collectively, with the
subsequent IPG/Goodson Agreement described below, the "Mark Goodson
Acquisition") of Mark Goodson Productions, L.P. and a related company
(collectively, the "Sellers"). The purchase price consisted of payment by the
Company of $25.0 million in cash and issuance by Interpublic of $25.0 million in
its common stock to the Sellers, together with a contingent earn-out described
below. Under the earn-out, Mark Goodson Productions, LLC will initially pay to
an assignee of the Sellers a specified percentage of "Domestic Net Profits"
(i.e. generally gross receipts less production costs, if applicable, a
distribution fee to the Company under certain circumstances and residual
payments) realized from the exploitation in the United States and Canada of the
Goodson game shows (currently, primarily The Price Is Right) and other purchased
television formats during the five-year period following October 6, 1995 (which
period is subject to extension for an additional five years if total earn-out
payments do not equal $48.5 million, in which case the earn-out shall be payable
in neither a minimum nor a maximum amount). The specified percentage of Domestic
Net Profits payable to the Sellers with respect to The Price Is Right is 75%
during the network exhibition of the program during the five years after October
6, 1995 and otherwise the specified percentage is generally 50% for other
programs. However, the earn-out does not apply to any net profits realized from
the international exploitation of any of the purchased game shows or other
purchased television formats. Additionally, the Company incurred transaction
costs of $0.8 million. Through June 30, 1996, the Company has recorded
contingent purchase price totaling $4.4 million (excluding an additional
contingent purchase price of $0.9 million allocated to a third party in 1995
prior to the Company's ownership of 100% of Mark Goodson Productions, LLC).
As of July 19, 1996 the Company entered into a Stock Purchase Agreement
(the "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, 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.
GOVERNMENT REGULATION
In a decision released September 6, 1995, the Federal Communications
Commission ("FCC") repealed its financial interest and syndication rules
effective as of September 21, 1995. Those FCC rules, which were adopted in 1970
to limit television network control over television programming and thereby
foster the development of diverse programming sources, had restricted the
ability of the three established, major U.S. television networks (i.e., ABC, CBS
and NBC), to own and syndicate television programming. The impact of the repeal
of the FCC's financial interest and syndication rules on the Company's
operations cannot be predicted at the present time, although it is expected that
there will be an increase in-house productions of television programming for the
network's own use. It is possible that this change will have a negative impact
on the Company's business. Additionally, in international markets, the Company
may be subject to local content and quota requirements which effectively
prohibit or limit access to particular markets.
In a decision released September 1, 1995, the FCC repealed the Prime Time
Access Rule, effective August 30, 1996. The Prime Time Access Rule generally
prohibits network-affiliated television stations in the top 50 television
markets from broadcasting more than three hours of network programs, or programs
previously aired on a network during the four prime time viewing hours (i.e.,
7:00 p.m. -- 11:00 p.m. Eastern and Pacific time, and 6:00 p.m. -- 10:00 p.m.
Central
63
<PAGE> 70
and Mountain times). Due to the Prime Time Access Rule, network-affiliated
television stations often acquire a certain amount of programming (typically
including game shows) for exhibition during the prime time access period from
independent television producers and syndicators. While the Company's sale of
syndicated programming during prime time is primarily to independent television
stations rather than to network-affiliated stations, it is possible that the
repeal of the Prime Time Access Rule may constrict the market for the Company's
television programming product and that the Company might be subject to
increased competition.
On February 1, 1996, Congress passed the Telecommunications Act of 1996
(the "1996 Act"), and President Clinton signed it into law on February 8, 1996.
The 1996 Act is the first comprehensive re-write of the Communications Act of
1934, as amended (the "1934 Act") and dramatically changes the ground rules for
competition and regulation in virtually all sectors of the telecommunications
industry, from local and long-distance telephone services, to broadcasting,
cable television, and equipment manufacturing. The 1996 Act eliminates many
entry barriers to the telecommunications business, relaxes concentration and
merger rules, and delegates authority for implementing the Act to the FCC.
Pursuant to the 1996 Act, the FCC has revised broadcast multiple ownership
rules so as to allow a single individual, person or entity to own or control or
have a cognizable interest in television stations that reach as much as 35% of
the U.S. television market. In addition, as mandated by the 1996 Act, the FCC
has eliminated the numerical limits previously set forth in the FCC's rules on
the number of television stations that a given individual or entity could own,
or have an attributable interest in.
Under the 1996 Act, manufacturers of television set equipment will be
required to equip all new television receivers with a so-called "V-Chip" which
would allow for parental blocking of violent, sexually-explicit or indecent
programming based on a rating for any given program that would be broadcast
along with the program. Unless the television industry establishes a voluntary
ratings system by February 1998, the FCC is directed by the 1996 Act to develop
a ratings system based upon the recommendations of an advisory committee
selected by the FCC. A coalition of various segments of the entertainment
industry has announced plans to devise a voluntary industry ratings code for
rating video programming with respect to violent, sexual or indecent content.
The industry coalition has announced its intent to have these new guidelines in
place before February 1997.
Other provisions of the 1996 Act allow local exchange telephone companies
to offer multichannel video programming service, subject to certain regulatory
requirements, and allow for cable companies to offer local exchange telephone
service. The 1996 Act thus fosters the development of a larger number of video
program distribution sources.
The impact on the Company of the changes in the 1934 Act brought about by
the 1996 Act and by accompanying changes in FCC rules cannot be predicted at the
present time, although it is expected that there will be an increase in the
demand for video programming product as a result of the likelihood that these
regulatory changes will facilitate the advent of additional exhibition sources
for such programming. However, it is possible that recent alliances of certain
program producers and television station group owners, coupled with the recent
FCC rule revision allowing a single television station licensee to own
television stations reaching up to 35 percent of the nation's television
households, may place additional competitive pressures on program suppliers who
are unaligned with any television station group owners.
EMPLOYEES
The Company has approximately 294 full-time employees and 5 part-time
employees, of whom 76 are based in its New York and other U.S. offices, 79 are
based in its Santa Monica office, 107 are based in Germany, 24 are based in
London and 13 are based in other countries, principally in Europe. When in
production, the Company has approximately 150 temporary employees working on the
production of episodic series such as Baywatch and Baywatch Nights. The
production season
64
<PAGE> 71
typically runs from March to December, with post-production activities typically
continuing into the following March.
Various employees of the Company's subsidiaries working on production of
programming are, or were, covered by collective bargaining agreements with
various professional guilds, including the Screen Actors Guild, the Writers
Guild of America, the American Federation of Television and Recording Artists,
the Directors Guild of America and the Association of Canadian Television and
Radio Artists, depending upon production locations and various other factors.
The Company believes that its relations with employees are good.
LEGAL PROCEEDINGS
On or about August 19, 1996, the Company's Subsidiary, Mark Goodson
Productions, LLC ("Goodson") filed an arbitration claim against Grundy
International Operations Limited ("Grundy"), with the American Arbitration
Association in New York, Case No. 13 T 153 00742 96. Goodson is the
successor-in-interest under a license agreement (the "Agreement") with Grundy
whereby Goodson's predecessor licensed to Grundy the rights in certain
territories to various television game shows and game show formats. The initial
term of the Agreement expired on June 28, 1996, subject to a contractual
provision in the Agreement requiring the parties to negotiate in good faith
about a possible two year extension of the Agreement during the six months prior
to such expiration date. No such extension was agreed upon by the parties during
such period. Goodson has declared a default in connection with Grundy entering
into various license agreements without obtaining Goodson's prior consultation
and approval as required under the Agreement, and Grundy has taken the position
that such license agreements were not subject to the consultation and approval
provisions of the Agreement and that Goodson did not fulfill the foregoing good
faith requirement. Goodson is seeking a declaration of rights, an accounting of
all monies Grundy received by Grundy under the licenses and all other
appropriate relief. While Goodson intends to vigorously prosecute the
arbitration, there is no assurance that Goodson will ultimately prevail in this
matter.
The Company is party to 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.
65
<PAGE> 72
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names, ages and positions of the executive officers and directors of
the Company are set forth below along with their business experience during the
past five years. Directors are elected at the annual meeting of stockholders to
serve until they resign or are removed, or are otherwise disqualified to serve,
or until their successors are elected and qualified. Executive officers of the
Company are appointed at the Board's first meeting after each annual meeting of
stockholders.
<TABLE>
<CAPTION>
NAME POSITION AGE
- ----------------------------- ------------------------------------------------------- ---
<S> <C> <C>
Anthony J. Scotti**.......... Chief Executive Officer and Chairman of the Board 56
Myron I. Roth**.............. President, Chief Operating Officer and Director 63
Thomas Bradshaw**............ Chief Financial Officer, Senior Executive Vice 54
President and Director
Sydney D. Vinnedge........... Senior Executive Vice President and Director 52
Benjamin J. Scotti........... Senior Executive Vice President; Executive Vice 59
President -- All American Music Group and Director
Lawrence E. Lamattina........ Chief Executive Officer and President -- All American/ 51
Fremantle Television Group and Director
Gordon C. Luce*.............. Director 70
R. Timothy O'Donnell*+ ++.... Director 41
David A. Mount*+ ++.......... Director 53
Eugene P. Beard.............. Director 61
</TABLE>
- ---------------
* Member of Stock Option Committee
** Member of Executive Committee
+ Member of Compensation Committee
++ Member of Audit Committee
Each of the persons listed above (other than Messrs. Lamattina, O'Donnell,
Mount and Beard) assumed the positions listed above on February 25, 1991, the
date on which Scotti Brothers Entertainment Industries, Inc. ("SBEI"), since
re-named All American Entertainment, Inc., merged (the "Merger") into All
American Television, Inc. ("AATV"), which was the legal predecessor to the
Company. Prior to such date, Anthony J. Scotti and Mr. Vinnedge were directors
of AATV.
ANTHONY J. SCOTTI is a co-founder of the Company and has been a director of
the Company since its inception in 1982. He became Chief Executive Officer and
Chairman of the Board on February 25, 1991. Mr. Scotti has served as a
consultant to Carolco Pictures Inc. (motion picture production) and was a
director of LIVE Entertainment, Inc. (entertainment software) from November 1988
until his resignation in May 1996. Mr. Scotti was the non-executive Chairman of
the Board of LIVE Entertainment from November 1992 until his resignation in
March 1996.
MYRON I. ROTH joined SBEI in December 1990 as President and Chief Operating
Officer, and he assumed the same titles and became a director of the Company on
February 25, 1991. Mr. Roth is a member of the Board of Directors of the Record
Industry Association of America.
THOMAS BRADSHAW was a director, Senior Executive Vice President and Chief
Financial Officer of SBEI from 1985 and, on February 25, 1991, he assumed the
same positions at the Company. In addition, Mr. Bradshaw was a director of LIVE
Entertainment, Inc. from December 1988 to November 1993.
SYDNEY D. VINNEDGE is a co-founder of the Company and has been a director
of the Company since its inception in 1982. Since February 25, 1991, Mr.
Vinnedge has served as Senior Executive Vice President of the Company.
66
<PAGE> 73
BENJAMIN J. SCOTTI co-founded the predecessor to SBEI in 1974 and served as
Co-Chairman of SBEI until February 25, 1991. Since February 25, 1991, Mr. Scotti
has been Senior Executive Vice President of the Company, Senior Executive Vice
President of All American Music Group (a subsidiary of the Company) and a
director of the Company. He is the brother of Anthony J. Scotti.
LAWRENCE E. LAMATTINA became Chief Executive Officer and President of All
American/ Fremantle Television Group, an operating division of the Company, on
August 3, 1994 and a director on October 12, 1994. Since May 1989, he has been
Chairman of the Board of Fremantle International, Inc. and Chairman and Chief
Executive Officer of EC TV, a division of The Interpublic Group of Companies,
Inc. ("IPG"). Mr. Lamattina also continues to act as a consultant to IPG with
respect to areas that are not competitive with the Company.
GORDON C. LUCE is a senior advisor to Eastman & Benirschke Financial Group
(financial planning and insurance brokerage), a position he has held from July
1990 to the present. Mr. Luce is a member of the Board of Directors of PS Group
(a diversified investment company) and Molecular Biosystems, Inc. (a medical
research enterprise) and is currently a member of the Board of Trustees of the
University of Southern California and the Chairman of Scripps Health. He became
a director of the Company on February 25, 1991. Mr. Luce was a director of
Carolco Pictures, Inc. until his resignation in November 1995.
R. TIMOTHY O'DONNELL was elected to the Company's Board of Directors
effective January 2, 1992. He is president of Jefferson Capital Group, Ltd., a
privately held investment banking group co-founded by Mr. O'Donnell in September
1989. Mr. O'Donnell has been a director of LIVE Entertainment, Inc. since 1988,
a director of Shorewood Packaging Corporation (packager for records, videos and
cassettes) since October 1991 and a director of Cinergi Pictures Entertainment
Inc. (motion picture production) since March 1994.
DAVID A. MOUNT was appointed to the Board on May 5, 1994. In March 1995,
Mr. Mount was named Chairman and Chief Executive Officer of Warner Media
Manufacturing and Distribution. Prior thereto, Mr. Mount had been President and
Chief Executive Officer of Warner/Elektra/Atlantic Corporation, a division of
Time Warner, Inc., since October 1993. Mr. Mount was President and Chief
Executive Officer of LIVE Entertainment, Inc. from August 1988 through September
1993. In addition, Mr. Mount served as a director of LIVE Entertainment in 1989
and from January 1992 to the present. On February 2, 1993, LIVE Entertainment
filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code and
emerged pursuant to a plan of reorganization on March 17, 1993. From August 1989
to June 1993, Mr. Mount was President of LIVE Home Video, Inc., a subsidiary of
LIVE Entertainment, Inc. He was Chief Executive Officer of LIVE Home Video, Inc.
from August 1989 to October 1993.
EUGENE P. BEARD became a member of the Board of Directors on October 12,
1994. Mr. Beard has been the Vice Chairman -- Finance and Operations of IPG
since October 1995, was Executive Vice President -- Finance and Operations of
IPG prior to that time and has served as a director of IPG since 1982. Mr. Beard
is a member of the Board of Directors of Brown Brothers Harriman, 59 Wall Street
Fund, Inc. (diversified investment fund), and Micrografx, Inc. (computer
software).
IPG has entered into a voting agreement with certain management
stockholders of the Company (including Anthony J. Scotti) to vote for the
election of one member of the Company's Board of Directors nominated by IPG.
67
<PAGE> 74
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of September 12, 1996
concerning the beneficial ownership of certain securities of the Company by (i)
each person who is known to the Company to be a beneficial owner of more than
five percent of the outstanding Common Stock or Class B Common Stock of the
Company, (ii) each of the current Directors of the Company, and (iii) all
current Directors, the Chief Executive Officer and the four most highly
compensated officers of the Company who served in such capacities during the
1995 fiscal year (the "Named Officers") of the Company, as a group. Unless
otherwise specified, the address of each beneficial owner listed below is 808
Wilshire Boulevard, Santa Monica, California 90401-1810.
<TABLE>
<CAPTION>
PERCENT OF CLASS B PERCENT OF CLASS B
COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED(1) OWNED OWNED(1) OWNED
------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C>
Anthony J. Scotti(2)................... 3,299,729 49.22% -- --
Benjamin J. Scotti(3).................. 1,441,995 24.57% -- --
Myron I. Roth(4)....................... 440,850 7.39% -- --
Thomas Bradshaw(5)..................... 385,850 6.50% 100,000 1.89%
Sydney D. Vinnedge(6).................. 153,975 2.62% -- --
Lawrence E. Lamattina(7)............... 130,000 2.18% -- --
Gordon C. Luce(8)...................... 2,800 * -- --
David A. Mount(8)...................... 1,800 * -- --
R. Timothy O'Donnell(9)................ 97,400 1.66%
Jefferson One Capital Group, Ltd.
One James Center
901 East Cary Street
Suite 1400
Richmond, Virginia 23219
Eugene P. Beard(10).................... -- -- -- --
The Interpublic Group of
Companies, Inc. ("IPG")
1271 Avenue of the Americas
New York, New York 10020
IPG(11)(12)............................ 630,000 10.74% 2,520,000 48.54%
1271 Avenue of the Americas
New York, New York 10020
FMR Corp.(13).......................... 628,403 9.72% -- --
82 Devonshire Street
Boston, Massachusetts 02109
Franklin Resources, Inc.(14)........... 366,957 5.89% -- --
777 Mariners Island Boulevard
San Mateo, California 94404
Janus Capital Corp.(15)................ -- -- 500,000 9.63%
100 Filmore Street, Suite 300
Denver, Colorado 80206
All Directors and Executive............ 4,891,074 70.91% 100,000 1.89%
Officers as a group (10 persons)
</TABLE>
- ---------------
* less than 1%
(1) Amounts include options and other securities exercisable or convertible
into shares of Common Stock or Class B Common Stock, as the case may be,
held by such beneficial owner, unless such securities are not convertible
or exercisable within 60 days.
(2) Common Stock includes 1,295,038 shares beneficially owned by Messrs. Roth,
Bradshaw, Vinnedge, Lamattina and certain other employees which Anthony J.
Scotti has a proxy to vote.
68
<PAGE> 75
Includes vested options to purchase 500,000 shares of Common Stock. Further
includes 8,696 shares of Common Stock issuable upon conversion of the
Convertible Notes registered under a registration statement. Does not
include 1,200,000 shares of Class B Common Stock issuable to Mr. Scotti
upon exercise of options which have not vested and are not subject to
vesting within the next 60 days.
(3) Includes 6,000 time vesting Common Stock options which have vested. Does
not include 14,000 time vesting Common Stock options which have not vested
and are not subject to vesting within the next 60 days. Further, does not
include 100,000 shares of Class B Common Stock issuable to Mr. B. Scotti
upon exercise of options which have not vested and are not subject to
vesting within the next 60 days.
(4) 415,850 of such Common Stock shares are subject to a voting proxy granted
to Anthony J. Scotti. Includes vested performance options to purchase
100,000 shares of Common Stock.
(5) 385,850 of such Common Stock shares are subject to a voting proxy granted
to Anthony J. Scotti. Includes vested performance options to purchase
70,000 shares of Common Stock. Includes 100,000 shares of Class B Common
Stock issuable to Mr. Bradshaw upon exercise of vested options. Does not
include 150,000 shares of Class B Common Stock issuable to Mr. Bradshaw
upon exercise of options which have not vested and are not subject to
vesting within the next 60 days.
(6) 120,225 of such Common Stock shares are subject to a voting proxy granted
to Anthony J. Scotti. Includes vested performance options to purchase
12,000 shares of Common Stock. Does not include 6,000 shares of Class B
Common Stock issuable to Mr. Vinnedge upon exercise of options which have
not vested and are not subject to vesting within the next 60 days.
(7) Mr. Lamattina owns 30,000 shares of restricted Common Stock which vest in
July 1998, is vested in time vesting options to purchase 50,000 shares of
Common Stock and is vested in performance options to purchase 50,000 shares
of Common Stock. All such shares are subject to a voting proxy granted to
Anthony J. Scotti. Excludes 75,000 time vesting Common Stock options which
have not vested and are not subject to vesting within the next 60 days.
Further, does not include 25,000 shares of Class B Common Stock issuable
upon exercise of options which have not vested and are not subject to
vesting within the next 60 days.
(8) Includes 1,800 time vesting Common Stock options which have vested.
Excludes 4,200 time vesting Common Stock options which have not vested and
are not subject to vesting within the next 60 days. Further, does not
include 3,000 shares of Class B Common Stock issuable upon exercise of
options which have not vested and are not subject to vesting within the
next 60 days.
(9) Mr. O'Donnell owns 33,100 shares of Common Stock, and his affiliate,
Jefferson Capital Group, Ltd., owns 62,500 shares of Common Stock. Includes
1,800 time vesting Common Stock options which have vested. Excludes 4,200
time vesting Common Stock options which have not vested and are not subject
to vesting within the next 60 days. Further, does not include 3,000 shares
of Class B Common Stock issuable upon exercise of options which have not
vested and are not subject to vesting within the next 60 days.
(10) Mr. Beard was appointed to the Board of Directors on October 12, 1994 to
fill a vacancy. Mr. Beard does not own any shares of Common Stock or Class
B Common Stock directly and disclaims beneficial ownership of the 630,000
shares of Common Stock and the 2,520,000 shares of Class B Common Stock
owned by IPG.
(11) As disclosed on a Schedule 13D, dated August 12, 1994.
(12) Represents approximately 27.3% (approximately 18.6% on a fully-diluted
basis) of Common Stock when Common Stock and Class B Common Stock are
aggregated as one class.
(13) As disclosed on a Schedule 13G, dated January 10, 1996; includes 600,003
shares of Common Stock issuable upon conversion of the Convertible Notes.
(14) As disclosed on a Schedule 13G, dated February 13, 1996.
(15) As disclosed on a Schedule 13G, dated February 8, 1996.
69
<PAGE> 76
DESCRIPTION OF CERTAIN INDEBTEDNESS AND CAPITAL STOCK
6 1/2% CONVERTIBLE SUBORDINATED NOTES
In October 1993, the Company issued its 6 1/2% Convertible Subordinated
Notes due 2003 (the "Convertible 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 Convertible 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 temporarily repay all amounts outstanding under its commercial bank
facilities, and for general corporate purposes.
The Convertible 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 Convertible 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 Convertible Notes is paid on the basis of a 360-day
year of twelve 30-day months. The Convertible Notes will mature on October 1,
2003.
The Convertible Notes are subordinated in right of payment to the prior
payment in full of all Senior Indebtedness (as defined in the Convertible Notes
and the Fiscal Agency Agreement) of the Company.
The Convertible 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 Convertible Notes), prior to redemption or
maturity. As of September 16, 1996, the Company had received notice from holders
of $3.7 million principal amount of the Convertible Notes to convert such
Convertible Notes into 320,695 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 Convertible Notes have been
registered with the Securities and Exchange Commission pursuant to an effective
registration statement.
The Convertible 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 104.643% 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 Convertible 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 Convertible Notes, together in each case with accrued interest to the
date of redemption. The Convertible 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).
On October 25, 1996, the Company provided notice to the Fiscal Agent that
it has elected to redeem in whole all of its outstanding Convertible Notes on
November 27, 1996. See "Use of Proceeds."
CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares
of Common Stock, consisting of (i) 20,000,000 shares of Common Stock having a
par value of $0.0001 per share and (ii) 20,000,000 shares of Class B Common
Stock having a par value of $0.0001 per share, and 5,000,000 shares of preferred
stock, par value $0.01 per share. As of September 12, 1996,
70
<PAGE> 77
5,800,957 (including 30,000 treasury shares) shares of Common Stock and
5,720,000 shares of Class B Common Stock were issued and outstanding and at the
date hereof, there are no shares of preferred stock which have been issued and
which are currently outstanding. The Board of Directors, without further action
by the stockholders, is authorized to issue preferred stock in one or more
series and to designate as to any such series the dividend rate, redemption
prices, preferences on liquidation or dissolution, sinking fund terms,
conversion rights, voting rights and any other preferences or special rights and
qualifications.
Common Stock
The Common Stock has no preemptive rights and no redemption, sinking fund
or conversion provisions. All shares of Common Stock have one vote on any matter
submitted to the vote of stockholders. The Common Stock does not have cumulative
voting rights. Upon any liquidation of the Company, the holders of Common Stock
are entitled to receive, share for share with the holders of shares of Common
Stock on a pro rata basis, all assets then legally available for distribution
after payment of debts and liabilities and preferences on preferred stock, if
any. Holders of Common Stock are entitled to receive dividends share for share
with the holders of shares of Common Stock when and as declared by the Board of
Directors out of funds legally available therefor (subject to the prior rights
of preferred stock, if any). All shares of Common Stock are fully paid and
nonassessable. As of September 12, 1996, there were approximately 70 registered
holders of Common Stock.
Class B Common Stock
The Class B Common Stock has no preemptive rights and no redemption,
sinking fund or conversion provisions. Except as otherwise required by law, the
shares of Class B Common Stock have no voting rights. Under Delaware law,
holders of Class B Common Stock are permitted to vote on amendments to the
Company's certificate of incorporation, whether or not entitled to vote thereon
by the certificate of incorporation, if such amendment would, among other
things, alter or change powers, preferences, or special rights of such class.
The Class B Common Stock shall be automatically converted into shares of Common
Stock on a share for share basis upon certain changes in control (as defined) of
the Company. As defined a "change in control" shall mean (i) the beneficial
ownership (as determined pursuant to Rule 13d-3 under the Securities Exchange
Act of 1934, as amended) of Anthony J. Scotti (and of members of his immediate
family, including Benjamin J. Scotti and his immediate family) and Related
Parties (which includes shares of Common Stock as to which Anthony J. Scotti,
from time to time, holds a proxy and any shares of Common Stock beneficially
owned by IPG) is less than 30% of the outstanding Common Stock (prior to any
conversion of the Convertible Notes), (ii) the beneficial ownership of Anthony
J. Scotti and Related Parties is less than 20% of the outstanding Common Stock
following conversion of any of the Convertible Notes (which percentage applies
as a result of the conversion of a portion of the Convertible Notes prior to the
date hereof), or (iii) if any person other than Anthony J. Scotti or any related
person acquires more than 50% of the Common Stock. Upon any liquidation of the
Company, the holders of Class B Common Stock are entitled to receive, share for
share with the holders of shares of Common Stock on a pro rata basis, all assets
then legally available for distribution after payment of debts and liabilities
and preferences on preferred stock, if any. Holders of Class B Common Stock are
entitled to receive dividends share for share with the holders of shares of
Common Stock when and as declared by the Board of Directors out of funds legally
available therefor (subject to the prior rights of preferred stock, if any). All
shares of Class B Common Stock are fully paid and nonassessable. As of September
12, 1996 there were six registered holders of Class B Common Stock.
In addition, the Company agreed with IPG, in connection with the Fremantle
International Acquisition, that IPG has the right to exchange a proportionate
number of shares (calculated on a fully diluted basis) of Class B Common Stock
acquired by IPG pursuant to the Fremantle International Acquisition for shares
of Common Stock in the event the Company consummates an
71
<PAGE> 78
acquisition of a business pursuant to which the Company issues shares of Common
Stock in exchange for the assets or the capital stock of such business (a
"Transaction"), provided, however, such shares shall not be exchangeable until
the Company issues, in one or more Transactions, an aggregate of 1,000,000
shares (subject to proportionate increase or decrease for stock splits, stock
dividends or combinations) of Common Stock. This contractual exchange right
applies to IPG only.
The Board of Directors and stockholders of the Company have approved an
amendment to the Company's Restated Certificate of Incorporation, subject to
NASDAQ approval, which would permit holders of Common Stock to convert each
share of Common Stock held by such holder into one share of Class B Common
Stock. Holders of Common Stock who choose to convert their shares will not
receive any consideration for such conversion, other than shares of Class B
Common Stock. No assurance is made, however, that approval by NASDAQ in
connection with such proposed amendment, will be obtained.
Warrants
In accordance with the terms of the LBS Acquisition, the Company issued
warrants to acquire up to an aggregate of 281,250 shares of its Common Stock to
certain creditors of LBS and other third parties as follows: warrants to
purchase 31,250 shares of Common Stock were issued to each of International
Family Entertainment, Inc. and the unsecured creditors of LBS at an exercise
price of $11.00 per share and warrants to acquire an aggregate of up to 218,750
shares of Common Stock were issued to the former senior secured creditor of LBS,
the Bank of New York. The Bank of New York received the following put options:
(i) with respect to warrants to acquire up to an aggregate of 156,250 shares of
Common Stock, at $8.00 per warrant if the Company's reported cumulative pre-tax
earnings reach $30.0 million at any time during the period beginning January 1,
1993 and ending December 31, 1995, for a total obligation of $1.3 million, and
(ii) with respect to warrants to acquire up to an aggregate of 62,500 shares of
Common Stock, at $4.00 per warrant beginning after December 31, 1993, for a
total obligation of $0.3 million (which put was exercised resulting in the
cancellation of such warrant). The remaining Bank of New York warrant was sold,
without the remaining put option, to accounts managed by Arnhold and S.
Bleichroeder, Inc.
72
<PAGE> 79
DESCRIPTION OF EXCHANGE NOTES
GENERAL
The Exchange Notes will be issued pursuant to an Indenture (the
"Indenture") between the Company and U.S. Trust Company of California, N.A., as
trustee (the "Trustee"), as supplemented and amended from time to time. The
Exchange Notes will evidence the same indebtedness as the Original Notes (which
they replace) and will be issued under, and entitled to the benefits of the
Indenture. The form and terms of the Exchange Notes are the same as the form and
terms of the Original Notes except that (i) the Exchange Notes will bear the
Series B Designation, (ii) the Exchange Notes will have been registered under
the Securities Act and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (iii) holders of the Exchange Notes will
not be entitled to certain rights of holders of the Original Notes under the
Registration Rights Agreement, which rights will terminate upon consummation of
the Exchange Offer. The terms of the Exchange Notes include those stated in the
Indenture. The Exchange Notes are subject to all such terms, and Holders of
Exchange Notes are referred to the Indenture for a statement thereof. The
Original Notes and the Exchange Notes will be considered collectively to be a
single class for all purposes under the Indenture, including, without
limitation, waivers, amendments, redemptions and offers to purchase. The
following summary of certain provisions of the Indenture does not purport to be
complete and is qualified in its entirety by reference to the Indenture,
including the definitions therein of certain terms used below. The definitions
of certain terms used in the following summary are set forth below under
"-- Certain Definitions."
The Exchange Notes will be general unsecured obligations of the Company and
will be subordinated in right of payment to Senior Debt. Operations of the
Company primarily are conducted through its Subsidiaries and, therefore, the
Company is dependent upon the cash flow of its Subsidiaries to meet its
obligations, including its obligations under the Exchange Notes, which have not
been guaranteed by the Subsidiaries. The Exchange Notes will be effectively
subordinated to all indebtedness and other liabilities and commitments
(including trade payables and lease obligations) of the Company's Subsidiaries.
Any right of the Company to receive assets of any of its Subsidiaries upon the
latter's liquidation or reorganization (and the consequent right of the Holders
of the Exchange Notes to participate in those assets) will be effectively
subordinated to the claims of that Subsidiary's creditors, except to the extent
that the Company is itself recognized as a creditor of such Subsidiary, in which
case the claims of the Company would still be subordinate to any security in the
assets of such Subsidiary and any indebtedness of such Subsidiary senior to that
held by the Company. The Indenture provides that indebtedness of Restricted
Subsidiaries (other than trade payables and general liabilities) will be limited
to indebtedness under the Bank Credit Agreement, Acquired Debt (as defined),
indebtedness owed to the Company or another Restricted Subsidiary and certain
other permitted indebtedness to the extent permitted thereunder. As of June 30,
1996, on a pro forma basis giving effect to the Private Offering, the Company
would have had Senior Debt of approximately $34.8 million and, through its
subsidiaries, would have had additional liabilities aggregating approximately
$84.8 million. In addition, as of such date, the Company would have had the
right on a pro forma basis to borrow an additional $89.4 million of Senior Debt
under the Restructured Credit Facility (plus up to an additional $30.8 million
of Senior Debt which could have been incurred thereunder subject to borrowing
base availability). See "Risk Factors -- Holding Company Structure."
As of the date of the Indenture, all of the Company's Subsidiaries were
Restricted Subsidiaries. However, under certain circumstances, the Company will
be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes are limited in aggregate principal amount to $100.0
million and will mature on October 15 , 2001. Interest on the Exchange Notes
will accrue at the rate of 10.875% per annum and will be payable semiannually in
arrears on April 15 and October 15, commencing on April 15,
73
<PAGE> 80
1997, to Holders of record on the immediately preceding April 1 and October 1,
respectively. Interest on the Exchange Notes will accrue from the most recent
date to which interest has been paid or, if no interest has been paid, from the
Issue Date. Interest will be computed on the basis of a 360-day year comprised
of twelve 30-day months. The Exchange Notes are payable both as to principal and
interest at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the option of the Company, payment
of interest may be made by check mailed to the Holders of the Exchange Notes at
their addresses set forth in the register of Holders of Exchange Notes;
provided, that all payments with respect to Global Notes and Certificated Notes
having an aggregate principal amount of $100,000 or more, the Holders of which
have given wire transfer instructions to the Company at least ten business days
prior to the applicable payment date, will be required to be made by wire
transfer of immediately available funds to the accounts specified by the Holders
thereof. Until otherwise designated by the Company, the Company's office or
agency in New York will be the office of the Trustee maintained for such
purpose.
FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER
The Exchange Notes will initially be represented by one Note in registered,
global form without interest coupons (the "Global Note"). The Global Note will
be deposited upon issuance with the Trustee as custodian for The Depository in
New York, New York, and registered in the name of the Depository or its nominee,
in each case for credit to an account of a direct or indirect participant in the
Depository as described below.
Except as set forth below, the Global Note may be transferred, in whole and
not in part, only to another nominee of the Depository or to a successor of the
Depository or its nominee. Beneficial interests in the Global Note may not be
exchanged for Notes in certificated form except in the limited circumstances
described below. See "-- Exchange of Book-Entry Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The Exchange
Notes may be presented for registration of transfer and exchange at the offices
of the Registrar.
DEPOSITORY PROCEDURES
The Depository has advised the Company that the Depository is a
limited-purpose trust company created to hold securities for its participating
organizations (collectively, the "Participants") and to facilitate the clearance
and settlement of transactions in those securities between Participants through
electronic book-entry changes in accounts of its Participants. The Participants
include securities brokers and dealers (including the Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to the
Depository's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may beneficially
own securities held by or on behalf of the Depository only through the
Participants or the Indirect Participants. The ownership interest and transfer
of ownership interest of each actual purchaser of each security held by or on
behalf of the Depository are recorded on the records of the Participants and
Indirect Participants.
The Depository has also advised the Company that, pursuant to procedures
established by it, (i) upon deposit of the Global Note, the Depository will
credit the accounts of Participants designated by the Purchasers with portions
of the principal amount of the Global Note and (ii) ownership of such interests
in the Global Note will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by the Depository (with respect to
the Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interests in the Global Note).
Investors in the Global Note may hold their interests therein directly
through the Depository, if they are participants in such system, or indirectly
through organizations (including Euroclear and CEDEL) which are participants in
such system. All interests in the Global Note, may be subject to the procedures
and requirements of the Depository. The laws of some states require that certain
74
<PAGE> 81
persons take physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in the Global Note to
such persons will be limited to that extent. Because the Depository can act only
on behalf of Participants, which in turn act on behalf of Indirect Participants
and certain banks, the ability of a person having beneficial interests in the
Global Note to pledge such interests to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such interests, may be affected by the lack of a physical certificate evidencing
such interests. For certain other restrictions on the transferability of the
Notes, see "-- Exchange of Book-Entry Notes for Certificated Notes."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTE WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of and premium, if any, and interest
on the Global Note registered in the name of the Depository or its nominee will
be payable by the Trustee to the Depository in its capacity as the registered
Holder under the Indenture. Under the terms of the Indenture, the Company and
the Trustee will treat the persons in whose names the Notes, including the
Global Note, are registered as the owners thereof for the purpose of receiving
such payments and for any and all other purposes whatsoever. Consequently,
neither the Company, the Trustee nor any agent of the Company or the Trustee has
or will have any responsibility or liability for (i) any aspect of the
Depository's records or any Participant's or Indirect Participant's records
relating to or payments made on account of beneficial ownership interests in the
Global Notes, or for maintaining, supervising or reviewing any of the
Depository's records or any Participant's or Indirect Participant's records
relating to the beneficial ownership interests in the Global Note or (ii) any
other matter relating to the actions and practices of the Depository or any of
its Participants or Indirect Participants. The Depository has advised the
Company that its current practice, upon receipt of any payment in respect of
securities such as the Notes (including principal and interest), is to credit
the accounts of the relevant Participants with the payment on the payment date,
in amounts proportionate to their respective holdings in the principal amount of
beneficial interests in the relevant security as shown on the records of the
Depository unless the Depository has reason to believe it will not receive
payment on such payment date. Payments by the Participants and the Indirect
Participants to the beneficial owners of Notes will be governed by standing
instructions and customary practices and will be the responsibility of the
Participants or the Indirect Participants and will not be the responsibility of
the Depository, the Trustee or the Company. Neither the Company nor the Trustee
will be liable for any delay by the Depository or any of its Participants in
identifying the beneficial owners of the Notes, and the Company and the Trustee
may conclusively rely on and will be protected in relying on instructions from
the Depository or its nominee for all purposes.
Interests in the Global Note are expected to be eligible to trade in the
Depository's Same-Day Funds Settlement System and secondary market trading
activity in such interests will therefore settle in immediately available funds,
subject in all cases to the rules and procedures of the Depository and its
participants.
Transfers between Participants in the Depository will be effected in
accordance with the Depository's procedures, and will be settled in same-day
funds.
The Depository has advised the Company that it will take any action
permitted to be taken by a Holder of Notes only at the direction of one or more
Participants to whose account with the Depository interests in the Global Note
are credited and only in respect of such portion of the aggregate principal
amount of the Notes as to which such Participant or Participants has or have
given such direction. However, if there is an Event of Default (as defined
below) under the Notes, the Depository reserves the right to exchange the Global
Note for legended Notes in certificated form, and to distribute such Notes to
its Participants.
The information in this section concerning the Depository, Euroclear and
CEDEL and their book-entry systems has been obtained from sources that the
Company believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
75
<PAGE> 82
Although the Depository has agreed to the foregoing procedures to
facilitate transfers of interests in the Global Note among participants in the
Depository it is under no obligation to perform or to continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Company nor the Trustee will have any responsibility for the performance by the
Depository or its participants or indirect participants of its obligations under
the rules and procedures governing their operations.
Exchange of Book-Entry Notes for Certificated Notes
The Global Note is exchangeable for definitive Notes in registered
certificated form ("Certificated Notes") if (i) the Depository (x) notifies the
Company that it is unwilling or unable to continue as depositary for the Global
Note and the Company fails within 90 days thereafter to appoint a successor
depositary or (y) has ceased to be a clearing agency registered under the
Exchange Act, (ii) the Company, at its option, notifies the Trustee in writing
that it elects to cause the issuance of the Notes in certificated form or (iii)
there shall have occurred and be continuing an Event of Default or any event
which after notice or lapse of time or both would be an Event of Default with
respect to the Notes. In addition, beneficial interests in the Global Note may
be exchanged for Certificated Notes upon request by the holder of such
beneficial interests, but only upon at least 20 days prior written notice given
to the Trustee by or on behalf of the Depository in accordance with its
customary procedures. In all cases, Certificated Notes delivered in exchange for
the Global Note or beneficial interests therein will be registered in the names,
and issued in any approved denominations, requested by or on behalf of the
Depository (pursuant to instructions from its direct or indirect participants
and in accordance with its customary procedures) unless the Company determines
otherwise in compliance with applicable law.
Exchange of Certificated Notes for Book-Entry Notes.
A Certificated Note may be exchanged for a beneficial interest in the
Global Note in accordance with the customary procedures of the Trustee and the
Depository. If the Global Note is not then outstanding, the Company shall issue,
and the Trustee shall authenticate, a new Global Note in the appropriate
principal amount.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Exchange Notes
represented by the Global Note (including principal, premium, interest and
Special Interest, if any) be made by wire transfer of immediately available
funds to the accounts specified by the Global Notes custodian. With respect to
Exchange Notes issued in definitive form, the Company will make all payments of
principal, premium, interest and Special Interest, if any, by mailing a check to
each such Holder's registered address, provided that all payments with respect
to Exchange Notes have an aggregate principal amount of $100,000 or more, the
Holders of which have given wire transfer instructions to the Company at least
ten business days prior to the applicable payment date, will be required to be
made by wire transfer of immediately available funds to the accounts specified
by the Holders thereof. Except for trades involving only Euroclear or CEDEL
participants, the Exchange Notes represented by the Global Notes are expected to
be eligible to trade in the Depository's Same-Day Funds Settlement System, and
any permitted secondary market trading activity in such notes will, therefore,
be required by the Depository to be settled in immediately available funds. The
Company expects that secondary trading in the Certificated Notes also will be
settled in immediately available funds.
REGISTRATION RIGHTS AGREEMENT
In connection with the Private Offering, the Company entered into a
Registration Rights Agreement (the "Registration Rights Agreement") pursuant to
which the Company agreed for the benefit of the Holders of the Original Notes,
(i) to file with the Commission, within 30 days following the closing of the
Private Offering, a registration statement (the "Registration Statement") under
76
<PAGE> 83
the Securities Act relating to the Exchange Offer and (ii) to use its best
efforts to cause the Registration Statement to be declared effective by the
Commission as soon as practicable thereafter. The Company further agreed to
commence the Exchange Offer promptly after the Registration Statement became
effective to hold the offer open for at least 20 business days, and to exchange
Exchange Notes for all Original Notes validly tendered and not withdrawn before
the expiration of the Exchange Offer.
The Registration Rights Agreement provides that if (i) the Company is not
permitted to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy or (ii) any Holder of Notes
notifies the Company within the specified time period that (A) it alone or
together with such other Holders who hold in the aggregate at least $1.0 million
principal amount of Notes is prohibited by law or Commission policy from
participating in the Exchange Offer or may not resell the Exchange Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Registration Statement is not
appropriate or available for such resales or (B) it is a broker-dealer and owns
Notes acquired directly from the Company or an affiliate of the Company, the
Company will file with the Commission a registration statement under the
Securities Act relating to a shelf registration of the Notes for resale by
Holders (the "Shelf Registration Statement") on or before the 30th day after the
date the Company makes the determination set forth in clause (i) above, or the
notice described in clause (ii) is received by the Company (the "Shelf Filing
Deadline"), and use its best efforts to cause the Shelf Registration Statement
to be declared effective by the Commission as soon as practicable thereafter and
to remain effective for a period of three years after the effective date thereof
(or such shorter period of time after which the Notes may be sold pursuant to
Rule 144(k), as amended from time to time), or, in the event the Shelf
Registration Statement is filed solely at the request of a broker-dealer who
owns Original Notes acquired directly from the Company or an affiliate of the
Company, one year. The Company will, in the event of the Shelf Registration
Statement, provide to the Holders of the Notes copies of the prospectus that is
a part of the registration statement filed in connection with the Shelf
Registration Statement, notify such Holders when the Shelf Registration
Statement for the Notes has become effective and take certain other actions as
are required to permit unrestricted resales of the Notes. A Holder of Notes that
sells such Notes pursuant to the Shelf Registration Statement generally would be
required to be named as a selling securityholder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Registration Rights Agreement that are
applicable to such a Holder (including certain indemnification obligations).
In the event that (i) the Company has not, if applicable, filed the Shelf
Registration Statement on or before the Shelf Filing Deadline, (ii) if
applicable, the Shelf Registration Statement has not become effective within 120
days following the Shelf Filing Deadline, (iii) the Exchange Offer has not been
consummated within 30 days after the effective date of the Registration
Statement or (iv) any registration statement required by the Registration Rights
Agreement is filed and declared effective but shall thereafter cease to be
effective (except as specifically permitted therein) without being succeeded
immediately by an additional registration statement filed and declared effective
(any such event referred to in clauses (i) through (iv), the "Registration
Default"), then the Company will pay Special Interest to each Holder of Notes
affected by such Registration Default, at the rate of 0.5% per annum on the
principal amount of such Notes, for the period from the occurrence of the
Registration Default until such time as no Registration Default is in effect.
Such Special Interest will be payable in cash semiannually in arrears on each
April 15 and October 15. If the Company has not consummated the Exchange Offer
within 240 days following the closing of the Private Offering (or, if
applicable, the Shelf Registration Statement has not become effective within 210
days following the Shelf Filing Deadline), then such Special Interest will
increase by an additional 0.5% per annum and Special Interest will be payable at
such increased rate until such time
77
<PAGE> 84
as the Company consummates the Exchange Offer or a Shelf Registration Statement
becomes effective.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which will be available upon request to the Company.
REDEMPTION OF NOTES
Mandatory Redemption. The Notes are not subject to any mandatory or
sinking fund redemption.
Optional Redemption. The Notes are not redeemable at the Company's option
prior to stated maturity. Notwithstanding the foregoing, in the event (a "Sale
Transaction Triggering Event") the Company enters into a letter of intent or
makes a public announcement during the first 18 months after October 11, 1996
with respect to the sale of all of the Company's capital stock (whether by
merger, consolidation or otherwise), or all or substantially all of the
Company's assets (a "Sale Transaction"), the Company may, subsequent to the
closing of such Sale Transaction, redeem up to $100.0 million in principal
amount of Notes at a redemption price of 110.875% of the principal amount
thereof, plus accrued and unpaid interest and Special Interest, if any, thereon
to the redemption date, provided that such Sale Transaction closes within 120
days after such Sales Transaction Triggering Event and, provided further, that
notice of such redemption shall be given within 30 days of the date of the
closing of such Sale Transaction. In addition, during the first 18 months after
October 11, 1996, the Company may redeem up to $35.0 million in principal amount
of Notes at a redemption price of 110.875% of the principal amount thereof, plus
accrued and unpaid interest and Special Interest, if any, thereon to the
redemption date, with the net proceeds of a public offering of common stock of
the Company, provided that at least $65.0 million in aggregate principal amount
of Notes remain outstanding immediately after the occurrence of such redemption
and provided further, that notice of such redemption shall be given within 30
days of the date of the closing of such public offering.
Any notice which relates to a Note to be redeemed in part only must state
the portion of the principal amount equal to the unredeemed portion thereof and
must state that on and after the date fixed for redemption, upon surrender of
such Note, a new Note or Notes in a principal amount equal to the unredeemed
portion thereof will be issued. Unless the Company defaults in payment of the
redemption price, on and after the redemption date, interest will cease to
accrue on the Notes or portions thereof called for redemption.
The Company may at any time buy Notes on the open market at prices which
may be greater or less than the optional redemption price stated above. In the
event of such open market purchases, the Company will comply with all applicable
securities laws.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes
(including, without limitation, by purchase of any Notes as described under the
caption "--Repurchase at the Option of Holders") will be subordinated in right
of payment, as set forth in the Indenture, to the prior indefeasible payment in
full in cash of all Senior Debt, whether outstanding on the date of the
Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full in cash of all Obligations due in respect of such Senior Debt
(including interest after the commencement of any such proceeding at the rate
specified in the applicable Senior Debt) before
78
<PAGE> 85
the Holders of Notes will be entitled to receive any payment with respect to the
Notes, and until all Obligations with respect to Senior Debt are paid in full in
cash, any distribution to which the Holders of Notes would be entitled shall be
made to the holders of Senior Debt (except that Holders of Notes may receive
securities that are subordinated at least to the same extent as the Notes to
Senior Debt and any securities issued in exchange for Senior Debt and payments
made from any trust established pursuant to the procedures described under
"--Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except in such securities or from any trust established pursuant to the
procedures described under "--Legal Defeasance and Covenant Defeasance", but
including a payment into any such trust) if (i) a default in the payment of the
principal of, premium, if any, or interest on Designated Senior Debt occurs and
is continuing beyond any applicable grace period or (ii) any other default
occurs and is continuing with respect to Designated Senior Debt that permits
holders of the Designated Senior Debt as to which such default relates to
accelerate its maturity and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the holders of any Designated Senior Debt,
which, in the case of the Bank Credit Agreement, may be given by the agent for
the lenders thereunder. Payments on the Notes may and shall be resumed (a) in
the case of a payment default, upon the date on which such default is cured or
waived or otherwise ceases to exist, and (b) in case of a nonpayment default,
the earlier of the date on which such nonpayment default is cured or waived or
179 days after the date on which the applicable Payment Blockage Notice is
received, unless the maturity of any Designated Senior Debt has been
accelerated. No new period of payment blockage may be commenced unless and until
360 days have elapsed since the effectiveness of the immediately prior Payment
Blockage Notice. No nonpayment default that existed or was continuing on the
date of delivery of any Payment Blockage Notice to the Trustee shall be, or be
made, the basis for a subsequent Payment Blockage Notice, unless such default
shall have been cured or waived for a period of not less than 90 consecutive
days. Furthermore, the Restructured Credit Facility provides that as long as any
amounts are outstanding or the lenders remain committed to lend thereunder, the
Company will be prohibited from redeeming, purchasing, retiring or defeasing any
subordinated debt (which would include the Notes) without the lenders' consent,
and from paying interest if an event of default under the Restructured Credit
Facility has occurred and is continuing, but the Company has agreed that any
covenant in the Bank Credit Agreement prohibiting payments of the Notes at their
final maturity shall not continue after the final maturity of the Notes.
In the event that the Trustee or any Holder receives any payment of any
Obligations with respect to the Notes at a time when such payment is prohibited
under the terms of the Indenture, such payment shall be held by the Trustee or
such Holder, in trust for the benefit of, and shall be paid forthwith over and
delivered to the holders of Senior Debt as their interests may appear or their
representative under the Bank Credit Agreement, indenture or other agreement (if
any) pursuant to which Senior Debt may have been issued, as their respective
interests may appear, for application to the payment of all Obligations with
respect to Senior Debt remaining unpaid to the extent necessary to pay such
Obligations in full in accordance with their terms, after giving effect to any
payment or distribution to or for the holders of Senior Debt made concurrently
with such payment received by the Trustee or such Holder.
The Indenture requires that the Trustee promptly notify holders of Senior
Debt if payment of the Notes is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company who are holders of Senior Debt. As of June 30, 1996, on
a pro forma basis giving effect to the Offering, the Company would have had
Senior Debt of approximately $34.8 million. In addition, as of such date, the
Company would have had the right on a pro forma basis to borrow an additional
$89.4 million of Senior Debt under its Restructured Credit Facility (plus up to
an additional $30.8 million of Senior Debt which could have been incurred
thereunder subject to borrowing base availability). The
79
<PAGE> 86
Indenture limits, subject to certain financial tests, the amount of additional
Indebtedness, including Senior Debt, that the Company and its subsidiaries can
incur. See "-- Certain Covenants -- Limitations on Additional Indebtedness."
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
In the event that there shall occur a Change of Control, then each Holder
shall have the right, at such Holder's option, subject to the terms and
conditions set forth in the Indenture, to require the Company to repurchase, and
upon the exercise of such right the Company shall repurchase, all or any part
(equal to $1,000 or an integral multiple thereof) of such Holder's Notes
pursuant to an Offer (as described below under the caption "-- Procedures for
Offers"), at a purchase price equal to 101.0% of the aggregate principal amount
thereof, plus accrued and unpaid interest and Special Interest thereon, if any,
to the date of purchase, which date shall be no fewer than 30 nor more than 60
days from the date such notice is mailed. See "-- Procedures for Offers." Such
right to require the repurchase of Notes shall not continue after a discharge of
the Company from its obligations with respect to the Notes (see "-- Satisfaction
and Discharge of Indenture"). The Company's Board of Directors may not waive
this provision.
The Change of Control provision of the Notes may in certain circumstances
make it more difficult or discourage a takeover of the Company and, as a result,
may make removal of incumbent management more difficult. The Change of Control
provision, however, is not the result of the Company's knowledge of any specific
effort to accumulate the Company's stock or to obtain control of the Company by
means of a merger, tender offer, solicitation or otherwise, or part of a plan by
management to adopt a series of anti-takeover provisions. Instead, the Change of
Control provision is a result of negotiations between the Company and the
Purchasers. The Company is not presently in discussions or negotiations with
respect to any pending offers which, if accepted, would result in, a transaction
involving a Change of Control, although it is possible that the Company would
decide to do so in the future.
The Bank Credit Agreement provides that certain change of control events
with respect to the Company would constitute a default thereunder. In addition,
the Bank Credit Agreement provides that the Company would be prohibited from
consummating an offer to repurchase the Notes pursuant to this Change of Control
covenant without obtaining the prior consent of the lenders thereunder. Any
future credit agreements or other agreements relating to Senior Debt to which
the Company becomes a party also may contain similar restrictions and
provisions. In the event a Change of Control occurs at a time when the Company
is prohibited from purchasing Notes, the Company could seek the consent of its
senior lenders under any Bank Credit Agreement, if necessary, to the purchase of
Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a default under
the Bank Credit Agreement, and possibly under other Senior Debt. In such
circumstances, the subordination provisions in the Indenture would likely
restrict payments to the Holders of Notes. Finally, the Company's ability to pay
cash to the holders of Notes in connection with a Change of Control may be
limited to the Company's then existing financial resources. There can be no
assurance that sufficient funds will be available when necessary to make any
required purchases.
The provisions of the Indenture would not necessarily afford Holders of the
Notes protection in the event of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction involving the Company that may
adversely affect the Holders.
80
<PAGE> 87
Asset Sales
The Indenture provides that the Company will not, and will not permit any
Restricted Subsidiary of the Company to, make any Asset Sale unless (i) the
Company or such Restricted Subsidiary receives consideration at the time of such
disposition (or in the case of a lease, over the term of such lease) at least
equal to the fair market value of the shares or assets disposed of (which shall
be as determined in good faith by the Board of Directors and evidenced by a
Board Resolution set forth in an Officer's Certificate delivered to the
Trustee), and (ii) except in the case of Permitted Non-Cash Asset Sale, at least
75% of the consideration for such disposition consists of cash or Cash
Equivalents; provided that the following will be deemed to be cash for purposes
of this covenant: (1) the amount of any liabilities (as shown on the Company's
or such Restricted Subsidiary's most recent balance sheet or in the notes
thereto) of the Company or such Restricted Subsidiary (other than liabilities
that are by their terms subordinated to the Notes) that are assumed by the
transferee of any such assets pursuant to a customary novation agreement that
releases the Company or such Restricted Subsidiary from further liability, (2)
any notes or other obligations received by the Company or such Restricted
Subsidiary from a transferee that are immediately converted by the Company or
such Restricted Subsidiary into cash or Cash Equivalents, and (3) the fair
market value of any assets into which the proceeds, if cash, could have been
reinvested as "assets related to the Principal Business of the Company";
provided, further, that the 75% limitation referred to above in clause (ii) will
not apply to any disposition of assets in which the cash portion of such
consideration received therefor on an after-tax basis, determined in accordance
with the foregoing proviso, is equal to or greater than what the after-tax net
proceeds would have been had such transaction complied with the aforementioned
75% limitation.
Within 365 days of any Asset Sale, the Company may elect to (i) apply the
Net Proceeds from such Asset Sale to permanently redeem or repay Senior Debt of
the Company or any Restricted Subsidiary of the Company and in each case to
correspondingly reduce commitments with respect to such Indebtedness, or (ii)
apply the Net Proceeds from such Asset Sale to invest in assets related to the
Principal Business of the Company, including, without limitation, the purchase
of Equity Interests of an entity which, after giving effect to such purchase, is
a Restricted Subsidiary of the Company. Pending the final application of any
such Net Proceeds, the Company may temporarily invest such Net Proceeds in any
manner permitted by the Indenture. Any Net Proceeds from an Asset Sale not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds."
As soon as practical, but in no event later than 10 business days after any
date (an "Asset Sale Trigger Date") that the aggregate amount of Excess Proceeds
exceeds $10.0 million, the Company will commence an Offer (as described below
under the caption "Procedures for Offers") to purchase the maximum principal
amount of Notes that may be purchased out of the Excess Proceeds, at an Offer
price in cash in an amount equal to 100.0% of the principal amount thereof, plus
accrued and unpaid interest and Special Interest thereon, if any, to the date of
purchase. To the extent that any Excess Proceeds remain after completion of an
Offer, the Company may use the remaining amount for general corporate purposes.
Upon completion of such Offer to purchase, the amount of Excess Proceeds will be
reset to zero.
The Bank Credit Agreement provides that the Company would be prohibited
from consummating an offer to repurchase the Notes pursuant to this Asset Sales
covenant without obtaining the prior consent of the lenders thereunder. Any
future Bank Credit Agreement or other agreements relating to Senior Debt to
which the Company becomes a party also may contain similar restrictions and
provisions. If the Company does not obtain such a consent or repay or refinance
such borrowings to eliminate such restrictions, the Company will remain
prohibited from purchasing Notes. In such case, the Company's failure to
purchase tendered Notes would constitute an Event of Default under the Indenture
which would, in turn, constitute a default under the Bank Credit Agreement, and
possibly under other Senior Debt. In such circumstances, the subordination
provisions in the Indenture would likely restrict payments to the Holders of
Notes. Finally, the
81
<PAGE> 88
Company's ability to pay cash to the holders of Notes in connection with an
Asset Sale may be limited to the Company's then existing financial resources.
There can be no assurance that sufficient funds will be available when necessary
to make any required purchases.
CERTAIN COVENANTS
The Indenture contains, among other things, the following covenants:
Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, (i) declare or pay any dividend or make any other payment or
distribution on account of the Company's or any of its Restricted Subsidiaries'
Equity Interests (including, without limitation, any payment by the Company or
its Restricted Subsidiaries in connection with any merger or consolidation
involving the Company) or to the direct or indirect holders of the Company's
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of the
Company or pro rata dividends or distributions in respect of Equity Interests of
a Restricted Subsidiary); (ii) purchase, redeem or otherwise acquire or retire
for value any Equity Interests of the Company or any direct or indirect parent
of the Company or other Affiliate of the Company that is not (or does not, as a
result of such purchase, redemption or acquisition, become) a Restricted
Subsidiary of the Company; (iii) make any principal payment on, or purchase,
redeem, defease or otherwise acquire or retire for value any Indebtedness that
is subordinated to the Notes (other than the Notes), except at final maturity
and in connection with any scheduled mandatory payment or sinking fund
obligation or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment on a pro forma basis:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Fixed Charge Coverage Ratio of the Company for the Company's
most recently ended four full fiscal quarters (taken as one accounting
period) for which internal financial statements are available immediately
preceding the date on which such Restricted Payment is made, calculated on
a pro forma basis as if such Restricted Payment had been made at the
beginning of such four-quarter period, would have been equal to or greater
than 2.0 to 1.0,
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of the Indenture (including Restricted Payments permitted by
clauses (t) and (w) of the next succeeding paragraph, but excluding all
other Restricted Payments permitted by the next succeeding paragraph), does
not exceed the sum of (i) 50% of the Consolidated Net Income of the Company
for the period (taken as one accounting period) from October 1, 1996 to the
end of the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted Payment
(or, if such Consolidated Net Income for such period is a deficit, less
100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds
received by the Company from the issue or sale since the date of the
Indenture of Equity Interests of the Company or of debt securities of the
Company issued since the date of the Indenture that have been converted
into such Equity Interests (other than Equity Interests (or convertible
debt securities) sold to a Subsidiary of the Company and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock), plus (iii) to the extent not otherwise included
pursuant to clause (ii) above, 100% of the aggregate net cash proceeds
received by the Company from capital contributions received by the Company
after the date of the Indenture which, in accordance with GAAP, is not
recognized as income by the Company and directly increases common
stockholders' equity, and which (1) is not a payment in respect or
satisfaction of any settlement, claim, dispute or obligation owed to the
Company or any of its
82
<PAGE> 89
Subsidiaries, (2) is not subject to any contingency, condition, repayment
or preference, and (3) does not require the Company to incur any liability,
contingent or otherwise, or to satisfy any obligation as a condition
thereof, plus (iv) to the extent that any Restricted Investment that was
made after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (A) the cash Net Proceeds with
respect to such Restricted Investment and (B) the initial amount of such
Restricted Investment, plus (iv) the principal amount of the Company's
Convertible Subordinated Notes outstanding on the date of the Indenture
that are converted into Equity Interests of the Company in accordance with
their terms, plus (v) solely with respect to Restricted Investments, $25.0
million.
The foregoing provisions will not prohibit (t) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (u) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the proceeds of,
the substantially concurrent sale (other than to a Subsidiary of the Company) of
other Equity Interests of the Company (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement or other acquisition shall be excluded
(to the extent otherwise included) from clause (c)(ii) of the preceding
paragraph; (v) the defeasance, redemption or repurchase of subordinated
Indebtedness with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness or the substantially concurrent sale (other than to a
Subsidiary of the Company) of Equity Interests of the Company (other than
Disqualified Stock); provided that the amount of any such net cash proceeds that
are utilized for any such redemption, repurchase, retirement or other
acquisition shall be excluded (to the extent otherwise included) from clause
(c)(ii) of the preceding paragraph; (w) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Company or
any Restricted Subsidiary of the Company held by any present or former employee,
officer or director of the Company (or any of its Subsidiaries), or such
person's estate or estate beneficiary, pursuant to any equity subscription
agreement or stock option agreement in effect as of the date of the Indenture,
and as may be entered into by the Company from time to time in the ordinary
course of business and consistent with the Company's past practice; provided
that the aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests shall not exceed $2.0 million in any twelve-month
period plus the aggregate cash proceeds received by the Company during such
twelve-month period from any reissuance of Equity Interests by the Company to
such persons, and no Default or Event of Default shall have occurred and be
continuing immediately after such transaction; (x) the repurchase, redemption,
retirement or other acquisition of the Company's Convertible Subordinated Notes,
outstanding on the date of the Indenture, plus accrued interest thereon, as
described under the caption "Use of Proceeds"; (y) the issuance of Common Stock
upon conversion of any of the Convertible Subordinated Notes in accordance with
the terms thereof as of the date of the Indenture; and (z) conversion of shares
of the Company's Class A Common Stock into Class B Common Stock, and conversion
of shares of the Company's Class B Common Stock into Class A Common Stock, each
in accordance with the respective terms as approved by the Company's
shareholders and submitted to the Nasdaq Stock Market for approval as of the
date of the Indenture.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later
than the date of making any Restricted Payment (other than Restricted Payments
permitted pursuant to the immediately preceding paragraph), the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed, which calculations
may be based upon the Company's latest available internal financial statements.
The Board of Directors of the Company may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation would not cause
a Default. For purposes of making such
83
<PAGE> 90
determination, all outstanding Investments by the Company and its Restricted
Subsidiaries (except to the extent repaid in cash) in the Subsidiary so
designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this Limitation on Restricted Payments covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the greatest of (x) the net book value of such Investments at the time
of such designation and (y) the fair market value of such Investments at the
time of such designation; provided that with respect to all Restricted
Subsidiaries engaged in the recorded music business ("Record Business Restricted
Subsidiaries") designated by the Board of Directors of the Company after the
date of the Indenture as an Unrestricted Subsidiary, the aggregate of such
amounts determined in respect of Record Business Restricted Subsidiaries shall
be reduced by an amount equal to the Company's Investment in All American Music
Group, a California corporation, and Santa Monica Sound Recorders, Inc., a
California corporation, as of the date of the Indenture, determined in
accordance with the immediately preceding clauses (x) and (y). Such designation
will only be permitted if such Restricted Payment would be permitted at such
time and if such Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary.
Limitations on Additional Indebtedness. The Indenture provides that the
Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guaranty or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt) and that the
Company will not issue any Disqualified Stock and will not permit any of its
Restricted Subsidiaries to issue any shares of preferred stock or Disqualified
Stock; provided, however, that the Company may incur Indebtedness (including
Acquired Debt) or issue shares of Disqualified Stock, and any of the Company's
Restricted Subsidiaries may incur Indebtedness under the Bank Credit Agreement
and Acquired Debt, if the Company's Fixed Charge Coverage Ratio for the
Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such Disqualified Stock is issued (taken
as one accounting period) would have been greater than 2.0 to 1.0, determined on
a pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred (or Disqualified
Stock issued) at the beginning of such four-quarter period.
The foregoing provisions will not apply to:
(i) (a) the incurrence by the Company or its Restricted Subsidiaries
of Indebtedness, under any Bank Credit Agreement, in an aggregate principal
amount at any one time outstanding not to exceed, together with all amounts
outstanding under clause (ii) below, an amount equal to $155.0 million less
the aggregate amount of all proceeds, if any, of all sales or other
dispositions of assets including the aggregate amount of all proceeds that
have been applied since the date of the Indenture to permanently reduce the
outstanding amount of Indebtedness under the Bank Credit Agreement pursuant
to the covenant described above under the caption "Asset Sales," and (b)
the guarantee of such Indebtedness by the Company and any of its Restricted
Subsidiaries;
(ii) the incurrence by the Company or any of its Restricted
Subsidiaries of Securitized Financing Indebtedness in an aggregate amount
at any one time outstanding not to exceed, together with all amounts
outstanding under clause (i) above, an amount equal to $155.0 million less
the aggregate amount of all proceeds, if any, of all sales or other
dispositions of assets that have been applied since the date of the
Indenture to permanently reduce the outstanding amount of Indebtedness
under the Bank Credit Agreement pursuant to the covenant described above
under the caption "Asset Sales."
(iii) the incurrence by the Company of Indebtedness represented by the
Notes;
84
<PAGE> 91
(iv) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund
Indebtedness that was permitted by the Indenture to be incurred;
(v) the incurrence by the Company or any of its Wholly Owned
Restricted Subsidiaries of intercompany Indebtedness between or among the
Company and any of its Wholly Owned Restricted Subsidiaries, provided,
however, that (a) if the Company is the obligor on such Indebtedness, such
Indebtedness is expressly subordinate to the payment in full of all
Obligations with respect to the Notes and (b) other than with respect to
Indebtedness of All American Music Group, a California corporation, and
Santa Monica Sound Recorders, Inc., a California corporation, in an amount
not exceeding such Indebtedness outstanding as of the date of the
Indenture, (1) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than the
Company or a Wholly Owned Restricted Subsidiary and (2) any sale or other
transfer of any such Indebtedness to a Person that is not either the
Company or a Wholly Owned Restricted Subsidiary shall be deemed, in each
case, to constitute an incurrence of such Indebtedness by the Company or
such Wholly Owned Restricted Subsidiary, as the case may be;
(vi) the incurrence by any non-wholly owned Restricted Subsidiary of
intercompany Indebtedness between or among the Company and any of its
Restricted Subsidiaries, provided that, as to the Person who is the obligee
on such Indebtedness, the portion of such Investment equal to the minority
interest in such Restricted Subsidiary is permitted under the covenant
described under the heading "-- Limitation on Restricted Payments" other
than by virtue of the definition of Permitted Investments; and, provided
further, that (a) if the Company is the obligor on such Indebtedness, such
Indebtedness is expressly subordinate to the payment in full of all
Obligations with respect to the Notes and (b) other than with respect to
Indebtedness of All American Music Group, a California corporation, and
Santa Monica Sound Recorders, Inc., a California corporation, in an amount
not exceeding such Indebtedness outstanding as of the date of the
Indenture, (1) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than the
Company or a Restricted Subsidiary and (2) any sale or other transfer of
any such Indebtedness to a Person that is not either the Company or a
Restricted Subsidiary shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by such Restricted Subsidiary;
(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by purchase money obligations
incurred for the purpose of financing all or any part of the purchase price
or cost of construction or improvement of property, plant or equipment used
in the business of the Company or such Restricted Subsidiary, in an
aggregate principal amount not to exceed $3.0 million at any time
outstanding;
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to Indebtedness that is
permitted by the terms of the Indenture to be outstanding or for the
purpose of fixing or hedging currency exchange risk with respect to any
currency exchanges; and
(ix) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness (in addition to Indebtedness permitted by any
other clause of this paragraph) in an aggregate principal amount (or
accreted value, as applicable) at any time outstanding not to exceed $2.0
million.
Notwithstanding the foregoing, the Company's Unrestricted Subsidiaries may
incur Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of
the Company.
85
<PAGE> 92
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries of the Company. The Indenture provides that the Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(a)
pay dividends or make any other distributions to the Company or any of its
Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits, or (b) pay any
indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii)
make loans or advances to the Company or any of its Restricted Subsidiaries or
(iii) transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) Existing Indebtedness and other agreements as in
effect on the date of the Indenture, (b) the Bank Credit Agreement as in effect
as of the date of the Indenture, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings are not materially more restrictive taken as a whole with respect
to such dividend and other payment restrictions than those contained in the Bank
Credit Agreement as in effect on the date of the Indenture, (c) the Indenture
and the Notes, (d) applicable law, (e) any instrument governing Indebtedness or
Capital Stock of a Person acquired by the Company or any of its Restricted
Subsidiaries as in effect at the time of such acquisition (except to the extent
such Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of such Person, so acquired, provided that the Consolidated
Cash Flow of such Person may be taken into account in determining whether such
acquisition was permitted by the terms of the Indenture only to the extent that
the definition of "Consolidated Cash Flow" would have permitted such inclusion
for a Restricted Subsidiary, (f) by reason of customary non-assignment
provisions in leases entered into in the ordinary course of business and
consistent with past practices, (g) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so acquired, or (h)
Permitted Refinancing Indebtedness, provided that the restrictions contained in
the agreements governing such Permitted Refinancing Indebtedness are not
materially more restrictive taken as a whole than those contained in the
agreements governing the Indebtedness being refinanced.
Limitation on Transactions with Shareholders and Affiliates. The Indenture
provides that the Company will not, and will not permit any Restricted
Subsidiary of the Company to, directly or indirectly, conduct any business or
enter into any transaction or series of similar transactions (including, without
limitation, the purchase, sale, transfer, lease or exchange of any property or
the rendering of any service) with (i) any direct or indirect holder of more
than 5% of any class of Capital Stock of the Company or of any Restricted
Subsidiary of the Company (other than transactions between or among the Company
and/or its Restricted Subsidiaries except for Restricted Subsidiaries owned in
any part by the Principal Shareholders) or (ii) any Affiliate of the Company
(other than transactions between or among the Company and/or its Restricted
Subsidiaries except for Restricted Subsidiaries owned in any part by the
Principal Shareholders) (each of the foregoing, a "Shareholder/Affiliate
Transaction") unless the terms of such business, transaction or series of
transactions (a) are set forth in writing and (b) are as favorable to the
Company or such Restricted Subsidiary in all material respects as terms that
would be obtainable at the time for a comparable transaction or series of
similar transactions in arm's-length dealings with a Person which is not such a
stockholder or Affiliate and, if such transaction or series of transactions
involves aggregate consideration greater than $5.0 million, then a majority of
the disinterested members of the Board of Directors shall in good faith
determine that the terms of such transaction comply with clauses (a) and (b)
above (evidenced by a Board Resolution set forth in an Officer's Certificate
delivered to the Trustee) or, as to any such transaction as an alternative to a
Board of Directors determination, the Company may obtain from an accounting,
appraisal or investment banking firm of
86
<PAGE> 93
national standing an opinion as to the fairness, from a financial point of view
and taking into account the standard in clauses (a) and (b) above, of the
transaction to the Company or Restricted Subsidiary.
Notwithstanding the foregoing limitations, the following shall not be
deemed to be Shareholder/Affiliate Transactions: (i) any payment of money or
issuance of securities (or issuance of benefits, including indemnification) by
the Company or any Restricted Subsidiary pursuant to employment agreements and
arrangements and employee benefit plans in the ordinary course of business,
consistent with past practices and approved by a majority of the members of the
Board of Directors of the Company or such Restricted Subsidiary, or a committee
of such Board of Directors that is composed solely of two or more non-employee
directors (as such terms are defined in Rule 16b-3 under the Exchange Act), (ii)
reasonable payments and other benefits (including indemnification) provided to
directors for service on the Board of Directors of the Company or any Restricted
Subsidiary, including the reimbursement or advancement of out-of-pocket expenses
and directors' and officers' liability insurance, each as paid or incurred in
the ordinary course of business and consistence with past practice and (iii)
transactions between the Company and any Restricted Subsidiary, or between any
Restricted Subsidiary and another Restricted Subsidiary, each in the ordinary
course of business and consistent with past practice.
Limitation on Liens. The Indenture provides that the Company will not and
will not permit any of its Restricted Subsidiaries to, create, incur, assume or
otherwise cause or suffer to exist or become effective any Lien upon any of
their property or assets, now owned or hereafter acquired (other than the
Convertible Note), that secures Obligations under any Indebtedness that is pari
passu with or subordinated in right of payment to the Notes unless all payments
due under the Indenture and the Notes are secured on an equal and ratable basis
with the obligations so secured until such time as such obligations are no
longer secured by a Lien; provided, that in any case involving a Lien securing
Indebtedness which is subordinated in right of payment to the Notes, such Lien
is subordinated to the Lien securing the Notes to the same extent that such
subordinated Indebtedness is subordinated to the Notes.
Limitation on Merger, Consolidation and Sale of Assets. The Indenture
provides that the Company may not consolidate or merge with or into (whether or
not the Company is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions, to another corporation, Person or
entity unless (i) the Company is the surviving corporation or the entity or the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia; (ii) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company) or the entity or Person to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made assumes all the obligations of the Company under the Notes
and the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no Default
or Event of Default exists; and (iv) except in the case of a merger of the
Company with or into a Wholly Owned Restricted Subsidiary of the Company, the
Company or the entity or Person formed by or surviving any such consolidation or
merger (if other than the Company), or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made (A) will have
Consolidated Net Worth immediately after the transaction equal to or greater
than the Consolidated Net Worth of the Company immediately preceding the
transaction and (B) will, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period (taken as one accounting period), be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant described
above under the caption "-- Limitations on Additional Indebtedness."
87
<PAGE> 94
Limitations on Preferred Stock of Restricted Subsidiaries. The Indenture
provides that the Company will not permit any of its Restricted Subsidiaries to
issue any preferred stock, or permit any Person to own or hold an interest in
any preferred stock of any such Restricted Subsidiary, except for (i) preferred
stock outstanding as of the date of the Indenture after giving effect to the
application of the proceeds of the Notes, (ii) stock issued to the Company or a
Wholly Owned Restricted Subsidiary of the Company and (iii) preferred stock
existing at the time such company becomes a Restricted Subsidiary or is merged
into the Company.
Limitation on Senior Subordinated Debt. The Indenture provides that the
Company and its Restricted Subsidiaries will not incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that is subordinate or
junior in right of payment to any Senior Debt and senior in any respect in right
of payment to the Notes.
Limitation on Business Activities. The Indenture provides that the Company
will not, and will not permit any Restricted Subsidiary to, engage in any
material respect in any business other than the Principal Business.
Provision of Financial Information. The Indenture provides that, whether
or not required by the rules and regulations of the Securities and Exchange
Commission (the "Commission"), so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K (as such requirement is in effect as of the date of the Indenture) if the
Company were required to file such reports. In addition, whether or not required
by the rules and regulations of the Commission, the Company will file a copy of
all such information and reports with the Commission for public availability
(unless the Commission will not accept such a filing) and make such information
available to securities analysts and prospective investors upon request. In
addition, the Company has have agreed that, for so long as any Notes remain
outstanding, it will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
PAYMENTS FOR CONSENT
The Indenture provides that neither the Company nor any of its Restricted
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture or the Notes unless such consideration
is offered to be paid or is paid to all Holders of the Notes that consent, waive
or agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for the definition of any other capitalized term used
herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured by
a Lien encumbering any asset acquired by such specified Person.
88
<PAGE> 95
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Sale" by any Person means (i) any transfer, conveyance, sale,
lease, license, or other disposition by such Person or any of its Restricted
Subsidiaries (including a consolidation or merger or other sale of any such
Restricted Subsidiaries with, into or to another Person in a transaction in
which such Restricted Subsidiary ceases to be a Restricted Subsidiary, but
excluding a disposition by a Restricted Subsidiary of such Person to such
Person) of any assets or rights of such Person or any of its Restricted
Subsidiaries outside of the ordinary course of business, and (ii) any issuance
or sale of Equity Interests in any of such Person's Restricted Subsidiaries
(other than to the Company or a Wholly Owned Restricted Subsidiary of the
Company), which in the case of either or both of clauses (i) and (ii), whether
in a single transaction or a series of related transactions, result in Net
Proceeds in excess of $5.0 million during any 12-month period, excluding
immaterial amounts received in respect of damaged, worn out or other property no
longer necessary to the conduct of business. Notwithstanding the foregoing,
"Asset Sales" shall be deemed not to include (i) the licensing of television
programming and recorded music in the ordinary course of business, (ii) assets
transferred or disposed of in connection with a Securitized Financing
Transaction and (iii) to the extent permitted by provisions of the Indenture
described under the caption "Certain Covenants--Limitation on Restricted
Payments," the transfer of assets by the Company to a Restricted Subsidiary or
by a Restricted Subsidiary to another Restricted Subsidiary shall not be deemed
"Asset Sales." The sale, lease, conveyance or other disposition of all or
substantially all the assets of the Company and its Subsidiaries taken as a
whole will be governed by the provisions of the Indenture described under the
caption "-- Certain Covenants--Limitation on Merger, Consolidation and Sale of
Assets" and not by the provisions of the covenants described under the caption
"-- Asset Sales."
"Bank Credit Agreement" means (i) the Amended Credit, Security, Guaranty
and Pledge Agreement dated as of April 13, 1995 as amended by the Amended and
Restated Credit, Security, Guaranty and Pledge Agreement, dated as of October
23, 1996 by and among the Company and the lenders named therein, (ii) each
instrument pursuant to which Obligations under the agreement described in clause
(i) is amended, deferred, extended, renewed, replaced, refunded or refinanced,
in whole or in part, provided that, subject to the subordination provisions
described herein, any covenant in such agreement as so amended, deferred,
extended, renewed, replaced, refunded or refinanced which prohibits payment of
the Notes at their final maturity shall not continue at or after final maturity
of the Notes and (iii) each instrument now or hereafter evidencing, governing,
guarantying or securing any Indebtedness under any agreements described in
clause (i) or (ii) above, in each case, as modified, amended, restated or
supplemented from time to time.
"Capital Lease" means, at the time any determination thereof is to be made,
any lease of property, real or personal or mixed in respect of which the present
value of the minimum rental commitment would be capitalized on a balance sheet
of the lessee in accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
89
<PAGE> 96
"Capitalized Lease Obligation" of any Person means any lease of any
property (whether real, personal or mixed) by that Person as lessee which, in
conformity with GAAP, is required to be accounted for as a Capital Lease on the
balance sheet of that Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500 million and a Keefe Bank Watch Rating of
"B" or better, (iv) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clauses (ii) and (iii)
entered into with any financial institution meeting the qualifications specified
in clause (iii) above, (v) commercial paper having one of the two highest rating
categories obtainable from Moody's or S&P and in each case maturing within six
months after the date of acquisition and (vi) readily marketable direct
obligations issued by any state of the United States of America or any political
subdivision thereof having one of the two highest rating categories obtainable
from Moody's or S&P.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition of (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any person (as such term is used in Section 13(d)(3) of the Exchange
Act) other than the Principal Shareholders and their Related Parties (as
defined), (each an "Acquiring Person"), provided, that the incurrence of a Lien
permitted by the covenant described under the caption "Limitation on Liens"
shall not be a Change of Control for purposes of this clause, (ii) the adoption
of a plan relating to the liquidation or dissolution of the Company, (iii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" other than the Principal
Shareholders and their Related Parties, becomes the "beneficial owner" (as each
such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act),
directly or indirectly, of more than 50.0% of the voting stock of the Company,
and (iv) the first day on which the majority of the Company's Board of Directors
are not Continuing Directors. For purposes of this definition, any transfer of
an equity interest of an entity that was formed for the purpose of acquiring
voting stock of the Company will be deemed to be a transfer of such voting stock
as corresponds to the portion of the equity that has been so transferred.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person and its Restricted Subsidiaries for
such period plus (i) an amount equal to any extraordinary loss plus any net loss
realized in connection with an Asset Sale (to the extent such losses were
deducted in computing such Consolidated Net Income), plus (ii) provision for
taxes based on income or profits of such Person and its Restricted Subsidiaries
for such period, to the extent that such provision for taxes was included in
computing such Consolidated Net Income, plus (iii) consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid or
accrued and whether or not capitalized (including, without limitation,
amortization of original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing such
Consolidated Net Income, plus (iv) depreciation, amortization (including
amortization of goodwill and other intangibles but excluding amortization of
programming costs and other prepaid cash expenses that were paid in a prior
period) and other non-cash charges (excluding any such non-cash charge to the
extent that it represents an accrual of or reserve for cash charges in any
future period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Restricted Subsidiaries for such period to the
extent that such depreciation, amortization and other
90
<PAGE> 97
non-cash charges were deducted in computing such Consolidated Net Income, minus
(v) payments in connection with contractual obligations either existing at the
date of the Indenture, or entered into after the date of the Indenture, in
connection with the payment of deferred purchase price, or any other payments
treated as purchase price adjustments in accordance with GAAP, with respect to
assets or properties acquired by such Person and its Restricted Subsidiaries.
Notwithstanding the foregoing, the provision for taxes on the income or profits
of, and the depreciation and amortization and other non-cash charges of, a
Restricted Subsidiary of the referent Person shall be added to Consolidated Net
Income to compute Consolidated Cash Flow only to the extent (and in same
proportion) that the Net Income of such Restricted Subsidiary was included in
calculating the Consolidated Net Income of such Person and only if a
corresponding amount would be permitted at the date of determination to be
dividended to the Company by such Restricted Subsidiary without prior
governmental approval (that has not been obtained), and without direct or
indirect restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Restricted Subsidiary or its stockholders.
"Consolidated Net Income" means, when used with reference to any Person,
for any period, the aggregate of the Net Income of such Person and its
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP, provided that (i) the Net Income of any Person which is not a
Restricted Subsidiary of such Person or is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid to such Person or its Restricted Subsidiaries, (ii) the Net
Income of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded, except to the
extent included pursuant to clause (i) above, (iii) extraordinary gains and
losses and gains and losses from the sale of assets outside the ordinary course
of such Person's business shall be excluded, (iv) the cumulative effect of
changes in accounting principles in the year of adoption of such changes shall
be excluded, (v) the effect of the write-off of unamortized debt issuance costs
and the redemption premium, each in connection with the redemption or purchase
of the Company's Convertible Subordinated Notes, if any, shall be excluded and
(vi) the tax effect of any of the items described in clauses (i) through (v)
above shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Restricted Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that by
its terms is not entitled to the payment of dividends unless such dividends may
be declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Restricted Subsidiaries (except, in each case, Permitted
Investments), and (z) all unamortized debt discount and expense and unamortized
deferred charges as of such date, all of the foregoing determined in accordance
with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Default" means any event which is, or after notice or the passage of time
or both, would be an Event of Default.
91
<PAGE> 98
"Designated Senior Debt" means (i) all Indebtedness under the Bank Credit
Agreement and (ii) any other Senior Debt the incurrence of which was permitted
under the Indenture the principal amount of which is $20.0 million or more and
that has been designated by the Company (with the concurrence of the agent under
the Bank Credit Agreement if then outstanding) as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock of the Company that, either by
its terms or by the terms of any security into which it is convertible or
exchangeable, is, or upon the happening of any event or passage of time would
be, required to be redeemed or purchased, including at the option of the holder,
in whole or in part, or has, or upon the happening of an event or passage of
time would have, a redemption, sinking fund or similar payment due, on or prior
to the Stated Maturity of the Notes.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means any outstanding Indebtedness of the Company
and its Restricted Subsidiaries (other than under the Bank Credit Agreement) as
of the date of the Indenture.
"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Restricted Subsidiaries incurs, assumes, Guarantees or
redeems any Indebtedness (other than revolving credit borrowings) or issues
preferred stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but prior to the date of the event for
which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, Guarantee or redemption
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to above,
(i) acquisitions that have been made by the Company or any of its Restricted
Subsidiaries (including, without duplication, the Mark Goodson Acquisition),
including through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to have
occurred on the first day of the four-quarter reference period and Consolidated
Cash Flow for such reference period shall be calculated without giving effect to
clause (ii) of the proviso set forth in the definition of Consolidated Net
Income, (ii) the Consolidated Cash Flow attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, but only to the extent that the obligations giving rise to such Fixed
Charges will not be obligations of the referent Person or any of its Restricted
Subsidiaries following the Calculation Date.
"Fixed Charges" means, with respect to any Person for any period, the sum
of (i) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued (including, without
limitation, amortization of original issue discount, non-cash interest payments,
the interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations, but excluding (1) the imputed interest discount recorded
by the Company on accounts receivable during such period to the extent that the
amortization thereof is excluded from Consolidated Net Income and (2)
amortization of debt issuance costs in respect of Indebtedness of such Person
outstanding on the date of the Indenture
92
<PAGE> 99
including, with respect to the Company, the Notes) and (ii) the consolidated
interest expense of such Person and its Subsidiaries that was capitalized during
such period, and (iii) any interest expense on Indebtedness of another Person
that is Guaranteed by such Person or one of its Restricted Subsidiaries or
secured by a Lien on assets of such Person or one of its Restricted Subsidiaries
(whether or not such Guarantee or Lien is called upon) and (iv) all cash
dividend payments (and non-cash dividend payments in the case of a Person that
is a Restricted Subsidiary) on any series of preferred stock of such Person, in
each case, on a consolidated basis and in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guaranty" means a guaranty (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) currency exchange or interest rate swap, cap or collar
agreements and (ii) other agreements or arrangements designed to protect such
Person against fluctuations in currency exchange or interest rates.
"Indebtedness" means, with respect to any Person, (i) any indebtedness of
such Person, without duplication, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar instruments
or letters of credit (or reimbursement agreements in respect thereof) or
banker's acceptances or representing Capital Lease Obligations or the balance
deferred and unpaid of the purchase price of any property or representing any
Hedging Obligations, except any such balance that constitutes an accrued expense
or trade payable, if and to the extent any of the foregoing indebtedness (other
than letters of credit and Hedging Obligations) would appear as a liability upon
a balance sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether or
not such indebtedness is assumed by such Person), (ii) to the extent not
included in clause (i), the Guarantee by such Person of any indebtedness of any
other Person and (iii) Securitized Financing Indebtedness. Notwithstanding the
foregoing, Indebtedness shall not include Program Guarantees.
"Investment" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities by
the Company for consideration consisting of common equity securities of the
Company shall not be deemed to be an Investment. If the Company or any
Subsidiary of the Company sells or otherwise disposes of any Equity Interests of
any direct or indirect Subsidiary of the Company such that, after giving effect
to any such sale or disposition, such Person is no longer a Subsidiary of the
Company, the Company shall be deemed to have made an Investment on the date of
any such sale or disposition equal to the fair market value of the Equity
Interests of such Subsidiary not sold or disposed of.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind (except for taxes not yet
owing) in respect of such asset, whether or not filed, recorded or otherwise
perfected, under applicable law (including any conditional sale or other
93
<PAGE> 100
title retention agreement, any lease in the nature thereof, any option or other
agreement to sell and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Maturity" means, with respect to any Note, the date on which the principal
of such Note becomes due and payable as provided in such Note or the Indenture,
whether at the Stated Maturity or by declaration of acceleration, call for
redemption or otherwise.
"Moody's" means Moody's Investor Service. Inc. and its successors.
"Net Income" of any Person for any period means the net income (loss) from
continuing operations of such Person for such period, determined in accordance
with GAAP.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than the Bank Credit Agreement) secured by a Lien on the asset or assets
that were the subject of such Asset Sale, contractual obligations either
existing at the date of the Indenture, or entered into after the date of the
Indenture from time to time in the ordinary course of business and consistent
with the Company's past practice in connection with the payment of deferred
purchase price of the properties or assets that were the subject of such Asset
Sale, and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP, provided that any such reduction
in such reserve shall be deemed to be Net Proceeds in connection with such Asset
Sale to the extent of such reduction.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness but excluding licensing in the ordinary course of business and
Program Guarantees), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
"Obligations" means any principal (including reimbursement obligations and
Guarantees), premium, if any, interest (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Company whether or not a claim for post-filing interest is allowed in such
proceedings), penalties, fees, indemnifications, reimbursements, damages and
other liabilities payable under the documentation governing any Indebtedness.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company that is engaged in the same or a similar
line of business as the Principal Business, provided that, (i) in the case of an
Investment in an Equity Interest in a corporation, such Investment increases pro
rata such Person's ownership of the outstanding voting capital stock of such
corporation and, (ii) in the case of an Investment in any other Subsidiary, such
Investment increases pro rata such Person's ownership and control of such
entity; (b) any Investment in Cash Equivalents; (c) any Investment by the
Company or any Restricted Subsidiary of the Company in a Person if as a result
of such Investment (i) such Person becomes a Restricted Subsidiary of the
Company that is engaged in the same or a similar line of business as the
Principal Business or
94
<PAGE> 101
(ii) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated into,
the Company or a Restricted Subsidiary of the Company that is engaged in the
same or a similar line of business as the Principal Business; (d) any Restricted
Investment made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the covenant
described above under the caption "Asset Sales"; and (e) loans and advances to
the Company's officers, directors and employees made in the ordinary course of
business and consistent with the Company's past practice in an aggregate amount,
when taken together with all other investments pursuant to this clause (e), does
not exceed $1.0 million.
"Permitted Non-Cash Asset Sale" means, with respect to any Person, any
Asset Sale of assets used in connection with, or related to, the production,
release, distribution and licensing of recorded music.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that: (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal amount (or
accreted value, if applicable) of plus the interest accrued and unpaid prior to
the occurrence of an event of default with respect to such other Indebtedness,
if any, on the Indebtedness so extended, refinanced, renewed, replaced, defeased
or refunded, (plus the amount of any premium required to be paid, and the amount
of reasonable expenses incurred, in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date equal to or later than the
final maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
is subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms at least as
favorable to the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness is incurred either by the
Company or by the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint stock company, trust, estate,
unincorporated organization or government or any agency or political subdivision
thereof.
"Principal Business" means, with respect to the Company and its Restricted
Subsidiaries, any line or lines of business activity conducted by the Company or
its Restricted Subsidiaries on the date of the Indenture, or any other
activities ancillary or related thereto, including without limitation,
television production, distribution and exhibition, recorded music production
and distribution and investments in working capital items and current assets
related thereto.
"Principal Shareholders" means Anthony J. Scotti and Benjamin J. Scotti and
their respective immediate family members.
"Program Guarantees" means with respect to any Person, any commitment of
such Person to a producer or owner of a program in conjunction with the
acquisition of a program or distribution rights in a program by such Person to
the effect that the gross revenues to be generated in the future from the
exploitation of such program or the net revenues to be received by such producer
or owner from the exploitation of such program will equal or exceed an amount
specified in the acquisition agreement related to such program or otherwise
requiring payment by such Person of a minimum amount specified in the
acquisition agreement related to such program regardless of actual performance
of such program.
95
<PAGE> 102
"Related Party" with respect to any Principal Shareholder means (A) any
controlling stockholder, 80% (or more) owned Subsidiary, or spouse or immediate
family member (in the case of an individual) of such Principal Shareholder or
(B) or trust, corporation, partnership or any other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding an 80% or more
controlling interest of which consist of such Principal Shareholder and/or such
other Persons referred to in the immediately preceding clause (A).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not (i) an Unrestricted Subsidiary or (ii) a direct or indirect
Subsidiary of an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Rating Group, a division of McGraw Hill,
Inc., a New York corporation and its successors.
"Securitized Financing Indebtedness" means, with respect to any Person, the
unreturned portion of the amount funded by the investors under an asset
securitization facility with such Person.
"Securitized Financing Transaction" means, with respect to any Person, a
securitized financing of receivables of such Person.
"Senior Debt" (i) means all Obligations under the Bank Credit Agreement and
(ii) all Obligations with respect to any other Indebtedness permitted to be
incurred by the Company under the terms of the Indenture, unless the instrument
under which such Indebtedness is incurred expressly provides that it is on a
parity with or subordinated in right of payment to the Notes. Notwithstanding
anything to the contrary in the foregoing, Senior Debt will not include (v)
Indebtedness (other than Indebtedness under clause (i) above) that is expressly
subordinate or junior in right of payment to any Indebtedness of the Company,
(w) any liability for federal, state, local or other taxes owed or owing by the
Company, (x) any Indebtedness of the Company to any of its Subsidiaries or other
Affiliates, (y) any trade payables created, incurred or assumed in the ordinary
course of business and consistent with past practice in connection with
obtaining materials or services or (z) any Indebtedness that is incurred in
violation of the Indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"Stated Maturity," when used with respect to any Note or any installment of
interest thereof, means the date specified in such Note as the fixed date on
which the principal of such Note or such installment of interest is due and
payable.
"Subsidiary" of any Person means (i) a corporation, association or other
business entity of which more than 50% of the total voting power of all classes
of the outstanding voting stock is owned, directly or indirectly, by such Person
or by one or more other Subsidiaries of such Person or by such Person and one or
more Subsidiaries thereof, (ii) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (b) the only general partners of which are such Person or one or more
Subsidiaries of such Person (or any combination thereof) and (iii) any other
Person not described in clauses (i) and (ii) above and designated by the Board
of Directors of such Person as a Subsidiary in which such Person, or one or more
other Subsidiaries of such Person or such Person and one or more other
Subsidiaries thereof, directly or indirectly, owns 50% ownership and the power,
pursuant to a written contract or agreement, to direct the policies and
management or the financial and other affairs thereof.
Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors of the Company as an Unrestricted Subsidiary pursuant to a
Board Resolution; but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or
96
<PAGE> 103
understanding are no less favorable to the Company or such Restricted Subsidiary
than those that might be obtained at the time from Persons who are not
Affiliates of the Company; (c) is a Person with respect to which neither the
Company nor any of its Restricted Subsidiaries has any direct or indirect
obligation (x) to subscribe for additional Capital Stock (including options,
warrants or other rights to acquire Capital Stock) or (y) to maintain or
preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; (d) has not guaranteed or otherwise
directly or indirectly provided credit support (excluding licensing in the
ordinary course of business and Program Guarantees) for any Indebtedness of the
Company or any of its Restricted Subsidiaries; and (e) has at least one director
on its board of directors that is not a director or executive officer of the
Company or any of its Restricted Subsidiaries and has at least one executive
officer that is not a director or executive officer of the Company or any of its
Restricted Subsidiaries. Any such designation by the Board of Directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted by the covenant described above under the caption "Certain
Covenants -- Limitation on Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary
shall be deemed to be incurred by a Restricted Subsidiary of the Company as of
such date (and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant described under the caption "Certain
Covenants -- Limitation on Additional Indebtedness," the Company shall be in
default of such covenant). The Board of Directors of the Company may at any time
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that such designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if (i) such
Indebtedness is permitted under the covenant described under the caption
"Certain Covenants -- Limitation on Additional Indebtedness," and (ii) no
Default or Event of Default would be in existence following such designation.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means (i) a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person and (ii) Fremantle International, Inc., a
New York corporation, and Fremantle de Espana, a Spanish corporation, (unless
either such subsidiary is designated by the Company's Board of Directors as an
Unrestricted Subsidiary), provided that not less than 99.0% of the outstanding
Capital Stock or other ownership interests thereof (other than directors'
qualifying shares) shall at the time be owned by such Person or by one or more
Wholly Owned Restricted Subsidiaries of such Person or by such Person and one or
more Wholly Owned Restricted Subsidiaries of such Person.
EVENTS OF DEFAULT
An "Event of Default" with respect to the Notes, occurs under the Indenture
if: (i) the Company defaults in the payment of any interest, including Special
Interest, if any, upon any Note when it becomes due and payable, and such
default continues for a period of 30 days (whether or not prohibited by the
subordination provisions of the Indenture); (ii) the Company defaults in the
payment of the principal of (or premium, if any, on) any Note at its Maturity
(whether or not
97
<PAGE> 104
prohibited by the subordination provisions of the Indenture); (iii) the Company
defaults in the payment of principal and interest and Special Interest, if any,
(whether or not prohibited by the subordination provisions of the Indenture) on
Notes required to be purchased pursuant to an Offer to Purchase as described
under the captions "--Change of Control," and "--Asset Sales" when due and
payable; (iv) the Company fails to observe or perform any covenant or condition
on the part of the Company to be performed or observed with respect to the
covenant entitled "--Certain Covenants--Limitation on Merger, Consolidation and
Sale of Assets"; (v) the Company defaults in the performance of, or breaches,
any covenant or warranty of the Company in the Indenture (other than a covenant
or warranty a default in whose performance or whose breach is elsewhere herein
specifically dealt with), and such default or breach continues for 60 days after
there has been given, by registered or certified mail, to the Company by the
Trustee or to the Company and the Trustee by the Holders of at least 25% in
principal amount of the Outstanding Notes a written notice specifying such
default or breach and requiring it to be remedied and stating that such notice
is a "Notice of Default"; (vi) a default occurs under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any Restricted
Subsidiary of the Company (or the payment of which is guaranteed by the Company
or a Restricted Subsidiary of the Company), whether such Indebtedness or
guarantee now exists or shall be created hereafter, if (a) either (1) such
default results from the failure to pay principal (and premium, if any) upon
expressed maturity of such Indebtedness (after the expiration of any applicable
grace period) or (2) as a result of such default the maturity of such
Indebtedness has been accelerated prior to its expressed maturity and, (b) the
principal (and premium, if any) amount of such Indebtedness, together with the
principal (and premium, if any) amount of any other such Indebtedness, with
respect to which the principal (and premium, if any) amount unpaid upon its
expressed maturity (after the expiration of any applicable grace period), or the
maturity of which has been so accelerated, aggregates $5.0 million or more;
(vii) a final judgment or final judgments for the payment of money are entered
by a court or courts of competent jurisdiction against the Company or any
Subsidiary of the Company and such judgment or judgments remain undischarged for
a period (during which execution shall not be effectively stayed, bonded, or
discharged) of 60 days, provided that the aggregate of all such judgments (to
the extent not paid or to be paid by insurance) exceeds $5.0 million; or (viii)
certain events of bankruptcy, insolvency or reorganization of the Company or any
Significant Subsidiary as specified in the Indenture.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately, provided, that so long
as any Indebtedness permitted to be incurred pursuant to the Bank Credit
Agreement shall be outstanding, such acceleration shall not be effective until
the earlier of (i) an acceleration of any such Indebtedness under the Bank
Credit Agreement or (ii) five business days after receipt by the Company of
written notice of such acceleration. Notwithstanding the foregoing, in the case
of an Event of Default arising from certain events of bankruptcy or insolvency,
with respect to the Company, any Significant Subsidiary or any group of
Subsidiaries that, taken together, would constitute a Significant Subsidiary,
all outstanding Notes will become due and payable without further action or
notice. Holders of the Notes may not enforce the Indenture or the Notes except
as provided in the Indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
98
<PAGE> 105
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture, except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes or a default with respect to any
covenant or provision which cannot be modified or amended without the consent of
the Holder of each outstanding Note affected.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
PROCEDURES FOR OFFERS
Within 30 days following any Change of Control or on any Asset Sale Trigger
Date, the Company will mail to each Holder of Notes at such Holder's registered
address a notice stating: (i) that an offer (an "Offer") is being made as a
result of a Change of Control or one or more Asset Sales, as the case may be,
the length of time the Offer shall remain open, and the maximum aggregate
principal amount of Notes that will be accepted for payment pursuant to such
Offer, (ii) the purchase price, the amount of accrued and unpaid interest and
Special Interest, if any, as of the purchase date, and the purchase date (which
will be no earlier than 30 days or later than 60 days from the date such notice
is mailed (the "Purchase Date")), (iii) in the case of a Change of Control, the
circumstances and material facts regarding such Change of Control to the extent
known to the Company (including, but not limited to, information with respect to
pro forma and historical financial information after giving effect to such
Change of Control and information regarding the Person or Persons acquiring
control), and (iv) such other information required by the Indenture and
applicable laws and regulations.
On the Purchase Date for any Offer, the Company will (i) in the case of an
Offer resulting from a Change of Control, accept for payment all Notes tendered
pursuant to such Offer and, in the case of an Offer resulting from one or more
Asset Sales, accept for payment the maximum principal amount of Notes tendered
pursuant to such Offer than can be purchased out of Excess Proceeds from such
Asset Sales, (ii) deposit with the Paying Agent the aggregate purchase price of
all Notes accepted for payment and any accrued and unpaid interest and Special
Interest, if any, on such Notes as of the Purchase Date, and (iii) deliver or
cause to be delivered to the Trustee all Notes tendered pursuant to the Offer.
If less than all Notes tendered pursuant to any Offer are accepted for payment
by the Company for any reason, selection of the Notes to be purchased by the
Trustee will be in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes are
not so listed, by lot or by such method as the Trustee shall deem fair and
appropriate; provided that Notes accepted for payment in part shall only be
purchased in integral multiples of $1,000. The Paying Agent will promptly mail
to each Holder of Notes accepted for payment an amount equal to the purchase
price for such Notes plus any accrued and unpaid interest and Special Interest
thereon, if any, and the Trustee will promptly authenticate and mail to such
Holder of Notes accepted for payment in part a new Note equal in principal
amount to any unpurchased portion of the Notes, and any Note not accepted for
payment in whole or in part shall be promptly returned to the Holder of such
Note. On and after a Purchase Date, interest will cease to accrue on the Notes
accepted for payment. The Company will announce the results of the Offer to
Holders of the Notes on or as soon as practicable after the Purchase Date.
The Company will comply with all applicable requirements of Rule 14e-1
under the Securities Exchange Act of 1934 (the "Exchange Act") and all other
applicable securities laws and regulations thereunder, to the extent applicable,
in connection with any Offer.
99
<PAGE> 106
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will upon Company Request cease to be of further effect
(except as to any surviving rights of registration of transfer or exchange of
Notes herein expressly provided for), and the Trustee, at the expense of the
Company, will execute proper instruments acknowledging satisfaction and
discharge of this Indenture, when (i) either (a) all Notes theretofore
authenticated and delivered (other than (1) Notes which have been destroyed,
lost or stolen and which have been replaced or paid as provided under the
Indenture and (2) Notes for whose payment money has theretofore been deposited
in trust or segregated and held in trust by the Company and thereafter repaid to
the Company or discharged from such trust, as provided under the Indenture) have
been delivered to the Trustee for cancellation; or (b) all such Notes not
theretofore delivered to the Trustee for cancellation (1) have become due and
payable, or (2) will become due and payable at their Stated Maturity within one
year, or (3) are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company, and the Company, in the
case of (1), (2) or (3) above, has irrevocably deposited or caused to be
irrevocably deposited with the Trustee as trust funds in trust for the purpose
an amount sufficient to pay and discharge the entire indebtedness on such Notes
not theretofore delivered to the Trustee for cancellation, for principal and any
premium and interest to the date of such deposit (in the case of Notes which
have become due and payable) or to the Stated Maturity or redemption date, as
the case may be; (ii) the Company has paid or caused to be paid all other sums
payable hereunder by the Company; and (iii) the Company has delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating that
all conditions precedent herein provided for relating to the satisfaction and
discharge of this Indenture have been satisfied.
Notwithstanding the satisfaction and discharge of the Indenture, the
obligations of the Company to the Trustee with respect to compensation and
reimbursement, the obligations of the Trustee to any authenticating agent under
the Indenture and, if money shall have been deposited with the Trustee pursuant
to subclause (b) of clause (i) above, the obligations of the Trustee with
respect to the application of trust money under the Indenture shall survive.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes, the Indenture or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Special Interest, if any, on such Notes when such payments are due from the
trust referred to below, (ii) the Company's obligations with respect to the
Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
100
<PAGE> 107
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest and Special Interest, if
any, on the outstanding Notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether the
Notes are being defeased to maturity or to a particular redemption date; (ii) in
the case of Legal Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred; (iv) no
Default or Event of Default shall have occurred and be continuing on the date of
such deposit (other than a Default or Event of Default resulting from the
borrowing of funds to be applied to such deposit) or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound and is permitted under the
subordination provisions of the Indenture; (vi) the Company must have delivered
to the Trustee an opinion of counsel to the effect that after the 91st day
following the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; (vii) the Company must deliver to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders of Notes over the other creditors of the
Company or with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for or relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Note selected for redemption. Also, the Company is not required to transfer
or exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance
101
<PAGE> 108
with any provision of the Indenture or the Notes may be waived with the consent
of the Holders of a majority in principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange offer
for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes in a manner
adverse to the Holders (other than provisions relating to the covenants
described above under the caption "--Repurchase at the Option of Holders"),
(iii) reduce the rate of or change the time for payment of interest on any Note,
(iv) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Notes (except a rescission of acceleration
of the Notes by the Holders of at least a majority in aggregate principal amount
of the Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Note payable in money other than that stated in the
Notes, (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of Notes to receive payments
of principal of or premium, if any, or interest on the Notes, (vii) waive a
redemption payment with respect to any Note (other than a payment required by
one of the covenants described above under the caption "-- Redemption of
Notes--Optional Redemption") or (viii) make any change in the foregoing
amendment and waiver provisions. In addition, no amendment to the Indenture may
make any change in the provisions described above under the caption
"--Subordination" that adversely affects the rights of any Holder of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
GOVERNING LAW
The Indenture and the Notes will be governed by and construed in accordance
with the laws of the State of New York.
102
<PAGE> 109
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
EXCHANGE OF NOTES
Because the Exchange Notes are identical in all material respects to the
Original Notes, the exchange of Original Notes for Exchange Notes should not be
considered a material modification of the Original Notes. The Exchange Notes
should therefore be considered the same debt instrument as the Original Notes
for federal income tax purposes. As a result, no material federal income tax
consequences will result to holders as a consequence of exchanging Original
Notes for Exchange Notes.
Information Reporting and Backup Withholding
The Company will, where required, report to the holders of Notes and the
Internal Revenue Service the amount of any interest paid on the Notes in each
calendar year and the amounts of tax withheld, if any, with respect to such
payments.
Under current federal income tax law, a holder of the Original Notes and
Exchange Notes is required to provide the Company (as payor) with such holder's
correct taxpayer identification number ("TIN") or otherwise establish a basis
for exemption from backup withholding to prevent backup withholding on each
payment in respect of interest thereon or gross proceeds thereof. If backup
withholding applies, the Company is required to withhold 31% of any payment made
to the holder of the Exchange Notes or other payee.
Under temporary Treasury regulations, these information reporting and
backup withholding requirements will apply to the gross proceeds paid to a
Non-United States Holder (defined below) on the disposition of the Notes by or
through a United States office of a United States or foreign broker, unless the
holder certifies to the broker under penalties of perjury as to its name,
address and status as a foreign person or the holder otherwise establishes an
exemption. Information reporting requirements, but not backup withholding, will
also apply to a payment of the proceeds of a disposition of the Notes by or
through a foreign office of a United States broker or foreign brokers with
certain types of relationships to the United States unless such broker has
documentary evidence in its file that the holder of the Notes is not a United
States person, and such broker has no actual knowledge to the contrary, or the
holder establishes an exception. Neither information reporting nor backup
withholding generally will apply to a payment of the proceeds of a disposition
of the Notes by or through a foreign office of a foreign broker not subject to
the preceding sentence.
Recently, the Treasury Department has issued proposed regulations regarding
the withholding and information reporting rules discussed above. In general, the
proposed regulations do not alter the substantive withholding and information
reporting requirements but unify current certification procedures and forms and
clarify reliance standards. If finalized in their current form, the proposed
regulations would generally be effective for payments made after December 31,
1996, subject to certain transition rules.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
The information reporting and backup withholding rules discussed above are
under review by the United States Treasury and their application to the Notes
could be changed by future regulations.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the acquisition, ownership and disposition
of Notes by an initial beneficial owner of Notes that, for United States federal
income tax purposes, is not a "United States person" (a "Non-
103
<PAGE> 110
United States Holder"). This discussion is based upon the United States federal
tax law now in effect, which is subject to change, possibly retroactively. For
purposes of this discussion, a "United States person" means a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in the United States or under the laws of the United States
or of any political subdivision thereof, or an estate or trust whose income is
includible in gross income for United States federal income tax purposes
regardless of its source. The tax treatment of the holders of the Notes may vary
depending upon their particular situations. U.S. persons acquiring the Notes are
subject to different rules than those discussed below. In addition, certain
other holders (including insurance companies, tax exempt organizations,
financial institutions and broker-dealers) may be subject to special rules not
discussed below. Prospective investors are urged to consult their tax advisors
regarding the United States federal tax consequences of acquiring, holding and
disposition of Notes, as well as any tax consequences that may arise under the
laws of any foreign, state, local or other taxing jurisdiction.
Interest
Interest paid by the Company to a Non-United States Holder will not be
subject to United States federal income or withholding tax if such interest is
not effectively connected with the conduct of a trade or business within the
United States by such Non-United States Holder and such Non-United States Holder
(i) does not actually or constructively own 10% or more of the total combined
voting power of all classes of stock of the Company; (ii) is not a controlled
foreign corporation with respect to which the Company is a "related person"
within the meaning of the United States Internal Revenue Code of 1986, as
amended (the "Code"), and (iii) certifies, under penalties of perjury, that such
holder is not a United States person and provides such holder's name and
address.
Gain on Disposition
A Non-United States Holder will generally not be subject to United States
federal income tax on gain recognized on a sale, redemption or other disposition
of a Note unless (i) the gain is effectively connected with the conduct of a
trade or business within the United States by the Non-United States Holder or
(ii) in the case of a Non-United States Holder who is a nonresident alien
individual and holds the Note as a capital asset, such holder is present in the
United States for 183 or more days in the taxable year and certain other
requirements are met. As discussed under "Exchange of Notes," above, the
exchange of the Original Notes for the Exchange Notes should result in no
material federal income tax consequences.
Federal Estate Taxes
If interest on the Notes is exempt from withholding of United States
federal income tax under the rules described above, the Notes will not be
included in the estate of a deceased Non-United States Holder for United States
federal estate tax purposes.
104
<PAGE> 111
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with the resales of Exchange Notes received in
exchange for Original Notes where such Original Notes were acquired as a result
of market-making activities or other trading activities. The Company has agreed
that for a period of up to one year after the effective date of the Registration
Statement, it will make this Prospectus, as amended or supplemented, available
to any broker-dealer that requests such document in the Letter of Transmittal
for use in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers or any other persons. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Exchange Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders of Original Notes (including any broker-dealers), and
certain parties related to such holders, against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes will be passed upon for the Company by
Kaye, Scholer, Fierman, Hays & Handler, LLP, Los Angeles, California.
INDEPENDENT AUDITORS
On July 16, 1996, the Company's Audit Committee and stockholders approved
the engagement of Price Waterhouse LLP as its independent accountants for the
year ending December 31, 1996, as a replacement of the Company's prior
independent accountants, Ernst & Young LLP.
The audit reports of Ernst & Young LLP on the consolidated financial
statements of the Company for the two fiscal years ended December 31, 1995 did
not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principles.
Ernst & Young LLP audited the Company's 1995 and 1994 financial statements
in addition to auditing financial statements for certain prior fiscal years. In
connection with the Company's two most recent fiscal years ended December 31,
1995 and any subsequent interim period, the Company believes that there were no
disagreements with Ernst & Young LLP on any manner of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
105
<PAGE> 112
which, if not resolved to their satisfaction, would have caused them to make
reference to the subject matter of the disagreement. However, following
discussions with Ernst & Young LLP subsequent to their termination, the Company
notes two accounting matters which Ernst & Young LLP believes constitute
disagreements within the meaning of Item 304 of Regulation S-K but which were
both resolved to Ernst & Young LLP's satisfaction prior to the issuance of their
reports on the aforementioned financial statements.
The first matter involved certain communications between the Company and
Ernst & Young LLP involving the Company's accounting during certain periods
prior to the 1994 reporting period for the capitalization and deferral of
advance royalties paid to recording artists. As recently as March 1996, the
Company contended, subject to the receipt of additional information, that Ernst
& Young LLP had recently interpreted such standards differently (and less
restrictively) in dealings with another publicly traded music client. Ernst &
Young LLP has advised the Company that such standards have been interpreted on a
consistent basis in relation to all of its clients in accordance with generally
accepted accounting principles.
The second matter, in connection with the audit of the financial statements
for the year ended December 31, 1995, involved a proposed reduction of $700,000
by the Company in the reserve accounts in the Recorded Music segment and an
equal increase in the reserve accounts in the Television segment. After Ernst &
Young LLP informed the Company's management that the full amount of the
adjustment could not be supported, the Company did not make such adjustment.
EXPERTS
The consolidated financial statements of All American Communications, Inc.
at December 31, 1995 and 1994, and for each of the three years in the period
ended December 31, 1995, and the combined financial statements of the combined
business of Mark Goodson Productions, L.P. and The Child's Play Company at
December 31, 1995 and for the period from October 6, 1995 (Inception) to
December 31, 1995, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
106
<PAGE> 113
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Independent Auditors....................................................... F-2
Consolidated Balance Sheets at December 31, 1995 and 1994............................ F-3
Consolidated Statements of Operations for Years ended December 31, 1995,
1994 and 1993...................................................................... F-4
Consolidated Statements of Stockholders' Equity for Years ended December 31, 1995,
1994 and 1993...................................................................... F-5
Consolidated Statement of Cash Flows for Years ended December 31, 1995,
1994 and 1993...................................................................... F-6
Notes to Consolidated Financial Statements -- December 31, 1995...................... F-7
COMBINED BUSINESS OF MARK GOODSON PRODUCTIONS, L.P. AND THE CHILD'S PLAY COMPANY
Report of Independent Auditors....................................................... F-26
Combined Balance Sheet at December 31, 1995.......................................... F-27
Combined Statement of Operating Income and Changes in Partners' Equity for the period
from October 6, 1995 (Inception) to December 31, 1995.............................. F-28
Combined Statement of Cash Flows for the Period from October 6, 1995 (Inception) to
December 31, 1995.................................................................. F-29
Notes to Combined Financial Statements............................................... F-30
</TABLE>
F-1
<PAGE> 114
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
ALL AMERICAN COMMUNICATIONS, INC.
We have audited the accompanying consolidated balance sheets of All
American Communications, Inc. and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1995.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
All American Communications, Inc. and subsidiaries at December 31, 1995 and
1994, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Los Angeles, California
March 4, 1996
F-2
<PAGE> 115
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Cash and cash equivalents............................................ $ 13,126 $ 9,178
Restricted cash -- Notes 1 and 10.................................... 6,968 2,730
Trade receivables, less allowances of $2,980 and $3,855 at
December 31, 1995 and 1994, respectively........................... 103,896 62,338
Unbilled receivables, less imputed interest of $2,354 at
December 31, 1995 -- Note 1........................................ 11,685 --
Inventory, net....................................................... 1,018 1,423
Advances to recording artists, net................................... 544 1,801
Television program costs, less accumulated amortization of $228,942
and $138,541 at December 31, 1995 and 1994, respectively -- Note
4.................................................................. 74,644 68,437
Property and equipment, less accumulated depreciation and
amortization -- Note 3............................................. 4,526 3,772
Investment in unconsolidated affiliate -- Note 2..................... 29,130 --
Goodwill, less accumulated amortization of $3,384 and $1,242 at
December 31, 1995 and 1994, respectively -- Notes 1 and 2.......... 49,403 51,545
Deferred income tax benefits -- Note 9............................... -- 235
Other -- Note 8...................................................... 6,642 6,548
-------- --------
Total assets......................................................... $301,582 $208,007
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable................................................... $ 14,293 $ 6,826
Accrued expenses................................................... 19,823 10,652
Royalties payable.................................................. 4,435 2,477
Deferred revenues.................................................. 277 257
Due to producers................................................... 26,271 27,278
Participations payable............................................. 30,979 17,091
Notes payable -- Note 5............................................ 134,982 115,343
Deferred taxes payable -- Note 9................................... 2,242 --
-------- --------
Total liabilities.................................................... 233,302 179,924
-------- --------
Commitments and contingencies -- Note 10
Stockholders' equity -- Notes 5, 6, 7 and 8:
Preferred stock, authorized 5,000,000 shares....................... -- --
Common stock, voting, $.0001 par value, authorized 20,000,000
shares, issued 5,662,052 in 1995 and 5,455,971 in 1994
(including treasury shares)..................................... 1 1
Common stock, Class B non-voting, $.0001 par value, authorized
20,000,000 shares, 5,720,000 issued in 1995 and 2,520,000 in
1994............................................................ 1 --
Additional paid-in capital......................................... 61,522 28,751
Common stock in treasury, at cost, 30,000 shares in 1995 and
1994............................................................ (135) (135)
Stock subscriptions receivable and deferred compensation........... -- (153)
Retained earnings (accumulated deficit)............................ 6,939 (309)
Currency translation adjustment.................................... (48) (72)
-------- --------
Total stockholders' equity........................................... 68,280 28,083
-------- --------
Total liabilities and stockholders' equity........................... $301,582 $208,007
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 116
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Television.................................... $ 206,734 $ 98,771 $ 57,407
Recorded music and merchandising -- Note 8.... 22,026 16,130 13,215
----------- ----------- ----------
228,760 114,901 70,622
Expenses:
Television.................................... 164,764 75,196 42,560
Recorded music and merchandising.............. 15,803 10,750 9,780
Selling, general and administrative........... 24,102 21,523 16,074
Goodwill amortization......................... 2,399 971 133
----------- ----------- ----------
207,068 108,440 68,547
Operating income................................ 21,692 6,461 2,075
Other income (expense):
Interest income............................... 669 204 91
Interest expense.............................. (9,959) (5,929) (1,688)
Other......................................... 95 49 77
----------- ----------- ----------
(9,195) (5,676) (1,520)
----------- ----------- ----------
Income before income taxes...................... 12,497 785 555
Provision for income taxes -- Note 9............ 5,249 330 175
----------- ----------- ----------
Net income...................................... 7,248 455 380
Accretion and dividends on redeemable stock
-- Note 1..................................... -- -- (2,208)
Excess of carrying value of redeemable shares
over purchase price -- Note 1................. -- -- 6,070
----------- ----------- ----------
Net income applicable to common stockholders.... $ 7,248 $ 455 $ 4,242
=========== =========== ==========
Earnings per share - primary -- Notes 1 and 5:
Net earnings............................... $ 0.87 $ 0.07 $ 0.87
=========== =========== ==========
Weighted average number of common shares
outstanding.............................. 8,330,000 6,201,000 4,874,000
=========== =========== ==========
Earnings per share - fully diluted -- Note 1:
Net earnings............................... $ 0.71 $ 0.07 $ 0.78
=========== =========== ==========
Weighted average number of common shares
outstanding.............................. 13,635,000 6,201,000 6,275,000
=========== =========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 117
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------
CLASS B
(NON-VOTING) COMMON
SHARES SHARES ADDITIONAL STOCK
ISSUED AND ISSUED AND PAID-IN IN
OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL TREASURY
----------- ------ ------------ ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992............................ 4,825,971 $ 1 -- $ -- $ 4,484 $(135)
Excess of carrying value of redeemable stock over
purchase price...................................... -- -- -- -- 6,070 --
Accretion on redeemable stock......................... -- -- -- -- (1,608) --
Payments on stock subscriptions receivable............ -- -- -- -- -- --
Amortization of deferred compensation................. -- -- -- -- -- --
Dividends on preferred stock.......................... -- -- -- -- (600) --
Issuance of employee stock options.................... -- -- -- -- 750 --
Net income............................................ -- -- -- -- -- --
--------- ----- --------- ----- --------- -------
Balance at December 31, 1993............................ 4,825,971 1 -- -- 9,096 (135)
--------- ----- --------- ----- --------- -------
Stock issued in connection with the Fremantle
International Acquisition........................... 630,000 -- 2,520,000 -- 20,000 --
Payments on stock subscriptions receivable............ -- -- -- -- -- --
Amortization of deferred compensation................. -- -- -- -- -- --
Cancellation of deferred compensation................. -- -- -- -- (345) --
Currency translation adjustment....................... -- -- -- -- -- --
Net income............................................ -- -- -- -- -- --
--------- ----- --------- ----- --------- -------
Balance at December 31, 1994............................ 5,455,971 1 2,520,000 -- 28,751 (135)
--------- ----- --------- ----- --------- -------
Net proceeds from public offering of Class B common
stock............................................... -- -- 3,200,000 1 30,534 --
Conversion of 6 1/2% subordinated notes, net of
related costs....................................... 206,081 -- -- -- 2,237 --
Payments on stock subscriptions receivable............ -- -- -- -- -- --
Currency translation adjustment....................... -- -- -- -- -- --
Net income............................................ -- -- -- -- -- --
--------- ----- --------- ----- --------- -------
Balance at December 31, 1995............................ 5,662,052 $ 1 5,720,000 $ 1 $ 61,522 $(135)
========= ===== ========= ===== ========= =======
<CAPTION>
STOCK
SUBSCRIPTIONS RETAINED
RECEIVABLE AND EARNINGS CURRENCY
DEFERRED (ACCUMULATED TRANSLATION
COMPENSATION DEFICIT) ADJUSTMENT TOTAL
-------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1992............................ $ (525) $ (1,144) $ -- $ 2,681
Excess of carrying value of redeemable stock over
purchase price...................................... -- -- -- 6,070
Accretion on redeemable stock......................... -- -- -- (1,608)
Payments on stock subscriptions receivable............ 119 -- -- 119
Amortization of deferred compensation................. 146 -- -- 146
Dividends on preferred stock.......................... -- -- -- (600)
Issuance of employee stock options.................... (435) -- -- 315
Net income............................................ -- 380 -- 380
----- ----- ----- ----
Balance at December 31, 1993............................ (695) (764) -- 7,503
----- ----- ----- ----
Stock issued in connection with the Fremantle
International Acquisition........................... -- -- -- 20,000
Payments on stock subscriptions receivable............ 137 -- -- 137
Amortization of deferred compensation................. 60 -- -- 60
Cancellation of deferred compensation................. 345 -- -- --
Currency translation adjustment....................... -- -- (72) (72)
Net income............................................ -- 455 -- 455
----- ----- ----- ----
Balance at December 31, 1994............................ (153) (309) (72) 28,083
----- ----- ----- ----
Net proceeds from public offering of Class B common
stock............................................... -- -- -- 30,535
Conversion of 6 1/2% subordinated notes, net of
related costs....................................... -- -- -- 2,237
Payments on stock subscriptions receivable............ 153 -- -- 153
Currency translation adjustment....................... -- -- 24 24
Net income............................................ -- 7,248 -- 7,248
----- ----- ----- ---------
Balance at December 31, 1995............................ $ -- $ 6,939 $ (48) $ 68,280
===== ===== ===== =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 118
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................................... $ 7,248 $ 455 $ 380
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization of property and equipment and goodwill....... 3,322 1,450 454
Amortization of television program costs................................... 90,401 32,534 33,236
Increase in allowance for doubtful accounts................................ 169 287 37
Increase (decrease) in allowance for sales returns......................... 246 204 (209)
Increase (decrease) in makegood reserve.................................... (1,290) 123 28
Increase in imputed interest discount...................................... 2,354 -- --
Equity earnings in unconsolidated affiliate, net........................... (3,603) -- --
Changes in operating assets and liabilities:
Restricted cash.......................................................... 102 (2,590) 360
Trade receivables, inventory and advances to recording artists........... (53,060) (5,423) (13,623)
Deferred income tax benefits............................................. 235 (235) --
Accounts payable, accrued expenses and royalties payable................. 18,596 (1,469) (686)
Due to producers and participations payable.............................. 12,881 4,797 6,152
Additions to television program costs.................................... (96,608) (43,490) (45,578)
Deferred revenues........................................................ 20 (1,680) (767)
Deferred taxes payable................................................... 2,242 (94) 94
Other assets............................................................. (226) 457 872
-------- -------- --------
Net cash used by operating activities.................................... (16,971) (14,674) (19,250)
INVESTING ACTIVITIES
Purchase of property and equipment, net of book value of assets retired...... (1,677) (497) (135)
Purchase of 50% equity interest in Mark Goodson, LLC......................... (25,785) -- --
Purchase of LBS, net of cash acquired........................................ -- -- (3,626)
Purchase of Fremantle........................................................ -- (32,527) --
Payment of net liabilities of the film division.............................. -- -- (3,553)
-------- -------- --------
Net cash used by investing activities.................................... (27,462) (33,024) (7,314)
FINANCING ACTIVITIES
Dividends paid............................................................... $ -- $ -- $ (600)
Repurchase of redeemable warrants............................................ -- (250) --
Net proceeds from public offering of Class B common stock.................... 30,535 -- --
Proceeds from issuance of Notes, net of related costs........................ -- -- 56,793
Repurchase of redeemable stock, including related costs...................... -- -- (15,746)
Payments on stock subscriptions receivable................................... 153 137 119
Proceeds from borrowings..................................................... 273,405 38,768 55,281
Repayments of borrowings..................................................... (276,396) (18,849) (66,091)
Restricted cash held for repayment of borrowings............................. (4,340) -- --
Proceeds from borrowings -- purchase of Fremantle, net of issuance costs..... -- 33,878 --
Proceeds from borrowings -- purchase of 50% equity interest in Mark Goodson,
LLC........................................................................ 25,000 -- --
-------- -------- --------
Net cash provided by financing activities.................................. 48,357 53,684 29,756
Effect of exchange rate changes on cash...................................... 24 (72) --
-------- -------- --------
Increase in cash............................................................. 3,948 5,914 3,192
Cash and cash equivalents at beginning of period............................. 9,178 3,264 72
-------- -------- --------
Cash and cash equivalents at end of period................................... $ 13,126 $ 9,178 $ 3,264
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized..................................... $ 9,496 $ 5,552 $ 765
======== ======== ========
Income taxes............................................................. $ 1,219 $ 247 $ 81
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 119
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business
All American Communications, Inc. ("AAC") and its wholly-owned
subsidiaries, All American Television, Inc. ("AATV"), All American Television
Production, Inc, ("AATP"), Scotti Brothers Entertainment Industries, Inc.
("SBEI"), All American Fremantle International, Inc. ("AAFII"), All American FDF
Holdings, Inc. ("AAFDF") and All American Goodson, Inc. ("AAG") (and together
with their respective wholly-owned subsidiaries collectively, the "Company" or
"All American"), produce and/or distribute, market and promote television
programs and recorded music 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 subsidiaries; all significant intercompany balances and transactions
have been eliminated.
Recognition of Revenues
Minimum guaranteed amounts from domestic television sales generally are
recognized when the license period begins and the program becomes available
pursuant to the terms of the license agreement. Advertising revenues are
recognized upon the commencement of the license period of the program and when
the advertising time has been sold pursuant to non-cancelable agreements,
provided the program is available for its first broadcast. 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 which is to be shared with the producers
and owners of the licensed program material (participations payable and due to
producers) is accrued as the revenue is recognized.
In certain instances, the Company guarantees viewer ratings for its
syndicated programs. Applicable revenue is recorded net of estimated shortfalls,
which are settled either by 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 the products
F-7
<PAGE> 120
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
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 guarantees 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 Chemical Bank and applied to the repayment of the
outstanding borrowings as specified in the lending agreement (See Note 5). The
cash held for repayment is included as restricted cash. Additionally, amounts
held in an interest bearing reserve account with respect to a dispute have been
included as restricted cash (See Note 10).
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 with Warner/Elektra/Atlantic Corporation, a division of Time Warner,
Inc. ("WEA")(the "WEA Distribution Agreement"), WEA has a security interest in
the Company's master recordings at any time the Company owes money to WEA.
F-8
<PAGE> 121
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
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 effect 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 to
whom the advance is made. 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") (See Note 9).
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.
The Company uses the flow-through method of accounting for unused
investment credits.
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.
F-9
<PAGE> 122
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
Share Information; Earnings Per Share
Primary earnings per share represents the per share income or loss
applicable to common stockholders and is computed based on the weighted average
common shares outstanding and dilutive common stock equivalents determined using
the treasury stock method (See Note 5). The net income for 1993 has been
adjusted for the dividend paid to Series A Preferred stockholders and the
accretion required to increase the carrying values of the redeemable Series A
Preferred and redeemable Common Stock to their mandatory redemption amounts. In
addition, net income applicable to common stockholders for the year ended
December 31, 1993 includes $6,070,000 which represents the excess of the
carrying value of the redeemable shares over the price paid for their purchase;
such treatment is in accordance with Securities and Exchange Commission
guidelines.
The fully diluted per share computations for 1995 and 1993 reflect the
effect of the assumed conversion of the Company's 6 1/2% Convertible
Subordinated Notes due 2003 (See Note 5) and increases net income applicable to
common stockholders by $2,400,000 and $666,000 for the elimination of interest
expense on such notes, net of tax benefits. Such assumed conversion is anti-
dilutive for 1994.
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.
Reclassifications
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform to the current year's presentation.
2. ACQUISITIONS
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 ("Interpublic"), acquired substantially all of the assets (excluding
assets relating to the lottery business) and assumed certain specified
liabilities (the "Mark Goodson Acquisition") of Mark Goodson Productions, L.P.
and the Child's Play Company (collectively, the "Sellers"). The Sellers are 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 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
F-10
<PAGE> 123
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
additional contingent purchase price accrues. The Company shares equally with
Interpublic in the contingent purchase price, prior to the purchase by the
Company of Interpublic's 50% interest in the LLC (See Note 13).
Based upon a review and evaluation, substantially all of the Company's
$25,785,000 portion of the initial purchase price has been allocated to goodwill
and is reflected in "investment in unconsolidated affiliate" in the accompanying
balance sheet. The contingent purchase price, to the extent earned, will be
treated as an increase in goodwill and will be amortized coterminously with the
original 25 year period. To the extent additional contingent purchase price
would be increased by a total of $24,250,000, annual amortization expense
associated with such additional goodwill would be $970,000 (for an aggregate
annual amortization expense of $2,001,000). As of December 31, 1995, the Company
has recorded its 50% share of contingent purchase price totaling $927,000. The
Mark Goodson Acquisition has been accounted for by the Company under the equity
method of accounting. The Company's 50% share of earnings in the LLC, of
$3,603,000, have been recorded in television revenues in the consolidated
statements of operations.
Fremantle International, Inc.
In August, 1994, the Company acquired (the "Fremantle International
Acquisition") certain assets and securities and assumed certain liabilities of
Fremantle International, Inc. ("Fremantle") through the Company's newly formed
wholly-owned subsidiary, All American Fremantle International, Inc. ("AAFII")
from Interpublic (which at such time had no ownership interest in the Company.
The consideration for the Fremantle International Acquisition consisted of
630,000 shares of the Company's Common Stock, 2,520,000 shares of nonvoting,
$.0001 par value Class B Common Stock ("Class B Stock") and $31,500,000 in cash
funded by a term loan from Chemical Bank (See Note 5). The Company has accounted
for the Fremantle International Acquisition as a purchase and has allocated the
purchase price based on the estimated fair value of assets and liabilities
acquired. The total consideration of $52,527,000 (including expenses related to
the acquisition of $1,027,000) exceeds the estimated fair value of net assets
acquired by $50,267,000 (goodwill); such goodwill is being amortized over 25
years. Results of operations of AAFII have been included in the Company's
results from August 3, 1994.
LBS Communications, Inc.
On February 8, 1993 the Company completed the acquisition (the "LBS
Acquisition") of LBS Communications, Inc. ("LBS"), under an agreement (the "LBS
Agreement") wherein the Company agreed, subject to various terms and conditions,
to purchase 100% of LBS' Class A Common Stock, constituting 100% of the
outstanding shares of capital stock of LBS. LBS is a company engaged in the
television syndication business. The purchase was made under an LBS plan of
reorganization as confirmed by the U.S. Bankruptcy Court for the Southern
District of New York on September 30, 1992. LBS is operated as a subsidiary of
AATV.
F-11
<PAGE> 124
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
3. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land................................................... $ 403 $ 403
Building and improvements.............................. 1,669 1,479
Sound studio and related equipment..................... 1,544 1,540
Office furniture and fixtures.......................... 4,417 2,943
Automobiles............................................ 163 163
Other.................................................. 39 30
------- -------
8,235 6,558
Less accumulated depreciation and amortization......... (3,709) (2,786)
------- -------
$ 4,526 $ 3,772
======= =======
</TABLE>
4. TELEVISION PROGRAM COSTS
Costs for television programs are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Released, less accumulated amortization................ $73,902 $64,780
In process and development............................. 742 3,657
------- -------
$74,644 $68,437
======= =======
</TABLE>
Based on management's estimates of gross revenues as of December 31, 1995,
approximately 71% of the unamortized costs applicable to released television
programming will be amortized during the three years ending December 31, 1998.
Interest capitalized to television program costs during the periods ended
December 31, 1995, 1994 and 1993 was approximately $1,249,000, $399,000 and
$259,000, respectively.
5. NOTES PAYABLE
Notes payable are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Notes payable to banks............................... $ 77,352 $ 55,343
Convertible Subordinated Notes, 6 1/2%............... 57,630 60,000
-------- --------
$134,982 $115,343
======== ========
</TABLE>
In connection with the Company's Class B Stock offering, completed December
11, 1995, (See Note 6), the Company received proceeds of approximately
$30,535,000 which were used to temporarily reduce amounts outstanding under the
Company's revolving credit facilities.
Through December 31, 1995, holders of an aggregate of $2,370,000 principal
amount of the Company's 6 1/2% Convertible Subordinated Notes Due 2003 (the
"Notes") had converted such
F-12
<PAGE> 125
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
Notes into 206,081 shares of the Company's voting common stock, $.0001 par value
("Class A Stock"). These conversions resulted in a decrease of debt issuance
costs related to the Notes of $133,000 and an increase in additional paid in
capital of $2,237,000. The weighted average number of shares outstanding which
resulted from such conversions have been utilized in the determination of
earnings per share as of December 31, 1995. Had these conversions of the Notes
occurred as of January 1, 1995, the primary earnings per share amount would have
been $0.85 per share as compared with $0.87 per share.
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 Chemical Bank consisting of the
following 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 Fremantle International Acquisition; (ii) a revolving credit
facility of up to $20,000,000 in the aggregate to be utilized for production and
distribution of Baywatch, of which $14,000,000 was initially utilized to
refinance existing bank debt related to production of Baywatch for the 1994/1995
and 1995/1996 broadcast seasons (the "Baywatch Production Line" or "Tranche B");
(iii) a revolving credit facility of up to $20,000,000 in the aggregate for
production and distribution of Baywatch Nights (the "Baywatch Nights Production
Line" or "Tranche C"); (iv) a revolving credit facility of up to $40,000,000 to
be utilized to finance certain working capital needs of the Company, of which
$10,000,000 was initially primarily used to refinance existing bank debt related
to the Company's working capital needs and to pay certain fees in connection
with the Senior Credit Facility Agreement (the "Working Capital Line" or
"Tranche D"); and (v) the $25,000,000 Goodson Term Loan described below. The
Working Capital Line together with the Baywatch Production Line and the Baywatch
Nights Production
Line are referred to collectively as the "Chemical Bank Facilities". In
connection with the Mark Goodson Acquisition, the Company effected a credit
utilization of the Working Capital Line in the form of a letter of credit (the
"Letter of Credit") from Chemical Bank to fund its $25,000,000 cash portion of
the total purchase price. On November, 13, 1995, the Senior Credit Facility was
amended to provide an additional $25,000,000 term loan under this facility (the
"Goodson Term Loan" or "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.
The obligations of the Company under the Chemical Bank Facilities, the Term
Loan and the Goodson Term Loan are cross-collateralized. The Term Loan matures
on December 31, 1998. The Chemical Bank Facilities and the Goodson Term Loan
mature on April 13, 1999. Under the terms of the Senior Credit Facility
Agreement, the amount the Company may borrow under Tranches B, C and D is based
upon the value of the collateral in the borrowing base which consists
principally of accounts receivable of the Company. Borrowings under the Senior
Credit Facility Agreement bear interest, at the Company's option, either (i) at
LIBOR plus 2 3/4% (8.50% as of December 31, 1995), or (ii) at the Alternate Base
Rate (which is the greater of Chemical Bank's Prime Rate, its Base CD rate plus
1%, or the Federal Funds Effective Rate plus 1/2%) plus 1 3/4% (10.50% as of
December 31, 1995), subject to reduction if certain financial ratios are
satisfied. As of December 31, 1995, the Company has outstanding borrowings of
$25,000,000 under the Term Loan, $25,000,000 under the Goodson Term Loan and
$27,352,000 under the Chemical Bank Facilities with approximately $48,399,000
available for borrowing under the Chemical Bank Facilities.
The Senior Credit Facility Agreement imposes a number of financial and
other conditions upon the Company, including limitations on indebtedness,
restrictions on the disposition of assets,
F-13
<PAGE> 126
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
restrictions on making certain payments (including dividends), restrictions on
acquisitions and certain financial tests. Additionally, the Baywatch Production
Line and the Baywatch Nights Production Line provide that certain conditions
must be satisfied before funding of each season of the respective series and
such conditions have been met for the 1995/1996 broadcast season of Baywatch and
Baywatch Nights. The Goodson Term Loan imposes a separate set of financial and
other conditions upon the Company, including a requirement that the
"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 Goodson Term Loan be prepaid to specified levels).
Except to the extent set forth below, under the terms of the Senior Credit
Facility Agreement substantially all of the Company's cash collections are
required to be paid into accounts maintained by Chemical Bank and applied to the
repayment of the Company's obligations under the Chemical Bank Facilities. All
of AAFII's cash collections are required to be paid into accounts maintained and
applied, subject to certain exceptions for working capital, to interest and
principal amounts outstanding under the Term Loan until such time as the Term
Loan is repaid in full. The Company has made two quarterly principal installment
payments totaling $5,000,000. The balance of the Tranche A term loan is
repayable in quarterly principal installments as follows: March 1996, $500,000;
June 1996, $500,000; September 1996 $3,000,000; December 1996, $3,000,000; March
1997, $1,000,000; June 1997, $1,000,000; September 1997, $3,000,000; December
1997, $3,000,000; March 1998, $1,000,000; June 1998, $1,000,000; September 1998,
$4,000,000 and a final installment due on the last borrower's day of December
1998 (each such payment being subject to reduction from certain prepayments).
The amount the Company is able to reborrow under the Chemical Bank Facilities is
subject to the collateral pledged to the lenders having sufficient borrowing
base value to support such borrowings. Substantially all of the Company's assets
other than real property are pledged under the Senior Credit Facility Agreement.
Under the Goodson Term Loan, substantially all of the cash flow available
to AAG from exploiting the Mark Goodson assets will be available, after
reserving for earn-out payments to the Sellers and certain administrative, tax
and other distributions to the LLC, to repay the Goodson Term Loan (See Note
13).
In October 1993, the Company issued its 6 1/2% Convertible Subordinated
Notes Due 2003 (the "Notes") in the aggregate principal amount of $60,000,000.
The Company received net proceeds of approximately $56,800,000 from the issuance
of the Notes. A portion of the proceeds were used to repurchase and retire all
of the issued and outstanding shares of redeemable Series A Preferred Stock and
redeemable Common Stock of the Company, to temporarily repay all amounts
outstanding under the Chemical 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 "Fiscal Agent"). The
following description of the Notes summarizes the detailed provisions of the
Notes and the Fiscal Agency Agreement.
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, commencing
on April 1, 1994. Interest on the Notes will be paid on the basis of a 360-day
year of twelve 30-day months. The Notes will mature on October 1, 2003 and upon
maturity will be redeemed at 100% of the principal amount thereof.
F-14
<PAGE> 127
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
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.
Except for certain limitations, the Notes are convertible into Common
Stock, initially at a conversion price 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. The conversion price is subject to adjustment in certain
events as set forth in the Fiscal Agency Agreement. The underlying shares have
been registered with the Securities and Exchange Commission (the "Commission")
pursuant to a registration statement filed on Form S-1 declared effective by the
Commission in February 1994.
The Notes may be redeemed, at the option of the Company, in whole or in
part, at any time on or after October 1, 1996, at redemption prices commencing
at 104.643% of par and declining to 100% in 2001 together with accrued but
unpaid interest thereon through the date of redemption. The Notes may be
redeemed at any time, as a whole but not in part, in the event of certain
changes in United States 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.
6. CAPITAL STOCK
In December 1995, the Company sold 3,200,000 newly issued shares of Class B
Stock through an underwritten stock offering (the "Stock Offering"). The Class B
Stock is identical to the Company's Class A Stock, except the Class B Stock in
non-voting. Net proceeds from the Stock Offering totaled approximately
$30,535,000 after deducting the underwriters discount of $2,352,000 and offering
expenses of approximately $853,000.
In August 1994, in connection with the Fremantle International Acquisition,
the Company issued 630,000 shares of its Class A Stock and 2,520,000 shares of
its Class B Stock (See Note 2).
7. STOCK OPTIONS AND WARRANTS
The Company's 1994 Stock Incentive Plan, as amended, (the "1994 Plan")
provides for the granting of stock incentive awards ("Awards") for up to
1,250,000 shares of its Class A Stock or Class B Stock (collectively "Common
Stock") to eligible employees, directors and consultants. The 1994 Plan, which
will terminate June 21, 2004, is administered by a committee appointed by the
Board of Directors (the "Committee") which determines the number of shares to be
covered by an award, the term and exercise price, if any, of the award and other
terms and provisions of awards.
Awards can be Stock Options ("Options"), Stock Appreciation Rights
("SARs"), Performance Share Awards ("PSAs") and Restricted Stock Awards
("RSAs"). The number and kind of shares available under the 1994 Plan are
subject to adjustment in certain events. Shares relating to Options or SARs
which are not exercised, shares relating to RSAs which do not vest and shares
relating to PSAs which are not issued will again be available for issuance under
the 1994 Plan.
An Option may be an incentive stock option ("ISO") or a non-qualified
Option. The exercise price for Options is to be determined by the Committee, but
in the case of an ISO is not to be less than fair market value on the date the
Option is granted (110% of fair market value in the case of an ISO granted to
any person who owns more than 10% of the Common Stock). The purchase price is
payable in any combination of cash, shares of Common Stock already owned by the
participant for at least six months or, if authorized by the Committee, a
promissory note secured by the Common Stock issuable upon exercise. In addition,
the award agreement may provide for "cashless" exercise and payment. Subject to
early termination or acceleration provisions, an Option is
F-15
<PAGE> 128
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
exercisable, in whole or in part, from the date specified in the related award
agreement (which may be six months after the date of grant) until the expiration
date determined by the Committee. The aggregate fair market value (determined on
the date of grant) of the shares of Common Stock for which ISOs may be granted
to any participant under the 1994 Plan and any other plan by the Company or its
affiliates which are exercisable for the first time by such participant during
any calendar year may not exceed $100,000.
The Options granted under the 1994 Plan become exercisable on such dates as
the Committee determines in the terms of each individual Option. Options become
immediately exercisable in full in the event of a disposition of all or
substantially all of the assets or capital stock of the Company by means of a
sale, merger, consolidation, reorganization, liquidation or otherwise, unless
the Committee arranges for the optionee to receive new Options covering shares
of the corporation purchasing or acquiring the assets or stock of the Company,
in substitution of the Options granted under the Plan (which Options shall
thereupon terminate). The Committee in any event may, on such terms and
conditions as it deems appropriate, accelerate the exercisability of Options
granted under the Plan. An ISO to a holder of more than 10% of the total
combined voting power of all classes of stock of the Company must expire no
later than five years from the date of grant. A non-qualified Option must expire
no later than ten years from the date of the grant.
The Options granted under the 1994 Plan are not transferable other than by
will or the laws of descent and distribution. Unexercised Options generally
lapse three months after termination of employment other than by reason of
retirement, disability or death in which case it terminates one year thereafter.
An SAR is the right to receive payment based on the appreciation in the
fair market value of Common Stock from the date of grant to the date of
exercise. In its discretion, the Committee may grant an SAR concurrently with
the grant of an Option. An SAR is only exercisable at such time, and to the
extent, that the related Option is exercisable. Upon exercise of an SAR, which
was issued concurrent with an Option, the holder receives for each share with
respect to which the SAR is exercised an amount equal to the difference between
the exercise price under the related Option and the fair market value of a share
of Common Stock on the date of exercise of the SAR. The Committee in its
discretion may pay the amount in cash, shares of Common Stock, or a combination
thereof.
An RSA is an award of a fixed number of shares of Common Stock subject to
restrictions. The Committee specifies the prices, if any, the recipient must pay
for such shares. Shares included in an RSA may not be sold, assigned,
transferred, pledged or otherwise disposed of or encumbered until they have
vested. These restrictions may not terminate earlier than six months after the
award date. The recipient is entitled to dividend and voting rights pertaining
to such RSA shares even though they have not vested, so long as such shares have
not been forfeited.
A PSA is an award of a fixed number of shares of Common Stock, the issuance
of which is contingent upon the attainment of such performance objectives, and
the payment of such consideration, if any, as is specified by the Committee.
Issuance shall in any case not be earlier than six months after the award date.
Upon the date a participant is no longer employed by the Company for any
reason, shares subject to the participant's RSAs which have not become vested by
that date or shares subject to the participant's PSAs which have not been issued
shall be forfeited in accordance with the terms of the related Award agreements.
Options which have become exercisable by the date of termination
F-16
<PAGE> 129
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
of employment or of service on the Committee must be exercised within certain
specified periods of time from the date of termination, the period of time to
depend on the reason for termination. Options which have not yet become
exercisable on the date the participant terminates employment or service on the
Committee for a reason other than retirement, death or total disability shall
terminate on that date.
In the event a change in control occurs, all of the outstanding options may
be accelerated. The 1994 Plan defines a change in control to have occurred if a
"person," as defined in Section 13(d) and 14(d) under the Securities Exchange
Act of 1934, as amended, acquires 20% or more of the outstanding shares of
Common Stock of the Company unless waived in advance by Committee.
The 1994 Plan provides for anti-dilution adjustments in the event of a
reorganization, merger, combination recapitalization, reclassification, stock
dividend, stock split or reverse stock split; however, no such adjustment need
be made if it is determined that the adjustment may result in the receipt of
federally taxable income to optionees of the holders of Common Stock or other
classes of the Company's securities. Upon the dissolution or liquidation of the
Company, or upon a reorganization, merger or consolidation of the Company as a
result of which the Company is not the surviving entity, the Plan shall
terminate, and any outstanding awards shall terminate and be forfeited unless
assumed by the successor corporation.
The Company's 1991 Incentive Stock Option Plan (the "1991 Plan"), as
amended, provides for the granting of options for up to 258,699 shares of its
Class A Stock to eligible employees and directors. Under the 1991 Plan, options
are granted at no less than fair market value on the date of grant. The period
during which these options are exercisable is fixed by the Stock Option
Committee at the time of grant. Options generally expire if not exercised within
ten years (or five years in the case of an employee owning 10% or more of the
Company's stock on the date of grant).
The following table summarizes stock option transactions under the 1991
Plan and the 1994 Plan (the "Plans") for the remaining unexercised stock options
and remaining unexercised warrants and stock options granted outside of the
Plans:
<TABLE>
<CAPTION>
1991 PLAN AND 1994 PLAN OUTSIDE OF THE PLANS
----------------------------- -----------------------------
NUMBER OF NUMBER OF
SHARES PRICE PER SHARE SHARES PRICE PER SHARE
--------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
Outstanding at December 31,
1992........................... 103,063 $ 2.63 - 30.00 732,143 $ 4.00 - 7.50
Granted........................ 5,000 7.00 306,250 4.00 - 18.00
Exercised...................... -- --
Canceled....................... (18,750) 7.25 (25,000) 12.00 - 18.00
--------- ---------
Outstanding at December 31,
1993........................... 89,313 2.63 - 30.00 1,013,393 4.00 - 11.00
Granted........................ 486,500 7.63 - 8.50 --
Exercised...................... -- (62,500) 4.00
Canceled....................... (12,500) 11.00 (633,929) 4.00 - 7.50
--------- ---------
Outstanding at December 31,
1994........................... 563,313 2.63 - 30.00 316,964 4.00 - 11.00
Granted........................ 456,500 9.13 --
Exercised...................... -- --
Canceled....................... (5,000) 8.50 (35,714) 7.50
--------- ---------
Outstanding at December 31,
1995........................... 1,014,813 2.63 - 30.00 281,250 4.00 - 11.00
========= =========
</TABLE>
F-17
<PAGE> 130
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
Options and warrants exercisable at December 31,
<TABLE>
<CAPTION>
UNDER THE 1991 PLAN OUTSIDE OF
AND THE 1994 PLAN THE PLANS
------------------- ----------
<S> <C> <C>
1995............................................ 123,013 281,250
1994............................................ 63,063 316,964
1993............................................ 51,813 983,393
</TABLE>
As of July 6, 1994, in connection with the employment agreement of an
officer (such officer also being a Director), the Company granted an RSA for
30,000 shares with a vesting date of July 5, 1998. The RSA shares are subject to
the terms of the 1994 Plan and the officer's employment agreement. Based on a
closing bid price on July 6, 1994 of $7.25 per share, this grant is expected to
generate expense of approximately $218,000 through July 5, 1998.
As of December 31, 1995, there have been no other SARs, PSAs or RSAs
granted.
Shares of the Company's Common Stock reserved for issuance follow:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
------ -----
(IN THOUSANDS)
<S> <C> <C>
1991 Plan and 1994 Plan................................... 1,509 1,509
Non-Plan options and warrants granted..................... 281 317
Common Stock Class B -- non-voting........................ 5,720 2,520
6 1/2% Convertible Subordinated Notes..................... 5,011 5,217
------ -----
12,521 9,563
====== =====
</TABLE>
8. RELATED PARTY TRANSACTIONS
Effective December 15, 1995, the Company entered into the WEA Distribution
Agreement. A Director of the Company is the Chairman/CEO -- Warner Media
Manufacturing & Distribution Group (a division of Time Warner, Inc.) with
responsibility for WEA. Such Director recused himself from the negotiations
between the Company and WEA which resulted in the WEA Distribution Agreement
(See Note 1). Included in recorded music and merchandising revenues for 1995 is
$3,000,000 related to a non-refundable, non recoupable advance.
During 1994 the Company loaned $250,000 to Thomas Bradshaw, the Company's
Chief Financial Officer, which loan is secured by a pledge of shares of Common
Stock of the Company owned by Mr. Bradshaw. The loan bears interest at a rate of
8.0% per annum (equal to the rate then in effect under the Company's Working
Capital Loan) and has been extended to mature upon expiration of Mr. Bradshaw's
current employment agreement which is currently February 1999. The loan has been
included with other assets in the accompanying consolidated balance sheets at
December 31, 1995 and 1994.
The Company engaged Jefferson Capital Group ("JCG") to provide investment
banking services to the Company in connection with the Stock Offering, including
advice regarding valuation and pricing of the transaction for fees and expenses
totaling $25,000. A member of the Company's Board of Directors is the President
and a significant stockholder of JCG. The Company has also agreed to indemnify
JCG against any liabilities it incurs in connection with the services provided,
except due to JCG's gross negligence or willful misconduct.
F-18
<PAGE> 131
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
The Company engaged JCG to provide investment banking services to the
Company in connection with the Fremantle International Acquisition, including
valuation of the transaction, pricing and financing for fees and expenses
totaling $319,000. The Company has also agreed to indemnify JCG against any
liabilities it incurs in connection with the acquisition of Fremantle, except
due to JCG's gross negligence or willful misconduct.
The Company engaged JCG to provide investment banking services to the
Company in connection with the LBS Acquisition, including valuation of the
transaction, pricing and financing for a fee of $100,000. During 1991 in
consideration for certain services the Company issued to JCG warrants to acquire
62,500 shares of Class A Stock at an exercise price of $4.00 per share, which
may be exercised for up to five years from the date of issuance. The Company has
also agreed to indemnify JCG against any liabilities it incurs in connection
with the LBS Acquisition, except due to JCG's gross negligence or willful
misconduct.
SBEI currently rents a building from two officers/members of the Board of
Directors of the Company at a cost to SBEI of approximately $4,300 per month,
which the Company believes is a market rate. This building is used for office
and warehouse space for the Company's recorded music operations.
9. INCOME TAXES
The provision for income taxes related to continuing operations is
comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
------ ----- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................ $ 718 $ -- $ --
State and local................................ 195 13 14
Foreign........................................ 1,858 646 67
------ ----- ----
2,771 659 81
------ ----- ----
Deferred:
Federal........................................ 2,478 (329) 67
State.......................................... -- -- 27
------ ----- ----
2,478 (329) 94
------ ----- ----
$5,249 $ 330 $175
====== ===== ====
</TABLE>
F-19
<PAGE> 132
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
Components of deferred income taxes as calculated under SFAS 109 as of
December 31, 1995 and 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Amortization and depreciation............................... $(4,018) $(9,627) $(7,283)
Accruals not currently deductible for tax purposes.......... 1,660 6,874 5,901
Deferred revenues........................................... 116 103 314
Net operating loss carryover................................ -- 2,466 672
Foreign tax and investment tax credit carryover............. -- 1,384 1,205
------- ------- -------
(2,242) 1,200 809
Valuation allowance......................................... -- (965) (903)
------- ------- -------
$(2,242) $ 235 $ (94)
======= ======= =======
</TABLE>
Reconciliation of effective rate of income taxes related to continuing
operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
------ ----- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Provision for income taxes at statutory federal rate of 35%...... $4,374 $ 275 $189
State and local income taxes..................................... 127 9 9
Foreign income taxes............................................. -- 646 67
Utilization of net operating losses, foreign and investment tax
credits........................................................ 323 (329) --
Tax deductible items and other items............................. 425 (271) (90)
------ ----- ----
Provision for income taxes....................................... $5,249 $ 330 $175
====== ===== ====
</TABLE>
Foreign taxes withheld on revenues were utilized for financial reporting
purposes in determining the provision for income taxes. These amounts withheld
in the periods ended December 31, 1995, 1994 and 1993 were $246,000, $646,000,
and $67,000, respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company has exercised its option with the producers of Baywatch to
produce 22 episodes of Baywatch for the 1996/1997 broadcast season. As of
December 31, 1995, three of the episodes for the 1996/1997 broadcast season have
been partially completed. The total production budget of approximately
$22,000,000 for the 1996/1997 broadcast season is expected to be funded through
a combination of: (i) borrowings under the Chemical Bank Facilities; (ii) cash
payments by The Fremantle Corporation (an unrelated company); and (iii) working
capital.
The Company has exercised its option with the producers of Baywatch Nights,
for the 1996/1997 broadcast season. The Company currently plans to
self-distribute Baywatch Nights both domestically and internationally. The total
production budget for the 22 planned new one-hour episodes for the 1996/1997
broadcast season of approximately $20,000,000 is expected to be funded through:
(i) borrowings under the proposed Chemical Bank Facilities; (ii) foreign sales
agreements; and (iii) working capital. Additionally, as of December 31, 1995,
the Company had completed production of 17 of 22 episodes for the 1995/1996
broadcast season with a total revised production budget of $23,000,000 for 22
episodes.
F-20
<PAGE> 133
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
The Company has reached an understanding 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 The Adventures of Sinbad
for the 1996/1997 broadcast season. In consideration for the Company providing
$670,000 of the $825,000 per episode production budget, the Company will retain
exclusive distribution rights to The Adventures of Sinbad in the United States
and Europe (including the United Kingdom and excluding Scandinavia). The
Company, under certain circumstances, has an annual option, exercisable on or
before February 15 of each of the initial three 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, in the event Atlantis does not
exercise its right to continue producing The Adventures of Sinbad, such right to
produce the series reverts to the Company.
In January 1995, the Company structured an arrangement with United
Television/Chris Craft Industries, Inc. ("Chris Craft") whereby the Company was
engaged through September 1997 as the exclusive domestic television distributor
for The Richard Bey Show, a five day per week one-hour talk show. Chris Craft
has agreed to deliver 39 weeks of original one-hour programs during each 52 week
broadcast season and to air The Richard Bey Show on Chris Craft's six owned and
operated stations in New York, Los Angeles, San Francisco, Minneapolis, Phoenix,
and Portland.
Minimum commitments for advances to recording artists at December 31, 1995
amounted to approximately $506,000.
On December 12, 1994, Credit Lyonnais Bank Nederland N.V. ("CLBN") made
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.
In addition, since approximately November 1993, CLBN and its
representatives have been reviewing certain books and records relating to the
distribution and production of certain motion pictures by Minority Pictures,
Inc. (formerly Scotti Brothers Pictures, Inc.) or its subsidiaries for which
CLBN provided financing. In October 1994, CLBN requested that Minority Pictures,
Inc. and various of its current and former affiliates (including All American
Communications, Inc. and certain of its subsidiaries) execute a tolling
agreement which would have tolled any claims which CLBN may have against such
persons, including but not limited to causes of action based on such financing.
In December 1994, the Company responded that based upon the information provided
by CLBN, or the lack thereof, it was extremely unclear whether there were any
tenable claims against the Company and its subsidiaries and that the Company was
therefore unwilling to enter into any tolling agreement. The Company and CLBN
are currently 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 which CLBN
may assert, and that the ultimate outcome of this matter will not result in a
materially adverse effect on the Company's financial condition or results of
operations, there can be no assurance that the Company ultimately will prevail.
F-21
<PAGE> 134
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
In September 1994, the Company filed a complaint (as amended) against the
producers of the series Acapulco H.E.A.T. in the Superior Court of the State of
California, County of Los Angeles (Case No. BC 110161) alleging, among other
things, breach of contract and fraud. The Company had entered into an agreement,
dated as of October 7, 1992, with the producers for the Company to distribute
the series Acapulco H.E.A.T. in the domestic television market. Subject to the
fulfillment of certain terms by the producers, the Company agreed to pay a
distribution advance of $6,600,000 (plus an additional amount per episode under
certain circumstances) payable over ten months commencing on November 30, 1993.
As of December 31, 1994, the Company had made payments totaling approximately
$4,698,000, at which time a dispute with the producers with regard to the
non-fulfillment of certain terms by the producers was raised by the Company. The
unpaid portion of the advance payments, totaling approximately $2,476,000, was
placed in an interest-bearing restricted cash account pending resolution of the
dispute. The producers filed an answer and cross-complaint alleging, among other
things, breach of contract and fraud in connection with the agreement to
distribute Acapulco H.E.A.T. and breach of contract and fraud in connection with
the Company's barter distribution of certain theatrical films unrelated to
Acapulco H.E.A.T. The Company did not exercise its option to distribute any
additional new episodes of Acapulco H.E.A.T. for the 1994/1995 broadcast season.
An agreement in principle has been reached to settle this litigation. If the
settlement is not consummated, the Company intends to vigorously pursue its
claim and defend against the cross-complaint. Management does not believe the
ultimate outcome of this matter will result in a materially adverse effect on
the Company's financial condition or results of operations. However, there can
be no assurance that the Company will be successful on the merits of the
lawsuit.
The Company is party to 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.
The Company leases office and production studio space under operating
leases expiring at various dates through 2005. Renewal options are available on
certain of these leases. The minimum lease payments, under noncancellable
operating leases at December 31, 1995, are as follows:
<TABLE>
<CAPTION>
MINIMUM CONTRACTUAL AMOUNTS
-----------------------------------
LEASE SUBLEASE NET LEASE
PAYMENTS INCOME PAYMENTS
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
1996..................................... $ 1,842 $ 94 $ 1,748
1997..................................... 1,714 98 1,616
1998..................................... 1,612 102 1,510
1999..................................... 1,233 106 1,127
2000..................................... 985 54 931
Thereafter............................... 4,300 -- 4,300
------- ---- -------
$11,686 $454 $11,232
======= ==== =======
</TABLE>
Rent expense of approximately $1,404,000, $1,014,000 and $690,000 is net of
sublease income of $85,000, $57,000 and $45,000 and amounts capitalized to
productions of $774,000, $288,000 and $309,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
F-22
<PAGE> 135
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
11. FINANCIAL INSTRUMENTS
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, restricted cash and
trade receivables.
The Company maintains its cash and restricted cash balances at various
financial institutions. These financial institutions are throughout the world
and Company policy is designed to limit exposure to any one institution. The
Company performs periodic evaluations of the relative credit standing of those
financial institutions holding significant account balances. As of December 31,
1995 and 1994, a significant concentration of credit risk exists only with
respect to the interest bearing restricted cash account held, pending resolution
of a dispute (See Note 10), with a single financial institution other than the
Company's primary lender. The balance of such account is $2,551,000 and
$2,478,000 at December 31, 1995 and 1994, respectively.
The Company produces and sells television programs, and recorded music
product to domestic and foreign distributors. Sales of advertising time retained
in television programming sold are to agencies representing national
advertisers, primarily in the consumer products industry. The Company generally
does not require collateral on trade receivables. Concentrations of credit risk
on trade receivables exist only with respect to the domestic recorded music
trade receivable. The Company's domestic recorded music trade receivable
($5,810,000 and $4,775,000 at December 31, 1995 and 1994, respectively) is with
BMG, one of the six major record companies. The Company's decision to change
domestic recorded music distributors to WEA, commencing January 1, 1996, is not
expected to impact realization of such trade receivables. Credit losses and
returns of recorded music product have consistently been within management's
expectations.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments approximate their
fair value with the exception of the Company's $60,000,000, 6 1/2% Convertible
Subordinated Notes ("Notes"). The Notes, which have a carrying value of
$57,630,000, (reflecting conversions exercised through December 31, 1995) had a
fair value of approximately $52,000,000 and $44,400,000 at December 31, 1995 and
1994, respectively. Such fair value was determined using the quoted market
prices for the Notes as of December 31, 1995 and 1994.
12. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company's activities consist of two business segments -- television
production and distribution, and recorded music production and distribution.
Summaries of financial information by business segment follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------
RECORDED
TELEVISION MUSIC CORPORATE TOTAL
---------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues...................................... $ 206,734 $22,026 $ -- $228,760
Operating income (loss)....................... 26,399 13 (4,720) 21,692
Identifiable assets........................... 281,063 10,726 9,793 301,582
Depreciation and amortization................. 93,528 140 55 93,723
Expenditures for property and equipment....... 947 9 721 1,677
</TABLE>
F-23
<PAGE> 136
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
--------------------------------------------------
RECORDED
TELEVISION MUSIC CORPORATE TOTAL
---------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues...................................... $ 98,771 $16,130 $ -- $114,901
Operating income (loss)....................... 12,523 (450 ) (5,612) 6,461
Identifiable assets........................... 190,064 8,949 8,994 208,007
Depreciation and amortization................. 33,783 141 60 33,984
Expenditures for property and equipment....... 377 20 100 497
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
--------------------------------------------------
RECORDED
TELEVISION MUSIC CORPORATE TOTAL
---------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues...................................... $ 57,407 $13,215 $ -- $ 70,622
Operating income (loss)....................... 7,012 (949 ) (3,988) 2,075
Identifiable assets........................... 92,387 9,887 10,247 112,521
Depreciation and amortization................. 33,635 -- 55 33,690
Expenditures for property and equipment....... 119 16 -- 135
</TABLE>
A summary of geographic financial information is presented for 1995 and
1994. Prior to 1994, the Company had operations in the United States only.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------
UNITED STATES EUROPE TOTAL
------------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues................................................ $ 146,303 $82,457 $228,760
Operating income........................................ 12,674 9,018 21,692
Identifiable assets..................................... 213,767 87,815 301,582
Depreciation and amortization........................... 91,098 2,625 93,723
Expenditures for property and equipment................. 1,228 449 1,677
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
--------------------------------------
UNITED STATES EUROPE TOTAL
------------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues................................................ $ 83,135 $31,766 $114,901
Operating income........................................ (388) 6,849 6,461
Identifiable assets..................................... 129,231 78,776 208,007
Depreciation and amortization........................... 32,882 1,102 33,984
Expenditures for property and equipment................. 273 224 497
</TABLE>
Revenues related to the television series Baywatch amounted to $66,211,000,
$35,328,000, and $29,185,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
Approximately $58,868,000, $15,802,000, and $0 of revenues from the
European segment are derived from the Company's operations in Germany for the
years ended December 31, 1995, 1994 and 1993, respectively. Of the revenues
derived from the German operations, approximately $13,322,000, $2,376,000 and $0
are generated by The Price Is Right for the years ended December 31, 1995, 1994
and 1993, respectively.
F-24
<PAGE> 137
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
During the years ended December 31, 1995, 1994 and 1993, one customer of
the recorded music segment accounted for 7%, 11% and 14%, respectively, and one
customer of the television segment accounted for 6%, 13%, and 17%, respectively
of consolidated revenues. Commencing January 1, 1996, the Company entered into
the WEA Distribution Agreement providing for the domestic distribution for all
of the Company's recorded music product (See Notes 1 and 8).
Included in United States sales are export sales in the years ended
December 31, 1995, 1994 and 1993 of $29,977,000, $20,821,000, and $14,921,000,
respectively.
13. SUBSEQUENT EVENT (UNAUDITED)
Interpublic and the Company, effective January 1, 1996, entered into an
agreement pursuant to which the Company agreed to purchase 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 5), 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 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 consummation
of the IPG/Goodson Agreement requires regulatory approval and the approval of a
significant majority of the members of the Company's lending syndicate, which
approvals are expected shortly but as of March 27, 1996 had not been obtained.
The IPG/Goodson Agreement is in lieu of and replaces 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
results in the Company's full ownership of the net assets held by the LLC.
Effective January 1, 1996, the Company's initial purchase price for the net
assets of Mark Goodson Productions (See Note 1) will increase by $25,000,000 to
$50,785,000, resulting in goodwill of $50,519,000. Consistent with its treatment
of its undivided 50% interest, the Company has allocated the increased purchase
price to goodwill which will be amortized over 25 years from October 6, 1995,
the date of the Mark Goodson Acquisition. The IPG/Goodson Agreement will further
result in the Company absorbing the full share of the contingent purchase price,
to the extent earned by the Sellers. The Company will account for the
IPG/Goodson Agreement as a purchase effective January 1, 1996.
F-25
<PAGE> 138
REPORT OF INDEPENDENT AUDITORS
Board of Directors
All American Communications, Inc.
We have audited the accompanying combined balance sheet of the combined
business of Mark Goodson Productions, L.P. and The Child's Play Company as of
December 31, 1995, and the related combined statements of operating income and
changes in partners' equity, and cash flows for the period from October 6, 1995
(inception) to December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the combined
business of Mark Goodson Productions, L.P. and The Child's Play Company at
December 31, 1995, and their operating income and their cash flows for the
period from October 6, 1995 (inception) to December 31, 1995, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
March 28, 1996
F-26
<PAGE> 139
COMBINED BUSINESS OF MARK GOODSON PRODUCTIONS, L.P.
AND THE CHILD'S PLAY COMPANY
COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Assets:
Trade receivables............................................................ $4,639
Trade receivables -- related party........................................... 4,724
Television program costs, net of accumulated amortization of $1,059.......... --
Furniture & equipment, net of accumulated depreciation of $13................ 253
Other........................................................................ 64
------
Total assets................................................................... $9,680
======
Liabilities and Partners' Equity:
Accounts payable and accrued expenses........................................ $1,415
Due to sellers............................................................... 793
------
Total liabilities......................................................... 2,208
------
Partners' capital............................................................ 266
Undistributed earnings....................................................... 7,206
------
Total partners' equity.................................................... 7,472
------
Total liabilities and partners' equity......................................... $9,680
======
</TABLE>
See accompanying notes.
F-27
<PAGE> 140
COMBINED BUSINESS OF MARK GOODSON PRODUCTIONS, L.P.
AND THE CHILD'S PLAY COMPANY
COMBINED STATEMENT OF OPERATING INCOME
AND CHANGES IN PARTNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 6, 1995
(INCEPTION) TO
DECEMBER 31, 1995
-----------------
<S> <C>
Revenues:
Domestic................................................................. $ 3,531
International -- related party........................................... 4,724
Other.................................................................... 27
------
8,282
------
Expenses:
Domestic................................................................. 1,059
Other.................................................................... 4
Depreciation............................................................. 13
------
1,076
------
Operating income........................................................... 7,206
Net assets acquired........................................................ 266
Partners' equity, beginning of period...................................... --
------
Partners' equity, end of period............................................ $ 7,472
======
</TABLE>
See accompanying notes.
F-28
<PAGE> 141
COMBINED BUSINESS OF MARK GOODSON PRODUCTIONS, L.P.
AND THE CHILD'S PLAY COMPANY
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 6, 1995
(INCEPTION) TO
DECEMBER 31, 1995
-----------------
<S> <C>
Operating activities:
Operating income......................................................... $ 7,206
Adjustments to reconcile operating income to net cash provided by
operating activities:
Depreciation and amortization......................................... 1,072
Increase in trade receivables......................................... (9,363)
Changes in operating assets and liabilities:
Additions to television program costs............................... (1,059)
Other assets........................................................ (64)
Accounts payable and accrued liabilities and due to sellers......... 2,208
-------
Net cash provided by operating activities.................................. --
Investing activity:
Acquisition of net assets................................................ (266)
-------
Net cash used by investing activity........................................ (266)
Financing activity:
Partners' capital contribution........................................... 266
-------
Net cash provided by financing activity.................................... 266
Increase in cash........................................................... --
Cash at beginning of period................................................ --
-------
Cash at end of period...................................................... $ --
=======
</TABLE>
See accompanying notes.
F-29
<PAGE> 142
COMBINED BUSINESS OF MARK GOODSON PRODUCTIONS, L.P.
AND THE CHILD'S PLAY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES AND TRANSACTIONS
Basis of Presentation
On October 6, 1995, the net assets of Mark Goodson Productions, L.P., The
Child's Play Company and certain affiliates under common control prior to
October 6, 1995 ("Mark Goodson Productions") were sold to All American
Communications, Inc. ("AACI") and The Interpublic Group of Companies
("Interpublic") and placed in Mark Goodson Productions, LLC, a joint venture
(the "LLC").
The accompanying combined financial statements for the combined business of
Mark Goodson Productions, L.P. and The Child's Play Company (the "Company") have
been prepared from the books and records of Mark Goodson Productions and present
the combined results of operations from October 6, 1995 (inception) through
December 31, 1995.
Recognition of Revenues
Revenues from network television licensing agreements are recognized as
episodes are completed and delivered to the network. Revenues from the
international licensing of format rights are recognized when earned as reported
to the Company by the licensees (principally a subsidiary of AACI).
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.
Television Program Costs
Television program costs consist of direct production costs and production
overhead, 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.
Depreciation
Furniture and equipment are carried at cost and depreciation is computed
using the straight line method over five years, the estimated useful lives of
the assets. Depreciation expense from inception through December 31, 1995
amounted to $13,000.
Income Taxes
No provision for income taxes has been presented in the accompanying
combined statement of operations and changes in partners' equity as the Company,
as a joint venture, is not subject to Federal or state taxes.
F-30
<PAGE> 143
COMBINED BUSINESS OF MARK GOODSON PRODUCTIONS, L.P.
AND THE CHILD'S PLAY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. RELATED PARTY TRANSACTIONS
The Company's principal source of international revenue and the related
receivable is from format rights licenses granted to a subsidiary of AACI. For
the period from October 6, 1995 through and as of December 31, 1995, the Company
reported revenues and had outstanding receivables from AACI of $4,724,000.
3. SIGNIFICANT CUSTOMER
The domestic revenue and receivable recognized by the Company as of
December 31, 1995 results from a license agreement with the CBS Network for the
game show The Price Is Right.
4. SUBSEQUENT EVENT
Interpublic and AACI, effective January 1, 1996, entered into an agreement
pursuant to which AACI agreed to purchase Interpublic's 50% interest in the LLC
(the "IPG/Goodson Agreement"). AACI will account for the IPG/Goodson Agreement
as a purchase as of January 1, 1996.
F-31
<PAGE> 144
APPENDIX A
A-1
<PAGE> 145
LETTER OF TRANSMITTAL
OFFER TO EXCHANGE
10 7/8% NOTES DUE 2001, SERIES B
($100,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR 10 7/8% NOTES DUE 2001, SERIES A
OF
ALL AMERICAN COMMUNICATIONS, INC.
PURSUANT TO THE PROSPECTUS DATED NOVEMBER 12, 1996
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
DECEMBER 11, 1996, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY
BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE.
<TABLE>
<S> <C>
By Hand Registered or Certified Mail By Facsimile:
or Overnight Courier: (212) 420-6504
U.S. TRUST COMPANY OF CALIFORNIA, N.A.
in care of For Information Call:
United States Trust Company of New York (800) 225-2398
770 Broadway, 13th Floor
New York, NY 10003
Attn: Corporate Trust Department
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN
AS SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS
VIA A FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges that he or she has received the Prospectus,
dated November 12, 1996 (the "Prospectus"), of All American Communications,
Inc., a Delaware corporation (the "Company"), and this Letter of Transmittal
(which together constitute the "Exchange Offer"), to exchange $1,000 (and
integral multiples of $1,000 thereafter) principal amount of its 10 7/8%
Subordinated Notes Due 2001, Series B (the "New Notes") for each $1,000 (and
integral multiples of $1,000 thereafter) in principal amount of its 10 7/8%
Subordinated Notes due 2001, Series A (the "Old Notes"). The Old Notes and New
Notes are collectively referred to herein as the "Notes."
Capitalized terms used but not defined herein shall have the meaning given
them in the Prospectus.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from October 11, 1996. Holders of Old
Notes whose Old Notes are accepted for exchange will be deemed to have waived
the right to receive any payment in respect of interest on the Old Notes accrued
from October 11, 1996 to the date of the issuance of the New Notes.
The Company reserves the right, at any time or from time to time, to extend
the Exchange Offer at its discretion, in which event the term "Expiration Date"
shall mean the latest time and date to which the Exchange Offer is extended. The
Company shall notify the holders of the Old Notes of any extension by means of a
press release or other public announcement prior to 9:00 A.M., New York City
time, on the next business day after the previously scheduled Expiration Date.
<PAGE> 146
This Letter of Transmittal is to be completed by a holder of Old Notes to
be delivered (i) by certificates representing the Old Notes forwarded herewith,
or (ii) by book-entry transfer to the account maintained by U.S. Trust Company
of California N.A. (the "Exchange Agent") at The Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedures set forth in "The
Exchange Offer" section of the Prospectus. Holders of Old Notes who are unable
to deliver certificates representing the Old Notes or confirmation of the
book-entry tender of their Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility (a "Book-Entry Confirmation"), and, in each case,
all other documents required by this Letter of Transmittal to the Exchange Agent
on or prior to the Expiration Date, must tender their Old Notes according to the
guaranteed delivery procedures set forth in "The Exchange Offer-Guaranteed
Delivery Procedures" section of the Prospectus. See Instruction 1. Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
The undersigned has completed the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
List below the Old Notes to which this Letter of Transmittal relates. If
the space provided below is inadequate, the principal amount of Old Notes should
be listed on a separate signed schedule affixed hereto.
TO BE COMPLETED BY ALL TENDERING HOLDERS
- --------------------------------------------------------------------------------
<TABLE>
DESCRIPTION OF OLD NOTES
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) AS SHOWN ON THE
CERTIFICATE(S) REPRESENTING THE OLD NOTES OR THE RECORDS OF THE BOOK-
ENTRY TRANSFER FACILITY, AS APPLICABLE (PLEASE FILL IN, IF BLANK) 1 2 3
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OLD NOTE AGGREGATE PRINCIPAL
NUMBER (ATTACH PRINCIPAL AMOUNT OF
SIGNED LIST AMOUNT OF OLD NOTES
IF NECESSARY)* OLD NOTES TENDERED**
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
Total
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Column 1 need not be completed by holders of Old Notes tendering Old Notes
for exchange by book-entry transfer.
** Complete only if different from amount indicated in column 2. Unless
otherwise indicated in this column, a holder will be deemed to have
tendered ALL of the Old Notes represented by the Old Notes indicated in
column 2. See Instruction 2. Old Notes tendered hereby must be in
denominations of principal amount of $1,000 and integral multiples of
$1,000 in excess thereof. See Instruction 1.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TO BE COMPLETED BY ALL TENDERING HOLDERS
[ ] TENDERED OLD NOTES ARE ENCLOSED HEREWITH.
[ ] TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE
ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER
FACILITY. PLEASE COMPLETE THE FOLLOWING:
Name of Tendering Institution
------------------------------------------------
Account Number
---------------------------------------------------------------
Transaction Code Number
------------------------------------------------------
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name(s) of Registered Holder(s)
----------------------------------------------
Window Ticket Number (if any)
------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery
---------------------------
Name of Institution which guaranteed delivery
--------------------------------
<PAGE> 147
[ ] I AM A BROKER-DEALER, AND I HEREBY REQUEST THAT THE PROSPECTUS BE MADE
AVAILABLE FOR USE IN CONNECTION WITH THE RESALES OF NEW NOTES PURSUANT TO,
AND FOR THE PERIOD PRESCRIBED IN, THE REGISTRATION RIGHTS AGREEMENT:
Name
-----------------------------------------------------------------------------
Address
-----------------------------------------------------------------------------
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
1. Upon the terms and subject to the conditions of the Exchange Offer,
the undersigned hereby tenders to the Company the aggregate principal amount of
Old Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of the Old Notes tendered hereby, the undersigned hereby sells, assigns
and transfers to, or upon the order of, the Company all right, title and
interest in and to such Old Notes as are being tendered hereby.
2. The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Old Notes
tendered hereby and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim when the same are accepted by the Company. The
undersigned hereby further represents that (i) the New Notes to be acquired in
connection with the Exchange Offer by the undersigned are being acquired by the
undersigned in the ordinary course of business of the undersigned, (ii) the
undersigned is not participating, does not intend to participate, and has no
arrangement or understanding with any person to participate, in the distribution
of the New Notes, (iii) the undersigned acknowledges and agrees that any person
participating in the Exchange Offer for the purpose of distributing the New
Notes must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction of the New
Notes acquired by such person and cannot rely on the position of the Staff of
the Securities and Exchange Commission (the "Commission") set forth in no-action
letters that are discussed in "The Exchange Offer" section of the Prospectus,
(iv) if the undersigned is a broker-dealer that acquired Old Notes as a result
of market making or other trading activities, it will deliver a prospectus in
connection with any resale of New Notes acquired in the Exchange Offer; however,
by acknowledging and delivering a prospectus, the undersigned will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act,
(v) the undersigned understands that a secondary resale transaction described in
clause (iii) above should be covered by an effective registration statement
containing the selling Note holder information required by Item 507 or 508, as
applicable of Regulation S-K of the Commission, and (vi) the undersigned is not
an "affiliate," as defined under Rule 405 of the Securities Act, of the Company
except as otherwise disclosed to the Company in writing.
<PAGE> 148
3. The undersigned also acknowledges that the Exchange Offer is being made
based on no-action letters issued by the Staff of the Commission to third
parties with respect to similar transactions and that the New Notes issued
pursuant to the Exchange Offer in exchange for the Old Notes may be offered for
resale, resold and otherwise transferred by holders thereof (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders are not engaging in, have no arrangement with any person to participate
in, and do not intend to engage in, any distribution of such New Notes. Any
holder who tenders in the Exchange Offer for the purpose of participating in a
distribution of New Notes cannot relay on such interpretation by the Staff of
the Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale.
4. The undersigned may, to the extent the conditions set forth in the
Registration Rights Agreement are satisfied, elect to have its Old Notes
registered in the Shelf Registration Statement (as defined and described in the
Registration Rights Agreement).
5. The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter of Transmittal and every
obligation of the undersigned hereunder shall be binding upon the successors,
assigns, heirs, executors, administrators, trustees in bankruptcy and legal
representatives of the undersigned and shall not be affected by, and shall
survive, the death or incapacity of the undersigned. This tender may be
withdrawn only in accordance with the procedures set forth in "The Exchange
Offer -- Withdrawal Rights" section of the Prospectus. See Instruction 8.
6. The undersigned understands that the tender of Old Notes pursuant to any
of the procedures set forth in the Prospectus and in the instructions hereto
will constitute the undersigned's acceptance of the terms and conditions of the
Exchange Offer. The Company's acceptance for exchange of Old Notes tendered
pursuant to any of the procedures described in the Prospectus will constitute a
binding agreement between the undersigned and the Company in accordance with the
terms and subject to the conditions of the Exchange Offer. For purposes of the
Exchange Offer, the undersigned understands that validly tendered Old Notes (or
defectively tendered Old Notes with respect to which the Company has, or has
caused to be, waived such defect) will be deemed to have been accepted by the
Company if, as and when the Company gives oral and written notice thereof to the
Exchange Agent.
7. Unless otherwise indicated in the box entitled "Special Issuance
Instructions" below, please issue certificates for the New Notes in the name of
the undersigned or credit the account indicated above maintained at the
Book-Entry Transfer Facility, as applicable.
The undersigned acknowledges that the Exchange Offer is subject to the more
detailed terms set forth in the Prospectus and, in case of any conflict between
the terms of the Prospectus and this Letter of Transmittal, the Prospectus shall
prevail.
<PAGE> 149
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AS
SET FORTH IN SUCH BOX ABOVE.
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY (i) if New Notes issued in exchange for Old Notes,
certificates for Old Notes in a principal amount not exchanged for New Notes or
Old Notes (if any) not tendered for exchange, are to be issued in the name of
someone other than the undersigned, or (ii) if Old Notes delivered by book-entry
transfer which are not accepted for exchange are to be returned by credit to an
account maintained at the Book-Entry Transfer Facility other than the account
indicated above. New Notes and/or Old Notes to:
Name(s)
--------------------------------------------
(Please Type or Print)
- ---------------------------------------------------------
(Please Type or Print)
Address
---------------------------------------------
(Zip Code)
---------------------------------------------------------
(Employer Identification
or Social Security Number)
Credit unexchanged Old Notes delivered by book-entry transfer to the
Book-Entry Transfer Facility account set forth below.
---------------------------------------------------------
(Book-Entry Transfer Facility Account Number)
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH CERTIFICATES
REPRESENTING OLD NOTES OR A BOOK-ENTRY CONFIRMATION, AS APPLICABLE,
AND ALL OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED
DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M.,
NEW YORK CITY TIME, ON THE EXPIRATION DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE.
<PAGE> 150
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
<TABLE>
<S> <C> <C>
1996
- --------------------------- ---------------------------
1996
- --------------------------- ---------------------------
1996
- --------------------------- ---------------------------
Signature(s) of Owner Date
</TABLE>
Area Code and Telephone Number: --------------------------------------
Contact Person: ------------------------------------------------------------
If a holder is tendering any Old Notes, this Letter of Transmittal must be
signed by the registered holder(s) as the name(s) appear(s) on the certificates
for the Old Notes or on the records of the Book-Entry Transfer Facility or by
any Person(s) authorized to become registered holder(s) by endorsements and
documents transmitted herewith. If a signature is by a trustee, executor,
administrator, guardian, officer or other person in a fiduciary or
representative capacity, please set forth full title. See Instructions 3.
Name(s) ---------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please type or print)
Capacity
-------------------------------------------------------------------------------
Address
-------------------------------------------------------------------------------
(include zip code)
Employer Identification or Social Security No. -----------------------------
(Please complete
Substitute Form W-9)
SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 3)
Signature(s) Guaranteed by an Eligible Institution:
Authorized Signature ----------------------------------------------------------
Title---------------------------------------------------------------------------
Name and Firm -------------------------------------------------------------
<PAGE> 151
INSTRUCTIONS
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OLD NOTES; GUARANTEED
DELIVERY PROCEDURES. This Letter of Transmittal is to be completed by holders
if (i) certificates representing Old Notes are to be physically delivered to the
Exchange Agent herewith by such holders; (ii) tender of Old Notes is to be made
pursuant to the procedures for delivery by book-entry transfer set forth in "The
Exchange Offer -- Book-Entry Transfer" section of the Prospectus; or (iii)
tender of Old Notes is to be made according to the guaranteed delivery
procedures set forth under the caption "The Exchange Offer -- Guaranteed
Delivery Procedures" in the Prospectus. All physically delivered Old Notes, or a
confirmation of a book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility of all Old Notes delivered electronically, as well
as a properly completed and duly executed Letter of Transmittal (or manually
signed facsimile thereof), any required signature guarantees and any other
documents required by this Letter of Transmittal must be received by the
Exchange Agent at the address set forth herein on or prior to the Expiration
Date, or the tendering holder must comply with the guaranteed delivery
procedures set forth below. Old Notes tendered hereby must be in denominations
of principal amount of $1,000 (and integral multiples of $1,000 thereafter).
If a holder desires to tender Old Notes pursuant to the Exchange Offer and
time will not permit this Letter of Transmittal, certificates representing such
Old Notes and all other required documents to reach the Exchange Agent, or the
procedures for book-entry transfer cannot be completed, on or prior to the
Expiration Date, such holder must tender such Old Notes pursuant to the
guaranteed delivery procedures set forth under the caption "The Exchange
Offer -- Guaranteed Delivery Procedures" in the Prospectus. Pursuant to such
procedures: (i) such delivery must be made by or through an Eligible
Institution, (ii) on or prior to the Expiration Date, the Exchange Agent must
receive from the Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s) of
such Old Notes and the principal amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within five (5) New York
Stock Exchange trading days after the Expiration Date, the duly executed Letter
of Transmittal (or a facsimile thereof), together with the certificate(s)
representing the Old Notes in proper form for transfer or a confirmation of a
book-entry transfer of such Old Notes, as the case may be, and any other
documents required by the Letter of Transmittal, will be deposited by the
Eligible Institution with the Exchange Agent; and (iii) such properly executed
Letter of Transmittal (or facsimile thereof), as well as the certificate(s)
representing all tendered Old Notes in proper form for transfer and all other
documents required by the Letter of Transmittal are received by the Exchange
Agent within five (5) New York Stock Exchange trading days after the Expiration
Date. Any Eligible Holder who wishes to comply with the guaranteed delivery
procedures described above must ensure that the Exchange Agent receives the
Notice of Guaranteed Delivery and Letter of Transmittal prior to 5:00 p.m., New
York City time, on the Expiration Date.
This Letter of Transmittal may be delivered by an Agent's Message (as
defined below) in connection with book-entry transfer. The term "Agent's
Message" means a message transmitted by the Book-Entry Transfer Facility to, and
received by, the Exchange Agent and forming a part of a book-entry confirmation,
which states that such Book-Entry Transfer Facility has received an express
acknowledgment from the participant in such Book-Entry Transfer Facility
tendering the Old Notes that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal and that the Company may enforce
such agreement against such participant.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE OLD NOTES AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE TENDERING HOLDERS,
BUT THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY
THE EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS
USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK
CITY TIME, ON THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD
BE SENT TO THE COMPANY. See "The Exchange Offer -- Procedures for Tendering"
section in the Prospectus.
<PAGE> 152
2. PARTIAL TENDERS. If less than all of the Old Notes are to be tendered,
the tendering holder(s) should fill in the aggregate principal amount at
maturity of Old Notes to be tendered in the box above entitled "Description of
Old Notes -- Principal Amount of Old Notes Tendered." In the case of a partial
tender of Old Notes evidenced by certificates, as soon as practicable after the
Expiration Date, new certificates for the remainder of the Old Notes that were
evidenced by such holder's old certificates will be sent to such holder, unless
otherwise provided in the appropriate box on this Letter of Transmittal. With
respect to Old Notes tendered by book-entry transfers, appropriate credit to the
account indicated above shall be made pursuant to the procedures for book-entry
transfer. All of the Old Notes delivered to the Exchange Agent will be deemed to
have been tendered unless otherwise indicated.
3. SIGNATURES ON THIS LETTER, BOND POWERS AND ENDORSEMENTS; GUARANTEE OF
SIGNATURES. If this Letter of Transmittal is signed by the registered holder of
the Old Notes tendered hereby, the signature must correspond exactly with the
name of such holder as written on the face of the certificate, without
alteration, or as maintained with the Book-Entry Transfer Facility, as
applicable.
If any tendered Old Notes are owned of record by two or more joint owners,
all such owners must sign this Letter of Transmittal.
When this Letter of Transmittal is signed by the registered holder or
holders of the Old Notes specified herein and tendered hereby, no endorsements
of separate bond powers are required. If, however, the New Notes are to be
issued, or any tendered Old Notes are to be reissued, to a person other than the
registered holder, then separate bond powers are required. Signatures on such
separate bond powers must be guaranteed by an Eligible Institution.
If this Letter of Transmittal or any bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
Signatures on bond powers required by this Instruction 3 must be guaranteed
by a firm which is a member of a registered national securities exchange or a
member of the National Association of Securities Dealers, Inc. or by a
commercial bank or trust company having an office or correspondent in the United
States or by such other Eligible Guarantor Institution within the meaning of
Rule 17Ad-15 under the Exchange Act (each an "Eligible Institution" and
collectively, "Eligible Institutions").
Signatures on this Letter of Transmittal need not be guaranteed by an
Eligible Institution if the Old Notes are tendered (i) by a registered holder of
Old Notes (which term, for purposes of the Exchange Offer, includes any
participant in the Book-Entry Transfer Facility system whose name appears on a
securities position listing as the holder of such Old Notes) who has not
completed the box entitled "Special Issuance Instructions" in this Letter of
Transmittal, or (iii) for the account of an Eligible Institution.
4. SPECIAL ISSUANCE INSTRUCTIONS. If New Notes are to be issued in the
name of a person other than the signatory of this Letter of Transmittal, the
appropriate boxes on this Letter of Transmittal should be completed. Old Notes
not exchanged will be returned (i) by issuing certificates for Old Notes, or,
(ii) if tendered by book-entry transfer, by crediting the account indicated
above maintained at the Book-Entry Transfer Facility, in either case, in an
amount equal to the Old Notes not exchanged.
5. TRANSFER TAXES. Holders who tender their Old Notes for exchange will
not be obligated to pay any transfer taxes in connection therewith, except that
holders who instruct the Company to register New Notes in the name of, or
request that Old Notes not tendered or not accepted in the Exchange Offer be
returned to, a person other than the registered tendering holder will be
responsible for the payment of any applicable transfer tax thereon. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted herewith, the amount of such transfer taxes will be billed directly to
such tendering holder.
6. WAIVER OF CONDITIONS. The Company reserves the right, in its reasonable
judgment, to waive satisfaction of any or all conditions enumerated herein or in
the Prospectus.
7. NO CONDITIONAL TENDERS; IRREGULARITIES. No alternative, conditional,
irregular or contingent tenders will be accepted. All tendering holders of Old
Notes, by execution of this Letter of Transmittal, shall waive the right to
receive notice of the acceptance of their Old Notes for exchange.
<PAGE> 153
The Company will determine, in its sole discretion, all questions as to the
form of documents, validity, eligibility (including time of receipt) and
acceptance for exchange of any tender of Old Notes, which determination shall be
final and binding on all parties. The Company reserves the absolute right to
reject any and all tenders determined by it not to be in proper form or the
acceptance of which, or exchange for, may, in the view of counsel to the
Company, be unlawful. The Company also reserves the right, in its reasonable
judgment, subject to applicable law, to waive any of the conditions of the
Exchange Offer set forth in the Prospectus under "The Exchange
Offer -- Procedures for Tendering" or any conditions or irregularity in any
tender of Old Notes of any particular holder whether or not similar conditions
or irregularities are waived in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including this Letter of Transmittal and the instructions hereto) will be
final and binding. No tender of Old Notes will be deemed to have been validly
made until all irregularities with respect to such tender have been cured or
waived. Neither the Company, any affiliates or assigns of the Company, the
Exchange Agent, nor any other person shall be under any duty to give
notification of any irregularities in tenders or incur any liability for failure
to give such notification.
8. WITHDRAWAL OF TENDERS. Tenders of Old Notes may be withdrawn by
delivery of a written notice to the Exchange Agent, at its address set forth in
"The Exchange Offer -- The Exchange Agent" section of the Prospectus, at any
time prior to 5:00 p.m., New York City time, on the Expiration Date. Any such
notice of withdrawal must (i) identify the Old Notes to be withdrawn, and (ii)
if tendered by book-entry transfer, specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes
and (iii) otherwise comply with the procedures of the Book-Entry Transfer
Facility or for issuance of certificates for such Old Notes, as applicable. Any
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company, in its sole discretion. The
Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry procedures described
above will be credited to an account maintained with the Book-Entry Transfer
Facility for the Old Notes as soon as practicable after such withdrawal.
Certificates for any Old Notes for which certificates have been tendered will be
issued to the undersigned or pursuant to any special instructions. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described under "The Exchange Offer -- Book-Entry Procedures for Tendering Old
Notes" at any time on or prior to the Expiration Date.
9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the
procedure of tendering, as well as requests for additional copies of the
Prospectus and this Letter of Transmittal, may be directed to the Exchange
Agent, at the address and telephone number indicated above.
IMPORTANT TAX INFORMATION
BACKUP WITHHOLDING
In order to avoid backup withholding under current federal income tax law,
a holder of New Notes is generally required to provide the Company (as payor)
with such holder's correct taxpayer identification number ("TIN") on Substitute
Form W-9. If the Company is not provided with the correct taxpayer
identification number, the holder of Old Notes and the holder of New Notes may
also be subject to a $50 penalty imposed by the Internal Revenue Service for
each failure to provide the correct TIN.
Certain holders of New Notes, such as corporations and certain foreign
persons, are not subject to these backup withholding and reporting requirements.
See the attached "Guidelines for Certification of Taxpayer Identification Number
on Substitute Form W-9," for additional guidance as to who is an exempt payee.
If backup withholding applies, the Company is required to withhold 31% of
any payment made to the holder of New Notes or other payee. Backup withholding
is not an additional federal income tax. Rather, the federal income tax
liability of persons subject to backup withholding will be reduced by the amount
of tax withheld. If withholding results in an overpayment of taxes, a refund may
be obtained from the Internal Revenue Service.
<PAGE> 154
Accordingly, to prevent backup withholding on payments that are to be made
with respect to New Notes, each prospective holder of New Notes should provide
the Company, through the Exchange Agent, with either: (i) such prospective
holder's correct TIN by completing the Substitute Form W-9 below, certifying
that the TIN provided on it is correct (or that such prospective holder is
awaiting a TIN) and that (A) such prospective holder has not been notified by
the Internal Revenue Service that he or she is subject to backup withholding as
a result of a failure to report all interest or dividends or (B) the Internal
Revenue Service has notified such prospective holder that he or she is no longer
subject to backup withholding; or (ii) an adequate basis for exemption.
If the prospective holder of New Notes is providing the Company with the
information required to comply with alternative (i) in the previous paragraph,
the prospective holder is required to give the Exchange Agent the TIN (e.g.,
social security number of employer identification number) of the prospective
record owner of New Notes. If New Notes will be held in more than one name or
are not held in the name of the actual owner, consult the attached "Guidelines
for Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional guidance regarding which number to report.
If a prospective holder is relying on an exemption from backup withholding
and is not a foreign person, such holder should indicate their exempt status on
Substitute Form W-9 by writing "EXEMPT" across the face of the Substitute Form
W-9 and providing the basis for the exemption at the bottom of the form. The
signed and dated form should be provided to the Company through the Exchange
Agent. Foreign persons may qualify as exempt holders by submitting to the
Company, through the Exchange Agent, the attached Substitute Form W-8, properly
completed and signed under penalty of perjury (see discussion regarding the
submission of Substitute Form W-8 by foreign persons, below).
AVOIDANCE OF WITHHOLDING WITH RESPECT TO FOREIGN PERSONS
Interest paid to foreign persons can be subject to withholding of up to 30%
of each payment made to the holder of New Notes or other payee unless the
interest paid qualifies as portfolio interest. Unlike backup withholding
described above, if this withholding applies, the amount withheld will be
considered the payment of an additional federal income tax, although a foreign
person may be able to file for a refund of all or a portion of the tax in
certain circumstances.
In the case of "registered obligations," such as New Notes, interest will
qualify as portfolio interest that is not subject to withholding if the Company
receives from the beneficial owner of the obligation a statement, signed by such
person under penalties of perjury, certifying that such owner is not a United
States person (in the case of an individual, this means that he or she is
neither a citizen nor resident of the United States). The statement must also
provide the beneficial owner's (i) name and permanent residence address, in the
case of an individual, (ii) name and principal office address, in the case of a
corporation or partnership, or (iii) name and permanent residence address or
principal office address of the fiduciary, as the case may be, in the case of a
trust or estate. At the option of the Company, the statement may be made on an
Internal Revenue Service Form W-8 or a Substitute Form W-8.
A Substitute Form W-8 will be used in this instance. The Substitute Form
W-8 must be received by the Company in the calendar year in which a payment is
to be made or the preceding two calendar years. Accordingly, a Substitute Form
W-8 received in 1996 can only be relied upon for payments made in 1996, 1997 and
1998; a prospective holder of New Notes who continues to hold New Notes past
calendar year 1998 will be required to file a new Substitute Form W-8 in order
to avoid withholding. In addition, if the information provided in any Substitute
Form W-8 changes, the beneficial owner must so inform the Company within 30 days
of such change.
Any foreign person that wishes to avoid having up to 30% of each interest
payment withheld must properly complete the attached Substitute Form W-8 and
provide it to the Company through the Exchange Agent.
<PAGE> 155
LOGO
<TABLE>
<S> <C> <C>
ALL AMERICAN TELEVISION, INC. ALL AMERICAN COMMUNICATIONS, INC. ALL AMERICAN/FREMANTLE
1325 AVENUE OF THE AMERICAS CORPORATE HEADQUARTERS 57 JAMESTOWN ROAD
NEW YORK, NEW YORK 10019 808 WILSHIRE BOULEVARD LONDON, NW1 7DB
SANTA MONICA, CALIFORNIA 90401 UNITED KINGDOM
</TABLE>
<PAGE> 156
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES BY ANY PERSON IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO ITS
DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information................. i
Incorporation of Certain Documents by
Reference........................... i
Summary............................... 1
Risk Factors.......................... 12
The Exchange Offer.................... 19
The Company........................... 29
Use of Proceeds....................... 29
Capitalization........................ 30
Pro Forma Financial Information....... 31
Selected Financial Data............... 33
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 36
Business.............................. 51
Management............................ 66
Principal Stockholders................ 68
Description of Certain Indebtedness
and Capital Stock................... 70
Description of Exchange Notes......... 73
Certain Federal Income Tax
Considerations...................... 103
Plan of Distribution.................. 105
Legal Matters......................... 105
Independent Auditors.................. 105
Experts............................... 106
Index to Consolidated Financial
Statements.......................... F-1
Appendix A............................ A-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
ALL AMERICAN
COMMUNICATIONS, INC.
$100,000,000
10 7/8% SENIOR SUBORDINATED
NOTES DUE 2001, SERIES B
LOGO
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 157
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the General Corporation Law of Delaware
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he believed to be in or not opposed to the best
interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that, despite the adjudication of liability, such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith that indemnification provided for by Section 145 shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the corporation is empowered to purchase and maintain
insurance on behalf of a director, officer, employee or agent of the corporation
against any liability asserted him or incurred by him in any such capacity or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under Section 145.
Article IV of the Registrant's Bylaws provides, in substance, for the
indemnification of directors and officers of the Registrant to the fullest
extent permitted by Delaware law.
The Registrant refers to the Underwriting Agreement filed as Exhibit 1.1 to
this Registration Statement, which provides for indemnification, under certain
circumstances, of the Registrant, certain of its directors and officers and
persons who control the Registrant against certain liabilities in connection
with this offering, including liabilities under the Securities Act.
The Registrant also refers to the indemnification provisions in the
employment agreements filed as Exhibits 10.1 through 10.6.1 to this Registration
Statement, which provide for the indemnification by the Company of certain
officers and directors of the Registrant against certain liabilities in
connection with this offering, including liabilities under the Securities Act.
See Item 17 of this Registration Statement regarding the opinion of the
Securities and Exchange Commission as to indemnification for liabilities arising
under the Securities Act.
II-1
<PAGE> 158
ITEM 21. EXHIBITS
<TABLE>
<S> <C>
2.1 Agreement dated as of June 30, 1994 as amended and restated as of August 3, 1994 by
and among the Company, Fremantle International, Inc. and The Interpublic Group of
Companies, Inc. (incorporated by reference to Exhibit 99.2 of the Company's Form
8-K/A dated August 3, 1994).
3.1 Restated Certificate of Incorporation of the Registrant filed on February 25, 1991
with the Secretary of State of the State of Delaware (incorporated by reference to
the same numbered Exhibit to the March 1991 Form 10-Q).
3.2 Restated Bylaws of the Registrant dated February 25, 1991 (incorporated by reference
to the same numbered Exhibit to the March 1991 Form 10-Q).
3.3 Certificate of Designations, Preferences and Relative, Participating, Optional or
Other Special Rights of Series A Convertible Preferred Stock of the Company filed on
February 25, 1991 with the Secretary of State of the State of Delaware (incorporated
by reference to the same numbered Exhibit to the March 1991 Form 10-Q).
3.4 Certificate of Amendment to Restated Certificate of Incorporation of the Registrant
filed on March 20, 1992 with the Secretary of State of the State of Delaware
(incorporated by reference to the same numbered Exhibit to the Registrant's
Amendment No. 1 to Form S-1 Registration Statement filed with the Securities and
Exchange Commission on April 3, 1992 (the "Amendment No. 1 to Form S-1")).
3.5 Certificate of the Voting Powers, Designations, Preferences, Rights, Qualifications,
Limitations and Restrictions of the Series B Convertible Preferred Stock of the
Company filed on August 2, 1994 with the Secretary of State of the State of Delaware
(incorporated by reference to Exhibit 3.1 to the Registrants' June 30, 1994 Form
10-Q (the "June 30, 1994 Form 10-Q").
4.1 Specimen Certificate for Common Stock (incorporated by reference to the same
numbered Exhibit to the Amendment No. 1 to Form S-1).
4.2 1994 Stock Incentive Plan (incorporated by reference to the same numbered Exhibit to
the June 30, 1994 Form 10-Q).
4.3 Purchase Agreement, dated October 4, 1996, by and between All American Communica-
tions, Inc. and Goldman, Sachs & Co. (incorporated by reference to the same numbered
Exhibit to the Registrant's October 22, 1996 Form 8-K (the "October , 1996 Form
8-K")).
4.4 Registration Rights Agreement, dated as of October 11, 1996, by and among All
American Communications, Inc., Goldman, Sachs & Co. and Chase Securities Inc.
(incorporated by reference to the same numbered Exhibit to the October 22, 1996 Form
8-K).
4.5 Indenture, dated as of October 11, 1996, by and between All American Communications,
Inc. and U.S. Trust Company of California, N.A. and Form of Qualified Institutional
Buyer Note, Institutional Accredited Investor Note and Regulation S Temporary Global
Note attached thereto as Exhibits (incorporated by reference to the same numbered
Exhibit to the October 22, 1996 Form 8-K).
5.1 Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP regarding the validity of
Exchange Notes.
8.1 Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP regarding certain tax
matters.
9.1 Shareholders Voting Agreement dated August 3, 1994 between The Interpublic Group of
Companies, Inc. the Company and certain of the Companies shareholders (incorporated
by reference to the same numbered Exhibit to the June 30, 1994 Form 10-Q).
9.2 Shareholders Agreement dated as of February 25, 1991 between the Company, Anthony J.
Scotti, Benjamin J. Scotti, Thomas Bradshaw, Myron Roth, Sydney D. Vinnedge, George
Back and Joseph E. Kovacs (incorporated by reference to the same numbered Exhibit to
the December 31, 1990 Form 10-K).
10.1 Employment Agreement dated as of February 25, 1991 between All American Communica-
tions, Inc. and Anthony J. Scotti (incorporated by reference to the same numbered
Exhibit to the December 31, 1990 Form 10-K).
</TABLE>
II-2
<PAGE> 159
<TABLE>
<S> <C>
10.1.1 Amendment to Employment Agreement dated as of February 25, 1991 between All American
Communications, Inc. and Anthony J. Scotti (incorporated by reference to the same numbered
Exhibit to the Registrant's Form S-1 Registration Statement filed with the Securities and
Exchange Commission on January 27, 1992 as thereafter amended and declared effective on May 7,
1992 (the "1992 Form S-1")).
10.1.2 Second Amendment to Employment Agreement dated as of February 25, 1991 between All American
Communications, Inc., and Anthony J. Scotti (incorporated by reference to the same numbered
Exhibit to the December 31, 1994 Form 10-K).
10.1.3 Third Amendment dated May 1, 1995 to Employment Agreement dated as of February 25, 1991
between All American Communications, Inc. and Anthony J. Scotti (incorporated by reference to
the same numbered Exhibit to the December 31, 1994 Form 10-K).
10.1.4 Fourth Amendment dated February 26, 1996 to Employment Agreement dated as of February 25, 1991
between All American Communications, Inc. and Anthony J. Scotti (incorporated by reference to
Exhibit 10.1.4 to the Registrant's March 31, 1996 Form 10-Q (the "March 31, 1996 Form 10-Q")).
10.2 Employment Agreement dated as of February 26, 1991 between All American Communications, Inc.
and Myron Roth (incorporated by reference to the same numbered Exhibit to the December 31,
1990 Form 10-K).
10.2.1 Amendment to Employment Agreement dated as of February 26, 1991 between All American
Communications, Inc. and Myron Roth (incorporated by reference to the same numbered Exhibit to
the 1992 Form S-1).
10.3 Employment Agreement dated as of February 12, 1996 between All American Communications, Inc.
and Thomas Bradshaw (incorporated by reference to Exhibit 10.3.2 to the March 31, 1996 Form
10-Q).
10.3.1 Employment Agreement dated as of February 25, 1991 between All American Communications, Inc.
and Thomas Bradshaw (incorporated by reference to Exhibit 10.3 to the Company's December 31,
1995 Form 10-K (the "December 31, 1995 Form 10-K").
10.3.2 Amendment to Employment Agreement dated as of February 25, 1991 between All American
Communications, Inc. and Thomas Bradshaw (incorporated by reference to Exhibit 10.3.1 to the
December 31, 1995 Form 10-K).
10.4 Employment Agreement dated as of February 12, 1996 between All American Communications, Inc.
and Benjamin J. Scotti (incorporated by reference to Exhibit 10.4.2 to the March 31, 1996 Form
10-Q).
10.4.1 Employment Agreement dated as of February 25, 1991 between All American Communications, Inc.
and Benjamin J. Scotti (incorporated by reference to Exhibit 10.4 to the December 31, 1995
Form 10-K).
10.4.2 Amendment to Employment Agreement dated as of February 25, 1991 between All American
Communications, Inc. and Benjamin J. Scotti (incorporated by reference to Exhibit 10.4.1 to
the December 31, 1995 Form 10-K).
10.5 Employment Agreement dated as of February 25, 1991 between All American Communications, Inc.
and Sydney Vinnedge (incorporated by reference to the same numbered Exhibit to the December
31, 1990 Form 10-K).
10.5.1 Amendment to Employment Agreement dated as of February 25, 1991 between All American
Communications, Inc. and Sydney Vinnedge (incorporated by reference to the same numbered
Exhibit to the 1992 Form S-1).
10.5.2 Second Amendment to Employment Agreement dated as of January 7, 1992 between All American
Communications, Inc. and Sydney Vinnedge (incorporated by reference to the same numbered
Exhibit to the Amendment No. 1 to 1992 Form S-1).
10.6 Employment Agreement, dated as of July 1, 1980, between All American Television, Inc. and
George Back (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on
Form 10-K for the fiscal quarter ended June 30, 1990 (the "June 1990 Form 10-K").
10.6.1 Second Amendment to Employment Agreement dated January 7, 1992 between All American Commu-
nications, Inc. and George Back (incorporated by reference to the same numbered Exhibit to the
Amendment No. 1 to Form S-1).
</TABLE>
II-3
<PAGE> 160
<TABLE>
<S> <C>
10.7 Shared Facilities and Services Agreement dated as of August 2, 1994 by and between All
American Communications, Inc. and Fremantle International, Inc. (incorporated by reference to
Exhibit 10.10 to the December 31, 1994 Form 10-K).
10.8 Registration Rights Agreement dated as of August 3, 1994 by and between All American
Communications, Inc. and the Interpublic Group of Companies, Inc. (incorporated by reference
to Exhibit 10.11 to the December 31, 1994 Form 10-K).
10.9 Option Letter, dated August 3, 1994, from The Interpublic Group of Companies, Inc., and
Fremantle International, Inc. to All American Communications, Inc. (incorporated by reference
to Exhibit 10.12 to the December 31, 1994 Form 10-K).
10.10 Exclusive License Agreement dated as of December 15, 1994 between The Baywatch Nights
Production Company and Taurus Film & Co. (confidential treatment granted) (incorporated by
reference to Exhibit 10.13 to the December 31, 1994 Form 10-K).
10.11 Letter Agreement dated as of June 10, 1994 to that certain Outline of Terms dated May 10, 1991
as amended by that certain letter dated February 16, 1993 by and between The Baywatch Nights
Production Company, on the one hand, and Michael Berk, Douglas Schwartz and Gregory Bonnan, on
the other hands (incorporated by reference to Exhibit 10.2 to the September 30, 1994 Form
10-Q).
10.12 Standard Industrial Lease Agreement dated October 31, 1994 between All American Communica-
tions, Inc. and Wilshire Lincoln Properties (incorporated by reference to Exhibit 10.3 to the
September 30, 1994 Form 10-Q).
10.13 Secured Promissory Note dated October 19, 1994 between All American Communications, Inc. and
Thomas Bradshaw (incorporated by reference to Exhibit 10.4 to the September 30, 1994 Form
10-Q).
10.14 Second Modification of Warrant and Warrant Agreement dated as of November 5, 1993 between All
American Communications, Inc. and Jefferson Capital Group, Ltd. (incorporated by reference to
Exhibit 10.35.2 to the 1994 Form S-1).
10.15 Office Building Lease dated December 13, 1991 for 5301 Beethoven Street, Los Angeles,
California between All American Communications, Inc. and Harvey Capital Corp. (incorporated by
reference to Exhibit 10.6 to the 1992 Form S-1).
10.16 Amendment No. 1 dated April 30, 1992, Amendment No. 2 dated September 14, 1993 and Amendment
No. 3 dated March 14, 1994, in each case, to the Office Building Lease dated December 13, 1991
for 5301 Beethoven Street, Los Angeles, California (incorporated by reference to Exhibit
10.40.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993)
Amendment No. 4 dated October 11, 1994 and Amendment No. 5 dated November 6, 1994 to the
Office and Building Lease dated December 13, 1991 for 5301 Beethoven Street, Los Angeles,
California (incorporated by reference to Exhibit 10.19 to the December 31, 1994 Form 10-K).
10.16.1 Industrial-Commercial Lease dated May 28, 1991 (and amendment) for 5433 Beethoven Street, Los
Angeles, California between The Baywatch Production Company and Jerome Cohen, Trustee of the
Fannie Delman 1982 Trust et. al. (incorporated by reference to Exhibit 10.19 to the December
31, 1994 Form S-1).
10.17 Industrial-Commercial Lease dated May 28, 1991 (and amendment) for 5433 Beethoven Street, Los
Angeles, California between The Baywatch Production Company and Jerome Cohen, Trustee of the
Fannie Delman 1983 Trust et al. (incorporated by reference to Exhibit 10.41 to the 1992 Form
S-1).
10.18 Modification of Agreement of Sublease, dated as of February 8, 1993, for 875 Third Avenue, New
York, New York between Grey Advertising, Inc. and LBS Communications, Inc. (incorporated by
reference to Exhibit number 10.62 to the December 31, 1992 Form 10-K).
10.19 Fiscal Agency Agreement dated September 29, 1993, between the Company and BankAmerica National
Trust Company, as Fiscal Agent and Form of Note attached thereto as Exhibit A (incorporated by
reference to the Exhibit 10.12 to the 1994 Form S-1).
10.19.1 Fiscal Agency Agreement dated October 6, 1993, between the Company and BankAmerica National
Trust Company as Fiscal Agent and Form of Note attached thereto as Exhibit A (incorporated by
reference to the Exhibit 10.20 to the December 30, 1996 Form 10-K).
</TABLE>
II-4
<PAGE> 161
<TABLE>
<S> <C>
10.20 Lease, dated as of December 7, 1993, for 1325 Avenue of the Americas between All American
Television, Inc. and 1325 Limited Partnership (incorporated by reference to the Exhibit 10.13
to the 1994 Form S-1).
10.21 Asset Purchase Agreement dated as of October 6, 1995 between and among Mark Goodson
Productions, L.P., The Child's Play Company, Mark Goodson Productions, LLC, The Interpublic
Group of Companies, Inc., the Estate of Mark Goodson and All American Communications, Inc.
(incorporated by reference to the Company's Current Report on Form 8-K dated October 12, 1995
(the "Form 8-K"))
10.22 License Agreement between Mark Goodson Productions, LLC and All American Goodson, Inc. dated
as of October 6, 1995 (incorporated by reference to the Company's Current Report on Form 8-K
dated October 12, 1995 (the "Form 8-K")).
10.23 Network License Agreement between All American Goodson, Inc. and Interpublic Game Shows, Inc.,
dated as of October 6, 1995 (incorporated by reference to the Company's Current Report on Form
8-K dated October 12, 1995 (the "Form 8-K")).
10.24 Operating Agreement between All American Communications, Inc. and All American Goodson, Inc.
dated as of October 6, 1995 (incorporated by reference to the Company's Current Report on Form
8-K dated October 12, 1995 (the "Form 8-K")).
10.25 Amended and Restated Operating Agreement among All American Communications, Inc., All American
Goodson, Inc., The Interpublic Group of Companies, Inc. and Interpublic Game Shows, Inc.,
dated as of October 6, 1995 (incorporated by reference to the Company's Current Report on Form
8-K dated October 12, 1995 (the "Form 8-K")).
10.26 Amended and Restated Credit, Security, Guaranty and Pledge Agreement, dated as of April 13,
1995 as Amended and Restated as of October 23, 1996, among (i) All American Communications,
Inc., a Delaware corporation ("Parent"), (ii) All American Netherlands B.V., a company
organized under the laws of the Netherlands ("NBV"), (iii) the Guarantors named herein, (iv)
the Lenders referred to herein, (v) The Chase Manhattan Bank (formerly known as Chemical
Bank), a New York banking corporation, as Agent (the "Agent") for the Lenders and (vi) The
Chase Manhattan Bank (formerly known as Chemical Bank) as Fronting Bank (the "Fronting Bank")
(incorporated by reference to the Company's Current Report on Form 8-K dated November 6, 1996
(the "November 6 8-K")).
10.27 Option Agreement dated as of October 6, 1995 by and between All American Communications, Inc.,
All American Goodson, Inc., The Interpublic Group of Companies, Inc. and Infoplan
International, Inc. (incorporated by reference to the same numbered Exhibit to the Amendment
No. 2 to Form S-2).
10.28 Network Production Agreement between Interpublic Game Shows, Inc. and TPIR LLC, dated as of
October 6, 1995 (incorporated by reference to Exhibit 10.4 to the Form 8-K).
10.29 Agreement dated as of May 1, 1995 between USA NETWORKS and All American Television
(incorporated by reference to the same numbered Exhibit to the Amendment No. 2 to Form S-2).
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 dated July 19, 1996,
(incorporated by reference to the same numbered Exhibit to the Company's June 30, 1996 Form
10-Q (the "June 30, 1996 Form 10-Q")).
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges.*
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included in Exhibits 5.1 and 8.1).
24.1 Power of Attorney (included on page II-8).*
25.1 Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture Act of 1939 of
U.S. Trust Company of California, N.A.*
99 All American Communications, Inc., press release, dated October 11, 1996 (incorporated by
reference to the October 22, 1996 Form 8-K.)
</TABLE>
- ---------------
* Previously filed.
II-5
<PAGE> 162
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under Securities Act of
1933, as amended (the "Securities Act"), may be permitted as to directors,
officers, and controlling persons of the Registrant pursuant to the provisions
described in Item 15 or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suite or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
A. To file during any period in which offers or sales are being made,
a post-effective amendment to the registration statement: (1) to include
any prospectus required by Section 10(a)(3) of the Securities Act; (2) to
reflect in the prospectus any fact or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement; (3) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
B. That, for the purpose of determining liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of securities at that time shall be deemed to be the initial bona
fide offering thereof.
C. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
D. That: (1) for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus as
filed as part of the registration statement in reliance upon rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of the registration statement as of the time it was declared
effective, and (2) for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 163
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Amendment No. 1 to
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the city of Santa Monica, State of California, on November
11, 1996.
ALL AMERICAN COMMUNICATIONS, INC.,
By: /s/ ANTHONY J. SCOTTI
-----------------------------------
Anthony J. Scotti
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<S> <C> <C>
/s/ ANTHONY J. SCOTTI Chairman of the Board November 11, 1996
- ----------------------------------------------- Chief Executive Officer
Anthony J. Scotti (principal executive officer)
* Director, Chief Financial November 11, 1996
- ----------------------------------------------- Officer and Treasurer
Thomas Bradshaw (principal financial
officer and principal
accounting officer)
* Director November 11, 1996
- -----------------------------------------------
Eugene P. Beard
* Director November 11, 1996
- -----------------------------------------------
Lawrence E. Lamattina
* Director November 11, 1996
- -----------------------------------------------
Gordon Luce
* Director November 11, 1996
- -----------------------------------------------
R. Timothy O'Donnell
* Director November 11, 1996
- -----------------------------------------------
David A. Mount
* Director November 11, 1996
- -----------------------------------------------
Myron I. Roth
* Director November 11, 1996
- -----------------------------------------------
Benjamin J. Scotti
* Director November 11, 1996
- -----------------------------------------------
Sydney D. Vinnedge
*By: /s/ ANTHONY J. SCOTTI
- -----------------------------------------------
Anthony J. Scotti
Attorney-in-fact
</TABLE>
II-7
<PAGE> 164
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------------ -----
<S> <C> <C>
2.1 Agreement dated as of June 30, 1994 as amended and restated as of August 3,
1994 by and among the Company, Fremantle International, Inc. and The
Interpublic Group of Companies, Inc. (incorporated by reference to Exhibit
99.2 of the Company's Form 8-K/A dated August 3, 1994). ......................
3.1 Restated Certificate of Incorporation of the Registrant filed on February 25,
1991 with the Secretary of State of the State of Delaware (incorporated by
reference to the same numbered Exhibit to the March 1991 Form 10-Q). .........
3.2 Restated Bylaws of the Registrant dated February 25, 1991 (incorporated by
reference to the same numbered Exhibit to the March 1991 Form 10-Q). .........
3.3 Certificate of Designations, Preferences and Relative, Participating, Optional
or Other Special Rights of Series A Convertible Preferred Stock of the Company
filed on February 25, 1991 with the Secretary of State of the State of
Delaware (incorporated by reference to the same numbered Exhibit to the March
1991 Form 10-Q). .............................................................
3.4 Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant filed on March 20, 1992 with the Secretary of State of the State of
Delaware (incorporated by reference to the same numbered Exhibit to the
Registrant's Amendment No. 1 to Form S-1 Registration Statement filed with the
Securities and Exchange Commission on April 3, 1992 (the "Amendment No. 1 to
Form S-1")). .................................................................
3.5 Certificate of the Voting Powers, Designations, Preferences, Rights,
Qualifications, Limitations and Restrictions of the Series B Convertible
Preferred Stock of the Company filed on August 2, 1994 with the Secretary of
State of the State of Delaware (incorporated by reference to Exhibit 3.1 to
the Registrants' June 30, 1994 Form 10-Q (the "June 30, 1994 Form 10-Q"). ....
4.1 Specimen Certificate for Common Stock (incorporated by reference to the same
numbered Exhibit to the Amendment No. 1 to Form S-1). ........................
4.2 1994 Stock Incentive Plan (incorporated by reference to the same numbered
Exhibit to the June 30, 1994 Form 10-Q). .....................................
4.3 Purchase Agreement, dated October 4, 1996, by and between All American
Communications, Inc. and Goldman, Sachs & Co. (incorporated by reference to
the same numbered Exhibit to the Registrant's October 22, 1996 Form 8-K (the
"October , 1996 Form 8-K")). ...............................................
4.4 Registration Rights Agreement, dated as of October 11, 1996, by and among All
American Communications, Inc., Goldman, Sachs & Co. and Chase Securities Inc.
(incorporated by reference to the same numbered Exhibit to the October 22,
1996 Form 8-K). ..............................................................
4.5 Indenture, dated as of October 11, 1996, by and between All American
Communications, Inc. and U.S. Trust Company of California, N.A. and Form of
Qualified Institutional Buyer Note, Institutional Accredited Investor Note and
Regulation S Temporary Global Note attached thereto as Exhibits (incorporated
by reference to the same numbered Exhibit to the October 22, 1996 Form
8-K). ........................................................................
5.1 Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP regarding the validity
of the Exchange Notes. .......................................................
8.1 Opinion of "Kaye, Scholer, Fierman, Hays & Handler, LLP" regarding certain tax
matters. .....................................................................
9.1 Shareholders Voting Agreement dated August 3, 1994 between The Interpublic
Group of Companies, Inc. the Company and certain of the Companies shareholders
(incorporated by reference to the same numbered Exhibit to the June 30, 1994
Form 10-Q). ..................................................................
</TABLE>
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------------ -----
<S> <C> <C>
9.2 Shareholders Agreement dated as of February 25, 1991 between the Company,
Anthony J. Scotti, Benjamin J. Scotti, Thomas Bradshaw, Myron Roth, Sydney D.
Vinnedge, George Back and Joseph E. Kovacs (incorporated by reference to the
same numbered Exhibit to the December 31, 1990 Form 10-K). ...................
10.1 Employment Agreement dated as of February 25, 1991 between All American
Communications, Inc. and Anthony J. Scotti (incorporated by reference to the
same numbered Exhibit to the December 31, 1990 Form 10-K). ...................
10.1.1 Amendment to Employment Agreement dated as of February 25, 1991 between All
American Communications, Inc. and Anthony J. Scotti (incorporated by reference
to the same numbered Exhibit to the Registrant's Form S-1 Registration
Statement filed with the Securities and Exchange Commission on January 27,
1992 as thereafter amended and declared effective on May 7, 1992 (the "1992
Form S-1")). .................................................................
10.1.2 Second Amendment to Employment Agreement dated as of February 25, 1991 between
All American Communications, Inc., and Anthony J. Scotti (incorporated by
reference to the same numbered Exhibit to the December 31, 1994 Form 10-K). ..
10.1.3 Third Amendment dated May 1, 1995 to Employment Agreement dated as of February
25, 1991 between All American Communications, Inc. and Anthony J. Scotti
(incorporated by reference to the same numbered Exhibit to the December 31,
1994 Form 10-K). .............................................................
10.1.4 Fourth Amendment dated February 26, 1996 to Employment Agreement dated as of
February 25, 1991 between All American Communications, Inc. and Anthony J.
Scotti (incorporated by reference to Exhibit 10.1.4 to the Registrant's March
31, 1996 Form 10-Q (the "March 31, 1996 Form 10-Q")). ........................
10.2 Employment Agreement dated as of February 26, 1991 between All American
Communications, Inc. and Myron Roth (incorporated by reference to the same
numbered Exhibit to the December 31, 1990 Form 10-K). ........................
10.2.1 Amendment to Employment Agreement dated as of February 26, 1991 between All
American Communications, Inc. and Myron Roth (incorporated by reference to the
same numbered Exhibit to the 1992 Form S-1). .................................
10.3 Employment Agreement dated as of February 12, 1996 between All American
Communications, Inc. and Thomas Bradshaw (incorporated by reference to Exhibit
10.3.2 to the March 31, 1996 Form 10-Q). .....................................
10.3.1 Employment Agreement dated as of February 25, 1991 between All American
Communications, Inc. and Thomas Bradshaw (incorporated by reference to Exhibit
10.3 to the Company's December 31, 1995 Form 10-K (the "December 31, 1995 Form
10-K"). ......................................................................
10.3.2 Amendment to Employment Agreement dated as of February 25, 1991 between All
American Communications, Inc. and Thomas Bradshaw (incorporated by reference
to Exhibit 10.3.1 to the December 31, 1995 Form 10-K). .......................
10.4 Employment Agreement dated as of February 12, 1996 between All American
Communications, Inc. and Benjamin J. Scotti (incorporated by reference to
Exhibit 10.4.2 to the March 31, 1996 Form 10-Q). .............................
10.4.1 Employment Agreement dated as of February 25, 1991 between All American
Communications, Inc. and Benjamin J. Scotti (incorporated by reference to
Exhibit 10.4 to the December 31, 1995 Form 10-K). ............................
10.4.2 Amendment to Employment Agreement dated as of February 25, 1991 between All
American Communications, Inc. and Benjamin J. Scotti (incorporated by
reference to Exhibit 10.4.1 to the December 31, 1995 Form 10-K). .............
10.5 Employment Agreement dated as of February 25, 1991 between All American
Communications, Inc. and Sydney Vinnedge (incorporated by reference to the
same numbered Exhibit to the December 31, 1990 Form 10-K). ...................
</TABLE>
<PAGE> 166
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------------ -----
<S> <C> <C>
10.5.1 Amendment to Employment Agreement dated as of February 25, 1991 between All
American Communications, Inc. and Sydney Vinnedge (incorporated by reference
to the same numbered Exhibit to the 1992 Form S-1). ..........................
10.5.2 Second Amendment to Employment Agreement dated as of January 7, 1992 between
All American Communications, Inc. and Sydney Vinnedge (incorporated by
reference to the same numbered Exhibit to the Amendment No. 1 to 1992 Form S-
1). ..........................................................................
10.6 Employment Agreement, dated as of July 1, 1980, between All American
Television, Inc. and George Back (incorporated by reference to Exhibit 10.1 of
the Company's Quarterly Report on Form 10-K for the fiscal quarter ended June
30, 1990 (the "June 1990 Form 10-K"). ........................................
10.6.1 Second Amendment to Employment Agreement dated January 7, 1992 between All
American Communications, Inc. and George Back (incorporated by reference to
the same numbered Exhibit to the Amendment No. 1 to Form S-1). ...............
10.7 Shared Facilities and Services Agreement dated as of August 2, 1994 by and
between All American Communications, Inc. and Fremantle International, Inc.
(incorporated by reference to Exhibit 10.10 to the December 31, 1994 Form
10-K). .......................................................................
10.8 Registration Rights Agreement dated as of August 3, 1994 by and between All
American Communications, Inc. and the Interpublic Group of Companies, Inc.
(incorporated by reference to Exhibit 10.11 to the December 31, 1994 Form
10-K). .......................................................................
10.9 Option Letter, dated August 3, 1994, from The Interpublic Group of Companies,
Inc., and Fremantle International, Inc. to All American Communications, Inc.
(incorporated by reference to Exhibit 10.12 to the December 31, 1994 Form
10-K). .......................................................................
10.10 Exclusive License Agreement dated as of December 15, 1994 between The Baywatch
Nights Production Company and Taurus Film & Co. (confidential treatment
granted) (incorporated by reference to Exhibit 10.13 to the December 31, 1994
Form 10-K). ..................................................................
10.11 Letter Agreement dated as of June 10, 1994 to that certain Outline of Terms
dated May 10, 1991 as amended by that certain letter dated February 16, 1993
by and between The Baywatch Nights Production Company, on the one hand, and
Michael Berk, Douglas Schwartz and Gregory Bonnan, on the other hands
(incorporated by reference to Exhibit 10.2 to the September 30, 1994 Form
10-Q). .......................................................................
10.12 Standard Industrial Lease Agreement dated October 31, 1994 between All
American Communications, Inc. and Wilshire Lincoln Properties (incorporated by
reference to Exhibit 10.3 to the September 30, 1994 Form 10-Q). ..............
10.13 Secured Promissory Note dated October 19, 1994 between All American
Communications, Inc. and Thomas Bradshaw (incorporated by reference to Exhibit
10.4 to the September 30, 1994 Form 10-Q). ...................................
10.14 Second Modification of Warrant and Warrant Agreement dated as of November 5,
1993 between All American Communications, Inc. and Jefferson Capital Group,
Ltd. (incorporated by reference to Exhibit 10.35.2 to the 1994 Form S-1). ....
10.15 Office Building Lease dated December 13, 1991 for 5301 Beethoven Street, Los
Angeles, California between All American Communications, Inc. and Harvey
Capital Corp. (incorporated by reference to Exhibit 10.6 to the 1992 Form
S-1). ........................................................................
10.16 Amendment No. 1 dated April 30, 1992, Amendment No. 2 dated September 14, 1993
and Amendment No. 3 dated March 14, 1994, in each case, to the Office Building
Lease dated December 13, 1991 for 5301 Beethoven Street, Los Angeles,
California (incorporated by reference to Exhibit 10.40.1 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993) Amendment No.
4 dated October 11, 1994 and Amendment No. 5 dated November 6, 1994 to the
Office and Building Lease dated December 13, 1991 for 5301 Beethoven Street,
Los Angeles, California (incorporated by reference to Exhibit 10.19 to the
December 31, 1994 Form 10-K). ................................................
</TABLE>
<PAGE> 167
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------------ -----
<S> <C> <C>
10.16.1 Industrial-Commercial Lease dated May 28, 1991 (and amendment) for 5433
Beethoven Street, Los Angeles, California between The Baywatch Production
Company and Jerome Cohen, Trustee of the Fannie Delman 1982 Trust et. al.
(incorporated by reference to Exhibit 10.19 to the December 31, 1994 Form
S-1). ........................................................................
10.17 Industrial-Commercial Lease dated May 28, 1991 (and amendment) for 5433
Beethoven Street, Los Angeles, California between The Baywatch Production
Company and Jerome Cohen, Trustee of the Fannie Delman 1983 Trust et al.
(incorporated by reference to Exhibit 10.41 to the 1992 Form S-1). ...........
10.18 Modification of Agreement of Sublease, dated as of February 8, 1993, for 875
Third Avenue, New York, New York between Grey Advertising, Inc. and LBS
Communications, Inc. (incorporated by reference to Exhibit number 10.62 to the
December 31, 1992 Form 10-K). ................................................
10.19 Fiscal Agency Agreement dated September 29, 1993, between the Company and
BankAmerica National Trust Company, as Fiscal Agent and Form of Note attached
thereto as Exhibit A (incorporated by reference to the Exhibit 10.12 to the
1994 Form S-1). ..............................................................
10.19.1 Fiscal Agency Agreement dated October 6, 1993, between the Company and
BankAmerica National Trust Company as Fiscal Agent and Form of Note attached
thereto as Exhibit A (incorporated by reference to the Exhibit 10.20 to the
December 30, 1996 Form 10-K). ................................................
10.20 Lease, dated as of December 7, 1993, for 1325 Avenue of the Americas between
All American Television, Inc. and 1325 Limited Partnership (incorporated by
reference to the Exhibit 10.13 to the 1994 Form S-1). ........................
10.21 Asset Purchase Agreement dated as of October 6, 1995 between and among Mark
Goodson Productions, L.P., The Child's Play Company, Mark Goodson Productions,
LLC, The Interpublic Group of Companies, Inc., the Estate of Mark Goodson and
All American Communications, Inc. (incorporated by reference to the Company's
Current Report on Form 8-K dated October 12, 1995 (the "Form 8-K")) ..........
10.22 License Agreement between Mark Goodson Productions, LLC and All American
Goodson, Inc. dated as of October 6, 1995 (incorporated by reference to the
Company's Current Report on Form 8-K dated October 12, 1995 (the "Form
8-K")). ......................................................................
10.23 Network License Agreement between All American Goodson, Inc. and Interpublic
Game Shows, Inc., dated as of October 6, 1995 (incorporated by reference to
the Company's Current Report on Form 8-K dated October 12, 1995 (the "Form
8-K")). ......................................................................
10.24 Operating Agreement between All American Communications, Inc. and All American
Goodson, Inc. dated as of October 6, 1995 (incorporated by reference to the
Company's Current Report on Form 8-K dated October 12, 1995 (the "Form
8-K")). ......................................................................
10.25 Amended and Restated Operating Agreement among All American Communications,
Inc., All American Goodson, Inc., The Interpublic Group of Companies, Inc. and
Interpublic Game Shows, Inc., dated as of October 6, 1995 (incorporated by
reference to the Company's Current Report on Form 8-K dated October 12, 1995
(the "Form 8-K")). ...........................................................
</TABLE>
<PAGE> 168
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------------ -----
<S> <C> <C>
10.26 Amended and Restated Credit, Security, Guaranty and Pledge Agreement, dated as
of April 13, 1995 as Amended and Restated as of October 23, 1996, among (i)
All American Communications, Inc., a Delaware corporation ("Parent"), (ii) All
American Netherlands B.V., a company organized under the laws of the
Netherlands ("NBV"), (iii) the Guarantors named herein, (iv) the Lenders
referred to herein, (v) The Chase Manhattan Bank (formerly known as Chemical
Bank), a New York banking corporation, as Agent (the "Agent") for the Lenders
and (vi) The Chase Manhattan Bank (formerly known as Chemical Bank) as
Fronting Bank (the "Fronting Bank") (incorporated by reference to the
Company's Current Report on Form 8-K dated November 6, 1996 (the "November 6
8-K")). ......................................................................
10.27 Option Agreement dated as of October 6, 1995 by and between All American
Communications, Inc., All American Goodson, Inc., The Interpublic Group of
Companies, Inc. and Infoplan International, Inc. (incorporated by reference to
the same numbered Exhibit to the Amendment No. 2 to Form S-2). ...............
10.28 Network Production Agreement between Interpublic Game Shows, Inc. and TPIR
LLC, dated as of October 6, 1995 (incorporated by reference to Exhibit 10.4 to
the Form 8-K). ...............................................................
10.29 Agreement dated as of May 1, 1995 between USA NETWORKS and All American
Television (incorporated by reference to the same numbered Exhibit to the
Amendment No. 2 to Form S-2). ................................................
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 dated July 19, 1996, (incorporated by reference
to the same numbered Exhibit to the Company's June 30, 1996 Form 10-Q (the
"June 30, 1996 Form 10-Q")). .................................................
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges.* .............
23.1 Consent of Ernst & Young LLP. ................................................
23.2 Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included in Exhibits
5.1 and 8.1). ................................................................
24.1 Power of Attorney (included on page II-8).* ..................................
25.1 Statement of Eligibility and Qualification (Form T-1) under the Trust
Indenture Act of 1939 of U.S. Trust Company of California, N.A.* .............
99 All American Communications, Inc., press release, dated October 11, 1996
(incorporated by reference to the October 22, 1996 Form 8-K). ................
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
KAYE, SCHOLER, FIERMAN, HAYS & HANDLER, LLP
[LETTERHEAD]
EXHIBIT 5.1
November 11, 1996
All American Communications, Inc.
808 Wilshire Boulevard
Santa Monica, CA 90401
Re: All American Communications, Inc., Exchange Offer
of 10-7/8% Senior Subordinated Notes due 2001
Ladies and Gentlemen:
We have acted as special counsel to All American Communications, Inc.
(the "Company") in connection with the offer by the Company contained in its
Registration Statement on Form S-4, as amended (the "Registration Statement"),
filed pursuant to the Securities Act of 1933, as amended (the "Act") to
exchange $1,000 principal amount of its 10-7/8% Senior Subordinated Notes due
2001, Series B (the "Series B Notes") for each outstanding $1,000 principal
amount of its 10-7/8% Senior Subordinated Notes due 2001, Series A (the
"Original Notes"), of which an aggregate of $100,000,000 principal amount is
outstanding. The Series B Notes are to be issued pursuant to an Indenture dated
as of October 11, 1996 between the Company and U.S. Trust Company of
California, N.A., as Trustee (the "Indenture").
In that connection, we have reviewed the Restated Certificate of
Incorporation of the Company, as amended, its By-Laws, resolutions of its Board
of Directors and such other documents and records as we have deemed
appropriate. We have assumed the genuineness of all signatures, the
authenticity of all documents and records submitted to us as originals, the
conformity to authentic original documents and records of all documents and
records submitted to us as copies, and the truthfulness of all statements of
fact contained therein. We have also assumed the due execution and delivery of
the Indenture and the due authentication of the Original Notes by duly
authorized officers of the Trustee.
<PAGE> 2
KAYE, SCHOLER, FIERMAN, HAYS & HANDLER, LLP
On the basis of such review and having regard to legal considerations
that we deemed relevant, it is our opinion that the Series B Notes have been
duly authorized, and upon issuance and delivery therefor in the manner
contemplated by the Registration Statement, will be validly binding obligations
of the Company, subject to bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and other laws of general applicability relating to or
affecting creditors' rights and to general equitable principles (whether
considered in a proceeding in equity or an action at law).
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the prospectus included therein. In giving this opinion, we
do not thereby admit that we are within the category of persons whose consent
is required under Section 7 of the Act or the rules and regulations of the
Securities and Exchange Commission.
Very truly yours,
Kaye, Scholer, Fierman, Hays & Handler, LLP
<PAGE> 1
[KAYE, SCHOLER, FIERMAN, HAYS & HANDLER, LLP LH]
EXHIBIT 8.1
November 11, 1996
All American Communications, Inc.
808 Wilshire Boulevard
Santa Monica, CA 90401
Re: All American Communications, Inc., Exchange Offer of 10 7/8% Senior
Subordinated Notes due 2001
Ladies and Gentlemen:
We have acted as special counsel to All American Communications, Inc., in
connection with the offer by the Company contained in its Registration Statement
on Form S-4, as amended (the "Registration Statement"), filed pursuant to the
Securities Act of 1993, as amended (the "Act"), to exchange $1,000 principal
amount of its 10- 7/8% Senior Subordinated Notes due 2001, Series B of the
Company (the "Series B Notes") for each outstanding $1,000 principal amount of
its 10- 7/8% Senior Subordinated Notes due 2001, Series A (the "Original
Notes"), of which an aggregate of $100,000,000 principal amount is outstanding.
You have requested our opinion as to certain United States federal income
tax consequences of the Exchange Offer. In preparing our opinion, we have
reviewed and relied upon the Registration Statement and such other documents as
we deemed necessary.
On the basis of the foregoing, it is our opinion that the exchange of the
Original Notes for the Series B Notes pursuant to the Exchange Offer will not be
treated as an "exchange" under Section 1001 of the Internal Revenue Code of
1986, as amended (the "Code"), and therefore is not a taxable transaction for
such purposes.
The opinion set forth above is based upon the applicable provisions of the
Code, the Treasury Regulations promulgated or proposed thereunder, positions of
the Internal Revenue Service (the "IRS") contained in published revenue rulings,
revenue procedures, and announcements, judicial decisions, and other applicable
authorities, all as they exist as of this date and all of which are subject to
change at any time, prospectively or retroactively. Future legislation, Treasury
Regulations, administrative pronouncements or court decisions may significantly
change the law and materially affect the conclusion expressed herein. No tax
rulings have been or will be sought from the IRS with respect to any of the
matters discussed herein. Unlike a ruling from the IRS, opinions of counsel are
not binding on the IRS. Hence, no assurance can be given that the opinion stated
in this letter will not be successfully challenged by the IRS. We express no
opinion concerning any United States federal income tax consequences of the
Exchange Offer except as expressly set forth above. This opinion speaks only as
of the date hereof and we assume no obligation to advise you of changes in the
law or facts that occur after the date of this opinion.
This letter may be relied upon by you only in connection with Registration
Statement and may not be used or relied upon by you for any other purpose or by
any other person for any purpose whatsoever without, in each instance, our prior
written consent. We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement.
Very truly yours,
KAYE, SCHOLER, FIERMAN,
HAYS & HANDLER, LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of all American
Communications, Inc. for the registration of $100,000,000 of its 10 7/8% Senior
Subordinated Notes due 2001 and to the incorporation by reference therein of our
report dated March 4, 1996, with respect to the consolidated financial
statements and schedule of All American Communications, Inc., and to our report
dated March 28, 1996, with respect to the combined financial statements of the
combined business of Mark Goodson Productions, L.P. and The Child's Play
Company, both of which are included in All American Communications, Inc.'s
Annual Report (Form 10-K) for the year ended December 31, 1995, filed with the
Securities and Exchange Commission.
Ernst & Young LLP
Los Angeles, California
November 8, 1996
