<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION FROM TO
COMMISSION FILE NUMBER 0-14333
ALL AMERICAN COMMUNICATIONS, INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-3803222
(STATE OF OR OTHER (I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
808 WILSHIRE BOULEVARD, 90401-1810
SANTA MONICA, CALIFORNIA
(ZIP CODE)
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)
</TABLE>
(310) 656-1100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes ___ No
As of November 8, 1996, there were 5,800,957 shares of $.0001 par value
Common Stock, and 5,191,800 shares of $.0001 par value Common Stock, Class B
outstanding.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
Cash and cash equivalents.......................................... $ 22,559 $ 13,126
Restricted cash.................................................... 4,096 6,968
Trade receivables, less allowances of $4,063 and $2,980 at
September 30, 1996 and December 31, 1995, respectively........... 81,925 103,896
Unbilled receivables, less imputed interest of $1,334 and $2,354 at
September 30, 1996 and December 31, 1995, respectively........... 6,199 11,685
Inventory, net..................................................... 890 1,018
Advances to recording artists, net................................. 437 544
Television program costs, less accumulated amortization of $288,344
and $228,942 at September 30, 1996 and December 31, 1995,
respectively..................................................... 91,160 74,644
Property and equipment, less accumulated depreciation and
amortization..................................................... 3,999 4,526
Investment in unconsolidated affiliate............................. -- 29,130
Goodwill, less accumulated amortization of $7,001 and $3,384 at
September 30, 1996 and December 31, 1995, respectively........... 106,190 49,403
Other.............................................................. 5,440 6,642
-------- --------
Total assets............................................. $ 322,895 $301,582
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable................................................. 14,281 14,293
Accrued expenses................................................. 28,732 19,823
Royalties payable................................................ 7,575 4,435
Deferred revenues................................................ 608 277
Due to producers................................................. 14,362 26,271
Participations payable........................................... 30,314 30,979
Notes payable.................................................... 148,067 134,982
Deferred taxes payable........................................... 2,242 2,242
-------- --------
Total liabilities........................................ 246,181 233,302
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares, none issued........ -- --
Common stock, voting, $.0001 par value, authorized 20,000,000
shares, issued 5,876,173 and 5,662,052 in 1996 and 1995,
respectively (including treasury shares)...................... 1 1
Common stock, Class B non-voting, $.0001 par value, authorized
20,000,000 shares, issued 5,720,000 in 1996 and 1995.......... 1 1
Additional paid-in capital....................................... 62,407 61,522
Common stock in treasury, at cost, 30,000 shares in 1996 and
1995.......................................................... (135) (135)
Retained earnings................................................ 15,258 6,939
Currency translation adjustment.................................. (818) (48)
-------- --------
Total stockholders' equity............................... 76,714 68,280
-------- --------
Total liabilities and stockholders' equity............... $ 322,895 $301,582
======== ========
</TABLE>
- ---------------
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
2
<PAGE> 3
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
Revenues:
Television........................................................ $ 63,011 $ 76,818
Recorded music and merchandising.................................. 3,630 8,332
---------- ----------
66,641 85,150
---------- ----------
Expenses:
Television........................................................ 44,219 60,672
Recorded music and merchandising.................................. 2,597 6,438
Selling, general and administrative............................... 6,070 6,000
Goodwill amortization............................................. 1,173 536
---------- ----------
54,059 73,646
---------- ----------
Operating income.................................................... 12,582 11,504
Other income (expense):
Interest income................................................... 306 218
Interest expense, net of amounts capitalized...................... (2,317) (2,132)
Other............................................................. (60) 114
---------- ----------
(2,071) (1,800)
---------- ----------
Income before provision for income taxes............................ 10,511 9,704
Provision for income taxes.......................................... 4,415 4,076
---------- ----------
Net income.......................................................... $ 6,096 $ 5,628
========== ==========
Net income per share -- Primary:
Net income per share.............................................. $ 0.51 $ 0.68
========== ==========
Weighted average number of common shares and common share
equivalents outstanding........................................ 12,203,000 8,296,000
========== ==========
Net income per share -- Fully diluted:
Net income per share.............................................. $ 0.42 $ 0.51
========== ==========
Weighted average number of common shares and common share
equivalents outstanding........................................ 15,370,000 11,811,000
========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
<PAGE> 4
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues:
Television...................................................... $ 134,684 $ 144,637
Recorded music and merchandising................................ 19,445 15,540
------------- -------------
154,129 160,177
------------- -------------
Expenses:
Television...................................................... 95,684 114,980
Recorded music and merchandising................................ 14,148 12,101
Selling, general and administrative............................. 19,363 18,094
Goodwill amortization........................................... 3,359 1,606
------------- -------------
132,554 146,781
------------- -------------
Operating income.................................................. 21,575 13,396
Other income (expense):
Interest income................................................. 1,105 262
Interest expense, net of amounts capitalized.................... (8,250) (6,904)
Other........................................................... (86) 241
------------- -------------
(7,231) (6,401)
------------- -------------
Income before provision for income taxes.......................... 14,344 6,995
Provision for income taxes........................................ 6,025 2,938
------------- -------------
Net income........................................................ $ 8,319 $ 4,057
============= =============
Net income per share - Primary:
Net income per share............................................ $ 0.70 $ 0.50
============= =============
Weighted average number of common shares and common share
equivalents outstanding...................................... 11,959,000 8,083,000
============= =============
Net income per share - Fully diluted:
Net income per share............................................ $ 0.61 $ 0.44
============= =============
Weighted average number of common shares and common share
equivalents outstanding...................................... 15,314,000 11,811,000
============= =============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE> 5
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................................... $ 8,319 $ 4,057
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation and amortization of property, equipment and
goodwill........................................................ 3,970 2,011
Amortization of television program costs........................... 58,838 76,394
Increase in allowance for doubtful accounts........................ 524 70
Increase in allowance for sales returns............................ 500 22
Increase (decrease) in make goods reserve.......................... 59 (1,290)
Increase (decrease) in imputed interest discount................... (1,020) 2,128
Changes in operating assets and liabilities:
Restricted cash................................................. 2,628 137
Trade receivables, unbilled receivables, inventory and advances
to recording artists........................................... 29,949 (38,875)
Additions to television program costs........................... (74,119) (83,982)
Deferred income tax benefit..................................... -- 235
Accounts payable, accrued expenses and royalties payable........ 9,998 13,537
Due to producers and participations payable..................... (10,212) 10,047
Deferred revenues............................................... 331 (250)
Other assets.................................................... 52 (419)
---------- ----------
Net cash provided (used) by operating activities........... 29,817 (16,178)
---------- ----------
INVESTING ACTIVITIES
Purchase of property and equipment, net.............................. (1,193) (509)
Purchase of remaining 50% interest in Mark Goodson Productions,
LLC................................................................ (10,558) --
Contingent earn out from purchase of Mark Goodson Productions, LLC... (6,146) --
Purchase of Orbis Entertainment, Inc................................. (2,500) --
---------- ----------
Net cash used in investing activities...................... (20,397) (509)
---------- ----------
FINANCING ACTIVITIES
Payments on stock subscriptions receivable........................... -- 85
Proceeds from borrowings............................................. 125,737 140,505
Repayments of borrowings............................................. (115,297) (120,548)
Restricted cash held for repayment of borrowings..................... 244 5,390
Repurchase of 6 1/2% Convertible Subordinated Notes Due 2003......... (9,901) --
---------- ----------
Net cash provided by financing activities.................. 783 25,432
---------- ----------
Effect of exchange rate changes on cash.............................. (770) 222
---------- ----------
Increase in cash..................................................... 9,433 8,967
Cash and cash equivalents at beginning of period..................... 13,126 1,662
---------- ----------
Cash and cash equivalents at end of period........................... $ 22,559 $ 10,629
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized............................ $ 7,627 $ 4,697
========== ==========
Income taxes.................................................... $ 4,005 $ 245
========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
<PAGE> 6
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business
All American Communications, Inc. ("AAC") and its wholly-owned
subsidiaries, All American Television, Inc. ("AATV"), All American Television
Production, Inc, ("AATP"), All American Entertainment Industries,
Inc. -- formerly Scotti Brothers Entertainment Industries, Inc. ("AAEI" or
"SBEI"), All American Fremantle International, Inc. ("AAFII"), All American FDF
Holdings, Inc. ("AAFDF"), All American Goodson, Inc. ("AAG"), All American
Orbis, Inc. ("AAO") and All American Consumer Marketing Group, Inc. ("AACM")
(and together with their respective direct or indirect wholly-owned subsidiaries
(including Mark Goodson Productions, LLC) collectively, the "Company" or "All
American") produce, distribute and market television programs and recorded music
both domestically and internationally.
The Company's primary source of revenues is from the production,
distribution and promotion of television programs. The Company has operations
throughout the world, with activities located principally in the United States
and Europe.
Intangible Assets
It is the Company's policy to evaluate the recovery of its intangible
assets (principally goodwill) and to recognize impairment if it is probable that
the recorded amounts are not recoverable from future undiscounted cash flow or
if there is an event or change in circumstances which establish the existence of
impairment indicators.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
AAC and its subsidiaries; all significant intercompany balances and transactions
have been eliminated.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and the
applicable rules of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results for the
three and nine month periods ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996. These financial statements should be read in conjunction with the
consolidated financial statements and related footnotes included in the
Company's latest Annual Report on Form 10-K.
Recognition of Revenues
Minimum guaranteed revenue from domestic cash license agreements typically
are recognized when the license period begins and the program becomes available
pursuant to the terms of the license agreement. 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
program and the advertising time has been sold pursuant to non-cancelable
agreements, provided that the program is available for its first broadcast.
Foreign minimum guaranteed amounts or outright fees are recorded as revenues and
contracts receivable on the date of the license agreement, unless the program is
not yet available for exhibition. Revenues under domestic and foreign
6
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ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
production agreements are recognized as completed episodes are delivered.
Deferred revenues consist principally of advance payments received on television
contracts for which the program materials are not yet available for broadcast or
exploitation.
The portion of recognized revenue to be shared with the producers and
owners of the licensed program material (participations payable and due to
producers) is accrued as the revenue is recognized.
In certain instances, the Company guarantees viewer ratings for its
syndicated programs. Applicable revenue is recorded net of estimated shortfalls,
which are settled by giving either additional advertising time (make goods) or
cash refunds to the advertiser. The Company provides for the full amount of the
estimated shortfall.
Domestic revenues from recorded music are recognized as units are shipped
to customers. The Company provides for estimated future returns of recorded
music product at the time when the products are initially sold. These provisions
are based upon historical experience. Actual returns are charged against the
reserve. Foreign distribution of recorded music is effected through a
distributor in exchange for guaranteed nonrefundable advances against future
royalties. Nonrefundable guaranties from foreign sales are recognized as product
is delivered to the Company's foreign distributor.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less and investments in money market funds
to be cash equivalents.
Restricted Cash
Pursuant to the Company's lending agreement, prior to its amendment and
restatement and subject to certain exceptions for working capital, substantially
all cash collected was required to be paid into accounts maintained by The Chase
Manhattan Bank, formerly known as Chemical Bank ("Chase Manhattan Bank"), and
applied to the repayment of the outstanding borrowings as specified in the
lending agreement. Such lending agreement has been amended and restated as of
October 23, 1996. The amended and restated lending agreement does not require
the repayment of outstanding balances from cash collections to the extent the
Company has a borrowing base sufficient to cover outstanding balances and no
event of default exists (see Note 3). The cash held for repayment is included as
restricted cash.
Also included as restricted cash are amounts transferred to the Company's
fiscal agent in connection with interest payments due on the Company's 6 1/2%
Convertible Subordinated Notes Due 2003 (the "Convertible Notes") on the first
of October and April of each year. Effective October 28, 1996, the Company
called the Convertible Notes for redemption (see Note 3).
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.
7
<PAGE> 8
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
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.
Television Program Costs
Television program costs consist of direct production costs, production
overhead, capitalized interest and certain exploitation costs, less accumulated
amortization. Such costs are stated at the lower of unamortized cost or
estimated net realizable value. Selling costs and other distribution costs which
are not recoverable from the producers' share of revenues are charged to expense
as incurred.
Television program costs, and estimated total costs of participations and
residuals, are amortized under the individual film forecast method in the ratio
that current period revenue recognized bears to management's estimate of
remaining gross revenue to be recognized. The use of estimates which may
ultimately differ from actual results could materially affect the Company's
consolidated financial statements. Such estimates, which are subject to change
based on a comparison of actual to estimated information, are re-evaluated
quarterly in connection with a review of the Company's inventory of television
product, and estimated losses, if any, are provided for in full.
Artist Compensation Cost
Royalties earned by artists from sales of recorded music are charged to
expense as the related revenues are recognized. Advances to artists against
future royalties are recorded as assets if the Company estimates the amount of
the advances will be recoverable from future royalties to be earned by the
artist, based upon the past performance and current popularity of the artist.
Such advances are applied against subsequent royalties earned by the artist.
Depreciation and Amortization
Property and equipment are carried at cost, and depreciation is computed
using accelerated and straight line methods over the estimated useful lives of
the assets; thirty years for the Company owned building and ranging from three
to ten years for the remaining assets. Leasehold improvements are amortized over
the lesser of the term of the lease or the estimated useful lives of the
improvements.
Goodwill is amortized on a straight-line basis over periods ranging from 10
to 25 years (principally 25 years).
Income Taxes
The Company records its income tax provision in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109").
8
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ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
Deferred income taxes under the liability method arise primarily from the
differences in the timing of the recognition of certain television and recorded
music revenue and expense items for book and tax purposes.
Stock Based Compensation
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees," and intends to
continue to do so.
Share Information; Earnings Per Share
Earnings per share represents the per share income and is computed based on
the weighted average common shares outstanding and dilutive common stock
equivalents determined using the modified treasury stock method. The fully
diluted per share computations for 1996 and 1995 have been calculated giving
consideration to $20,694,000 principal value of the Convertible Notes
repurchased and considered retired through November 8, 1996 (see Note 3).
Foreign Currency
The operations of all foreign entities are principally measured in local
currencies. Assets and liabilities are translated into United States ("U.S.")
dollars using exchange rates in effect at the end of each reporting period.
Revenues and expenses are translated at the average exchange rates prevailing
during the period. Adjustments resulting from translating the financial
statements of foreign entities into U.S. dollars are recorded as a separate
component of stockholders' equity.
2. ACQUISITIONS
Orbis Entertainment Company
As of July 19, 1996, the Company consummated a stock purchase agreement
("Orbis Agreement") with Orbis Entertainment Company, Inc. ("Orbis"), a
television production company, and the shareholders of Orbis (the "Orbis
Acquisition") to purchase all of the outstanding shares of Orbis for an initial
purchase price of $2.5 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.
Mark Goodson Productions
In October 1995, the Company and The Interpublic Group of Companies
("Interpublic") each acquired an undivided 50% interest in substantially all of
the assets (excluding assets relating to the lottery business) and assumed
certain specified liabilities (the "MG Acquisition") of Mark Goodson
Productions, L.P. and The Child's Play Company (collectively, the "Sellers").
The Sellers were not affiliated with the Company. The purchase price paid by the
Company for its undivided 50% interest of the Sellers' net assets acquired
("Mark Goodson Productions") consisted of a cash payment of $25,000,000,
transaction costs of $785,000, and an as yet undetermined contingent purchase
price. The contingent purchase price, payable to the Sellers, is to be earned
and paid based on the income (as defined) resulting from a domestic television
network contract and the actual exploitation of certain other domestic
television rights. The contingent purchase price, in total, is limited to
$48,500,000 if paid (whether earned or not) during the first five years
following October 6, 1995.
9
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ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
Otherwise, the amount of contingent purchase price is unlimited to the extent it
is earned within the first ten years following October 6, 1995. At the end of
ten years, no additional contingent purchase price accrues.
In January 1996, the Company acquired from Interpublic the remaining 50%
interest of Mark Goodson Productions 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 plus accrued interest
thereon at a rate of 7% per annum from January 1, 1996; and (iii) the issuance
of a subordinated note in the amount of $2,800,000, yielding interest at the
rate of 7% per annum from January 1, 1996, and representing Interpublic's 50%
share of the LLC's earnings through December 31, 1995, as defined, with $687,000
due and paid 30 days from the Closing Date and the balance due 30 days after
maturity of a tranche of the Former Credit Facility. The remaining amounts due
($12,500,000 plus accrued interest and $2,113,000 plus accrued interest) were
paid October 28, 1996 with the initial borrowings under the Restructured Credit
Facility (see Note 3).
As a result of acquiring Interpublic's 50% interest in Mark Goodson
Productions, the Company is responsible for the full share of the contingent
purchase price, to the extent earned by the Sellers. Such contingent purchase
price, which may total $48,500,000 by the fifth anniversary of the MG
Acquisition, will be treated as an increase in goodwill and will be amortized
coterminously with the original 25 year period. Through September 30, 1996, the
Company has recorded contingent purchase price totaling $7,081,000 (excluding
Interpublic's share through December 31, 1995 of $935,000). As of September 30,
1996, goodwill, including the total initial purchase price of $53,757,000
(including deal costs of $957,000 and before allocation of $2,934,000 to
identifiable net assets) and contingent purchase price totals $57,904,000
(before accumulated amortization of $1,944,000). The Company has accounted for
the Mark Goodson Acquisition under the purchase accounting method effective
January 1, 1996.
The pro forma unaudited results from operations of the Company for the nine
months ended September 30, 1995 (giving effect to the Mark Goodson Acquisition
as of January 1, 1995) follows:
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30, 1995
--------------------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNT)
<S> <C>
Revenues................................... $171,151
Operating income........................... $ 25,996
Net income................................. $ 9,625
Net income per share, primary.............. $ 1.19
Net income per share, fully diluted........ $ 0.92
</TABLE>
The pro forma information presented above is prepared for comparative
purposes only and does not purport to be indicative of what would have occurred
if the Mark Goodson Acquisition had been made at January 1, 1995, or of the
results which may occur in the future.
10
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ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
3. NOTES PAYABLE
Notes payable and amounts due to banks are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
(IN THOUSANDS)
Notes payable to banks............................. $ 87,810 $ 77,352
Other notes payable................................ 14,595 --
Convertible subordinated notes, 6 1/2%............. 45,662 57,630
-------- --------
$ 148,067 $134,982
======== ========
</TABLE>
Restructured Credit Facility
On October 23, 1996, the Company amended and restated its senior secured
credit facility (the "Restructured Credit Facility") with a syndicate of lenders
led by The Chase Manhattan Bank. The amendment and restatement increased the
Company's borrowing capacity up to $155,000,000, subject to borrowing base
limitations (as defined in the Restructured Credit Facility) and extended the
maturity to a four year term. Prior to amending and restating its credit
facility agreement, using a portion of the proceeds from the Senior Notes (as
defined below) issuance, the Company paid down amounts outstanding under the
then existing bank facilities (the "Former Credit Facility"). In connection with
the amendment and restatement, the Company initially utilized $30,000,000 of the
Restructured Credit Facility: (i) to pay Interpublic $15,448,000 (including
accrued interest -- see Note 2); (ii) to repurchase ($10,000,000) a portion of
certain outstanding Convertible Notes (as defined below); (iii) to pay closing
fees of $2,500,000 in connection with the amendment and restatement and (iv)
$2,052,000 for production and general corporate purposes. Borrowings under the
Restructured Credit Facility bear interest, at the Company's option, 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 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 had outstanding borrowings of $30,000,000 under the Restructured
Credit Facility with $103,489,000 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 test, a leverage test and
an interest coverage ratio test. 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 BV (a foreign subsidiary presently being
formed by the Company), subject to borrowing base availability. Substantially
all of the Company's assets (other than real property) are pledged under the
Restructured Credit Facility Agreement.
11
<PAGE> 12
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
Senior Subordinated Notes
On October 11, 1996, the Company issued $100,000,000 of 10 7/8% Senior,
Subordinated Notes due 2001 ("Senior Notes") in a private placement offering to
Goldman, Sachs & Co. and Chase Securities, Inc. (the "Initial Purchasers"). The
Senior Notes are unsecured obligations of AAC which mature October 15, 2001 and
bear interest at 10 7/8% per annum, payable semiannually each April 15 and
October 15 (commencing April 15, 1997). Net proceeds, net of issuance costs and
fees, from the issuance of the Senior Notes totalled approximately $96,000,000.
The Senior Notes were issued pursuant to an Indenture between the Company and
U.S. Trust Company of California, N.A. (the "Indenture"). The Senior Notes are
subordinated in right of payment to the prior payment in full of all Senior
Indebtedness (as defined in the Indenture) of the Company.
The Indenture imposes certain covenants and conditions upon the Company,
including but not limited to restrictions or limits on making certain payments
or investments, limits on certain transactions, limits on liens, limits on
merger, consolidation and sale of assets, limits on senior subordinated debt,
limits on business activities and change of control provisions. 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 $100,000,000 in principal amount
of the Senior Notes at a redemption price of 110 7/8% of the principal amount
thereof, plus accrued and unpaid interest, 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 $35,000,000 in principal amount of the Senior Notes at a redemption
price of 110 7/8% of the principal amount thereof, plus accrued and unpaid
interest, with the net proceeds of a public offering of common stock of the
Company, provided that at least $65,000,000 in aggregate principal amount of the
Senior 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. Following a
Change of Control (as defined in the Indenture), the Company will be required to
offer to purchase all or any part of the Senior Notes tendered at the option of
the holders thereof at 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest.
In connection with the private placement offering, the Company entered into
a Registration Rights Agreement ("Registration Rights Agreement") with the
Initial Purchasers, granting certain exchange registration rights to the holders
of the Original Notes (as defined in the Registration Rights Agreement). On
October 28, 1996 the Company filed a Form S-4 Registration Statement pursuant to
its obligations under the Registration Rights Agreement. On November 12, 1996
the Company amended such Form S-4, which registration statement, as amended, was
declared effective by the Securities and Exchange Commission on such date.
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
$60,000,000. Through September 30, 1996 Convertible Notes with principal amounts
totaling $3,788,000 have been converted into the Company's Common Stock. Through
November 8, 1996, the Company has repurchased and effectively retired
12
<PAGE> 13
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
$20,694,000 principal amount of the Convertible Notes. On October 25, 1996, the
Company notified the Fiscal Agent of the Convertible Notes of its intention to
redeem the Convertible Notes in full on November 27, 1996 at 104.643% of par. As
of November 8, 1996, there were Convertible Notes of $35,518,000 principal
amount outstanding. The maximum payment, including redemption premium and
accrued interest, expected to be made on November 27, 1996 is approximately
$37,534,000, subject to reduction for Convertible Note holders who convert their
holdings to Common Stock at the rate of 86.957 shares per $1,000 principal
amount of Convertible Notes prior to November 27, 1996.
4. TELEVISION PROGRAM COSTS
Costs for television programs are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Released, less accumulated amortization.............. $89,746 $ 73,902
In process and development........................... 1,414 742
------- -------
$91,160 $ 74,644
======= =======
</TABLE>
The Company capitalizes interest, using the Company's effective borrowing
rate, and overhead on television programs in production. Included in television
program costs for the nine months ended September 30, 1996 and 1995 are
capitalized interest of $741,000 and $1,031,000, respectively and capitalized
overhead of $3,856,000 and $2,197,000, respectively.
5. COMMITMENTS AND CONTINGENCIES
The Company has reached an agreement with Atlantis Releasing B.V.
("Atlantis") whereby Atlantis will produce a minimum of 13 and a maximum of 22
one-hour live action episodes of a new series entitled The Adventures of Sinbad
for the 1996/1997 broadcast season. In consideration for the Company providing
the majority (approximately $695,000 per episode) of the approximately $850,000
per episode production budget, the Company will retain exclusive distribution
rights to 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
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, such
right to produce the series reverts to the Company. As of November 4, 1996, the
Company has spent approximately $8,800,000 towards the production of 15 episodes
of The Adventures of Sinbad for the 1996/1997 broadcast season. The total
commitment of up to approximately $15,290,000 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
sublicensees; and (iii) working capital, pending receipt of license fees.
Through November 4, 1996, The Adventures of Sinbad has 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 $8,200,000, payable in installments
based on the commencement of production and delivery of each episode of the
series.
The Company has commenced production on the 22 episodes of Baywatch for the
1996/1997 broadcast season. As of November 4, 1996, the Company has spent
approximately $19,500,000 towards the production of 22 episodes for the
1996/1997 broadcast season. The total production budget of approximately
$22,000,000 for the 1996/1997 broadcast season is expected to be funded
primarily through a combination of: (i) borrowings under the Restructured Credit
Facility; (ii) cash payments by The Fremantle Corporation (an
13
<PAGE> 14
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
unaffiliated company); and (iii) working capital, pending receipt of license
fees. Through November 4, 1996, Baywatch has 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 $14,750,000 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 $8,600,000
and completed principal photography on nine episodes of Baywatch Nights for the
1996/1997 broadcast season. The total production budget of approximately
$20,000,000 for the 1996/1997 broadcast season is expected to be funded
primarily through a combination of: (i) borrowings under the Restructured Credit
Facility; (ii) cash payments received from international sub-licensees; and
(iii) working capital, pending receipt of license fees. Through November 4,
1996, Baywatch Nights has 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 $10,700,000 payable in
installments based on the commencement of production and delivery of each
episode of the series.
The Company presently has network or cable commitments in connection with
the production by the Company of two movies-of-the-week totaling $4,755,000. The
preliminary budgets in connection with such commitments total $6,350,000. The
total production budgets are expected to be funded primarily through a
combination of: (i) network or cable license fees; (ii) cash payments from
international licensees; and (iii) pending receipt of license fees, working
capital. There is no assurance that the Company will be successful in its
efforts to fully fund these productions through a combination of the network or
cable license fees and international sales.
On December 12, 1994, Credit Lyonnais Bank Nederland N.V. ("CLBN") made a
demand upon SBEI under a Guarantee, dated July 29, 1986 (the "SBEI Guarantee"),
for payment of approximately $3,742,000 plus interest accrued or costs incurred
since November 11, 1994 under a Loan and Security Assignment, dated July 29,
1986, between CLBN and various former subsidiaries of SBEI relating to the
discontinued motion picture operations of the Company. In a letter dated
December 22, 1994, SBEI rejected the foregoing demand based upon, among other
reasons, the following: (i) that in a January 1993 agreement, CLBN agreed to
release all liens and any interests in any property or assets of SBEI, which in
effect released SBEI from any obligations under the SBEI Guarantee; (ii) the
loan purportedly guaranteed has been repaid; and (iii) SBEI is not a party to
and was not bound by a material amendment to the abovereferenced Loan and
Security Assignment. The Company and CLBN have reached a settlement agreement in
principal resolving all of their various disputes, although there is no
assurance that such settlement will be consummated. While the Company believes
that SBEI has good and meritorious defenses with respect to the SBEI Guarantee
and any related claims by CLBN, and that the ultimate outcome of this matter
will not result in a material adverse effect on the Company's financial
condition or results of operations, there is no assurance that the Company
ultimately will prevail.
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. Moreover, 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. Goodson is
14
<PAGE> 15
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
seeking a declaration of rights, an accounting of all monies received by Grundy
under licenses and all other appropriate relief.
In contrast, Grundy alleges in its counterclaims that Goodson, in order to
avoid the Agreement's provisions granting to Grundy a right of first refusal
following expiration of the Agreement and the right to complete licenses entered
into prior to such expiration, wrongfully attempted to terminate the Agreement
by (i) misapplying its provisions permitting Goodson a right of approval over
Grundy's licenses; (ii) unreasonably withholding approval (if required) with
respect to Grundy's proposed transactions; and (iii) refusing to negotiate an
extension of the Agreement in good faith as required by the Agreement. Grundy
seeks an award of damages in an unstated amount; an award extending and renewing
the Agreement; an order compelling Goodson to perform under the Agreement and to
account to Grundy (including but not limited to the payment to Grundy of
AUS$84,666); a declaration of tortious interference by Goodson with Grundy's
contracts and prospective economic relations and an award of damages therefore
in an unstated amount; a declaration that Goodson owes Grundy compensation in
quantum meruit to the extent that Goodson has been unjustly enriched; and for
such other relief as may be proper. Goodson intends to answer the counterclaims,
denying Grundy's allegations and asserting Goodson's own affirmative defenses.
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 certain other legal proceedings which are routine
and incidental to the business. The Company believes that the results of such
litigation will not have a material adverse effect on the Company's financial
condition or results of operations.
Minimum commitments for advances to recording artists at November 11, 1996
amounted to approximately $365,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a diversified entertainment company which produces,
distributes and markets television programs and recorded music both domestically
and internationally.
The television industry may be broadly divided into three major segments:
(i) production, involving the development, financing and making of television
shows; (ii) distribution, involving the promotion and exploitation of completed
television shows; and (iii) broadcast, involving the domestic or international
airing of programming over network affiliated stations, independent stations and
cable or satellite television.
The U.S. broadcast television market is served principally by network
affiliated stations, independent stations and cable and satellite television
operators. Broadcasters telecast network programming, including off-network
programming (reruns) (in the case of network affiliates); self and/or locally
produced programming; and off-network programming or first-run programming from
independent producers or "syndicators" such as the Company. In general terms, a
syndicator is a company that sells programming to independent television
stations and network affiliates. Programming acquired by stations on a
syndicated basis is acquired either for a cash license fee or in exchange for a
certain amount of commercial advertising time within the program which is
retained by the syndicator for sale to advertisers ("barter"), or for a
combination of cash and barter. The Company domestically distributes programming
for television produced by the Company or unrelated third parties in the
first-run and rerun syndication markets. In general, the Company receives
revenues from program license fees paid by broadcasters and/or by selling
advertising time for programs distributed on a barter basis.
15
<PAGE> 16
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
Barter syndication is the process whereby a syndicator obtains clearances
from television stations to broadcast a program in certain agreed upon time
periods, retains advertising time in the program in lieu of receiving a cash
licensing fee, and sells such retained advertising time for its own account to
national advertisers at rates based on projected ratings and viewer
demographics. From time to time, certain stations may obtain cash consideration
from the Company in addition to programming in exchange for advertising time
and/or a commitment for a particular time period. By placing the program with
television stations throughout the United States, the syndicator creates an "ad
hoc" network of stations that have agreed to carry the program. The creation of
this ad hoc network, typically representing a penetration of at least 70% of
total U.S. television households (calculated by means of a generally recognized
system as measured by Nielsen Media Ratings), enables the syndicator to sell the
commercial inventory through advertising agencies to sponsors desiring national
coverage (including but not limited to Procter & Gamble, Bristol Myers-Squibb,
MCI, Smith-Kline Beecham, Kraft/General Foods, Mars, Nestle and RJR Nabisco).
The rates charged by a syndicator for advertising time are typically lower than
the rates charged by the networks for similar demographics since the networks'
coverage of the market is generally greater.
The international broadcast television market is served principally by
independent stations and cable and satellite television operators. The Company
produces and distributes "local" content programming internationally through its
wholly owned subsidiaries, All American Fremantle International, Inc. ("AAFII"),
principally using game and variety show formats acquired as part of the Mark
Goodson Acquisition or from third parties and All American Orbis, Inc. ("AAO")
using talk show formats. License agreements for international programming are
typically entered into prior to the commencement of production and generally
provide for license fees sufficient to cover the costs of production. While the
Company has international production facilities in several countries, AAFII's
production activities occur primarily in Germany and the United Kingdom.
The international distribution and exploitation of Baywatch Nights
(worldwide), 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 AAFII. In
addition to producing and distributing Company owned product, AAFII provides
television related producer-for-hire and distributor services for a fee.
In most cases, the Company's domestic and international distribution
revenues are based on a percentage of the net revenues derived from cash license
fees and/or the sale of advertiser sponsorships. The Company normally advances
all distribution costs for items such as advertising, promotion, and tape
shipping and duplication and recovers such expenses out of program revenues. The
Company's fee for distribution is generally between 15% and 35% of net revenues,
and its fee for advertising sales representation is generally between 10% and
15% of net revenues. However, each fee arrangement is separately negotiated and
may be subject to variation. Amounts remaining in excess of the Company's
distribution fees and recoupable expenses (including a portion of the amounts
derived from the sale of advertising time) are either remitted in full to the
producer from whom the Company obtained the distribution rights, or, if the
Company has a profit participation in the program, are shared between the
Company and the producer in accordance with a pre-determined allocation. In some
instances, the Company will make an advance payment to the producer to cover
production costs or will guarantee the producer certain minimum license fees.
Such advance payments may reduce the Company's distribution fee or result in a
loss if sufficient revenues are not generated. For the 1996/1997 broadcast
season, the Company has made certain guarantees to the producers with respect to
The Adventures of Sinbad. See "-- Liquidity and Capital Resources."
A small number of programs and musical recordings have historically
accounted for a significant portion of the Company's revenues in any given
fiscal period. In addition, the Company's television distribution
16
<PAGE> 17
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
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 nine 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.
Except for the historical information contained herein, certain of the
matters discussed in this quarterly report are "forward-looking statements" as
defined in the Private Securities Litigation Reform Act of 1995, which involve
certain risks and uncertainties, which could cause actual results to differ
materially from those discussed herein, including but not limited to the
Company's dependence on a limited number of projects, risks of expansion,
acquisitions and new programming, dependence on key personnel, fluctuation in
results of operations, and risks relating to the nature of the entertainment
industry, government regulation, competition and control by management. See the
relevant discussions elsewhere herein, and the Company's periodic reports and
other documents filed with the Securities and Exchange Commission, including the
Company's registration statements on Form S-4, as amended on November 12, 1996
and on Form S-2 as amended on December 11, 1995, for a further discussion of
these and other risks and uncertainties applicable to the Company's business.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
The following unaudited table sets forth the percentage relationship to
total revenues of certain items included in the Company's unaudited condensed
consolidated statements of operations for the three months ended September 30,
1996 and 1995:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
----- -----
<S> <C> <C>
Revenues:
Television............................................. 94.6% 90.2%
Recorded music and merchandising....................... 5.4 9.8
----- -----
Total.......................................... 100.0 100.0
Operating expenses:
Television............................................. 66.4 71.3
Recorded music and merchandising....................... 3.9 7.6
Selling, general and administrative.................... 9.1 7.0
Goodwill amortization.................................. 1.7 0.6
----- -----
Total.......................................... 81.1 86.5
Other expense, principally interest...................... 3.1 2.1
----- -----
Income before income taxes............................... 15.8% 11.4%
===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
Revenues. The Company's total revenues decreased by approximately $18.5
million or 22% to $66.6 million for the three months ended September 30, 1996,
from $85.1 million for the three months ended September 30, 1995. Revenues from
television operations decreased to $63.0 million (95% of total revenues) for the
three months ended September 30, 1996, from $76.8 million for the three months
ended September 30,
17
<PAGE> 18
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
1995 (90% of total revenues). Revenues from recorded music and merchandising
decreased to $3.6 million (5% of total revenues) for the three months ended
September 30, 1996, from $8.3 million (10% of total revenues) for the three
months ended September 30, 1995.
The decrease in revenues from television operations of $13.8 million or 18%
for the three months ended September 30, 1996, as compared with the three months
ended September 30, 1995 was due primarily to reductions in Baywatch revenues,
principally due to an expected decline in Baywatch strip syndication revenues
recognized in the three months ended September 30, 1996 of $9.1 million as
compared with $26.7 million for the three months ended September 30, 1995, and
other television distribution revenues. These decreases were partially offset by
the recognition of revenues from Mark Goodson Productions.
Revenues from Baywatch decreased by $15.5 million or 39% to $24.6 million
for the three months ended September 30, 1996 from $40.1 million for the three
months ended September 30, 1995. This decrease in Baywatch revenues was
primarily due to the expected decrease in revenues from the strip syndication of
Baywatch as discussed above partially offset by an increase in Baywatch revenues
from first-run syndication attributable to the delivery of 13 episodes in the
1996 period as compared with the delivery of ten episodes in the comparable 1995
period. Additionally, other television distribution revenues (excluding
Baywatch, AAFII and Mark Goodson Productions) decreased by $3.4 million due to
the recognition of the network license fee and foreign revenues in connection
with the delivery of The Malibu Branch, a network series pilot (the series
option was not exercised by the network), during the three months ended
September 30, 1995 with no comparable item in the 1996 period. While certain of
the Company's syndicated television programming, including the Baywatch strip
syndication, has experienced a ratings decline on a year-to-year basis compared
to the prior period, the impact on the Company has been offset in part by an
increase in available advertising rates. Revenues from AAFII of $17.1 million
for the three months ended September 30, 1996 decreased slightly from $17.4
million for the three months ended September 30, 1995.
The foregoing decreases in revenues were partially offset by the
recognition of $5.4 million in revenues (after elimination of intercompany
revenues) from Mark Goodson Productions (the remaining 50% interest of which was
acquired as of January 1, 1996) for the three months ended September 30, 1996
compared to no such revenues in the prior period. The Price Is Right contributed
revenue of $5.0 million in the 1996 period. On a pro forma basis, revenues from
Mark Goodson Productions were comparable with revenues from the year ago period,
while total pro forma television revenues declined from the 1995 period for the
reasons discussed above.
Recorded music and merchandising revenues decreased by $4.7 million or 56%
to $3.6 million for the three months ended September 30, 1996, from $8.3 million
for the three months ended September 30, 1995. This decrease was primarily
attributable to higher sales of new releases in the three months ended September
30, 1995, led by the new artist Skee-Lo, as compared with no comparable new
releases in the three months ended September 30, 1996. The Company does not have
any major new recorded music releases scheduled during the remainder of 1996.
Operating Expenses. Total operating expenses decreased by $19.5 million or
27% to $54.1 million for the three months ended September 30, 1996, from $73.6
million for the three months ended September 30, 1995, due to a $16.5 million
reduction in television operating costs corresponding to lower television
revenues, higher margins on the revenues from Mark Goodson Productions, and a
$3.8 million reduction in recorded music and merchandising costs corresponding
to lower recorded music and merchandising revenues, partially offset by
increased goodwill amortization attributable to the Mark Goodson Acquisition (
see "-- Liquidity and Capital Resources") of $0.6 million and increased selling,
general and administrative expenses, including corporate overhead of $0.4
million.
18
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ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
Television expenses, before overhead and goodwill amortization, decreased
by $16.5 million or 27% to $44.2 million (70% of total television revenues) for
the three months ended September 30, 1996, from $60.7 million (79% of total
television revenues) for the three months ended September 30, 1995. The decrease
in television expenses as a percentage of total television revenues is
attributable to revenues recognized from programming (principally related to
Mark Goodson Productions and AAFII revenues from certain licensing agreements)
which has higher gross profit percentages than the overall mix of the Company's
other distributed programming in the prior period. Television selling, general
and administrative expenses during the three months ended September 30, 1996 of
$3.5 million reflect an increase of $0.3 million over the three months ended
September 30, 1995 due to planned increases in the Company's television
promotion and research departments. Goodwill amortization of nearly $1.2 million
for the three months ended September 30, 1996 increased $0.6 million, as a
result of the Mark Goodson Acquisition, from $0.5 million for the three months
ended September 30, 1995.
The Company's recorded music and merchandising expenses, before selling,
general and administrative expenses, decreased $3.8 million or 60% to $2.6
million (72% of total recorded music and merchandising revenues) for the three
months ended September 30, 1996, from $6.4 million (77% of total recorded music
and merchandising revenues) for the three months ended September 30, 1995. The
decrease in expenses and improvement in operating margins was due to lower
levels of artist advances and recording expenditures during the 1996 period as
compared with the 1995 period.
Operating Income. Total operating income for the Company increased $1.1
million or 9% to $12.6 million for the three months ended September 30, 1996,
from $11.5 million for the three months ended September 30, 1995, due to an
increase in television operating income offset by increased goodwill
amortization, corporate overhead and reduced recorded music and merchandising
operating income.
Television operating income was $14.1 million (after the inclusion of
goodwill amortization of $1.2 million and selling, general and administrative
expenses of nearly $3.5 million) for the three months ended September 30, 1996,
as compared to $12.5 million (after the inclusion of goodwill amortization of
$0.5 million and selling, general and administrative expenses of $3.1 million)
for the three months ended September 30, 1995. On a pro forma basis, giving
effect to the Mark Goodson Acquisition as if it occurred on January 1, 1995,
television operating income decreased by $3.8 million or 21% from the year ago
period primarily due to the decreases in Baywatch strip syndication revenues
discussed above.
Operating income from recorded music and merchandising operations decreased
$0.2 million to a loss of nearly $0.1 million for the three months ended
September 30, 1996 (after the inclusion of selling, general and administrative
expenses of $1.1 million), from a profit of $0.1 million for the three months
ended September 30, 1995 (after the inclusion of selling, general and
administrative expenses of $1.8 million). This decrease in recorded music and
merchandising operating income was primarily attributable to the lower revenues
discussed above.
Goodwill amortization for the quarter ended September 30, 1996 increased by
$0.6 million to nearly $1.2 million, from $0.5 million for the three months
ended September 30, 1995, due to the inclusion of amortization in connection
with the Mark Goodson Acquisition. The Company expects to report amortization
expense of at least $1.2 million on a quarterly basis as a result of prior
acquisitions, subject to increase based upon the amount of contingent purchase
price payable to the Sellers in the Mark Goodson Acquisition and the contingent
payments, if any, in connection with the acquisition of Orbis Entertainment
Company, Inc. (the "Orbis Acquisition"), or in the event of future acquisitions.
Foreign Currency Exchange Gain or Loss. The Company recognized a foreign
currency exchange loss of $0.1 million for the three months ended September 30,
1996 as compared to a foreign currency exchange gain
19
<PAGE> 20
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
of $0.1 million for the three months ended September 30, 1995 which results from
the settlement and valuation of certain licensing agreements, denominated in
foreign currencies, into U.S. dollars as of September 30, 1996 and 1995,
respectively. The Company has historically experienced gains and losses as a
result of fluctuations in exchange rates. The Company has not entered into
foreign currency swap agreements. To the extent that the Company does not enter
into foreign currency swap agreements, the Company can expect to record foreign
exchange losses and gains in the future.
Interest Expense. Interest expense, net of capitalized interest ($0.4
million) and interest income ($0.3 million), increased by $0.1 million to $2.0
million for the three months ended September 30, 1996, from $1.9 million, net of
interest capitalized ($0.7 million) and interest income ($0.2 million), for the
three months ended September 30, 1995, due to increased borrowings in connection
with the Mark Goodson Acquisition offset by reduced borrowings as a result of
AAFII term loan pay downs and lower corporate and production borrowings. The
Company expects that the general trend of increased interest costs will continue
in part as a result of increased borrowings in connection with the Mark Goodson
Acquisition, the Orbis Acquisition, continuing production and expansion and the
Company's recent issuance of $100.0 million in 10 7/8% Senior Subordinated Notes
due 2001 (see "-- Liquidity and Capital Resources").
Income Taxes. The Company recorded a tax provision for the three months
ended September 30, 1996 of $4.4 million and $4.1 million during the three
months ended September 30, 1995, representing an effective tax rate of
approximately 42%.
Net Income. The net income of $6.1 million for the three months ended
September 30, 1996 compares with net income of $5.6 million for the three months
ended September 30, 1995. The variance is attributable to matters discussed
above. Earnings per share decreased to $0.51 per primary share and $0.42 per
fully diluted share for the three months ended September 30, 1996, as compared
to $0.68 per primary share and $0.51 per fully diluted share for the three
months ended September 30, 1995, due to an increase in the outstanding number of
weighted average common shares and common share equivalents partially offset by
the quarter to quarter increase in net income (due to the items discussed
above). Such increase in shares is due to the inclusion of the shares issued in
connection with the Company's Class B Common Stock offering in December 1995 as
well as an increase in the number of equivalent shares of outstanding options
and warrants determined using the modified treasury method.
20
<PAGE> 21
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
The following unaudited table sets forth the percentage relationship to
total revenues of certain items included in the Company's unaudited condensed
consolidated statements of operations for the nine months ended September 30,
1996 and 1995:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
----- -----
<S> <C> <C>
Revenues:
Television............................................. 87.4% 90.3%
Recorded music and merchandising....................... 12.6 9.7
----- -----
Total.......................................... 100.0 100.0
Operating expenses:
Television............................................. 62.1 71.8
Recorded music and merchandising....................... 9.2 7.5
Selling, general and administrative.................... 12.6 11.3
Goodwill amortization.................................. 2.2 1.0
----- -----
Total.......................................... 86.1 91.6
Other expense, principally interest...................... 4.6 4.0
----- -----
Income before income taxes............................... 9.3% 4.4%
===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
Revenues. The Company's total revenues decreased by $6.0 million or 4% to
$154.1 million for the nine months ended September 30, 1996, from $160.2 million
for the nine months ended September 30, 1995. Revenues from television
operations decreased to $134.7 million (87% of total revenues) for the nine
months ended September 30, 1996, from $144.6 million (90% of total revenues) for
the nine months ended September 30, 1995. Revenues from recorded music and
merchandising increased to $19.4 million (13% of total revenues) for the nine
months ended September 30, 1996, from $15.5 million (10% of total revenues) for
the nine months ended September 30, 1995.
Revenues from television operations decreased by $10.0 million or 7% for
the nine months ended September 30, 1996, as compared with the nine months ended
September 30, 1995. This decrease was due primarily to period to period
reductions in Baywatch strip syndication revenues and other television
distribution revenues recognized during the nine months ended September 30,
1996. These decreases were partially offset by period to period increases in
Mark Goodson Productions and AAFII revenues.
Baywatch revenues decreased by $22.6 million or 43% to $29.6 million for
the nine months ended September 30, 1996 from $52.1 million for the nine months
ended September 30, 1995, due to the decline in Baywatch strip syndication
revenues. Additionally, certain other television distribution revenues decreased
by $10.3 million or 26% to $29.1 million for the nine months ended September 30,
1996, as compared with $39.4 million for the nine months ended September 30,
1995 due to the recognition of revenues from prior first run syndicated
programming (Family Feud), the delivery of The Malibu Branch and recognition of
a cable sale during the nine months ended September 30, 1995 with no
corresponding items in the 1996 period.
AAFII revenues increased $10.9 million or 21% to $64.0 million for the nine
months ended September 30, 1996 from the production and distribution of
television programming (primarily game shows) as compared with $53.1 million for
the nine months ended September 30, 1995. The German operations contributed
$40.1 million (63% of total AAFII revenues) for the nine months ended September
30, 1996, a
21
<PAGE> 22
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
decrease of $0.3 million from $40.4 million (76% of total AAFII revenues) for
the nine months ended September 30, 1995 due to the timing of the delivery of
programming. The distribution of programming in France contributed $10.6 million
(17% of total AAFII revenues) for the nine months ended September 30, 1996 as
compared to $2.1 million (4% of total AAFII revenues) for the nine months ended
September 30, 1995 due to an increase in program licenses during 1996. The
continued expansion of the distribution of programming in Belgium ($1.7 million
in 1996 compared to $0.2 million in 1995) and Spain ($1.9 million in 1996
compared to $0.7 million in 1995) further contributed to the period to period
increase in AAFII revenues. Additionally, television revenues were further
increased by the recognition (after elimination of intercompany revenues) of
$12.0 million in revenues from Mark Goodson Productions (the remaining 50%
interest of which was acquired as of January 1, 1996) for the nine months ended
September 30, 1996. The Price Is Right contributed revenue of $11.4 million in
the 1996 period. On a pro forma basis, revenues from Mark Goodson Productions
were comparable with revenues for the year ago period, while total pro forma
television revenues declined from the 1995 period for the reasons discussed
above.
Recorded music and merchandising revenues increased by $3.9 million or 25%
to $19.4 million for the nine months ended September 30, 1996, from $15.5
million for the nine months ended September 30, 1995. This increase was
primarily attributable to the continued higher sales of new releases in the nine
months ended September 30, 1996, led by the "platinum" selling new release, Bad
Hair Day, by artist "Weird Al" Yankovic, with 1.3 million albums shipped in the
period, as compared with the new release (in the third quarter 1995) by Skee-Lo
with 0.5 million albums shipped during the nine months ended September 30, 1995.
Operating Expenses. Total operating expenses decreased by $14.2 million or
10% to $132.6 million for the nine months ended September 30, 1996, from $146.8
million for the nine months ended September 30, 1995, due primarily to decreased
costs as a result of the lower revenues discussed above and higher margins on
the revenues from Mark Goodson Productions partially offset by increased
goodwill amortization attributable to the Mark Goodson acquisition ($1.7
million) and increased selling, general and administrative expenses, including
corporate overhead ($1.3 million).
The Company's television division expenses, before overhead and goodwill
amortization, decreased by $19.3 million to $95.7 million (71% of total
television revenues) for the nine months ended September 30, 1996, from $115.0
million (79% of total television revenues) for the nine months ended September
30, 1995. The decrease in television expenses as a percentage of total
television revenues is attributable to revenues recognized from programming
(principally related to Mark Goodson Productions) which has a higher gross
profit margin than the overall mix of the Company's other distributed
programming in the prior period. Television selling, general and administrative
expenses of $10.8 million during the nine months ended September 30, 1996
increased by $0.9 million or 10% from $9.8 million the nine months ended
September 30, 1995, due primarily to the increase in AAFII expenses of $0.5
million to $4.5 million for the nine months ended September 30, 1996, as
compared with $4.0 million for the nine months ended September 30, 1995
reflecting AAFII's planned expansion in existing and new territories and
increases in television distribution overhead of $0.4 million from $5.8 million
for the nine months ended September 30, 1995 to $6.2 million for the nine months
ended September 30, 1996 due to planned increases in the promotion and research
departments. Goodwill amortization of $3.4 million for the nine months ended
September 30, 1996 increased, as a result of the Mark Goodson Acquisition, by
$1.8 million from $1.6 million for the nine months ended September 30, 1995.
The Company's recorded music and merchandising expenses, before selling,
general and administrative expenses, increased $2.0 million or 17% to $14.1
million (73% of total recorded music and merchandising revenues) for the nine
months ended September 30, 1996, from $12.1 million (78% of total recorded music
and merchandising revenues) for the nine months ended September 30, 1995. The
increase was primarily due
22
<PAGE> 23
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
to costs of $4.9 million incurred in connection with the release of "Weird Al"
Yankovic's new album in 1996. The improvement in operating margins was
attributable to lower levels of artist advances and recording expenditures in
the 1996 period as compared with the 1995 period.
Corporate overhead increased by $0.9 million or 25% to $4.3 million for the
nine months ended September 30, 1996 from $3.4 million for the nine months ended
September 30, 1995. This increase is primarily attributable to increased
occupancy costs associated with the Company's new corporate headquarters.
Operating Income. Total operating income for the Company increased $8.2
million or 61% to $21.6 million for the nine months ended September 30, 1996,
from $13.4 million for the nine months ended September 30, 1995, due to
increased operating margins in television and increases in recorded music and
merchandising revenues.
Operating income from television operations increased $6.7 million or 37%
to $24.9 million for the nine months ended September 30, 1996 (after the
reduction for goodwill amortization of $3.4 million and selling, general and
administrative expenses of $10.8 million), from $18.2 million for the nine
months ended September 30, 1995 (after the reduction for goodwill amortization
of $1.6 million and selling, general and administrative expenses of $9.8
million). This increase in television operating income was primarily
attributable to inclusion of operating income from Mark Goodson Productions of
$10.0 million (after the reduction for goodwill amortization of $1.7 million).
On a pro forma basis, giving effect to the Mark Goodson Acquisition as if it
occurred on January 1, 1995, television operating income decreased by $6.0
million or 19% over the year ago period due to the expected decrease in Baywatch
strip syndication revenues discussed above. Goodwill amortization for the nine
months ended September 30, 1996 increased by $1.8 million to $3.4 million, from
$1.6 million for the nine months ended September 30, 1995, due to the inclusion
of amortization in connection with the Mark Goodson Acquisition of $1.7 million
for nine 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 reduction for selling, general and administrative
expenses of $4.3 million) for the nine months ended September 30, 1996, as
compared to an operating loss of $1.4 million (after the reduction for selling,
general and administrative expenses of $4.8 million) for the nine months ended
September 30, 1995. Such increase in operating income was primarily attributable
to increased revenues as discussed above.
Foreign Currency Exchange Gain or Loss. The Company recognized a foreign
currency exchange loss of $0.1 million for the nine months ended September 30,
1996, as compared to a foreign currency exchange gain of $0.2 million for the
nine months ended September 30, 1995, resulting from the settlement and
valuation of certain licensing agreements, denominated in foreign currencies,
into U.S. dollars as of September 30, 1996 and 1995. The Company has experienced
in the past, and may experience in the future, gains and losses as a result of
fluctuations in exchange rates. The Company has not entered into foreign
currency swap agreements. To the extent that the Company does not enter into
foreign currency swap agreements, the Company can expect to record foreign
exchange losses and gains in the future.
Interest Expense. Interest expense, net of interest capitalized ($0.7
million) and interest income ($1.1 million), increased $0.5 million to $7.1
million for the nine months ended September 30, 1996, from $6.6 million, net of
interest capitalized ($1.0 million) and interest income ($0.3 million), for the
nine months ended September 30, 1995, due to increased borrowings in connection
with the Mark Goodson Acquisition offset by reduced borrowings as a result of
AAFII term loan pay downs and lower corporate and production borrowings.
23
<PAGE> 24
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
Income Taxes. The Company recorded a tax provision of $6.0 million for the
nine months ended September 30, 1996 and $2.9 million for the nine months ended
September 30, 1995, representing an effective tax rate of approximately 42%.
Net Income. The net income of $8.3 million for the nine months ended
September 30, 1996 compares with net income of $4.1 million for the nine months
ended September 30, 1995. The variance is attributable to matters discussed
above. Earnings per share increased to $0.70 per primary share and $0.61 per
fully diluted share for the nine months ended September 30, 1996, as compared to
$0.50 per primary share and $0.44 per fully diluted share for the nine months
ended September 30, 1995, due to the increase in net income (attributable to the
items discussed above) partially offset by an increase in the outstanding number
of weighted average common shares and common share equivalents. Such increase in
shares is due to the inclusion of the shares issued in connection with the
Company's Class B Common Stock offering in December 1995 as well as an increase
in the number of equivalent shares of outstanding options and warrants
determined using the modified treasury method.
LIQUIDITY AND CAPITAL RESOURCES
This discussion should be read in conjunction with the notes to the
condensed consolidated financial statements and the corresponding information
more fully described in the Company's Form 10-K for the year ended December 31,
1995.
Historically, the Company has financed its cash flow requirements through
cash flows generated from operations, the issuance of securities and third party
and bank financings. The proceeds from these financings were used to complete
the Mark Goodson Acquisition and the Orbis Acquisition, to finance the Company's
operations, including the production of Baywatch and Baywatch Nights, and to pay
for general operating expenses.
On October 23, 1996, the Company amended and restated its senior secured
credit facility (the "Restructured Credit Facility") with a syndicate of lenders
led by The Chase Manhattan Bank. The amendment and restatement increased the
Company's borrowing capacity up to $155.0 million, subject to borrowing base
limitations (as defined in the Restructured Credit Facility) and extended the
maturity to a four year term. Prior to amending and restating its credit
facility agreement, using a portion of the proceeds from the Senior Notes (as
defined below) issuance, the Company paid down amounts outstanding under the
then existing bank facilities (the "Former Credit Facility"). In connection with
the amendment and restatement, the Company initially utilized $30.0 million of
the Restructured Credit Facility: (i) to pay Interpublic $15.4 million
(including accrued interest); (ii) to repurchase $10.0 million a portion of
certain outstanding Convertible Notes (as defined below); (iii) to pay closing
fees of $2.5 million in connection with the amendment and restatement and (iv)
$2.1 million for production and general corporate purposes. Borrowings under the
Restructured Credit Facility bear interest, at the Company's option, 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 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 had outstanding borrowings of $30.0 million under the Restructured
Credit Facility with $103.5 million 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,
24
<PAGE> 25
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
restrictions on making certain payments (including dividends), restrictions on
acquisitions and certain financial tests, including a minimum net worth test, a
leverage test and an interest coverage ratio test. 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 BV (a foreign subsidiary
presently being formed by the Company), subject to borrowing base availability.
Substantially all of the Company's assets (other than real property) are pledged
under the Restructured Credit Facility Agreement.
On October 11, 1996, the Company issued $100.0 million of 10 7/8% Senior,
Subordinated Notes due 2001 ("Senior Notes") in a private placement offering to
Goldman, Sachs & Co. and Chase Securities, Inc. (the "Initial Purchasers"). The
Senior Notes are unsecured obligations of AAC which mature October 15, 2001 and
bear interest at 10 7/8% per annum, payable semiannually each April 15 and
October 15 (commencing April 15, 1997). Net proceeds, net of issuance costs and
fees, from the issuance of the Senior Notes totalled approximately $96.0
million. The Senior Notes were issued pursuant to an Indenture between the
Company and U.S. Trust Company of California, N.A. (the "Indenture"). The Senior
Notes are subordinated in right of payment to the prior payment in full of all
Senior Indebtedness (as defined in the Indenture) of the Company.
The Indenture imposes certain covenants and conditions upon the Company,
including but not limited to restrictions or limits on making certain payments
or investments, limits on certain transactions, limits on liens, limits on
merger, consolidation and sale of assets, limits on senior subordinated debt,
limits on business activities and change of control provisions. 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 the Senior Notes at a redemption price of 110 7/8% of the principal
amount thereof, plus accrued and unpaid interest, 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 the Senior Notes at a
redemption price of 110 7/8% of the principal amount thereof, plus accrued and
unpaid interest, 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 the Senior 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. Following a
Change of Control (as defined in the Indenture), the Company will be required to
offer to purchase all or any part of the Senior Notes tendered at the option of
the holders thereof at 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest.
In connection with the private placement offering, the Company entered into
a Registration Rights Agreement ("Registration Rights Agreement") with the
Initial Purchasers, granting certain exchange registration rights to the holders
of the Original Notes (as defined in the Registration Rights Agreement). On
October 28, 1996 the Company filed a Form S-4 Registration Statement pursuant to
its obligations under the Registration Rights Agreement. On November 12, 1996
the Company amended such Form S-4, which
25
<PAGE> 26
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
registration statement, as amended, was declared effective by the Securities and
Exchange Commission on such date.
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. Through September 30, 1996 Convertible Notes with principal
amounts totaling $3.8 million have been converted into the Company's Common
Stock. Through November 8, 1996, the Company has repurchased and effectively
retired $20.7 million principal amount of the Convertible Notes. On October 25,
1996, the Company notified the Fiscal Agent of the Convertible Notes of its
intention to redeem the Convertible Notes in full on November 27, 1996 at
104.643% of par. As of November 8, 1996, there were Convertible Notes of $35.5
million principal amount outstanding. The maximum payment, including redemption
premium and accrued interest, expected to be made on November 27, 1996 is
approximately $37.5 million, subject to reduction for Convertible Note holders
who convert their holdings to Common Stock at the rate of 86.957 shares per
$1,000 principal amount of Convertible Notes prior to November 27, 1996.
In October 1995, the Company and The Interpublic Group of Companies
("Interpublic") each acquired an undivided 50% interest in substantially all of
the assets (excluding assets relating to the lottery business) and assumed
certain specified liabilities (the "MG Acquisition") of Mark Goodson
Productions, L.P. and The Child's Play Company (collectively, the "Sellers").
The Sellers were not affiliated with the Company. The purchase price paid by the
Company for its undivided 50% interest of the Sellers' net assets acquired
("Mark Goodson Productions") consisted of a cash payment of $25.0 million,
transaction costs of $0.8 million, and an as yet undetermined contingent
purchase price. The contingent purchase price, payable to the Sellers, is to be
earned and paid based on the income (as defined) resulting from a domestic
television network contract and the actual exploitation of certain other
domestic television rights. The contingent purchase price, in total, is limited
to $48.5 million if paid (whether earned or not) during the first five years
following October 6, 1995. Otherwise, the amount of contingent purchase price is
unlimited to the extent it is earned within the first ten years following
October 6, 1995. At the end of ten years, no additional contingent purchase
price accrues.
In January 1996, the Company acquired from Interpublic the remaining 50%
interest of Mark Goodson Productions for: (i) $12.5 million plus accrued
interest thereon at a rate of 7% per annum from January 1, 1996 to the closing
date, as defined (the "Closing Date"); (ii) the issuance of a subordinated note
in the amount of $12.5 million due 12 months from the Closing Date plus accrued
interest thereon at a rate of 7% per annum from January 1, 1996; and (iii) the
issuance of a subordinated note in the amount of $2.8 million, yielding interest
at the rate of 7% per annum from January 1, 1996, and representing Interpublic's
50% share of the LLC's earnings through December 31, 1995, as defined, with $0.7
million due and paid 30 days from the Closing Date and the balance due 30 days
after maturity of a tranche of the Former Credit Facility. The remaining amounts
due ($12.5 million plus accrued interest and $2.1 million plus accrued interest)
were paid October 28, 1996 with the initial borrowings under the Restructured
Credit Facility.
Through September 30, 1996, the Company has recorded contingent purchase
price totaling $7.1 million (excluding Interpublic's share through December 31,
1995 of $0.9 million).
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
26
<PAGE> 27
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
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 Common Stockholders to convert Common Stock into
Class B Common Stock are subject to NASDAQ approval of the proposed amendment to
the Restated Certificate of Incorporation. Subsequent to September 30, 1996, the
Company repurchased on the open market, 528,200 shares of its Class B Common
Stock for approximately $5.0 million.
During the nine months ended September 30, 1996, the Company generated cash
of $29.8 million from its operations, compared with the use of $16.2 million for
the nine months ended September 30, 1995. This positive cash flow from
operations was due primarily to the net collection of accounts receivable of
$27.4 million during the nine months ended September 30, 1996. The Company used
$20.4 million in investing activities during the nine months ended September 30,
1996, primarily in connection with the Mark Goodson Acquisition. The Company
experienced a net increase in cash flow from financing activities of $0.8
million during the first nine 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 nine 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 redemption of the Convertible Notes. 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
Restructured Credit Facility, subject to its continued availability, 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 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
27
<PAGE> 28
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
of generating revenues and receipts. Any expansion of the Company's business
could require the Company to make substantially increased advance payments or
provide guarantees to third parties. Further, there is no assurance that such
amounts will be recouped by the Company and, if not recouped, that such payments
will not have a material adverse effect on the Company. In addition, the
Company's working capital requirements in connection with its development and
production activities relating to potential television programming are expected
to substantially increase as a result of the Orbis Agreement and the Company's
agreement with The Gerber Company, which provides the services of television
producer David Gerber to the Company for the purpose of developing and producing
television programming. The cost of production of television programming is
typically partially offset by foreign, network or pre-sale license fees.
The Company has reached an agreement with Atlantis Releasing B.V.
("Atlantis") whereby Atlantis will produce a minimum of 13 and a maximum of 22
one-hour live action episodes of a new series entitled 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 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, 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 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 has 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 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 has 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
capital, pending receipt of license fees. Through November 4, 1996, Baywatch
Nights has 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.
28
<PAGE> 29
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 12, 1994, Credit Lyonnais Bank Nederland N.V. ("CLBN") made a
demand upon SBEI under a Guarantee, dated July 29, 1986 (the "SBEI Guarantee"),
for payment of approximately $3,742,000 plus interest accrued or costs incurred
since November 11, 1994 under a Loan and Security Assignment, dated July 29,
1986, between CLBN and various former subsidiaries of SBEI relating to the
discontinued motion picture operations of the Company. In a letter dated
December 22, 1994, SBEI rejected the foregoing demand based upon, among other
reasons, the following: (i) that in a January 1993 agreement, CLBN agreed to
release all liens and any interests in any property or assets of SBEI, which in
effect released SBEI from any obligations under the SBEI Guarantee; (ii) the
loan purportedly guaranteed has been repaid; and (iii) SBEI is not a party to
and was not bound by a material amendment to the above-referenced Loan and
Security Assignment. The Company and CLBN have reached a settlement agreement in
principal resolving all of their various disputes, although there is no
assurance that such settlement will be consummated. While the Company believes
that SBEI has good and meritorious defenses with respect to the SBEI Guarantee
and any related claims by CLBN, and that the ultimate outcome of this matter
will not result in a material adverse effect on the Company's financial
condition or results of operations, there is no assurance that the Company
ultimately will prevail.
29
<PAGE> 30
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
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. Moreover, 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. Goodson is seeking a
declaration of rights, an accounting of all monies received by Grundy under
licenses and all other appropriate relief.
In contrast, Grundy alleges in its counterclaims that Goodson, in order to
avoid the Agreement's provisions granting to Grundy a right of first refusal
following expiration of the Agreement and the right to complete licenses entered
into prior to such expiration, wrongfully attempted to terminate the Agreement
by (i) misapplying its provisions permitting Goodson a right of approval over
Grundy's licenses; (ii) unreasonably withholding approval (if required) with
respect to Grundy's proposed transactions; and (iii) refusing to negotiate an
extension of the Agreement in good faith as required by the Agreement. Grundy
seeks an award of damages in an unstated amount; an award extending and renewing
the Agreement; an order compelling Goodson to perform under the Agreement and to
account to Grundy (including but not limited to the payment to Grundy of
AUS$84,666); a declaration of tortious interference by Goodson with Grundy's
contracts and prospective economic relations and an award of damages therefore
in an unstated amount; a declaration that Goodson owes Grundy compensation in
quantum meruit to the extent that Goodson has been unjustly enriched; and for
such other relief as may be proper. Goodson intends to answer the counterclaims,
denying Grundy's allegations and asserting Goodson's own affirmative defenses.
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 certain other legal proceedings which are routine
and incidental to the business. The Company believes that the results of such
litigation will not have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on July 16, 1996, at
which time the following matters were considered, voted on and approved by the
vote of the Company's stockholders set forth below:
1. The election of Class II and Class III directors (two classes being
voted on since the Company did not hold a meeting of stockholders in
1995):
ELECTION OF CLASS II DIRECTORS:
<TABLE>
<CAPTION>
FOR WITHHOLD
--------- --------
<S> <C> <C>
Anthony J. Scotti................................. 4,347,703 125
Thomas Bradshaw................................... 4,347,703 125
Myron Roth........................................ 4,347,703 125
R. Timothy O'Donnell.............................. 4,347,703 125
</TABLE>
30
<PAGE> 31
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
ELECTION OF CLASS III DIRECTORS:
<TABLE>
<CAPTION>
FOR WITHHOLD
--------- --------
<S> <C> <C>
Sydney Vinnedge................................... 4,347,703 125
Gordon Luce....................................... 4,347,703 125
Lawrence Lamattina................................ 4,347,703 125
</TABLE>
The continuing Class I Directors are Benjamin J. Scotti, David A. Mount and
Eugene P. Beard with terms expiring at the 1997 Annual Meeting of Stockholders.
2. To approve an amendment to the Company's Restated Certificate of
Incorporation to enable holders of Company's Common Stock to convert
each share of Common Stock held by such holder into one share of Class B
Common Stock:
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
- ---------- -------- --------
4,347,528 75 225
</TABLE>
3. To ratify an amendment to the Company's 1994 Stock Incentive Plan,
including an authorization of awards in either Common Stock or Class B
Common Stock and an increase of 2,250,000 shares of Common Stock or
Class B Common Stock reserved for issuance:
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
- ---------- -------- --------
4,347,228 475 125
</TABLE>
4. To approve a certain award granted to Anthony J. Scotti under the 1994
Stock Incentive Plan:
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
- ---------- -------- --------
3,716,908 795 630,125
</TABLE>
5. To approve awards granted to certain other executive officers, directors
and employees of the Company under the 1994 Stock Incentive Plan:
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
- ---------- -------- --------
4,347,228 475 125
</TABLE>
6. To approve the appointment of Price Waterhouse LLP as the Company's
independent accountants for the fiscal year ending December 31, 1996:
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
- ---------- -------- --------
4,347,328 75 425
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C> <C>
10.7(A) Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated
as of April 13, 1995 as amended and restated as of October 23, 1996
(incorporated by reference to Exhibit 10.7 (A) to the Company's Current
Report on Form 8-K filed on November 5, 1996)
11 and Statement re: Computation of Per Share Earnings
11-1
27 Financial Data Schedule
</TABLE>
31
<PAGE> 32
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996
(b) Reports on Form 8-K
Current report on Form 8-K, filed August 6, 1996, regarding the
acquisition of Orbis Entertainment Company, Inc.
Current report on Form 8-K, filed September 25, 1996, press release
announcing the Company's Stock Repurchase Program and Proposed Refinancing.
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALL AMERICAN COMMUNICATIONS, INC.
Date: November 14, 1996 By /s/ Anthony J. Scotti
------------------------------
Anthony J. Scotti,
Chief Executive Officer
Date: November 14, 1996 By /s/ Thomas Bradshaw
------------------------------
Thomas Bradshaw,
Chief Financial Officer and Treasurer
(Principal financial officer and
principal accounting officer)
33
<PAGE> 1
EXHIBIT 11
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS - EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1996 1995
------------ ----------
<S> <C> <C>
Weighted average number of common shares outstanding 11,515 7,976
Assumed exercise of dilutive options and warrants under the
modified treasury stock method based on average market price 688 320
-------- --------
Weighted average number of common shares and common share
equivalents - primary (B) 12,203 8,296
Additional shares from assumed exercise of dilutive options
and warrants under the modified treasury stock method based on
ending market price 73 97
Weighted average assumed conversion of 6 1/2% Convertible
Subordinated Notes due 2003 3,094 3,418
-------- --------
Weighted average number of common shares and common share
equivalents - fully diluted (D) 15,370 11,811
======== ========
Computation of net income for per share purposes:
Net income $ 6,096 $ 5,628
Add: After tax reduction of interest expense for assumed
reduction of borrowings from aggregate proceeds on options and
warrants assumed to have been exercised in excess of 20% of
the outstanding shares under the modified treasury stock
method - primary 98 -
-------- --------
Net income for primary per share computation (A) 6,194 5,628
Add: After tax reduction of interest expense for assumed
conversion of 6 1/2% Convertible Subordinated Notes due 2003 358 397
Less: Incremental after tax reduction of interest expense for
assumed reduction of borrowings from aggregate proceeds on
options and warrants assumed to have been exercised in excess
of 20% of the outstanding shares under the modified treasury
stock method - fully diluted (55) -
-------- --------
Net income for fully diluted per share computation (C) $ 6,497 $ 6,025
======== ========
Net earnings per share:
Primary (A)+(B) $ 0.51 $ 0.68
======== ========
Fully diluted (C)+(D) $ 0.42 $ 0.51
======== ========
</TABLE>
<PAGE> 1
EXHIBIT 11-1
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS - EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1996 1995
--------- --------
<S> <C> <C>
Weighted average number of common shares outstanding 11,428 7,976
Assumed exercise of dilutive options and warrants under the
modified treasury stock method based on average market price 531 107
--------- --------
Weighted average number of common shares and common share
equivalents - primary (B) 11,959 8,083
Additional shares from assumed exercise of dilutive options
and warrants under the modified treasury stock method based on
ending market price 230 310
Weighted average assumed conversion of 6 1/2% Convertible
Subordinated Notes due 2003 3,125 3,418
--------- --------
Weighted average number of common shares and common share
equivalents - fully diluted (D) 15,314 11,811
========= ========
Computation of net income for per share purposes:
Net income $ 8,319 $ 4,057
Add: After tax reduction of interest expense for assumed
reduction of borrowings from aggregate proceeds on options and
warrants assumed to have been exercised in excess of 20% of
the outstanding shares under the modified treasury stock
method - primary 38 -
--------- --------
Net income for primary per share computation (A) 8,357 4,057
Add: After tax reduction of interest expense for assumed
conversion of 6 1/2% Convertible Subordinated Notes due 2003 1,075 1,191
Less: Incremental after tax reduction of interest expense for
assumed reduction of borrowings from aggregate proceeds on
options and warrants assumed to have been exercised in excess
of 20% of the outstanding shares under the modified treasury
stock method - fully diluted (19) -
--------- --------
Net income for fully diluted per share computation (C) $ 9,413 $ 5,132
========= ========
Net earnings per share:
Primary (A)+(B) $ 0.70 $ 0.50
========= ========
Fully diluted (C)+(D) $ 0.61 $ 0.44
========= ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1996
AND THE THREE AND NINE MONTH PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 26,655
<SECURITIES> 0
<RECEIVABLES> 93,521
<ALLOWANCES> 5,397
<INVENTORY> 92,050
<CURRENT-ASSETS> 0
<PP&E> 7,762
<DEPRECIATION> 3,763
<TOTAL-ASSETS> 322,895
<CURRENT-LIABILITIES> 0
<BONDS> 148,067
0
0
<COMMON> 2
<OTHER-SE> 76,712
<TOTAL-LIABILITY-AND-EQUITY> 322,895
<SALES> 19,445
<TOTAL-REVENUES> 154,129
<CGS> 14,148
<TOTAL-COSTS> 129,195
<OTHER-EXPENSES> 3,359
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,250
<INCOME-PRETAX> 14,344
<INCOME-TAX> 6,025
<INCOME-CONTINUING> 8,319
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,319
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.61
</TABLE>
