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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1996,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-14333
ALL AMERICAN COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-3803222
STATE OF OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
808 WILSHIRE BOULEVARD 90401-1810
SANTA MONICA, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (310) 656-1100
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common Stock, $0.0001 par value
Common Stock, Class B, $0.0001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant is approximately $36,000,000 based upon the closing price of the
Common Stock on March 10, 1997. As of March 10, 1997, there were 6,903,713
shares of Common Stock, and 5,191,800 shares of Common Stock, Class B
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the definitive Proxy Statement of the registrant to be filed
with the Commission not later than April 30, 1997, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, are
incorporated by reference in Part III of this Form 10-K.
Total number of pages Exhibit Index begins on page
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PART I
ITEM 1. BUSINESS
GENERAL
All American Communications, Inc. ("AAC") and its wholly-owned
subsidiaries, All American Television, Inc. ("AATV"), All American Television
Production, Inc, ("AATP"), All American Entertainment, Inc. -- formerly Scotti
Brothers Entertainment Industries, Inc. ("AAEI" or "SBEI"), All American
Fremantle International, Inc. ("AAFI"), All American FDF Holdings, Inc.
("AAFDF"), All American Goodson, Inc. ("AAG"), All American Orbis, Inc. ("AAO"),
All American Consumer Merchandising Group, Inc. ("AACM") and All American
Netherlands B.V. ("AAN") (and together with their respective direct or indirect
wholly-owned subsidiaries collectively, the "Company" or "All American"), is a
diversified worldwide entertainment company with operations in television and
recorded music production and distribution. The Company is a leading independent
producer and distributor of television programming and believes that it is the
largest supplier of game show programming in multiple formats and languages
worldwide. The Company's programming includes the Baywatch franchise and over 60
game show formats and other television programming created by the Company's
subsidiary Mark Goodson Productions, LLC, including The Price Is Right, the
longest running game show in the United States. The Company distributes or owns
television programming consisting of 32 series, approximately 30,000 game show
episodes, 145 motion pictures and a library of children's programming,
documentaries and specials. Additionally, the Company has operated as an
independent producer of recorded music since 1981.
All American is a global provider of quality television programming.
Management believes that ownership of its programming combined with its global
production and worldwide distribution capabilities provide important long-term
competitive advantages. Opportunistic acquisitions and internal development
efforts are expected to remain important elements in the Company's growth
strategy.
Management believes that the Company is well positioned to take advantage
of current trends in the television industry and that recent regulatory changes,
local content requirement, and the proliferation of distribution channels via
satellite and cable television will increase the demand for programming content.
The Company's principal executive offices are located at 808 Wilshire
Boulevard, Santa Monica, California 90401-1810, and its telephone number is
(310) 656-1100.
TELEVISION OPERATIONS
The Television Industry
The television industry may be broadly divided into three major segments:
(i) production, involving the development, financing and making of television
shows; (ii) distribution, involving the promotion and exploitation of completed
television shows; and (iii) exhibition, involving the airing or broadcast of
programming over network affiliated stations, independent stations and cable or
satellite television. The U.S. television market is the largest in the world,
consisting of the principal broadcast networks and their affiliates, independent
television stations and cable television networks. Expanding international
television broadcast, cable and satellite delivery systems offer further
opportunities for the exploitation of television programming.
Domestic Market. The U.S. market for television programming is primarily
composed of four submarkets: (i) the broadcast television networks (ABC, CBS,
NBC, FOX and emerging networks consisting of UPN and WB); (ii) pay cable
services (such as HBO, The Disney Channel and Showtime/The Movie Channel, Inc.);
(iii) basic cable services (such as USA Networks, The Discovery Channel, The
Arts & Entertainment Network, Lifetime, The Family Channel and Turner
Broadcasting Network); and (iv) independent broadcast television stations (not
affiliated with the television networks). The U.S. television market currently
is dominated by the three major networks, each of which has approximately 200
affiliated stations and the FOX network, which has approximately 170 affiliated
stations. The affiliates broadcast network-supplied programming and national
commercials in return for payments by the major networks. This relationship
results in the networks being able to reach virtually all of the significant
television markets in the
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United States. There are also a significant number of independent commercial
television stations in the United States. These stations offer an alternative to
network distribution through syndication. The network schedule provides
affiliates with only a portion of their daily program schedule, and the balance
of the time is filled with programs acquired through television syndication
companies or produced locally by the station. Cable services generally are
classified as being in one of four categories: telephone delivery (e.g., Disney
TeleVentures' arrangement with four phone companies to deliver programming over
telephone lines); superstations (e.g., Turner Broadcasting Network); pay cable
services (e.g., HBO); and basic cable networks (advertiser-supported, e.g., The
Discovery Channel). The most successful cable networks reach more than 60% of
U.S. television households. Recently developed digital compression technology
combined with fiber optics or small-sized satellite dishes may permit cable
companies, telephone companies or direct broadcast satellite systems to expand
the domestic television market up to 500 or more channels.
Domestic Syndication. Independent television stations, during both prime
time hours (primarily 8:00 P.M. to 11:00 P.M. in the Eastern and Pacific time
zones and 7:00 P.M. to 10:00 P.M. in the Central and Mountain time zones) and
non-prime time hours, telecast self-produced programming, off-network
programming (reruns) or first-run programming from independent producers or
"syndicators." In non-prime time, network affiliates telecast network
programming, off-network programming, first-run programming (programming
produced for distribution on a syndicated basis), and local programming produced
by the local stations themselves. In general terms, a syndicator is a company
that sells programming to independent television stations and network
affiliates. Programming acquired by stations on a syndicated basis is acquired
either for a cash license fee or in exchange for a certain amount of commercial
advertising time within the program which is retained by the syndicator for sale
to advertisers ("barter"), or for a combination of cash and barter. In general,
the Company receives revenues from program license fees paid by broadcasters
and/or by selling advertising time for programs distributed on a barter basis.
Barter syndication is the process whereby a syndicator obtains agreements
from television stations to broadcast a program in certain agreed upon time
periods ("clearances"), retains advertising time in the program in lieu of
receiving a cash license fee, and sells such retained advertising time for its
own account to national advertisers at rates based on projected ratings and
viewer demographics. From time to time, certain stations may obtain cash
consideration from the Company in addition to programming in exchange for
advertising time and/or a commitment for a particular time period. By placing
the program with television stations throughout the United States, the
syndicator creates an "ad hoc" network of stations that have agreed to carry the
program. The creation of this ad hoc network, typically representing a
penetration of at least 70% of total U.S. television households (calculated by
means of a generally recognized system as measured by Nielsen Media Ratings),
enables the syndicator to sell the commercial inventory through advertising
agencies to sponsors desiring national coverage (including, but not limited to,
Procter & Gamble, Bristol Myers-Squibb, MCI, Smith-Kline Beecham, Kellogg
Company, Nestle and RJR Nabisco). The rates charged by a syndicator for
advertising time are typically lower than the rates charged by the networks for
similar demographics since the networks' coverage of the market is generally
greater.
International Markets. The number of outlets for television programming
outside the United States has been increasing with the worldwide proliferation
of broadcast, cable and satellite delivery systems. Over the last ten years,
European governments have privatized television systems in several countries,
including Germany, Italy, France and Spain. The Company believes that privatized
systems are more likely to broadcast U.S. programming than government-owned
networks. In addition, both the number of pay and satellite television systems
in Europe and the number of subscribers to these systems have increased. Pay
television and satellite distribution systems also are developing in other
geographic areas, including many Asian and South American countries. In
international markets, suppliers of programming may be subject to local content
and quota requirements which prohibit or limit the amount of U.S. programming in
particular markets.
Domestic Television Production
In May 1991, the Company acquired the rights to produce the weekly action
drama series Baywatch, starring David Hasselhoff. Baywatch is currently one of
the highest rated one hour series in first-run syndication in the United States.
In December 1991, the Company also acquired the domestic rights to
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distribute the original episodes on a strip basis (i.e., Monday through Friday).
The original 23 episodes were produced by a third party and aired on the NBC
network during the 1989/1990 broadcast season. Broadcast of the Baywatch
episodes produced by the Company commenced in the United States in September
1991. Since it began producing Baywatch for the 1991/1992 broadcast season, the
Company has produced and delivered an aggregate of 132 episodes of Baywatch
through the 1996/1997 broadcast season. Additionally, the Company intends to
produce 22 episodes of Baywatch for the 1997/1998 broadcast season for a
production budget of approximately $1.1 million per episode. The total
production budget is expected to be funded primarily through a combination of:
(i) barter advertiser sales; (ii) cash payments from an international licensee;
and (iii) working capital, pending receipt of license fees and advertiser sales.
There is no assurance that the Company will be successful in its efforts to
fully fund the production through a combination of the advertiser sales and
international sales. During 1996, the Company also produced the second season of
Baywatch Nights, a spinoff of Baywatch.
The Company and Atlantis Releasing B.V. ("Atlantis") produced 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 a
substantial portion of the production budget, the Company retains 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 to cause Atlantis to produce up to 22 new episodes in each of the
three subsequent broadcast seasons, exercisable on or before February 15 of each
such subsequent broadcast seasons. At the end of three years, if Atlantis does
not exercise its right to continue producing The Adventures of Sinbad, the right
to produce the series reverts to the Company. The Company has exercised its
option to cause Atlantis to produce 22 new episodes of The Adventures of Sinbad
for the 1997/1998 broadcast season. The Company's share of the total production
budget (approximately $0.7 million of the expected $0.9 million per episode) is
expected to be funded primarily through a combination of: (i) barter advertiser
sales; (ii) cash payments from international licensees; and (iii) working
capital, pending receipt of license fees and advertiser sales. There is no
assurance that the Company will be successful in its efforts to fully fund these
productions through a combination of the advertiser sales and international
sales.
The Company has entered into agreements with New Dominion Productions and
Bristol-Myers Squibb to produce 22 one-hour episodes of a new series entitled
Ghost Stories for the 1997/1998 broadcast season with an estimated aggregate
production budget of $7.5 million. The Company's agreement with Bristol-Myers
Squibb provides the latter with a substantial portion of the available barter
advertiser time for $3.5 million, net of agency commissions. The remaining
portion of the production budget is expected to be funded primarily through a
combination of: (i) sales of the remaining barter advertiser time; (ii) cash
payments from international licensees; and (iii) working capital, pending
receipt of license fees and advertiser sales. There is no assurance that the
Company will be successful in its efforts to fully fund the production through a
combination of the advertiser sales and international sales.
The Company has an option to enter into personal service agreements with
Arthel Neville and Fred Roggin, for an initial 13 week period with options for
subsequent periods, for the production of a five day a week talk show program
for the 1997/1998 broadcast season entitled the Arthel/Fred Talk Show. The
estimated production budget will be approximately $0.3 million per week for up
to 35 weeks. The production budget is expected to be funded primarily through a
combination of: (i) barter advertiser sales; and (ii) working capital, pending
receipt of advertiser sales. There is no assurance that the Company will be
successful in its efforts to fully fund the production through the advertiser
sales.
In July 1995, the Company entered into an arrangement with The Gerber
Company ("TGC") pursuant to which the services of TGC are provided to the
Company's television development and production operations for a two-year term
through August 1997, subject to a one year renewal option in favor of the
Company. Pursuant to this arrangement, David Gerber renders exclusive services
to the Company, subject only to his involvement with certain pre-existing
projects. Mr. Gerber, formerly a senior executive of both Columbia Pictures
Television and MGM Television, has assumed the position of President of AATP.
Mr. Gerber is responsible for developing programming for both network television
and, to a lesser extent, first-run syndication. While head of television
programming at a major studio, Mr. Gerber was responsible for television
projects such as thirtysomething and In The Heat of the Night. Mr. Gerber is
currently developing
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movies-for-television and episodic series for potential network, first-run
syndication and cable exhibition. The Company presently has a network commitment
in connection with, and has completed principal photography on, a
movie-of-the-week entitled On The Line, starring Linda Hamilton. There is no
assurance that the Company will be successful in its efforts to fully fund this
production through a combination of the network license fee and international
sales.
Domestic Television Distribution
In addition to producing Baywatch, the Company distributes the show
domestically to independent broadcast stations. The 1997/1998 broadcast season
will represent the seventh consecutive season for which the Company has produced
and domestically distributed the show and the eighth season of the series.
Through March 10, 1997, Baywatch had been licensed for the 1996/1997 broadcast
season to television stations covering more than 97% of the U.S. television
market.
In addition to producing Baywatch Nights for the 1996/1997 broadcast
season, the Company is distributing the show domestically and internationally.
The Company has entered into a sublicensing agreement for the distribution of
the show throughout Continental Europe. As of March 10, 1997, Baywatch Nights
had been licensed for the 1996/1997 broadcast season to television stations
covering more than 93% of the U.S. television market.
Through March 10, 1997, The Adventures of Sinbad had been licensed for the
1996/1997 broadcast season to television stations covering more than 90% of the
U.S. television market, including an agreement with the Tribune Entertainment
Company ("Tribune") whereby Tribune agreed to clear The Adventures of Sinbad on
its owned and operated television stations, including those in New York, Los
Angeles, Chicago, Philadelphia and Houston, representing more than 35% of the
U.S. television market. In consideration for clearing The Adventures of Sinbad
on its stations, Tribune retains the right to sell the national advertising time
in each weekly telecast of The Adventures of Sinbad for a specified fee.
During 1995, the Company launched a domestic rerun ("strip") syndication
package of 111 previously aired Baywatch episodes for broadcast during the
1995/1996 and 1996/1997 broadcast seasons ending September 1997 (at which time
such episodes are licensed to USA Networks pursuant to the license described
below). Domestic rerun syndication typically involves the exhibition of
programming five days a week on local television stations and/or cable services
after first-run exhibition. Typically, to be successful in rerun syndication, a
television series must have at least 66 episodes (the equivalent of three full
television seasons). Through March 10, 1997, the rerun syndication package had
been licensed to television stations covering more than 93% of the U.S.
television market on a cash and barter basis.
In May 1995, the Company entered into an exclusive license agreement with
USA Networks in regard to the licensing of 110 episodes of Baywatch, 22 episodes
of Sirens and 22 episodes of Acapulco H.E.A.T. The license agreement is
exclusive in the United States, its territories and possessions (including
Puerto Rico) over all forms of transmission by all means (including, without
limitation, free over-the-air broadcasts, basic and pay cable, or via video on
demand), other than by continuous first-run syndication and other than the rerun
strip syndication of the first episodes of Baywatch during the period commencing
June 26, 1995 through September 19, 1997. The initial term of the license
agreement has already commenced for certain series and will commence in
September 1997 for Baywatch, with a common termination date of September 2000
for such series. Revenue has been and will be recognized on commencement of the
license period for each show. The minimum license fee aggregates $30.6 million,
payable in 36 equal monthly installments of approximately $0.9 million
commencing September 1997 through August 2000. The license agreement also
provides that if Baywatch is produced for first-run syndication during the
1997/1998 broadcast season and certain conditions concerning the availability of
the leading performers (including David Hasselhoff who is currently in
negotiations with the Company for the 1997/1998 broadcast season) of the series
are met (or waived by USA Networks), USA Networks is obligated to extend the
license to include such broadcast seasons, and the minimum license fee is
increased by specified amounts. Upon production of Baywatch for the 1997/1998
broadcast season, the license fee would be increased by approximately $3.1
million. USA Networks also has certain options to extend the term of the license
for up to four years for additional specified consideration.
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GAME SHOWS
The Company believes that it is the largest supplier of game show
programming in multiple formats and languages worldwide.
The Company has substantially expanded and diversified its television
operations in the past two years through the acquisitions of Mark Goodson
Productions ("Goodson"), the producer and worldwide copyright owner and licensor
of many of the most successful game show formats ever developed, including The
Price Is Right, Family Feud, Match Game, What's My Line and Password; and
Fremantle International, Inc., which pioneered the international production of
American television game show formats in local versions and languages, both for
Goodson shows and shows developed by other producers such as Let's Make a Deal
and The Dating Game. These two acquisitions represent an aggregate investment by
the Company of over $100.0 million in total consideration plus, in the case of
the Mark Goodson Acquisition, a contingent earn-out of up to an additional $48.5
million based on a portion of domestic net profits in the five-year period
ending October 2000. The earn-out period is subject to extension for an
additional five years if total earn-out payments do not equal $48.5 million, in
which case the earn-out shall be payable in neither a minimum nor a maximum
amount.
The Company's current game show line-up consists of The Price Is Right, in
its 25th consecutive season on CBS, as well as local versions, in certain cases
renewed for multi-year periods, of The Price Is Right and Family Feud in Germany
and France. The Company has over 17,000 broadcast hours of rerun game show
programming produced by Mark Goodson Productions which are licensed to The Sony
Game Show Channel (the "Channel") through October 1997 when such licensing
rights revert to the Company. Additionally, the Company has recently acquired
the worldwide rights to the game show format Press Your Luck. The Company has
also recently expanded into the production and distribution of local versions of
U.S. style talk-shows in Europe through its acquisition of Orbis Entertainment
Company, Inc.
Copyright Ownership of Game Show Formats
By way of the Mark Goodson Acquisition, the Company acquired the formats to
some of the historically most popular game shows. Since 1946, Goodson has
produced approximately 30,000 episodes of television programming, totaling over
17,000 broadcast hours. Goodson was the creator of and, pursuant to the Mark
Goodson Acquisition, has transferred ownership rights to its popular game show
formats to the Company. The game show formats owned by the Company include:
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Beat the Clock Get the Message Password Plus That's My Line
Blockbusters He Said, She Said Play Your Hunch The Better Sex
Body Language Hit the Jackpot Press Your Luck The Match Game
By Popular Demand It's News To Me Rate Your Mate The Name's The Same
Call My Bluff! Judge For Yourself Say When! The Price Is Right
Card Sharks Make The Connection Showoffs To Tell The Truth
Child's Play Mindreaders Snap Judgment Trivia Trap
Split
Choose Up Sides Missing Links Personality Two For The Money
Double Dare Now You See It Spin To Win Winner Take All
Family Feud Number Please Super Password What's My Line?
New Family Feud Password Tattletales What's Going On
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International Production and Distribution
Through All American Fremantle International, Inc. ("AAFI"), the Company
currently distributes, and, in some cases, locally produces game shows
throughout Europe, Asia, Australia and South America. The Company believes that
it is one of the world's largest suppliers of television game shows outside of
the United States, producing and distributing more than 90 game shows in 29
countries. The Company's programming outside the United States has expanded to
include the distribution of the Mark Goodson Productions game show formats which
it owns, as well as other shows, including Let's Make A Deal, The $25,000
Pyramid and The Dating Game. AAFI has become one of the leading producers of
daytime entertainment in Germany, with three shows (including The Price Is Right
and Family Feud) airing on the RTL broadcast network and an additional three
shows broadcast on SAT 1. AAFI's franchise is also strong in the United Kingdom
and France, and the Company has operations, or is expanding its presence, into
the Netherlands, Greece, India, Asia and Australia.
The Company distributes and, in some cases, produces game shows pursuant to
licensing contracts ("producer contracts") with various producers who control
the rights to specific game show formats. The Company licenses the right to
create and/or distribute game shows on a local basis in various international
territories to terrestrial as well as satellite broadcasters using the
successful U.S. formats. Thus, for example, the Company produces German language
versions of The Price Is Right, known as Der Press Ist Heiss. The Company
licenses the right to produce The Price Is Right in France, where it is known as
Le Juste Prix, and Spain, where the show is called El Precio Justo. The rights
derived from the producer contracts are sub-licensed to broadcast outlets in
mostly Western European territories ("sub-license contracts") with major
television exhibitors. These sub-license contracts have terms which generally
range from one to three years with renewal options. While the sublicense
contracts are generally of a short term nature, the risk of their non-renewal
is, as historically determined, largely a function of ratings performance. In a
number of cases, the Company's programs are among the top rated programs in
their time slots and markets. There is no assurance that the Company can
continue to achieve the ratings necessary to cause the programs to be renewed or
that the programs will, in fact, be renewed. The third party producer contracts
generally include "tail" provisions or are subject to a course of dealing which
allow AAFI or the Company to retain distribution rights after the expiration of
the original term of the contract (except in certain circumstances where there
is a specific outside term) on stations in those territories in which the show
is already being broadcast. In such a case, the Company would not have the right
to sell the show into new territories unless a new contract was negotiated,
thereby limiting certain growth opportunities.
The development of strong international distribution capabilities has
complemented the Company's existing production business. For example, the
Company is distributing Baywatch Nights and The Adventures of Sinbad in both the
domestic and international marketplace. AAFI's management is broadly experienced
in the various facets of international television production and distribution,
and it has strong links with the advertising community.
U.S. Production and Distribution
Currently, the Company's only game show in initial exhibition is The Price
Is Right, in its 25th consecutive season, hosted by Bob Barker and exhibited on
the CBS network as a day-time program. The network has extended the series for a
period of 52 additional weeks through the 1997/1998 broadcast season and has
three annual renewal options, preceding the ensuing broadcast season
(exercisable on or prior to March 1), to further extend the term of the series.
Concurrently, the Company has extended its contract with Bob Barker for a period
of 52 additional weeks through the 1997/1998 broadcast season and has three
annual renewal options to further extend such contract. The network has reserved
the right, in the event of the unavailability of Bob Barker to serve as host for
any reason or cause, to retroactively convert the then term of the series to a
26 week period for the cycle then in progress. In such event, the network has
the right of approval with respect to a replacement for Bob Barker and the
commitment of a minimum of 26 additional weeks of new programs.
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The Company is also developing updated versions of three other Goodson game
show formats for possible network exhibition or first-run syndication In
addition to developing new game show programming, the Company is exploiting its
library of tapes of previous Goodson game show episodes. This library, which
includes over 17,000 broadcast hours of programming and approximately 30,000
episodes, is one of the largest game show libraries in the world. Goodson has
maintained high-quality tapes covering a substantial proportion of its
production. Prior to the Mark Goodson Acquisition, Goodson entered into a
license agreement with the Sony Game Show Channel, which license was assigned to
the Company as part of such acquisition. The Channel is a cable service
dedicated to the broadcast of game show material. For existing episodes, the
Goodson license to the Channel provides for certain exclusivity rights in the
United States and Canada in favor of the Channel other than for standard
broadcast television. The license also covers new episodes produced by third
parties under format licenses. For certain other new game show series, the
Channel has certain first negotiation rights for cable exploitation. The term of
the license expires on October 11, 1997 unless extended or renewed. There is no
assurance that the Company will be successful in its efforts to exploit its game
show formats or create new game show formats. See "-- Acquisitions" for a
description of the Mark Goodson Acquisition.
International Production and Distribution of Talk Shows
Through its acquisition of Orbis Entertainment Company, Inc., the Company
is seeking to expand the international game show franchise established by AAFI
into the talk show area, specifically by creating local versions of U.S. style
talk shows and other programming in local languages abroad. For certain talk
shows, Procter & Gamble France, SNC retains exclusivity provisions within
certain territories subject to the satisfaction of certain contractual
thresholds. See "-- Acquisitions." The Company has entered into a distribution
agreement with SAT 1 in Germany for the distribution of a weekly, one-hour,
reality show for the 1997/1998 broadcast season. The estimated budget for this
program is approximately $9.5 million. While the license fee for the program is
in excess of the estimated budget, there is no assurance that the license fee
will cover the actual costs of production.
LIBRARY
The Company has been building an extensive library of television
programming to support its distribution activities. The Company currently
distributes, represents or owns participation interests in 145 motion pictures,
32 television series, a variety of children's programming and live event
specials. The Company distributes All American Feature Theatre, a package of
feature length motion pictures acquired by the Company in separate agreements
with third party producers or distributors. The Company also distributes other
programming, including documentary series. In addition, the Company acquired
certain programming rights from Blair Entertainment Corporation and John Blair
Communications, Inc. in June 1992, including distribution rights to previously
aired episodes of Divorce Court.
The Company distributes children's television programming consisting of
both television series and animated feature films, including Heathcliff and
Inspector Gadget. In February 1993, the Company entered into a long term
(through 2004) sublicense agreement with The Family Channel for the animated
series Heathcliff for the domestic cable and syndication markets.
The distribution terms and rights vary as to media and geographic area for
each program, but are generally for representation or distribution throughout
the United States except for the game shows, which are for distribution both
domestically and internationally. Extension of terms may be available in certain
cases if the Company meets pre-defined performance standards. The Company
intends to seek extensions of the
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distribution periods for these properties on satisfactory economic terms,
although there is no assurance that the Company will be able to do so. The table
below sets forth certain of these properties as of March 10, 1997:
SERIES Baywatch, Baywatch Nights, Acapulco H.E.A.T., The
Adventures of Sinbad, America's Top Ten, BeachClash,
Divorce Court, Sirens, Stuntmasters, Tales From The
Darkside
CHILDREN'S SERIES Heathcliff, Inspector Gadget
MOTION PICTURES Bad Influence, Care Bears Movie, Care Bears Movie II,
Freeze Frame, Ghostwriter, Hansel and Gretel, It Nearly
Wasn't Christmas, Wild Orchid
BOB HOPE CLASSIC FILMS Cancel My Reservation, The Great Lover, How to Commit
Marriage, The Lemon Drop Films Kid, My Favorite Brunette,
Paris Holiday, The Private Navy of Sgt. O'Farrell, Road
to Bali, Road to Rio, Seven Little Foys, Son of Paleface
SPECIALS The Boy King, Christmas at the Movies, The Elvis Files,
Exploring Psychic Powers, The JFK Conspiracy, The Kennedy
Assassinations, Madonna Exposed, Mysteries of the
Pyramids, Remembering Marilyn, Return to the Titanic, The
Royal Family -- In Crisis
Acquisition of Properties for Distribution
The Company generally acquires properties for television distribution by
entering into agreements with producers/owners or by producing or co-producing
its own programs. The Company's distribution agreements generally provide that
the revenues derived from the program are allocated between the producer and the
Company on a pre-negotiated basis. Acquisitions are based on projected station
demand and acceptance as well as expected advertiser sponsorship.
Under some arrangements, the Company will guarantee that the producer's
share of the revenue will not be less than a specified dollar amount. In other
instances, the Company will provide the producer with a production advance, in
which case the Company usually recoups such advance before making any remittance
of the producer's share of revenues. Where possible, the Company has endeavored
to limit its risk by arranging for other distribution or major station groups to
provide production, financing and/or distribution services in exchange for a
portion of the Company's fees.
In addition to U.S. television broadcast and cable rights, the Company also
acquires, where available on acceptable terms, world-wide broadcast television
and non-standard television distribution rights (such as cable and videocassette
rights) to the programs which it distributes. These acquisitions are typically
on a long term exclusive basis, often between three and 12 years, in some cases
with various renewal options, and may provide that the Company has the right to
undertake production of the program if the producer fails to deliver the
contracted programming.
Concentration and Competition
Competition is intense in the production and distribution of television
programming. The Company's programming competes with other first-run
programming, network programming reruns, and programs produced by local
television stations. The Company competes with many other companies that have
been acquiring, producing and distributing programs longer than the Company,
most of which have greater financial resources than the Company. These
competitors include large television and film studios such as The Walt Disney
Company, Paramount Communications, Inc., Columbia Pictures, 20th Century Fox
Film Corp.,
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<PAGE> 10
Universal, Inc., and Warner Bros, Inc., as well as other television distribution
companies such as King World Productions, Inc. and Viacom, Inc. In addition,
vertical integration of the television broadcast market and the creation and
expansion of new "networks" which create a substantial portion of their own
programming, such as UPN (United Paramount Network) and WB (Warner Brothers,
Inc.), have decreased the number of available time slots for, and thereby
increased the competition among, programs marketed for first-run syndication by
independent syndicators like the Company. The Company also competes with
companies for the sale of television advertising time, including Tribune
Broadcasting Co., Viacom, Inc. and King World Productions, Inc.
The Company's success is highly dependent upon such various unpredictable
factors as the viewing preferences of television audiences. Public taste is
unpredictable, and a shift in demand could cause a loss of appeal in the
Company's programming. Television programming also competes for audiences with
many other forms of entertainment and leisure time activities, some of which
include new areas of technology (e.g., video games and the Internet), the impact
of which on the Company's operations cannot be predicted.
For the Company to successfully place its syndicated television programming
with independent television stations, the Company must generally enter into an
agreement with station groups which own stations in the New York, Los Angeles
and Chicago markets. The largest of these station groups include Chris Craft and
Tribune which own or operate stations covering approximately 19% and 35% of the
domestic television market, respectively.
During the years ended December 31, 1996, 1995 and 1994, The Fremantle
Corporation, a corporation not affiliated with the Company, accounted for 10%,
6% and 13% of consolidated revenues, respectively.
RECORDED MUSIC OPERATIONS
The Recorded Music Industry
According to statistics released by the Recording Industry Association of
America, Inc., sales in the U.S. recorded music industry increased 1.7% during
1996 to $12.5 billion, based in part on the shipment of 1.14 billion units of
records, tapes, compact discs ("CDs") and music videos. Industry wide unit
shipments of CDs grew 8.4% as compared to new shipments in 1995. CDs also
generally have a higher wholesale price and per unit gross profit margin than
vinyl records and tapes. However, recordable CDs, digital audio tape ("DAT") and
digital compact cassette ("DCC") technology enable consumers to make high
quality duplicates from original CDs and DATS. In the absence of adequate
copyright protection, recordable CD, DAT and DCC technology may affect industry
sales of CDs, DATs and DCCs. It is not possible to predict the extent to which
sales will be affected.
Recorded Music Artists and Catalog
The Company's recorded music division has been operating for approximately
15 years, nine years as a custom label and approximately the last six years as a
full service operation. During this period, the Company has released
approximately 140 albums of individual artists, groups, motion picture
soundtracks, and special projects and compilations. The Company's current roster
is comprised of 10 active artists, including James Brown and "Weird Al"
Yankovic, whose recently released album, entitled Bad Hair Day, went "platinum."
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The Company's music catalog currently has approximately 75 catalog albums in
active release. The following table sets forth certain albums in the Company's
catalog:
<TABLE>
<S> <C>
"WEIRD AL" YANKOVIC Alapalooza, Bad Hair Day, Dare to be Stupid, Even Worse, The Food
Album, Greatest Hits, Greatest Hits Vol. II, In 3-D, Off the Deep
End, Permanent Record (Box Set), Polka Party
JAMES BROWN Gravity, Greatest Hits of the Fourth Decade, Greatest Hits -- Live,
I'm Real, Live at the Apollo, Living in America, Love Overdue,
Universal James
SKEE-LO I Wish
SURVIVOR Caught in the Game, Eye of the Tiger, Greatest Hits, Moment of
Truth, Premonition, Vital Signs, When Seconds Count
E.L.O. PART II Electric Light Orchestra Part 2, Greatest Hits -- Live
THE NYLONS Because, Four on the Floor, Harmony, The Christmas LP, Live to Love
SWEET SABLE Old Time's Sake
12 GAUGE 12 Gauge, Let Me Ride Again
FREDDIE JACKSON Private Party
COUNT BASIE, Jazz Fest Masters
SARAH VAUGHN,
DIZZY GILLESPIE
EDDIE & THE CRUISERS Eddie: The Unreleased Tapes
JOHN CAFFERTY & Roadhouse, Tough All Over
THE BEAVER BROWN BAND
SOUNDTRACKS Another 48 Hours, Baywatch, Cliffhanger, Cobra, Eddie & The
Cruisers, Eddie & The Cruisers II: Eddie Lives, Never Talk to
Strangers, Rambo III, Revenge of the Nerds, Rocky IV, The
Transformers, UHF
</TABLE>
Music Distribution
Music distribution includes the sale and physical delivery of product to
retailers and the collection of the related receivables. Generally, the recorded
music industry attempts to restrict the return of products that remain unsold
through the use of a penalty percentage on returned product.
The Company has operated its recorded music division as a full service
label since September 30, 1990, and has obtained certain distribution services,
primarily physical delivery of the product, collection of receivables and
certain sales functions, from one of the major record distributors. Commencing
January 1, 1996, Warner/Elektra/Atlantic Corporation, a division of Time Warner,
Inc. ("WEA"), assumed responsibility for these distribution functions in the
domestic market pursuant to a distribution agreement with an initial term of
five years, under which WEA receives a distribution fee. David A. Mount, a
director of the Company, is an executive officer of WEA. The Company is
responsible for all other activities, including producing, marketing, promoting
and manufacturing recorded music product for domestic distribution. These
arrangements require the Company to fund various costs resulting in more risk to
the Company, as opposed to a "custom label" arrangement where, for a larger
distribution fee, the distributor assumes responsibility for substantially all
of the activities currently handled by the Company. The WEA distribution
agreement provided a $3.0 million nonrefundable, nonrecoupable payment to the
Company as consideration for the Company's entering into the agreement. This
agreement may be extended, at WEA's option, if at the end of the initial five
year term, net sales of the Company's product through WEA have not reached
$150.0 million. Such extension shall only continue until cumulative net sales
reach $150.0 million. During the years ended December 31, 1996, 1995 and 1994,
total recorded music and merchandising sales accounted for approximately 11%,
10% and 14% of consolidated revenues, respectively.
The Company has extended, effective July 1, 1995, its existing foreign
distribution agreement with PolyGram S.A. ("PolyGram") solely with respect to
its current catalog product for five years, expiring
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<PAGE> 12
June 30, 2000. PolyGram provides the Company with distribution and collection of
recorded music sales for which the Company earns a royalty based on recorded
music product sold throughout the world (net of reserves for returns), excluding
the United States, Canada and Japan. PolyGram is responsible for all costs and
expenses in connection with manufacturing, marketing, promotion and distribution
in its territories.
The Company has also entered into arrangements with other companies for
distribution of the Company's recorded music products in Canada (Attic) and
Japan (Pony/Canyon, Inc.). The agreement with Pony/Canyon, Inc. expired March
20, 1997. The Company is presently negotiating a new agreement for the continued
services of Pony/Canyon, Inc. in Japan and Southeast Asia. These arrangements
provide for advances to the Company against royalties to be earned by the
Company on recordings sold. The Company is in discussions with other companies
concerning the distribution of its new product in the PolyGram territories.
The Company owns 64-track digital and 24-track recording facilities which
enable the Company to produce recordings at a reduced cost in comparison to the
cost of using outside facilities.
Marketing and Promotion
Marketing involves advertising and otherwise gaining exposure for
recordings and artists through public performances and magazines, radio and
television, other media and point-of-sale material. Promotion consists of
efforts to obtain air play by radio stations of the recordings in coordination
with the marketing and distribution programs. Under its WEA distribution
agreement, the Company is responsible for all such domestic activities and
expenses.
Because the success of recording artists and releases is highly dependent
upon consumer tastes and critical response, as well as public awareness of
recording artists, the level of marketing and promotional activities and
expenses necessary in any particular instance cannot be predicted with
certainty.
The production and distribution of music videos to accompany certain major
record releases have become a promotional necessity and an additional financial
burden to the releasing company. These videos may significantly increase the
losses on any individual release if such recording is not successful, or
increase revenues on a successful recording.
Concentration and Competition
There are six major recorded music distribution companies: WEA, Sony Music,
BMG, PolyGram, Capitol Records/EMI (CEMA) and Universal Music Group. The
combined sales of these companies (with the inclusion of their independent
distribution) represent substantially all of the sales in the recording
industry. In recent years, significant consolidation has occurred through the
acquisition by these major companies of smaller recorded music companies, such
as the acquisitions by PolyGram of A&M, Island Records and Motown Record Corp.
The success of any musical release depends upon unpredictable and changing
factors such as the individual tastes of critics and consumers. The capital
resources, artist rosters and retail penetration of the "major" recorded music
companies are significantly greater than those of the Company. The greater
capital resources of the "majors" permit them to withstand longer periods of low
rates of successful releases.
The relatively large number of artists under contract with a "major" could
tend to increase the absolute number of profitable records produced by such a
company; however, there are also inherent risks of producing relatively large
numbers of unsuccessful products. While the Company has several successful
artists under contract, each of the "majors" has far larger numbers of such
artists under contract and may therefore be less affected than the Company by a
single success or failure.
Through the Company's arrangements for distribution with WEA and PolyGram
(as to catalog items), the Company seeks to take advantage of the distribution
facilities of two of the "majors" and their inherently greater market
penetration.
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ANCILLARY BUSINESSES
The Company generates additional revenue by merchandising certain of its
television properties, principally Baywatch, and by developing on-line and
interactive applications. The Company also retains music publishing rights with
respect to its television and recorded music products to the extent possible.
ACQUISITIONS
The Company from time to time considers the acquisition of program rights
and the expansion of its business through the acquisition of assets or
businesses of other entities engaged in operations complementary to the current
operations of the Company. This growth through acquisition strategy has
contributed significantly to the Company's success. As part of the
implementation of its strategy to acquire assets or businesses that increase
production and distribution capabilities, the Company significantly expanded its
international television production and distribution operations with the
acquisition of certain assets of Fremantle International, Inc. in August 1994
(the "Fremantle International Acquisition") and the Mark Goodson Acquisition in
October 1995 (completed as to the remaining 50% interest as of January 1996).
The price for the Fremantle International Acquisition consisted of $31.5
million in cash, 0.63 million shares of Common Stock and 2.52 million shares of
Class B Common Stock. Additionally, the Company incurred transaction costs of
$1.0 million. Upon consummation of the Fremantle International Acquisition,
certain international programming rights (excluding programming rights under the
Goodson contract) were transferred to the Company, and 100% of the non-voting
equity (representing 99% of the total outstanding equity) of Fremantle
International, Inc. (which held the programming rights under the Goodson
contract) was transferred to the Company. The Company has since converted a
portion of its non-voting shares into voting shares representing approximately
78.5% of the voting stock of Fremantle International, Inc.
As of October 6, 1995, the Company and The Interpublic Group of Companies
("Interpublic") consummated the Mark Goodson Acquisition, pursuant to which Mark
Goodson Productions, LLC (the "LLC") acquired substantially all of the assets
(excluding those relating to the lottery business) and assumed certain specified
liabilities (collectively, with the subsequent IPG/Goodson Agreement described
below, the "Mark Goodson Acquisition") of Mark Goodson Productions, L.P. and a
related company (collectively, the "Sellers"). The purchase price consisted of
payment by the Company of $25.0 million in cash and issuance by Interpublic of
$25.0 million in its common stock to the Sellers, together with a contingent
earn-out described below. In January 1996, the Company acquired from Interpublic
the remaining 50% interest of Mark Goodson Productions, LLC (the "IPG/Goodson
Agreement"). Under the earn-out, the LLC will initially pay to an assignee of
the Sellers a specified percentage of "Domestic Net Profits" (i.e. generally
gross receipts less production costs, if applicable, a distribution fee to the
Company under certain circumstances and residual payments) realized from the
exploitation in the United States and Canada of the Goodson game shows
(currently, primarily The Price Is Right) and other purchased television formats
during the five-year period following October 6, 1995, (which period is subject
to extension for an additional five years if total earn-out payments do not
equal $48.5 million, in which case the earn-out shall be payable in neither a
minimum nor a maximum amount). The specified percentage of Domestic Net Profits
payable to the Sellers with respect to The Price Is Right is 75% during the
network exhibition of the program during the five years after October 6, 1995
and otherwise the specified percentage is generally 50% for other programs.
However, the earn-out does not apply to any net profits realized from the
international exploitation of any of the purchased game shows or other purchased
television formats. Additionally, the Company incurred transaction costs of $0.9
million.
As a result of acquiring Interpublic's 50% interest in the LLC, 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 increases
goodwill, will be amortized coterminously with the original 25 year period used
for amortization of the purchase price. Through December 31, 1996, the accrued
contingent purchase price totaled $10.1 million (including Interpublic's share
through December 31, 1995 of $0.9 million). The Company has accounted for the
Mark Goodson Acquisition under the purchase accounting method effective January
1, 1996.
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As of July 1996, the Company entered into a Stock Purchase Agreement (the
"Orbis Agreement"), with Orbis Entertainment Company, Inc. ("Orbis"), a
television production company, and the shareholders of Orbis (the "Orbis
Acquisition") to purchase all of the outstanding shares of Orbis for an initial
purchase price of $2.5 million, which has been paid. In addition to the initial
purchase price, the Orbis Agreement, for the first five years, provides for a
contingent earn-out payment equal to 50% of net cash flow, as defined, and an
additional contingent payment due after year five based on the cash flows of
Orbis in years four and five, also as defined. Following the acquisition, the
name of Orbis was changed to All American Orbis, Inc. ("AAO"). The Company has
accounted for the Orbis Acquisition under the purchase accounting method. As of
July 1996, the Company entered into five year employment agreements with the AAO
executives.
GOVERNMENT REGULATION
In a decision released September 6, 1995, the Federal Communications
Commission ("FCC") repealed its financial interest and syndication rules
effective as of September 21, 1995. Those FCC rules, which were adopted in 1970
to limit television network control over television programming and thereby
foster the development of diverse programming sources, had restricted the
ability of the three established, major U.S. television networks (i.e., ABC, CBS
and NBC) to own and syndicate television programming. The impact of the repeal
of the FCC's financial interest and syndication rules on the Company's
operations cannot be predicted at the present time, although it is expected that
there will be increased in-house production of television programming for the
network's own use. It is possible that this change will have a negative impact
on the Company's business. Additionally, in international markets, the Company
may be subject to local content and quota requirements which effectively
prohibit or limit access to particular markets.
In a decision released September 1, 1995, the FCC repealed the Prime Time
Access Rule, effective August 30, 1996. The Prime Time Access Rule generally
prohibited network-affiliated television stations in the top 50 television
markets from broadcasting more than three hours of network programs, or programs
previously aired on a network, during the four prime time viewing hours (i.e.,
7:00 p.m. - 11:00 p.m. Eastern and Pacific time, and 6:00 p.m. - 10:00 p.m.
Central and Mountain times). Due to the Prime Time Access Rule, network
affiliated television stations often acquired a certain amount of programming
(typically including game shows) for exhibition during the prime time access
period from independent television producers and syndicators. While the
Company's sale of syndicated programming during prime time is primarily to
independent television stations rather than to network-affiliated stations, it
is possible that the repeal of the Prime Time Access Rule may constrict the
market for the Company's television programming, and that the Company might be
subject to increased competition.
On February 1, 1996, Congress passed the Telecommunications Act of 1996
(the "1996 Act"), and President Clinton signed it into law on February 8, 1996.
The 1996 Act is the first comprehensive re-write of the Communications Act of
1934, as amended (the "1934 Act") and dramatically changes the ground rules for
competition and regulation in virtually all sectors of the telecommunications
industry, from local and long-distance telephone services, to broadcasting,
cable television, and equipment manufacturing. The 1996 Act eliminates many
entry barriers to the telecommunications business, relaxes concentration and
merger rules, and delegates authority for implementing such Act to the FCC.
Pursuant to the 1996 Act, the FCC has revised broadcast multiple ownership
rules so as to allow a single individual, person or entity to own or control or
have a cognizable interest in television stations that reach as much as 35% of
the U.S. television market. In addition, as mandated by the 1996 Act, the FCC
has eliminated the numerical limits previously set forth in the FCC's rules on
the number of television stations that a given individual or entity could own,
or have an attributable interest in.
Under the 1996 Act, manufacturers of television set equipment will be
required to equip all new television receivers with a so-called "V-Chip" which
would allow for parental blocking of violent, sexually-explicit or indecent
programming based on a rating for any given program that would be broadcast
initially along with the program. Unless the television industry establishes a
voluntary ratings system by February 1998, the FCC is directed by the 1996 Act
to develop a ratings system based upon the recommendations of an advisory
committee selected by the FCC. A coalition of various segments of the
entertainment industry has devised a
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<PAGE> 15
voluntary industry ratings code for rating video programming with respect to
violent, sexual or indecent content. The recent implementation of a voluntary
industry ratings code by broadcasters is presently being evaluated and is
subject to modification.
Other provisions of the 1996 Act allow local exchange telephone companies
to offer multichannel video programming service, subject to certain regulatory
requirements, and allow for cable companies to offer local exchange telephone
service. The 1996 Act thus fosters the development of a larger number of video
program distribution sources.
The impact on the Company of the changes to the 1934 Act brought about by
the 1996 Act and by accompanying changes in FCC rules cannot be predicted at the
present time, although it is expected that there will be an increase in the
demand for video programming product as a result of the likelihood that these
regulatory changes will facilitate the advent of additional exhibition sources
for such programming. However, it is possible that recent alliances of certain
program producers and television station group owners, coupled with the recent
FCC rule revision allowing a single television station licensee to own
television stations reaching up to 35% of the nation's television households,
may place additional competitive pressures on program suppliers who are
unaligned with any television station group owners.
EMPLOYEES
The Company has approximately 316 full-time employees and 5 part-time
employees, of whom 71 are based in its Santa Monica office, 81 are based in its
New York and other U.S. offices, 93 are based in Germany, 32 are based in India,
25 are based in London and 19 are based in other countries, principally in
Europe. When in production, the Company has approximately 150 temporary
employees working on the production of episodic series such as Baywatch and
Baywatch Nights. The production season, typically runs from March to December,
with post-production activities typically continuing into the following March.
Various employees of the Company's subsidiaries working on production of
programming are, or were, covered by collective bargaining agreements with
various professional guilds, including the Screen Actors Guild, the Writers
Guild of America, the American Federation of Television and Recording Artists,
the Directors Guild of America and the Association of Canadian Television and
Radio Artists, depending upon production locations and various other factors.
The Company believes that its relations with employees are good.
ITEM 2. PROPERTIES
The Company conducts its domestic television production and recorded music
operations primarily from its headquarters in Santa Monica, California and
conducts its domestic distribution operations primarily from New York, New York.
The Company conducts its recording studio operations from Santa Monica,
California. The Company conducts its international television production and
distribution operations primarily from its administrative offices in New York,
New York, Hurth, Germany and London, England.
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The following table sets forth certain information relating to the
principal properties of the Company:
<TABLE>
<CAPTION>
SQUARE TERMS OF
LOCATION PRIMARY USES FEET OCCUPANCY
- -------------------- ------------------------------------------------- -------- --------------
<S> <C> <C> <C>
Santa Monica, Executive and administrative offices, Company 32,000 Leased(1)
California headquarters
New York, AATV executive administrative offices, sales 23,200 Leased(2)
New York office
New York, Administrative offices 8,000 Leased(3)
New York
Santa Monica, Administrative offices 2,200 Leased(4)
California
Marina del Rey, Administrative offices, production studio 29,600 Leased(5)
California
Marina del Rey, Administrative offices, production studio 13,000 Leased(6)
California
Santa Monica, Production offices, recording studio 10,000 Owned
California
London, England Executive and administrative offices 5,000 Leased(7)(18)
London, England Executive and administrative offices 2,000 Leased(8)(18)
Hurth, Germany Administrative offices, production studio 22,300 Leased(9)(18)
Munich, Germany Administrative offices 6,100 Leased(10)(18)
Ossendorf, Germany Administrative offices, production studio 12,400 Leased(11)(18)
Ossendorf, Germany Administrative offices, production studio 1,400 Leased(12)(18)
Paris, France Administrative offices Leased(13)(18)
Athens, Greece Administrative offices 3,200 Leased(14)(18)
New Delhi, India Administrative offices Leased(15)(18)
Hilversum, Administrative offices Leased(16)(18)
Netherlands
Hong Kong Administrative offices Leased
</TABLE>
- ---------------
(1) Lease provides for monthly base rent of approximately $69,000 commencing in
February 1996, subject to annual increases, and expires in February 2006,
with three additional two-year renewal options.
(2) Lease provides for monthly base rent of approximately $51,000 commencing on
June 1, 1994, subject to annual increases, and expires on May 31, 1999,
with an additional three-year renewal option.
(3) Lease provides for annual base rent of approximately $166,000 for the first
five years and approximately $181,000 for the last five years and expires
on March 1, 2001. A portion of this space is subleased to a non-affiliated
third party.
(4) Lease provides for a monthly base rent of approximately $4,500 commencing
in January 1997, subject to annual 5% increases, and expires in April 2001.
The property is owned by Anthony J. Scotti and Benjamin J. Scotti.
(5) Lease provides for a monthly base rent of approximately $20,500 and expires
in June 1997, with four additional one-year renewal options. The Company
has executed its renewal option extending the lease through June 1998 for a
monthly base rent of approximately $21,500.
(6) Lease provides for a monthly base rent of approximately $12,150 commencing
in March 1996 and expiring in February 1998.
(7) Lease provides for an annual base rent of approximately $98,600 through
November 3, 1997, with an additional five-year renewal option.
(8) Lease provides for annual base rent of approximately $32,000 through
November 4, 1997, with an additional five-year renewal option.
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<PAGE> 17
(9) Lease provides for annual base rent of approximately $279,200 through
termination on July 31, 1996. Lease continues month to month under similar
terms while being renegotiated.
(10) Lease provides for an annual base rent of approximately $109,300 through
termination on December 31, 1999.
(11) Lease provides for annual base rent of approximately $122,100 through
termination on October 1, 2000.
(12) Lease provides for annual base rent of approximately $30,600 through
termination on December 1, 1997.
(13) Lease provides for annual base rent of approximately $46,100 through
termination on July 14, 2006, subject to cancellation at the Company's
option on or after July 14, 1999.
(14) Lease provides for annual base rent of approximately $44,000 through April
14, 1997, with an additional three-year renewal option.
(15) Lease provides for annual base rent of approximately $33,500 through August
15, 1999, with an additional two-year renewal option.
(16) Lease provides for annual base rent of approximately $20,000 through August
31, 1997, with an additional one-year renewal option.
(17) Lease provides for annual base rent of approximately $38,100 through
December 15, 1998.
(18) Lease rates are based upon prevailing exchange rates and are subject to
currency fluctuation.
ITEM 3. LEGAL PROCEEDINGS
On or about August 19, 1996, the Company's Subsidiary, Mark Goodson
Productions, LLC (the "LLC") 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. The LLC is the
successor-in-interest under a license agreement (the "Agreement") with Grundy
whereby the LLC'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. The LLC declared a default in connection with Grundy entering into
various license agreements without obtaining the LLC's prior consultation and
approval as required under the Agreement, and Grundy took the position that such
license agreements were not subject to the consultation and approval provisions
of the Agreement and that the LLC did not fulfill the foregoing good faith
requirement. The LLC sought a declaration of rights, an accounting of all monies
received by Grundy under the licenses and all other appropriate relief. On March
12, 1997, the LLC and Grundy entered into a settlement agreement. Pursuant to
the settlement agreement, all rights granted to Grundy under the Agreement
reverted to the LLC as of June 29, 1996 except for certain existing rights
retained by Grundy.
On December 12, 1994, Credit Lyonnais Bank Nederland N.V. ("CLBN") made
demand upon SBEI under a Guarantee, dated July 29, 1986 (the "SBEI Guarantee"),
for payment of approximately $3.7 million plus interest accrued or costs
incurred since November 11, 1994 under a Loan and Security Assignment, dated
July 29, 1986, between CLBN and various former subsidiaries of SBEI relating to
the discontinued motion picture operations of the Company. In a letter dated
December 22, 1994, SBEI rejected the foregoing demand based upon, among other
reasons, the following: (i) that in a January 1993 agreement, CLBN agreed to
release all liens and any interests in any property or assets of SBEI, which in
effect released SBEI from any obligations under the SBEI Guarantee; (ii) the
loan purportedly guaranteed has been repaid; and (iii) SBEI is not a party to
and was not bound by a material amendment to the above-referenced Loan and
Security Assignment.
In addition, since approximately November 1993, CLBN and its
representatives have been reviewing certain books and records relating to the
distribution and production of certain motion pictures by Minority
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Pictures, Inc. (formerly Scotti Brothers Pictures, Inc.) or its subsidiaries for
which CLBN provided financing. In October 1994, CLBN requested that Minority
Pictures, Inc. and various of its current and former affiliates (including All
American Communications, Inc. and certain of its subsidiaries) execute a tolling
agreement which would have tolled any claims which CLBN may have against such
persons, including but not limited to causes of action based on such financing.
In December 1994, the Company responded that based upon the information provided
by CLBN, or the lack thereof, it was extremely unclear whether there were any
tenable claims against the Company and its subsidiaries and that the Company was
therefore unwilling to enter into any tolling agreement. The Company and CLBN
are currently engaged in discussions regarding the potential resolution of all
of their disputes. While there is no assurance that these discussions will be
successful in terminating the disputes, the Company believes that CLBN's claims
will not have a material adverse effect on the Company's financial position or
results of operations.
The Company is party to legal proceedings which are routine and incidental
to the business. The Company believes that the results of such litigation will
not have a material adverse effect on the Company's financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's stockholders for a vote during
the fourth quarter of the fiscal year covered by this report.
18
<PAGE> 19
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded on the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ") National Market
("NNM") under the symbol AACI. The Company's Class B Common Stock is traded on
the NNM under the symbol AACIB. The following table sets forth, for the periods
indicated, the high and low closing sale prices per share for the Common Stock
and the Class B Common Stock. For the period prior to December 14, 1995, the
table sets forth the high and low bid price quotations per share of the Common
Stock as reported on the NASDAQ SmallCap Market.
<TABLE>
<CAPTION>
CLASS B COMMON
COMMON STOCK STOCK
------------------- ------------------
LOW HIGH LOW HIGH
------- ------- ------ -------
<S> <C> <C> <C> <C>
YEAR ENDING DECEMBER 31, 1997
First Quarter (through March 10, 1997)............. $12.500 $15.250 $8.750 $11.500
YEAR ENDED DECEMBER 31, 1996
First Quarter...................................... 9.625 12.250 7.750 9.125
Second Quarter..................................... 10.000 11.875 7.375 9.125
Third Quarter...................................... 8.875 11.250 5.250 8.875
Fourth Quarter..................................... 11.500 14.375 8.625 10.750
YEAR ENDED DECEMBER 31, 1995
First Quarter...................................... 6.250 10.000 -- --
Second Quarter..................................... 8.250 11.500 -- --
Third Quarter...................................... 9.750 13.688 -- --
Fourth Quarter (through December 13, 1995)......... 9.875 13.375 -- --
Fourth Quarter (commencing December 14, 1995)...... 9.250 10.625 8.375 10.625
YEAR ENDED DECEMBER 31, 1994
First Quarter...................................... 7.250 9.750 -- --
Second Quarter..................................... 7.000 9.250 -- --
Third Quarter...................................... 7.000 9.750 -- --
Fourth Quarter..................................... 5.250 7.250 -- --
</TABLE>
On March 10, 1997, the closing sale prices of the Common Stock and Class B
Common Stock as reported on the NNM were $14.75 and $10.75 per share,
respectively. As of March 10, 1997, there were 72 holders of record of the
Common Stock and 5 holders of record of the Class B Common Stock.
DIVIDENDS
The Company did not pay dividends on its Common Stock or Class B Common
Stock during the years ended December 31, 1996, 1995 or 1994 and currently does
not intend to pay any dividends on its Common Stock or Class B Common Stock in
the foreseeable future. Further, the Company's credit facilities and Senior
Subordinated Notes restrict the payment of dividends to holders of the Company's
Common Stock or Class B Common Stock. See "Management's Discussion and
Analysis -- Liquidity and Capital Resources."
19
<PAGE> 20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth the Selected Consolidated Financial Data of
the Company for the five most recent fiscal years. In February 1993, the Company
transferred its ownership of certain indirect film company subsidiaries to a
third party. Such transfer has been accounted for as a discontinued operation as
of December 31, 1992. In February 1993, the Company acquired the stock of LBS
Communications, Inc. ("LBS"). The financial data for periods subsequent to
February 1993 reflect the acquisition of LBS. In August 1994, the Company
acquired certain assets, non-voting stock and assumed certain liabilities of
Fremantle International, Inc. through AAFI. The financial data for periods
subsequent to August 1994 reflect the results of AAFI. In October 1995, the
Company, in a joint venture with Interpublic, completed the Mark Goodson
Acquisition. The financial data for the period from October 6, 1995 through
December 31, 1995 reflects the Mark Goodson Acquisition, accounted for using the
equity method of accounting. The financial data for periods subsequent to
January 1, 1996, the date on which the Company acquired the remaining interest
in the joint venture, reflect the results of Mark Goodson, accounted for using
the purchase method of accounting. The data should be read in conjunction with
the Consolidated Financial Statements, related notes, and Management's
Discussion and Analysis included elsewhere in this Form 10-K.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Television......................................... $210,874 $206,734 $ 98,771 $ 57,407 $45,302
Recorded music and merchandising................... 25,584 22,026 16,130 13,215 12,616
-------- -------- -------- -------- -------
236,458 228,760 114,901 70,622 57,918
-------- -------- -------- -------- -------
Expenses:
Television......................................... 152,252 164,764 75,196 42,560 32,078
Recorded music and merchandising................... 17,903 15,803 10,750 9,780 9,250
Selling, general and administrative................ 26,197 24,102 21,523 16,074 13,471
Goodwill amortization.............................. 4,602 2,399 971 133 138
-------- -------- -------- -------- -------
200,954 207,068 108,440 68,547 54,937
-------- -------- -------- -------- -------
Operating income..................................... $ 35,504 $ 21,692 $ 6,461 $ 2,075 $ 2,981
======== ======== ======== ======== =======
Income from continuing operations, before
extraordinary charge............................... $ 14,106 $ 7,248 $ 455 $ 380 $ 1,863
======== ======== ======== ======== =======
Net income from continuing operations................ $ 12,686 $ 7,248 $ 455 $ 380 $ 1,863
======== ======== ======== ======== =======
Income (loss) per share applicable to common
stockholders from continuing operations(1):
Before extraordinary charge...................... $ 1.18 $ .87 $ .07 $ .87(2) $ (.18)(3)
======== ======== ======== ======== =======
After extraordinary charge....................... $ 1.06 $ .87 $ .07 $ .87(2) $ (.18)(3)
======== ======== ======== ======== =======
BALANCE SHEET DATA:
Receivables, net..................................... $109,982 $115,581 $ 62,338 $ 43,226 $27,178
======== ======== ======== ======== =======
Television program costs, net........................ $ 94,031 $ 74,644 $ 68,437 $ 52,381 $33,993
======== ======== ======== ======== =======
Total assets......................................... $359,735 $301,582 $208,007 $112,521 $74,130
======== ======== ======== ======== =======
Notes payable........................................ $179,000 $134,982 $115,343 $ 60,424 $11,234
======== ======== ======== ======== =======
Total liabilities.................................... $271,747 $233,302 $179,924 $105,018 $51,084
======== ======== ======== ======== =======
Redeemable stock:
Preferred.......................................... $ -- $ -- $ -- $ -- $11,124
======== ======== ======== ======== =======
Common............................................. $ -- $ -- $ -- $ -- $ 9,241
======== ======== ======== ======== =======
Stockholders' equity................................. $ 87,988 $ 68,280 $ 28,083 $ 7,503 $ 2,681
======== ======== ======== ======== =======
</TABLE>
- ---------------
(1) Fully diluted earnings per share for 1993 through 1996 were restated to
reflect the November 1996 redemption of the Company's 6 1/2% Convertible
Subordinated Notes. As a result of such restatement, the presentation of
fully diluted earnings per share is no longer required for the periods 1993
through 1996.
(2) Per share income from continuing operations applicable to common
stockholders for the year ended December 31, 1993 includes a gain of $3.9
million, which represents the excess carrying value of the redeemable
preferred and common stock formerly outstanding over the price paid for its
purchase, net of accretion and dividends on such redeemable stock.
(3) Per share loss from continuing operations applicable to common stockholders
for the year ended December 31, 1992 includes the effect of $2.7 million of
accretion and dividends on redeemable stock.
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a diversified entertainment company which produces,
distributes, markets and promotes television programs and recorded music both
domestically and internationally.
The television industry is 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 airing or broadcast of
programming over network affiliated stations, independent stations and cable or
satellite television.
The U.S. broadcast television market is served principally by network
affiliated stations, independent stations and cable and satellite television
operators. Broadcasters telecast network programming (in the case of network
affiliates); self and/or locally produced programming; and off-network
programming (reruns) or first-run programming from independent producers or
"syndicators" such as the Company. In general terms, a syndicator is a company
that sells programming to independent television stations and network
affiliates. Programming acquired by stations on a syndicated basis is acquired
either for a cash license fee or in exchange for a certain amount of commercial
advertising time within the program which is retained by the syndicator for sale
to advertisers ("barter"), or for a combination of cash and barter. The Company
domestically distributes programming for television produced by the Company or
unrelated third parties in the first-run and rerun syndication markets. In
general, the Company receives revenues from program license fees paid by
broadcasters and/or by selling advertising time for programs distributed on a
barter basis.
Barter syndication is the process whereby a syndicator obtains clearances
from television stations to broadcast a program in certain agreed upon time
periods, retains advertising time in the program in lieu of receiving a cash
licensing fee, and sells such retained advertising time for its own account to
national advertisers at rates based on projected ratings and viewer
demographics. From time to time, certain stations may obtain cash consideration
from the Company in addition to programming in exchange for advertising time
and/or a commitment for a particular time period. By placing the program with
television stations throughout the United States, the syndicator creates an "ad
hoc" network of stations that have agreed to carry the program. The creation of
this ad hoc network, typically representing a penetration of at least 70% of
total U.S. television households (calculated by means of a generally recognized
system as measured by Nielsen Media Ratings), enables the syndicator to sell the
commercial inventory through advertising agencies to sponsors desiring national
coverage (including but not limited to Procter & Gamble, Bristol Myers-Squibb,
MCI, SmithKline 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. See "Business -- Television
Operations -- Domestic Television Distribution."
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 subsidiary, AAFI, principally using game and variety show formats
acquired as part of the Mark Goodson Acquisition or from third parties and 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, AAFI'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 AAFI. In
addition to producing and distributing Company owned product, AAFI provides
television related producer-for-hire and distributor services for a fee.
In most cases, the Company's domestic and international distribution
revenues are based on a percentage of the net revenues derived from cash license
fees and/or the sale of advertiser sponsorships. The Company
21
<PAGE> 22
normally advances all distribution costs for items such as advertising,
promotion, and tape shipping and duplication and recovers such expenses out of
program revenues. The Company's fee for distribution is generally between 15%
and 35% of net revenues, and its fee for advertising sales representation is
generally between 10% and 15% of net revenues. However, each fee arrangement is
separately negotiated and may be subject to variation. Amounts remaining in
excess of the Company's distribution fees and recoupable expenses (including a
portion of the amounts derived from the sale of advertising time) are either
remitted in full to the producer from whom the Company obtained the distribution
rights, or, if the Company has a profit participation in the program, are shared
between the Company and the producer in accordance with a predetermined
allocation. In some instances, the Company will make an advance payment to the
producer to cover production costs or will guarantee the producer certain
minimum license fees. Such advance 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 television 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
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. 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. The results for 1996 reflect the full consolidation of the LLC, the
remaining 50% of which was acquired effective as of January 1, 1996.
Except for the historical information contained herein, certain of the
matters discussed in this 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 risk factors set forth in the Company's
registration statement on Form S-3 as filed with the Securities and Exchange
Commission on January 14, 1997, for a further discussion of these and other
risks and uncertainties applicable to the Company's business.
22
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total
revenues of certain items included in the Company's Consolidated Statements of
Operations for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
% OF TOTAL % OF TOTAL % OF TOTAL
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
-------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Television....................... $210,874 89.2% $206,734 90.4% $ 98,771 86.0%
Recorded music and
merchandising................. 25,584 10.8 22,026 9.6 16,130 14.0
-------- ----- -------- ----- -------- -----
236,458 100.0 228,760 100.0 114,901 100.0
-------- ----- -------- ----- -------- -----
Expenses:
Television....................... 152,252 64.4 164,764 72.0 75,196 65.5
Recorded music and
merchandising................. 17,903 7.6 15,803 6.9 10,750 9.4
Selling, general and
administrative................ 26,197 11.1 24,102 10.6 21,523 18.7
Goodwill amortization............ 4,602 1.9 2,399 1.0 971 0.8
-------- ----- -------- ----- -------- -----
200,954 85.0 207,068 90.5 108,440 94.4
-------- ----- -------- ----- -------- -----
Operating income................... 35,504 15.0 21,692 9.5 6,461 5.6
Other expense, net................. 11,184 4.7 9,195 4.0 5,676 4.9
-------- ----- -------- ----- -------- -----
Income before income taxes......... $ 24,320 10.3% $ 12,497 5.5% $ 785 0.7%
======== ===== ======== ===== ======== =====
</TABLE>
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995
Revenues
The Company's total revenues increased by $7.7 million, or 3%, to $236.5
million for the year ended December 31, 1996, from $228.8 million for the year
ended December 31, 1995. Revenues from television operations increased to $210.9
million (89% of total revenues) for the year ended December 31, 1996, from
$206.7 million (90% of total revenues) for the year ended December 31, 1995.
Recorded music and merchandising revenues increased to $25.6 million (11% of
total revenues) during the year ended December 31, 1996, from $22.0 million (10%
of total revenues) for the year ended December 31, 1995.
The increase in revenues from television operations of $4.1 million, or 2%,
for the year ended December 31, 1996, as compared with the year ended December
31, 1995, was due primarily to growth in the Company's AAFI operations
internationally (which increased $4.3 million over 1995, principally from the
Company's expansion into France), the availability in 1996 of The Adventures of
Sinbad (which contributed $16.7 million on the delivery of 19 episodes) and 22
new Baywatch episodes and the inclusion of a full year of revenues from the Mark
Goodson Acquisition, partially offset by the recognition of approximately $22.0
million of higher revenues in 1995 from initial licenses in connection with the
strip syndication of Baywatch, a decrease in revenues from certain other
programming and the recognition of revenues in 1995 from previously distributed
product (principally Sirens and the domestic distribution of Family Feud and
Acapulco H.E.A.T.).
The Company's AAFI operations contributed revenues of $86.8 million (37% of
total revenues) for the year ended December 31, 1996, as compared with $82.5
million (36% of total revenues) for the year ended December 31, 1995. Revenues
from German operations of $53.9 million (62% of total AAFI revenues) in 1996
decreased by 8% from $58.9 million (71% of total AAFI revenues) in 1995. Such
decrease was more than offset by increases in French licensing revenues to $15.8
million (18% of total AAFI revenues) in 1996 from $6.9 million (8% of total AAFI
revenues) in 1995.
Contributing to the increased television revenues was the inclusion of 100%
of a full year of revenues from the Mark Goodson Acquisition of $19.3 million
(after elimination of intercompany revenues) for the year ended December 31,
1996, as compared with the recognition of $3.6 million in revenues under the
equity method of accounting from October 6, 1995 (the date of acquisition of 50%
of the Mark Goodson assets)
23
<PAGE> 24
through December 31, 1995. Mark Goodson revenues, on a pro forma basis giving
effect to the Mark Goodson Acquisition as if it occurred on January 1, 1995,
increased by $4.8 million from $14.5 million for the year ended December 31,
1995 due to an increase in the number of The Price Is Right episodes delivered
over 1995 and non-AAFI international revenues.
Recorded music and merchandising revenues increased by $3.6 million, or
16%, to $25.6 million during the year ended December 31, 1996, from $22.0
million for the year ended December 31, 1995. This increase was primarily
attributable to higher sales of new releases, led by "Weird Al" Yankovic's
"platinum-selling" album entitled Bad Hair Day and an increase in merchandising
revenues.
The Company has, as of March 10, 1997, completed principal photography on
On The Line, a movie-of-the-week ("MOW") licensed for exhibition on the ABC
television network for approximately $3.0 million. The Company has also
committed, or plans to commit, to the production and distribution of the
Arthel/Fred Talk Show, a daily talk show hosted by Arthel Neville and Fred
Roggin; and Ghost Stories, an hour long weekly series. Both programs are
presently being cleared on independent television stations and network
affiliates. Furthermore, AAO has entered into an agreement with SAT 1 in Germany
for the distribution of a weekly one-hour reality show for license fees of
approximately $11.0 million. In addition to the above programming, the Company
has several projects in development including, but not limited to, MOWs and game
shows. There is no assurance that the Company's efforts to obtain sufficient
clearances with the broadcasters or the Company's development of new programming
will be successful.
Operating Expenses
Total operating expenses decreased by $6.1 million, or 3%, to $201.0
million for the year ended December 31, 1996, from $207.1 million for the year
ended December 31, 1995, due to a $12.5 million reduction in television
operating costs reflecting higher margins on the revenues from Mark Goodson
Productions partially offset by a $2.1 million increase in recorded music and
merchandising costs corresponding to higher recorded music and merchandising
revenues, a $2.2 million increase in goodwill amortization attributable to the
Mark Goodson Acquisition (see " -- Liquidity and Capital Resources") and a $2.1
million increase in selling, general and administrative expenses resulting
primarily from expansion of the Company's international operations as well as
increased corporate overhead of $1.1 million.
Television expenses, before overhead and goodwill amortization, decreased
by $12.5 million, or 8%, to $152.3 million (72% of total television revenues)
for the year ended December 31, 1996, from $164.8 million (80% of total
television revenues) for the year ended December 31, 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 AAFI revenues from certain French 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 year ended December 31, 1996 of $14.7 million
reflect an increase of $1.6 million over the year ended December 31, 1995 due to
planned increases in the AAFI operations and the Company's television promotion
and research departments. Goodwill amortization of $4.6 million for the year
ended December 31, 1996 increased $2.2 million, as a result of the Mark Goodson
Acquisition, from $2.4 million for the year ended December 31, 1995.
The Company's recorded music and merchandising expenses, before selling,
general and administrative expenses, increased $2.1 million, or 13%, to $17.9
million (70% of total recorded music and merchandising revenues) for the year
ended December 31, 1996, from $15.8 million (72% of total recorded music and
merchandising revenues) for the year ended December 31, 1995. The 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 $13.8 million, or 64%, to
$35.5 million for the year ended December 31, 1996, from $21.7 million for the
year ended December 31, 1995, due to an increase in
24
<PAGE> 25
television and recorded music and merchandising operating income offset by
increased goodwill amortization and corporate overhead.
Television operating income was $39.3 million (after the inclusion of
goodwill amortization of $4.6 million and selling, general and administrative
expenses of $14.7 million) for the year ended December 31, 1996, as compared to
$26.4 million (after the inclusion of goodwill amortization of $2.4 million and
selling, general and administrative expenses of $13.2 million) for the year
ended December 31, 1995. On a pro forma basis, giving effect to the Mark Goodson
Acquisition as if it had occurred on January 1, 1995, television operating
income decreased by $6.8 million, or 15%, 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 increased
to $2.1 million for the year ended December 31, 1996 (after the inclusion of
selling, general and administrative expenses of $5.6 million), from $0.01
million for the year ended December 31, 1995 (after the inclusion of selling,
general and administrative expenses of $6.2 million). This increase in recorded
music and merchandising operating income was primarily attributable to the
higher revenues discussed above.
Goodwill amortization for the year ended December 31, 1996 increased by
$2.2 million to $4.6 million, from $2.4 million for the year ended December 31,
1995, due to the inclusion of a full year of amortization in connection with the
Mark Goodson Acquisition. The Company expects to report amortization expense of
at least $4.8 million on an annual 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 Orbis Acquisition (the Company has no contingent
payment obligation through December 31, 1996), or in the event of future
acquisitions.
Foreign Currency Exchange Gain/(Loss)
The Company recognized a foreign currency exchange loss of $0.2 million for
the year ended December 31, 1996, as compared to a foreign currency exchange
gain of $0.3 million for the year ended December 31, 1995 which results from the
settlement and valuation of certain licensing agreements, denominated in foreign
currencies, into U.S. dollars as of December 31, 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. Currency fluctuations impact the
Company only to the extent the Company repatriates funds from or provides funds
to its offices in foreign countries. The Company, on an ongoing basis, monitors
its exposure to foreign currency risk. When, in management's opinion, the
foreign currency risk exposure becomes greater than the cost of foreign currency
swap agreements, the Company will consider entering into such agreements. As a
result of the recent strengthening of the U.S Dollar relative to several
European currencies, the Company may suffer declines in the value of future
overseas agreements denominated in U.S. Dollars.
Interest Expense
Interest expense, net of capitalized interest ($0.9 million) and interest
income ($1.7 million), increased by $1.7 million to $11.0 million for the year
ended December 31, 1996, from $9.3 million, net of capitalized interest ($1.2
million) and interest income ($0.7 million), for the year ended December 31,
1995, due to increased borrowings in connection with the Mark Goodson
Acquisition and increased borrowings related to the temporary concurrent
outstanding borrowings under the Company's $100.0 million, 10 7/8% Senior
Subordinated Notes due 2001 ("Senior Notes") issued in October 1996 and the
Company's 6 1/2% Convertible Subordinated Notes due 2003 ("Convertible Notes")
prior to the redemption (in November 1996) of such Convertible Notes (resulting
in additional interest expense of approximately $0.5 million), partially offset
by reduced borrowings as a result of pay downs from operating cash flow 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,
25
<PAGE> 26
continuing production and expansion and the Company's recent issuance of its
Senior Notes (see " -- Liquidity and Capital Resources").
Income Taxes
The Company recorded a tax provision for the year ended December 31, 1996
of $10.2 million and $5.2 million for the year ended December 31, 1995,
representing an effective tax rate of approximately 42%.
Extraordinary Charge
On November 27, 1996, the Company redeemed the balance of the Convertible
Notes outstanding. Through November 27, 1996, Convertible Notes with principal
amounts totaling $16.1 million had been converted into the Company's Common
Stock, the Company had purchased and retired $22.9 million principal amount and
redeemed $21.0 million principal amount of the Convertible Notes. The
Convertible Notes were redeemed for 104.643% of par plus accrued interest. The
net expense of the redemption and purchase of certain of the Convertible Notes
was $2.4 million. Such cost, net of the related tax benefit of $1.0 million, has
been treated as an extraordinary charge on the statement of operations.
Net Income
Net income, before the extraordinary charge of $1.4 million discussed
above, was $14.1 million for the year ended December 31, 1996, which represents
a 95% increase when compared with net income of $7.2 million for the year ended
December 31, 1995. The variance is attributable to matters discussed above.
Earnings per share increased to $1.06 per share ($1.18 per share before the
extraordinary charge) for the year ended December 31, 1996, as compared to $0.87
per share for the year ended December 31, 1995, due to an increase in the net
income reported by the Company, partially offset by an increase in the weighted
average number of outstanding common shares and common share equivalents. Such
increase in shares is due to the full year inclusion of the 3.2 million shares
issued in connection with the Company's Class B Common Stock offering in
December 1995, the weighted average of 1.4 million shares of Common Stock issued
upon conversion of $16.1 million in principal of the Convertible Notes through
1996, as well as an increase in the number of equivalent shares of outstanding
options and warrants determined using the modified treasury method. These
increases in shares were partially offset by the weighted average of the Class B
shares repurchased by the Company in October 1996. In November 1996, the Company
redeemed all of the outstanding Convertible Notes. Accordingly, subsequent to
such redemption, the fully diluted earnings per share calculation has been
recomputed without including the equivalent shares related to the portion of the
Convertible Notes which were redeemed or purchased by the Company ($43.9
million) for all periods presented. As a result, fully diluted earnings per
share, which now approximates primary earnings per share for all periods
presented, is no longer presented.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1994
Revenues
The Company's total revenues increased by $113.9 million, or 99%, to $228.8
million for the year ended December 31, 1995, from $114.9 million for the year
ended December 31, 1994. Revenues from television operations increased by $107.9
million, or 109%, to $206.7 million for the year ended December 31, 1995, from
$98.8 million for the year ended December 31, 1994. This increase was due
primarily to: (i) the inclusion of AAFI revenues of $82.5 million for the year
ended December 31, 1995 compared to $31.8 million for five months (from the date
of the Fremantle International Acquisition) through December 31, 1994; (ii) the
recognition of Baywatch strip syndication revenue of $33.0 million; (iii) the
recognition of $19.8 million from the new one-hour series Baywatch Nights,
reflecting the delivery of 17 of the 22 episodes for the 1995/1996 broadcast
season; and (iv) the recognition of $3.6 million, representing the Company's
share of earnings relating to the Mark Goodson Acquisition for the period
commencing October 6, 1995 through year-end, before amortization of goodwill and
interest charges. AAFI revenues from the production and distribution of
television programming in Germany contributed $58.9 million, or 71%, of AAFI
revenues. On a pro forma basis, AAFI revenues, assuming a full 1994 year,
increased by $20.1 million, or 32%, to $82.5 million for the year ended December
31, 1995, due principally to the commencement of additional production
operations in
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Germany during the year and the increased participation of AAFI in the purchase
of prize merchandising for its programming.
Recorded music and merchandising revenues increased by $5.9 million, or
37%, to $22.0 million during the year ended December 31, 1995, from $16.1
million for the year ended December 31, 1994. This increase was primarily
attributable to: (i) higher sales of new releases, led by the new artist
Skee-Lo's "gold-selling" album entitled I Wish; (ii) the recognition of a $3.0
million non-refundable, non recoupable advance receivable from WEA upon the
signing of a new domestic distribution agreement; and (iii) merchandising
revenues of $1.8 million for the year ended December 31, 1995, compared to $.4
million for the year ended December 31, 1994. Partially offsetting these revenue
increases was a decrease in foreign licensing advances received for the year
ended December 31, 1995, compared with the year ended December 31, 1994.
Operating Expenses
Total operating expenses increased by $98.7 million, or 91%, to $207.1
million for the year ended December 31, 1995, from $108.4 million for the year
ended December 31, 1994. This increase was due primarily to: (i) the inclusion
of AAFI operating expenses which increased by $48.5 million, or 195%, to $73.4
million (89% of AAFI revenues) for the year ended December 31, 1995 (including
AAFI overhead and $2.0 million of goodwill amortization), from $24.9 million
(78% of AAFI revenues) for the five months (from the date of the Fremantle
International Acquisition) through December 31, 1994; and (ii) amortization of
television program costs of $90.4 million for the year ended December 31, 1995,
an increase of $57.9 million (including an increase of $9.0 million in
amortization included in AAFI operating expenses above), or 178%, from $32.5
million for the year ended December 31, 1994, due to the higher television
revenues. Selling, general and administrative expenses, including corporate
overhead and goodwill amortization, increased by $4.0 million, or 18%, to $26.5
million for the year ended December 31, 1995, from $22.5 million for the year
ended December 31, 1994. This increase was due principally to the inclusion of
AAFI overhead, including goodwill amortization, for the full year in 1995
compared with five months in 1994.
The Company's television expenses increased by $89.6 million, or 119%, to
$164.8 million (80% of total television revenues) for the year ended December
31, 1995, from $75.2 million (76% of total television revenues) for the year
ended December 31, 1994. The increase was primarily due to the increase in AAFI
expenses described above, increased amortization of television program costs
attributable to increased revenues and increased distribution expenses in
connection with the first run and strip syndication of Baywatch. Television
selling, general and administrative expenses for the year ended December 31,
1995 increased by $3.1 million, or 31%, to $13.2 million from $10.1 million for
the year ended December 31, 1994, due primarily to the $3.1 million increase in
AAFI charges of $5.5 million for the year ended December 31, 1995, from $2.4
million for five months (from the date of the Fremantle International
Acquisition) through December 31, 1994. On a pro forma basis, AAFI expenses,
assuming a full year, increased by $19.2 million, or 35%, to $73.4 million for
the year ended December 31, 1995, from $54.2 million for the pro forma year
ended December 31, 1994. Such increase was related to the commencement of
additional production operations in Germany during the year and the increased
participation of AAFI in the purchase of prize merchandising for its
programming.
Goodwill amortization for the year ended December 31, 1995 increased by
$1.4 million, or 140%, to $2.4 million from $1.0 million for the year ended
December 31, 1994, due to the inclusion of goodwill amortization related to the
Fremantle International Acquisition of $2.0 million for the year ended December
31, 1995, an increase of $1.2 million, or 150%, from $.8 million for the five
months (from the date of the Fremantle International Acquisition) ended December
31, 1994. As a result of the agreement by the Company to acquire the balance of
the equity of the Goodson LLC effective January 1, 1996, in consideration for
$27.8 million in cash and notes, which includes approximately $2.8 million for
Interpublic's share of earnings through December 31,1995, additional goodwill
amortization of $1.0 million will be recognized per year before consideration of
contingent earnout amounts (for which the Company will recognize 100% of the
increased amortization). Corporate overhead of $4.7 million for the year ended
December 31, 1995 decreased by $.9 million, or 16%, from $5.6 million for the
year ended December 31, 1994, due primarily to charges for certain one-time
employment terminations taken in 1994.
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The Company's recorded music and merchandising expenses increased $5.0
million, or 47%, to $15.8 million (72% of recorded music and merchandising
revenues) for the year ended December 31, 1995, from $10.8 million (67% of music
and merchandising revenues) for the year ended December 31, 1994. This increase
was primarily due to an increase of $3.7 million in artist related costs to
$14.5 million for the year ended December 31, 1995, from $10.8 million for the
year ended December 31, 1994, and merchandising costs of $1.3 million compared
with no costs in the comparable prior period.
Operating Income
Total operating income for the Company increased $15.2 million, or 236%, to
$21.7 million for the year ended December 31, 1995, from $6.5 million for the
year ended December 31, 1994, due principally to increases in television
operating income. Operating income from television operations increased by $13.9
million, or 111%, to $26.4 million for the year ended December 31, 1995, from
operating income of $12.5 million for the year ended December 31, 1994. Such
increase in television operating income, which was primarily attributable to the
increases in revenues and expenses discussed above, was partially offset by
increases in amortization of goodwill and overhead.
The Company's recorded music division recognized operating income of $0.01
million (after inclusion of selling, general and administrative expenses of $6.2
million), for the year ended December 31, 1995, compared to an operating loss of
$0.5 million (after inclusion of selling, general and administrative expenses of
$5.8 million) for the year ended December 31, 1994. Such increase was primarily
attributable to the increased revenue discussed above.
Foreign Currency Exchange Gain
The Company recognized a foreign currency exchange gain of $0.3 million for
the year ended December 31, 1995, compared to a foreign currency exchange gain
of $0.1 million at December 31, 1994 which results from the settlement and
valuation of certain licensing agreements, denominated in foreign currencies,
into U.S. Dollars as of December 31, 1995 and 1994, respectively. The Company
has not entered into any foreign currency swap agreements or any other foreign
currency hedging activities. The Company has experienced in the past, and may
experience in the future, gains and losses as a result of fluctuations in
exchange rates.
Interest Expense
Interest expense, net of interest capitalized ($1.2 million) and interest
income ($0.7 million), increased by $3.6 million, or 63%, to $9.3 million for
the year ended December 31, 1995, from $5.7 million, net of interest capitalized
($0.4 million) and interest income ($0.2 million), for the year ended December
31, 1994, due to increased borrowings in connection with the Fremantle
International Acquisition and as a result of increased production activities.
The Company expects that the trend of increased interest costs will continue in
part as a result of increased borrowings in connection with the Mark Goodson
Acquisition and the purchase of the balance of the equity of the LLC.
Income Taxes
The Company recorded a tax provision for the years ended December 31, 1995
and 1994 in the amount of $5.2 million and $0.3 million, respectively, which
reflects an expected effective tax rate for both 1995 and 1994 of 42%.
Net Income
Net income increased by $6.7 million to $7.2 million for the year ended
December 31, 1995, from a net income of $.5 million for the year ended December
31, 1994, as a result of factors discussed above. Earnings per share increased
to $0.87 per share for the year ended December 31, 1995, compared to income of
$0.07 per share for the year ended December 31, 1994, due to the period to
period increase in net income partially offset by an increase in the outstanding
number of weighted average common shares and common share equivalents.
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Such increase of shares was due to the inclusion of the shares of stock issued
in connection with the Fremantle International Acquisition for the year through
December 1995, compared with five months through December 1994, the issuance of
additional shares in a public offering, and an increase in the number of
equivalent shares from outstanding options and warrants determined using the
treasury method.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its cash flow requirements through
cash flows generated from operations, the issuance of securities and bank and
other third party financings. The proceeds of these financings were used to
complete the Mark Goodson Acquisition, the Fremantle International Acquisition
and the LBS Acquisition, to finance the Company's operations, including the
production of Baywatch, Baywatch Nights and The Adventures of Sinbad, and 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. In connection with the amendment and restatement,
the Company initially utilized $30.0 million of the Restructured Credit
Facility: (i) to pay notes payable of $15.4 million, including accrued interest,
to Interpublic; (ii) to purchase, for $10.0 million, a portion of certain
outstanding Convertible Notes; (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% (ranging from 6.19% to 7.0% as of March 10, 1997); 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%
(8.75% as of March 10, 1997), subject to increase by 1/2 of 1% in the event of
the Company's failure to satisfy certain financial ratios. As of February 28,
1997, the Company had outstanding borrowings of $76.3 million under the
Restructured Credit Facility with $60.3 million available for borrowing. As of
February 28, 1996, the Company had cash, cash equivalents and borrowing capacity
of approximately $87.0 million. 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 prior bank consent under the
Restructured Credit Facility. Furthermore, certain conditions must be satisfied
before the funding of each season of certain television series. Loans under the
Restructured Credit Facility may be made as "Domestic Loans" to All American
Communications, Inc. or as "Foreign Loans" to All American Netherlands B.V.,
subject to borrowing base availability. All outstanding loans as of March 10,
1997 are "Domestic Loans." Substantially all of the Company's assets (other than
real property) are pledged as collateral under the Restructured Credit Facility
agreement.
On October 11, 1996, the Company issued $100.0 million principal amount 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 the Company
which mature October 15, 2001 and bear interest at 10 7/8% per annum, payable
semi-annually 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
totaled approximately $96.0 million. Net proceeds were used principally to
purchase and redeem the Company's 6 1/2% Convertible Subordinated Notes Due
2003, to repurchase approximately 500,000 shares of the Class B Common Stock and
to temporarily repay bank borrowings. 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.
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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 the
Company enters into a letter of intent or makes a public announcement (a "Sale
Transaction Triggering Event") 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, 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, 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 ("Exchange
Offer") to the holders of the Original Notes (as defined in the Registration
Rights Agreement). As of December 11, 1996 (the expiration date of the Exchange
Offer), the Exchange Offer was completed, and all original notes were exchanged
for publicly tradable notes.
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 terms of the Class B Common Stock are identical to those of the Company's
Class A Common Stock, except the Class B Common Stock is non-voting other than
as required by law. Net proceeds from the Stock Offering totaled $30.5 million
after deducting the underwriters' discount of $2.4 million and offering expenses
of $.7 million.
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. On November 27, 1996, the Company redeemed the remaining
outstanding Convertible Notes. Through November 27, 1996, $16.1 million
principal amount of the Convertible Notes had been converted into the Company's
Common Stock, the Company had purchased and retired $22.9 million principal
amount and redeemed $21.0 million principal amount of the Convertible Notes. The
Convertible Notes were redeemed for 104.643% of par, plus accrued interest. The
net expense of the redemption and purchase of certain of the Convertible Notes,
was $2.4 million. Such cost, net of the related tax benefit of $1.0 million, has
been treated as an extraordinary charge on the statement of operations.
During the year ended December 31, 1996, the Company generated cash of
$11.2 million from its operations which was an increase in net cash provided
from operations of $28.2 million compared to the $17.0 million of net cash used
by its operations during the year ended December 31, 1995. This positive cash
flow from operations was due primarily to increased cash flow from earnings of
$13.5 million as compared with the 1995 period, a decrease in accounts
receivables of $10.8 million (primarily from collections on the strip
syndication of Baywatch) and an increase in accounts payable, accrued expenses
and royalties payable of $8.4 million, partially offset by net payments to
producers and participants of $12.7 million and net additions to television
program costs of $111.5 million (primarily related to the 1996/1997 broadcast
season) as compared with net additions of $96.6 million in the 1995 period.
During the year ended December 31, 1996, the Company utilized $39.9 million from
investing activities, principally related to the Mark Goodson Acquisition. The
Company experienced a net increase in cash flow from financing activities of
$50.0 million during the year, primarily due to the issuance of the Senior
Notes, partially offset by the Company's
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redemption of its Convertible Notes. 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, out of
its lines of credit or outside sources.
As described more fully below, the Company will have substantial capital
requirements during the next twelve months, principally arising from the
acquisition, production and distribution of television programming, the
continued release of recorded music product requiring related marketing,
promotion and recording expenses and debt servicing costs. The commencement of
production of television programming for the 1996/1997 broadcast season has
required the Company to incur substantial production costs associated with its
television distribution operations. The Company believes that its existing
working capital, together with borrowings under its bank line of credit,
anticipated cash flows from operations and other available funding sources, will
be sufficient to meet its expected working capital needs for at least the next
twelve months.
The Company, from time to time, considers the acquisition of businesses
complementary to its current operations. 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 the sale of advertising time, the Company often is required
to make payments under such guarantees in advance of generating revenues and
receipts. Any expansion of the Company's business could require the Company to
make substantially increased advance payments or provide guarantees to third
parties. Further, there is no assurance that such amounts will be recouped by
the Company and, if not recouped, that such payments will not have a material
adverse affect on the Company. In addition, the Company's working capital
requirements in connection with its development and production activities
relating to potential network programming are expected to increase substantially
as a result of the Company's agreement, effective August 1995, with The Gerber
Company. The cost of production of network programming is typically partially
offset by the related network license fee. See "Business -- Television
Operations -- Domestic Television Production."
The Company and Atlantis Releasing B.V. ("Atlantis") have produced 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
$0.7 million of the $0.9 million per episode production budget, the Company
retains exclusive distribution rights to The Adventures of Sinbad in the United
States and Europe (including the United Kingdom and excluding Scandinavia). The
Company, under certain circumstances, has an annual option to cause Atlantis to
produce up to 22 new episodes in each of the three subsequent broadcast seasons,
exercisable on or before February 15 of each of such subsequent broadcast
seasons. At the end of three years, if Atlantis does not exercise its right to
continue producing The Adventures of Sinbad, the right to produce the series
reverts to the Company. The Company has exercised its option to cause Atlantis
to produce 22 new episodes of The Adventures of Sinbad for the 1997/1998
broadcast season. The Company's share of the total production budget is expected
to be funded primarily through a combination of: (i) barter advertiser sales;
(ii) cash payments from international licensees; and (iii) working capital,
pending receipt of license fees and advertiser sales. There is no assurance that
the Company will be successful in its efforts to fully fund these productions
through a combination of the advertiser sales and international sales.
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The Company has entered into agreements with New Dominion Productions and
Bristol-Myers Squibb to produce 22 one-hour episodes of a new series entitled
Ghost Stories for the 1997/1998 broadcast season with an estimated aggregate
production budget of $7.5 million. The Company's agreement with Bristol-Myers
Squibb provides the latter with a substantial portion of the available barter
advertiser time for $3.5 million, net of agency commissions. The remaining
portion of the production budget is expected to be funded primarily through a
combination of: (i) sales of the remaining barter advertiser time; (ii) cash
payments from international licensees; and (iii) working capital, pending
receipt of license fees and advertiser sales. There is no assurance that the
Company will be successful in its efforts to fully fund the production through a
combination of the advertiser sales and international sales.
The Company has an option to enter into personal service agreements with
Arthel Neville and Fred Roggin, for an initial 13 week period with options for
subsequent periods, for the production of a five day a week talk show program
for the 1997/1998 broadcast season entitled the Arthel/Fred Talk Show. The
estimated production budget will be approximately $0.3 million per week for up
to 35 weeks. The production budget is expected to be funded primarily through a
combination of: (i) barter advertiser sales; and (ii) working capital, pending
receipt of advertiser sales. There is no assurance that the Company will be
successful in its efforts to fully fund the production through the advertiser
sales.
The Company has entered into a distribution agreement with SAT 1 in Germany
for the distribution of a weekly, one-hour, reality show for the 1997/1998
broadcast season. The estimated budget for this program is approximately $9.5
million. While the license fee for the program is in excess of the estimated
budget, there is no assurance that the license fee will cover the actual costs
of production.
In December 1996, the Company completed production of 22 one-hour episodes
of Baywatch for the 1996/1997 broadcast season. The total production budget of
approximately $23.0 million for the 1996/1997 broadcast season was funded
through a combination of: (i) borrowings under the Restructured Credit Facility;
(ii) cash payments by The Fremantle Corporation (a company not related to AAFI
and Fremantle) pursuant to its foreign distribution agreement with the Company;
(iii) proceeds from the Senior Note offering; and (iv) working capital, pending
receipt of license fees and advertiser sales. The Company has exercised its
option with the producers of Baywatch to produce 22 episodes of Baywatch for the
1997/1998 broadcast season. The total production budget of approximately $24.0
million for the 1997/1998 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; (iii) collection of advertiser
sales; and (iv) working capital, pending receipt of license fees and advertiser
sales.
Through March 10, 1997, the Company completed production on 22 episodes of
Baywatch Nights for the 1996/1997 broadcast season. The total production budget
of approximately $21.0 million for the 1996/1997 broadcast season was funded
through a combination of: (i) borrowings under the Restructured Credit Facility;
(ii) cash payments received from international licensees; (iii) collections of
license fees and advertiser sales; and (iv) proceeds from the Senior Note
offering.
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 10 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.
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Minimum contractual commitments to existing artists totaled approximately
$0.6 million at March 12, 1997, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Item 8 are set
forth in the pages indicated in Item 14(a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 7, 1996, the Audit Committee (the "Audit Committee") of the Company
approved the engagement of Price Waterhouse LLP as its independent accountants
as a replacement of the Company's prior independent accountants, Ernst & Young
LLP.
The audit reports of Ernst & Young LLP on the consolidated financial
statements of the Company for the two fiscal years ended December 31, 1995 did
not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principles.
Ernst & Young LLP audited the Company's 1995 and 1994 financial statements
in addition to auditing financial statements for certain prior fiscal years. In
connection with the Company's two fiscal years ended December 31, 1995 and any
subsequent interim period, the Company believes that there were no disagreements
with Ernst & Young LLP on any manner of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which, if not
resolved to their satisfaction, would have caused them to make reference to the
subject matter of the disagreement in connection with their report. However,
following discussions with Ernst & Young LLP subsequent to their termination,
the Company notes two accounting matters which Ernst & Young LLP believes
constitute disagreements within the meaning of Item 304 of Regulation S-K but
which were both resolved to Ernst & Young LLP's satisfaction prior to the
issuance of their reports on the aforementioned financial statements.
The first matter involved certain communications between the Company and
Ernst & Young LLP involving the Company's accounting during certain periods
prior to the 1994 reporting period for the capitalization and deferral of
advance royalties paid to recording artists. As recently as March 1996, the
Company contended, subject to the receipt of additional information, that Ernst
& Young LLP had recently interpreted such standards differently (and less
restrictively) in dealings with another publicly traded music client. Ernst &
Young LLP has advised the Company that such standards have been interpreted on a
consistent basis in relation to all of its clients in accordance with generally
accepted accounting principles.
The second matter, in connection with the audit of the financial statements
for the year ended December 31, 1995, involved a proposed reduction of $0.7
million by the Company in the reserve accounts in the recorded music segment and
an equal increase in the reserve accounts in the television segment. After Ernst
& Young LLP informed the Company's management that the full amount of the
adjustment could not be supported, the Company did not make such adjustment.
In connection with the Company's audit for the current fiscal year, the
Company solicited bids from independent accountants, including Ernst & Young
LLP, for accounting services to be provided to the Company. Ernst & Young LLP
submitted a bid but was not selected, and thus its services have been
terminated. The winning bidder was Price Waterhouse LLP.
The Company requested Ernst & Young LLP to furnish the Company with a
letter addressed to the Securities and Exchange Commission stating whether Ernst
& Young LLP agrees with the statements made by the Company in response to this
matter and, if not, stating the respects in which Ernst & Young LLP does
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not agree. The letter, as received from Ernst & Young LLP, indicated their
agreement with the statements made by the Company in response to this matter.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for in Item 10 of Part III shall be filed not later
than 120 days after the Company's fiscal year end (December 31, 1996) in the
Company's definitive Proxy Statement in connection with its Annual Meeting of
Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934
(as amended) or in an amendment to this Annual Report on Form 10-K under Form
10K/A.
ITEM 11. EXECUTIVE COMPENSATION
The information called for in Item 11 of Part III shall be filed not later
than 120 days after the Company's fiscal year end (December 31, 1996) in the
Company's definitive Proxy Statement in connection with its Annual Meeting of
Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934
(as amended) or in an amendment to this Annual Report on Form 10-K under Form
10K/A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for in Item 12 of Part III shall be filed not later
than 120 days after the Company's fiscal year end (December 31, 1996) in the
Company's definitive Proxy Statement in connection with its Annual Meeting of
Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934
(as amended) or in an amendment to this Annual Report on Form 10-K under Form
10K/A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for in Item 13 of Part III shall be filed not later
than 120 days after the Company's fiscal year end (December 31, 1996) in the
Company's definitive Proxy Statement in connection with its Annual Meeting of
Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934
(as amended) or in an amendment to this Annual Report on Form 10-K under Form
10K/A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Price Waterhouse LLP, Independent Accountants....................... F-1
Report of Ernst & Young LLP, Independent Auditors............................. F-2
Consolidated Balance Sheets at December 31, 1996 and 1995..................... F-3
Consolidated Statements of Operations for Years Ended December 31, 1996, 1995
and 1994.................................................................... F-4
Consolidated Statements of Stockholders' Equity for Years Ended December 31,
1996, 1995 and 1994......................................................... F-5
Consolidated Statements of Cash Flows for Years Ended December 31, 1996, 1995
and 1994.................................................................... F-6
Notes to Consolidated Financial Statements.................................... F-7
</TABLE>
34
<PAGE> 35
The following financial statement schedule of the Company and its
subsidiaries is included in Item 14(a)(1):
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Schedule II Valuation and Qualifying Accounts............................... S-1
</TABLE>
All other financial statement schedules not listed above have been omitted
since the required information is included in the consolidated financial
statements or the notes thereto, or is not applicable or required.
(2) EXHIBITS
<TABLE>
<C> <S>
2.1 Agreement dated as of June 30, 1994 as amended and restated as of August
3, 1994 by and among the Company, Fremantle International, Inc. and The
Interpublic Group of Companies, Inc. (incorporated by reference to Exhibit
99.2 of the Registrant's Form 8-K/A dated August 3, 1994).
3.1 Restated Certificate of Incorporation of the Registrant filed on February
25, 1991 with the Secretary of State of the State of Delaware
(incorporated by reference to the same numbered Exhibit to the
Registrant's March 1991 Form 10-Q).
3.2 Restated Bylaws of the Registrant dated February 25, 1991 (incorporated by
reference to the same numbered Exhibit to the Registrant's March 1991 Form
10-Q).
3.3 [Deleted]
3.4 Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant filed on March 20, 1992 with the Secretary of State of the
State of Delaware (incorporated by reference to the same numbered Exhibit
to the Registrant's Amendment No. 1 to Form S-1 Registration Statement
filed with the Securities and Exchange Commission on April 3, 1992 (the
"Amendment No. 1 to Form S-1")).
3.5 [Deleted]
4.1 Specimen Certificate for Common Stock (incorporated by reference to the
same numbered Exhibit to the Amendment No. 1 to Form S-1).
4.2 1994 Stock Incentive Plan (incorporated by reference to the same numbered
Exhibit to the Registrant's June 30, 1994 Form 10-Q).
4.3 Purchase Agreement, dated October 4, 1996, by and between All American
Communications, Inc. and Goldman, Sachs & Co. (incorporated by reference
to the same numbered Exhibit to the Registrant's October 22, 1996 Form 8-K
(the "October 22, 1996 Form 8-K"))
4.4 Registration Rights Agreement, dated as of October 11, 1996, by and among
All American Communications, Inc., Goldman, Sachs & Co, and Chase
Securities, Inc. (incorporated by reference to the same numbered Exhibit
to the October 22, 1996 Form 8-K)
4.5 Indenture, dated as of October 11, 1996, by and between All American
Communications, Inc. and U.S. Trust Company of California, N.A., and Form
of Qualified Institutional Buyer Note, Institutional Accredited Investor
Note and Regulation S Temporary Global Note attached thereto as Exhibits
(incorporated by reference to the same numbered Exhibit to the October 22,
1996 Form 8-K)
9.1 Shareholders Voting Agreement dated August 3, 1994 between The Interpublic
Group of Companies, the Company and certain of the Companies shareholders
(incorporated by reference to the same numbered Exhibit to the
Registrant's June 30, 1994 Form 10-Q).
</TABLE>
35
<PAGE> 36
<TABLE>
<C> <S>
9.2 Shareholders Agreement dated as of February 25, 1991 between the Company,
Anthony J. Scotti, Benjamin J. Scotti, Thomas Bradshaw, Myron Roth, Sydney
D. Vinnedge, George Back and Joseph E. Kovacs (incorporated by reference
to the same numbered Exhibit to the Registrant's December 31, 1990 Form
10-K).
9.2.1 Extended Shareholders Agreement effective as of August 25, 1996 between
the Company, Anthony J. Scotti, Benjamin J. Scotti, Thomas Bradshaw and
Sydney D. Vinnedge.
10.1 Employment Agreement dated as of February 25, 1991 between All American
Communications, Inc. and Anthony J. Scotti (incorporated by reference to
the same numbered Exhibit to the Registrant's December 31, 1990 Form
10-K).
10.1.1 Amendment to Employment Agreement dated as of February 25, 1991 between
All American Communications, Inc. and Anthony J. Scotti (incorporated by
reference to the same numbered Exhibit to the Registrant's Form S-1
Registration Statement filed with the Securities and Exchange Commission
on January 27, 1992 as thereafter amended and declared effective on May 7,
1992 (the "1992 Form S-1")).
10.1.2 Second Amendment to Employment Agreement dated as of February 25, 1991
between All American Communications, Inc. and Anthony J. Scotti
(incorporated by reference to the same numbered Exhibit to the
Registrant's December 31, 1994 Form 10-K).
10.1.3 Third Amendment dated May 1, 1995 to Employment Agreement dated as of
February 25, 1991 between All American Communications, Inc. and Anthony J.
Scotti (incorporated by reference to the same numbered Exhibit to the
Registrant's December 31, 1994 Form 10-K).
10.1.4 Fourth Amendment dated February 26, 1996 to Employment Agreement dated as
of February 25, 1991 between All American Communications, Inc. and Anthony
J. Scotti (incorporated by reference to the same numbered Exhibit to the
Registrant's March 31, 1996 Form 10-Q).
10.2 [Deleted]
10.2.1 [Deleted]
10.3 Employment Agreement dated as of February 12, 1996 between All American
Communications, Inc. and Thomas Bradshaw (incorporated by reference to
Exhibit 10.3.2 to the Registrant's March 31, 1996 Form 10-Q).
10.3.1 [Deleted]
10.3.2 [Deleted]
10.4 Employment Agreement dated as of February 12, 1996 between All American
Communications, Inc. and Benjamin J. Scotti (incorporated by reference to
Exhibit 10.4.2 to the Registrant's March 31, 1996 Form 10-Q).
10.4.1 [Deleted]
10.4.2 [Deleted]
10.5 Employment Agreement dated as of February 25, 1991 between All American
Communications, Inc. and Sydney Vinnedge (incorporated by reference to the
same numbered to the Registrant's December 31, 1990 Form 10-K).
10.5.1 Amendment to Employment Agreement dated as of February 25, 1991 between
All American Communications, Inc. and Sydney Vinnedge (incorporated by
reference to the same numbered Exhibit to the 1992 Form S-1).
10.5.2 Second Amendment to Employment Agreement dated as of January 7, 1992
between All American Communications, Inc. and Sydney Vinnedge
(incorporated by reference to the same numbered Exhibit to the Amendment
No. 1 to 1992 Form S-1).
</TABLE>
36
<PAGE> 37
<TABLE>
<C> <S>
10.6 Employment Agreement, dated as of July 1, 1990, between All American
Television, Inc. and George Back (incorporated by reference to Exhibit
10.1 to the Registrant's June 30, 1990 Form 10-Q).
10.6.1 Second Amendment to Employment Agreement dated January 7, 1992 between All
American Communications, Inc. and George Back (incorporated by reference
to the same numbered Exhibit to the Amendment No. 1 to Form S-1).
10.7 Shared Facilities and Services Agreement dated as of August 2, 1994 by and
between All American Communications, Inc. and Fremantle International,
Inc. (incorporated by reference to Exhibit 10.10 to the Registrant's
December 31, 1994 Form 10-K).
10.8 Registration Rights Agreement dated as of August 3, 1994 by and between
All American Communications, Inc. and the Interpublic Group of Companies,
Inc. (incorporated by reference to Exhibit 10.11 to the Registrant's
December 31, 1994 Form 10-K).
10.9 Option Letter, dated August 3, 1994, from The Interpublic Group of
Companies, Inc., and Fremantle International, Inc. to All American
Communications, Inc. (incorporated by reference to Exhibit 10.12 to the
Registrant's December 31, 1994 Form 10-K).
10.10 Exclusive License Agreement dated as of December 15, 1994 between The
Baywatch Nights Production Company and Taurus Film & Co. (confidential
treatment granted) (incorporated by reference to Exhibit 10.13 to the
Registrant's December 31, 1994 Form 10-K).
10.11 Letter Agreement dated as of June 10, 1994 to that certain Outline of
Terms dated May 10, 1991 as amended by that certain letter dated February
16, 1993 by and between The Baywatch Nights Production Company, on the one
hand, and Michael Berk, Douglas Schwartz and Gregory Bonnan, on the other
hands (incorporated by reference to Exhibit 10.2 to the Registrant's
September 30, 1994 Form 10-Q).
10.12 Standard Industrial Lease Agreement dated October 31, 1994 between All
American Communications, Inc and Wilshire Lincoln Properties (incorporated
by reference to Exhibit 10.3 to the Registrant's September 30, 1994 Form
10-Q).
10.13 Secured Promissory Note dated October 19, 1994 between All American
Communications, Inc. and Thomas Bradshaw (incorporated by reference to
Exhibit 10.4 to the Registrant's September 30, 1994 Form 10-Q).
10.14 Second Modification of Warrant and Warrant Agreement dated as of November
5, 1993 between All American Communications, Inc. and Jefferson Capital
Group, Ltd. (incorporated by reference to Exhibit 10.35.2 to the 1994 Form
S-1).
10.15 Office Building Lease dated December 13, 1991 for 5301 Beethoven Street,
Los Angeles, California between All American Communications, Inc. and
Harvey Capital Corp. (incorporated by reference to Exhibit 10.6 to the
1992 Form S-1).
10.16 Amendment No. 1 dated April 30, 1992, Amendment No. 2 dated September 14,
1993 and Amendment No. 3 dated March 14, 1994, in each case, to the Office
Building Lease dated December 13, 1991 for 5301 Beethoven Street, Los
Angeles, California (incorporated by reference to Exhibit 10.40.1 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1993) Amendment No. 4 dated October 11, 1994 and Amendment No. 5 dated
November 6, 1994 to the Office and Building Lease dated December 13, 1991
for 5301 Beethoven Street, Los Angeles, California (incorporated by
reference to Exhibit 10.19 to the Registrant's December 31, 1994 Form
10-K).
10.16.1 Industrial-Commercial Lease dated May 28, 1991 (and amendment) for 5433
Beethoven Street, Los Angeles, California between The Baywatch Production
Company and Jerome Cohen, Trustee of the Fannie Delman 1982 Trust et. al.
(incorporated by reference to Exhibit 10.19 to the December 31, 1994 Form
S-1).
</TABLE>
37
<PAGE> 38
<TABLE>
<C> <S>
10.17 Industrial-Commercial Lease dated May 28, 1991 (and amendment) for 5433
Beethoven Street, Los Angeles, California between The Baywatch Production
Company and Jerome Cohen, Trustee of the Fannie Delman 1983 Trust et. al.
(incorporated by reference to Exhibit 10.41 to the 1992 Form S-1).
10.18 Modification of Agreement of Sublease, dated as of February 8, 1993, for
875 Third Avenue, New York, New York between Grey Advertising, Inc. and
LBS Communications, Inc. (incorporated by reference to Exhibit number
10.62 to the Registrant's December 31, 1992 Form 10-K).
10.19 [Deleted]
10.19.1 [Deleted]
10.20 Lease, dated as of December 7, 1993, for 1325 Avenue of the Americas
between All American Television, Inc. and 1325 Limited Partnership
(incorporated by reference to the Exhibit 10.13 to the 1994 Form S-1).
10.21 Asset Purchase Agreement dated as of October 6, 1995 between and among
Mark Goodson Productions, L.P., the Child's Play Company, Mark Goodson
Productions, LLC, The Interpublic Group of Companies, Inc., the
Co-Executors of the Estate of Mark Goodson and All American
Communications, Inc. (incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated October 12, 1995 (the
"October 12, 1995 Form 8-K").
10.22 License Agreement between Mark Goodson Productions, LLC and All American
Goodson, Inc. dated as of October 6, 1995 (incorporated by reference to
Exhibit 10.3 to the October 12, 1995 Form 8-K).
10.23 Network License Agreement between All American Goodson, Inc. and
Interpublic Game Shows, Inc. dated as of October 6, 1995 (incorporated by
reference to Exhibit 10.2 to the October 12, 1995 Form 8-K).
10.24 [Deleted]
10.25 Amended and Restated Operating Agreement among All American
Communications, Inc., All American Goodson, Inc., The Interpublic Group of
Companies, Inc. and Interpublic Game Shows, Inc. dated as of October 6,
1995 (incorporated by reference to Exhibit 10.6 to the October 12, 1995
Form 8-K).
10.26 Credit, Security, Guaranty and Pledge Agreement dated April 13, 1995 as
Amended and Restated as of October 23, 1996, by and among the Company and
the lenders named therein (incorporated by reference to the same numbered
Exhibit to the Registrant's Current Report on Form 8-K filed November 5,
1996).
10.27 [Deleted]
10.28 Network Production Agreement between Interpublic Game Shows, Inc. and TPIR
LLC, dated as of October 6, 1995 (incorporated by reference to Exhibit
10.4 to the Registrant's Current Report on Form 8-K filed October 12,
1995).
10.29 Agreement dated as of May 1, 1995 between USA NETWORKS and All American
Television (incorporated by reference to the same numbered Exhibit to the
Amendment No. 2 to Form S-2).
10.42 Stock Purchase Agreement, dated July 19, 1996, by and among All American
Communications, Inc., Orbis Entertainment Company, Inc., Robert L. Turner,
Ethan J. Podell and Alexandra Buhler Jewett (incorporated by reference to
Exhibit 10.42 to the Registrant's Current Report on Form 8-K dated July
19, 1996, (incorporated by reference to the same numbered Exhibit to the
Registrant's June 30, 1996 Form 10-Q).
11 Statement re Computation of Per Share Earnings.
23.1 Consent of Independent Accountants.
</TABLE>
38
<PAGE> 39
<TABLE>
<C> <S>
23.2 Consent of Independent Auditors.
</TABLE>
(b) REPORTS ON FORM 8-K:
Current Report on Form 8-K, dated October 22, 1996, regarding the Company's
placement of $100.0 million principal amount of its 10 7/8% Senior Subordinated
Notes due 2001.
Current Report on Form 8-K, dated November 5, 1996, regarding the Company's
Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of
April 13, 1995 as amended and restated as of October 23, 1996, and the Company's
notice of redemption dated October 28, 1996 related to its then outstanding
6 1/2% Convertible Subordinated Notes due 2003.
39
<PAGE> 40
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
ALL AMERICAN COMMUNICATIONS, INC.
We have audited the accompanying consolidated balance sheet of All American
Communications, Inc. and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, of stockholders' equity, and of cash
flows for the year then ended. Our audit also included an audit of the financial
statement schedule for the year ended December 31, 1996 listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
All American Communications, Inc. and subsidiaries at December 31, 1996, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles. Also, in our
opinion, the financial statement schedule for the year ended December 31, 1996
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Los Angeles, California
February 27, 1997
F-1
<PAGE> 41
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
ALL AMERICAN COMMUNICATIONS, INC.
We have audited the accompanying consolidated balance sheet of All American
Communications, Inc. and subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 1995. Our audits also
included the financial information shown for each of the two years in the period
ended December 31, 1995 in the financial statement schedule listed in the Index
at Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
All American Communications, Inc. and subsidiaries at December 31, 1995, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the financial information
shown for each of the two years in the period ended December 31, 1995 in the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Los Angeles, California
March 4, 1996
F-2
<PAGE> 42
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Cash and cash equivalents.............................................. $ 33,858 $ 13,126
Restricted cash -- Note 1.............................................. -- 6,968
Trade receivables, less allowances of $3,716 and $2,980 at December 31,
1996 and 1995, respectively.......................................... 106,108 103,896
Unbilled receivables, less imputed interest of $1,078 and $2,354 at
December 31, 1996 and 1995, respectively -- Note 1................... 3,874 11,685
Inventory, net......................................................... 848 1,018
Advances to recording artists, net..................................... 225 544
Television program costs, less accumulated amortization of $322,864 and
$228,942 at December 31, 1996 and 1995, respectively -- Note 4....... 94,031 74,644
Property and equipment, less accumulated depreciation and
amortization -- Note 3............................................... 4,116 4,526
Investment in unconsolidated affiliate -- Note 2....................... -- 29,130
Goodwill, less accumulated amortization of $8,241 and $3,384 at
December 31, 1996 and 1995, respectively -- Notes 1 and 2............ 106,990 49,403
Other -- Note 8........................................................ 9,685 6,642
-------- --------
Total assets........................................................... $359,735 $301,582
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable..................................................... $ 9,274 $ 14,293
Accrued expenses..................................................... 35,310 19,823
Royalties payable.................................................... 5,386 4,435
Deferred revenues.................................................... 738 277
Due to producers..................................................... 13,215 26,271
Participations payable............................................... 26,600 30,979
Notes payable -- Note 5.............................................. 179,000 134,982
Deferred taxes payable -- Note 9..................................... 2,242 2,242
-------- --------
Total liabilities...................................................... 271,765 233,302
-------- --------
Commitments and contingencies -- Note 10
Stockholders' equity -- Notes 5, 6, 7 and 8 Preferred stock, authorized
5,000,000 shares..................................................... -- --
Common stock, voting, $.0001 par value, authorized 20,000,000 shares,
issued 6,933,713 in 1996 and 5,662,052 in 1995 (including treasury
shares)........................................................... 1 1
Common stock, Class B non-voting, $.0001 par value, authorized
20,000,000 shares, 5,720,000 issued in 1996 and 5,720,000 in 1995
(including treasury shares)....................................... 1 1
Additional paid-in capital........................................... 74,486 61,522
Common stock in treasury, at cost, 528,200 shares and 0 shares Common
Stock, Class B, respectively and 30,000 shares Common Stock in
1996 and 1995..................................................... (5,501) (135)
Retained earnings.................................................... 19,625 6,939
Currency translation adjustment...................................... (642) (48)
-------- --------
Total stockholders' equity............................................. 87,970 68,280
-------- --------
Total liabilities and stockholders' equity............................. $359,735 $301,582
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 43
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Television....................................... $ 210,874 $ 206,734 $ 98,771
Recorded music and merchandising -- Note 8....... 25,584 22,026 16,130
----------- ---------- ----------
236,458 228,760 114,901
Expenses:
Television....................................... 152,252 164,764 75,196
Recorded music and merchandising................. 17,903 15,803 10,750
Selling, general and administrative.............. 26,197 24,102 21,523
Goodwill amortization............................ 4,602 2,399 971
----------- ---------- ----------
200,954 207,068 108,440
Operating income...................................... 35,504 21,692 6,461
Other income (expense):
Interest income.................................. 1,706 669 204
Interest expense................................. (12,719) (9,959) (5,929)
Other............................................ (171) 95 49
----------- ---------- ----------
(11,184) (9,195) (5,676)
----------- ---------- ----------
Income before income taxes and extraordinary charge... 24,320 12,497 785
Provision for income taxes -- Note 9.................. 10,214 5,249 330
----------- ---------- ----------
Net income before extraordinary charge................ 14,106 7,248 455
Extraordinary charge for redemption of Convertible
Subordinated Notes, 6 1/2% due 2003, net of income
tax benefit of $1,028 -- Notes 5 and 6.............. (1,420) -- --
----------- ---------- ----------
Net income............................................ $ 12,686 $ 7,248 $ 455
=========== ========== ==========
Earnings per common and common equivalent share --
Notes 1, 5 and 6:
Net income before extraordinary charge........... $ 1.18 $ 0.87 $ 0.07
Extraordinary charge............................. (0.12) -- --
----------- ---------- ----------
Net income....................................... $ 1.06 $ 0.87 $ 0.07
=========== ========== ==========
Weighted average number of common and common
equivalent shares outstanding.................. 12,029,000 8,330,000 6,201,000
=========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 44
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------
CLASS B COMMON
(NON- STOCK AND STOCK
VOTING) CLASS B SUBSCRIPTIONS
SHARES SHARES ADDITIONAL COMMON RECEIVABLE
ISSUED AND ISSUED AND PAID-IN STOCK IN AND DEFERRED
OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL TREASURY COMPENSATION
----------- ------ ----------- ------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993....... 4,825,971 $1 -- $ -- $ 9,096 $ (135) $ (695)
Stock issued in connection with
the Fremantle International
Acquisition.................... 630,000 -- 2,520,000 -- 20,000 -- --
Payments on stock subscriptions
receivable..................... -- -- -- -- -- -- 137
Amortization of deferred
compensation................... -- -- -- -- -- -- 60
Cancellation of deferred
compensation................... -- -- -- -- (345) -- 345
Currency translation adjustment.. -- -- -- -- -- -- --
Net income....................... -- -- -- -- -- -- --
--
--------- --------- --- ------- ------- -----
Balance at December 31, 1994....... 5,455,971 1 2,520,000 -- 28,751 (135) (153)
--
--------- --------- --- ------- ------- -----
Net proceeds from public offering
of Class B common stock........ -- -- 3,200,000 1 30,534 -- --
Conversion of 6 1/2% Convertible
Subordinated Notes, net of
related costs.................. 206,081 -- -- -- 2,237 -- --
Payments on stock subscriptions
receivable..................... -- -- -- -- -- -- 153
Currency translation adjustment.. -- -- -- -- -- -- --
Net income....................... -- -- -- -- -- -- --
--
--------- --------- --- ------- ------- -----
Balance at December 31, 1995....... 5,662,052 1 5,720,000 1 61,522 (135) --
--
--------- --------- --- ------- ------- -----
Issuance of common stock for
settlement of trade payables... 15,000 -- -- -- 139 -- --
Issuance of common stock on
exercise of vested warrants and
stock options.................. 63,100 -- -- -- 255 -- --
Redemption, conversion,
repurchase and retirement of
6 1/2% Convertible Subordinated
Notes, net of related costs.... 1,193,561 -- -- -- 12,570 -- --
Repurchase of Class B common
stock.......................... -- -- -- -- -- (5,366) --
Currency translation adjustment.. -- -- -- -- -- -- --
Net income....................... -- -- -- -- -- -- --
--
--------- --------- --- ------- ------- -----
Balance at December 31, 1996....... 6,933,713 $1 5,720,000 $ 1 $ 74,486 $(5,501) $ --
========= == ========= === ======= ======= =====
<CAPTION>
RETAINED
EARNINGS CURRENCY
(ACCUMULATED TRANSLATION
DEFICIT) ADJUSTMENT TOTAL
------------ ---------- -------
<S> <C> <C> <C>
Balance at December 31, 1993....... $ (764) $ -- $ 7,503
Stock issued in connection with
the Fremantle International
Acquisition.................... -- -- 20,000
Payments on stock subscriptions
receivable..................... -- -- 137
Amortization of deferred
compensation................... -- -- 60
Cancellation of deferred
compensation................... -- -- --
Currency translation adjustment.. -- (72) (72)
Net income....................... 455 -- 455
------- ----- -------
Balance at December 31, 1994....... (309) (72) 28,083
------- ----- -------
Net proceeds from public offering
of Class B common stock........ -- -- 30,535
Conversion of 6 1/2% Convertible
Subordinated Notes, net of
related costs.................. -- -- 2,237
Payments on stock subscriptions
receivable..................... -- -- 153
Currency translation adjustment.. -- 24 24
Net income....................... 7,248 -- 7,248
------- ----- -------
Balance at December 31, 1995....... 6,939 (48) 68,280
------- ----- -------
Issuance of common stock for
settlement of trade payables... -- -- 139
Issuance of common stock on
exercise of vested warrants and
stock options.................. -- -- 255
Redemption, conversion,
repurchase and retirement of
6 1/2% Convertible Subordinated
Notes, net of related costs.... -- -- 12,570
Repurchase of Class B common
stock.......................... -- -- (5,366)
Currency translation adjustment.. -- (594) (594)
Net income....................... 12,686 -- 12,686
------- ----- -------
Balance at December 31, 1996....... $ 19,625 $ (642) $87,970
======= ===== =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 45
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................................... $ 12,686 $ 7,248 $ 455
Adjustments to reconcile net income to net cash used by operating
activities:
Depreciation and amortization of property and equipment and
goodwill....................................................... 5,423 3,322 1,450
Amortization of television program costs......................... 93,358 90,401 32,534
Increase in allowance for doubtful accounts...................... 714 169 287
Increase (decrease) in allowance for sales returns............... (37) 246 204
Increase (decrease) in makegood reserve.......................... 59 (1,290) 123
Increase (decrease) in imputed interest discount................. (1,276) 2,354 --
Equity earnings in unconsolidated affiliate, net................. -- (3,603) --
Extraordinary charge for redemption of Convertible Subordinated
Notes, 6 1/2% due 2003, net of tax............................. 1,420 -- --
Changes in operating assets and liabilities net of effects from
acquisitions:
Restricted cash................................................ 2,628 102 (2,590)
Trade receivables, inventory and advances to recording
artists...................................................... 11,267 (53,060) (5,423)
Deferred income tax benefits................................... -- 235 (235)
Accounts payable, accrued expenses and royalties payable....... 8,369 18,596 (1,469)
Due to producers and participations payable.................... (12,711) 12,881 4,797
Additions to television program costs.......................... (111,510) (96,608) (43,490)
Deferred revenues.............................................. 461 20 (1,680)
Deferred taxes payable......................................... -- 2,242 (94)
Other assets................................................... 366 (226) 457
--------- --------- --------
Net cash provided (used) by operating activities.......... 11,217 (16,971) (14,674)
INVESTING ACTIVITIES
Purchase of property and equipment, net of book value of assets
retired.......................................................... (1,360) (1,677) (497)
Purchase of Orbis, net of cash acquired............................ (2,323) -- --
Purchase of Mark Goodson, net of cash acquired..................... (27,972) (25,785) --
Contingent earn out from purchase of Mark Goodson.................. (8,207) -- --
Purchase of Fremantle, net of cash acquired........................ -- -- (32,527)
--------- --------- --------
Net cash used by investing activities..................... (39,862) (27,462) (33,024)
FINANCING ACTIVITIES
Repurchase of redeemable warrants.................................. -- -- (250)
Net proceeds from public offering of Class B common stock.......... -- 30,535 --
Proceeds from issuance of Senior Notes, net of related costs....... 96,213 -- --
Redemption of Convertible Notes.................................... (44,659) -- --
Repurchase of Class B common stock, including related costs........ (5,366) -- --
Payments on stock subscriptions receivable......................... -- 153 137
Proceeds from borrowings........................................... 178,100 273,405 38,768
Repayments of borrowings........................................... (206,457) (276,396) (18,849)
Restricted cash held for repayment of borrowings................... 4,340 (4,340) --
Proceeds from borrowings -- purchase of Fremantle, net of issuance
costs............................................................ -- -- 33,878
Proceeds from borrowings -- purchase of Mark Goodson............... 27,800 25,000 --
--------- --------- --------
Net cash provided by financing activities................. 49,971 48,357 53,684
Effect of exchange rate changes on cash............................ (594) 24 (72)
--------- --------- --------
Increase in cash................................................... 20,732 3,948 5,914
Cash and cash equivalents at beginning of period................... 13,126 9,178 3,264
--------- --------- --------
Cash and cash equivalents at end of period......................... $ 33,858 $ 13,126 $ 9,178
========== ========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized........................... $ 11,355 $ 9,496 $ 5,552
========== ========== =========
Income taxes................................................... $ 6,935 $ 1,219 $ 247
========== ========== =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 46
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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, Inc. -- formerly Scotti
Brothers Entertainment Industries, Inc. ("AAEI" or "SBEI"), All American
Fremantle International, Inc. ("AAFI"), All American FDF Holdings, Inc.
("AAFDF"), All American Goodson, Inc. ("AAG"), All American Orbis, Inc. ("AAO"),
All American Consumer Merchandising Group, Inc. ("AACM") and All American
Netherlands B.V. ("AAN") (and together with their respective direct or indirect
wholly-owned subsidiaries 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 flows or
if there is an event or change in circumstances which establish the existence of
impairment indicators.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
AAC and subsidiaries; all significant intercompany balances and transactions
have been eliminated.
Recognition of Revenues
Minimum guaranteed revenues 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 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
F-7
<PAGE> 47
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
shipped. 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 as of October 23, 1996), subject to certain exceptions for working
capital, substantially all cash collected was required to be paid into accounts
maintained by the lender and applied to the repayment of the outstanding
borrowings as specified in the lending agreement. The cash held for repayment
was included as restricted cash as of December 31, 1995. Additionally, amounts
held in an interest bearing reserve account with respect to a dispute which has
been settled were included as restricted cash in 1995.
Unbilled Receivables
Unbilled receivables represent amounts due under cash (excluding barter)
television syndication contracts which will be billed over the contractual terms
of the agreements, generally ranging from one to five years.
Imputed Interest Discount
The Company records an imputed interest discount on contracted cash
(excluding barter) receivables with original payment terms extending beyond one
year. The discount is determined using the Company's incremental borrowing rate
at the time of revenue recognition. The discount is amortized over the
underlying contracts' payment stream using the interest method and is credited
to interest income.
Inventory
Inventory consists of recorded music product and is carried at the lower of
cost or estimated net realizable value.
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
F-8
<PAGE> 48
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
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, specifically thirty years for the Company owned building and ranging
from three to ten years for the remaining assets. Leasehold improvements are
amortized over the lesser of the term of the lease or the estimated useful lives
of the improvements.
Goodwill is amortized on a straight-line basis over periods ranging from 10
to 25 years (principally 25 years).
Income Taxes
The Company records its income tax provision in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109").
Deferred income taxes under the liability method arise primarily from the
differences in the timing of the recognition of certain television and recorded
music revenue and expense items for book and tax purposes.
Stock Based Compensation
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees," and intends to
continue to do so.
Share Information; Earnings Per Share
Primary earnings per share represent the per share income applicable to
common stockholders and is computed based on the weighted average common shares
outstanding and dilutive common stock equivalents determined using the modified
treasury stock method.
During, 1996 the Company redeemed its outstanding 6 1/2% Convertible
Subordinated Notes due 2003 (See Note 5). Accordingly, the fully diluted
earnings per share calculations have been recomputed to eliminate the impact of
the assumed conversion of the Convertible Notes, which were not considered to be
common stock equivalents. The Convertible Notes which converted into shares of
common stock have been included in the weighted average number of common shares
from the date of such conversion. Fully diluted earnings per share, as
recomputed, are materially the same as primary earnings per share and
accordingly, have not been presented.
F-9
<PAGE> 49
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Foreign Currency
The operations of all foreign entities are principally measured in local
currencies. Assets and liabilities are translated into United States ("U.S.")
dollars using exchange rates in effect at the end of each reporting period.
Revenues and expenses are translated at the average exchange rates prevailing
during the period. Adjustments resulting from translating the financial
statements of foreign entities into U.S. dollars are recorded as a separate
component of stockholders' equity.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the current year's presentation.
2. ACQUISITIONS
Orbis Entertainment Company
In July 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 the fifth year based on the cash flows of Orbis in
the fourth and fifth years, 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. In
July 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") consummated an acquisition, pursuant to which Mark Goodson
Productions, LLC ((a 50% / 50% joint venture between the Company and
Interpublic) the "LLC") acquired substantially all of the assets (excluding
those relating to the lottery business) and assumed certain specified
liabilities (collectively, with the Company's subsequent acquisition of the
remaining 50 % of the LLC as described below, the "Mark Goodson Acquisition") of
Mark Goodson Productions, L.P. and a related 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 total contingent purchase price is
limited to $48,500,000 if paid (whether earned or not) during the first five
years following October 6, 1995. Otherwise, the amount of contingent purchase
price is unlimited to the extent that 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 LLC. As a result, 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 initial acquisition in October 1995,
will be treated as an increase in goodwill and will be amortized coterminously
with the original 25 year period. Through December 31, 1996, accrued contingent
purchase price totaled $10,077,000 (including Interpublic's share through
December 31, 1995 of $935,000).
F-10
<PAGE> 50
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
As of December 31, 1996, goodwill, including the total initial purchase price of
$53,757,000 (including deal costs of $901,000) and contingent purchase price
totals $59,965,000 (before accumulated amortization of $2,657,000). The Company
has accounted for its ownership of the LLC under the purchase accounting method
effective January 1, 1996.
Fremantle International, Inc.
In August 1994, the Company acquired (the "Fremantle International
Acquisition") certain assets and securities and assumed certain liabilities of
Fremantle International, Inc. ("Fremantle") through the Company's newly formed
whollyowned subsidiary, All American Fremantle International, Inc. ("AAFI"),
from Interpublic (which at such time had no ownership interest in the Company).
The consideration for the Fremantle International Acquisition consisted of
630,000 shares of the Company's Common Stock, 2,520,000 shares of nonvoting,
$.0001 par value Class B common stock ("Class B Stock") and $31,500,000 in cash
funded by a term loan from Chemical Bank (subsequently replaced by the
Restructured Credit Facility -- see Note 5). The Company has accounted for the
Fremantle International Acquisition as a purchase and has allocated the purchase
price based on the estimated fair value of assets and liabilities acquired. The
total consideration of $52,527,000 (including expenses related to the
acquisition of $1,027,000) exceeds the estimated fair value of net assets
acquired by $50,267,000 (goodwill); such goodwill is being amortized over 25
years. Results of operations of AAFII have been included in the Company's
results from August 3, 1994.
3. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land..................................................... $ 403 $ 403
Building and improvements................................ 1,704 1,669
Sound studio and related equipment....................... 1,534 1,544
Office furniture and fixtures............................ 4,249 4,417
Automobiles.............................................. 163 163
Other.................................................... 39 39
------- -------
8,092 8,235
Less accumulated depreciation and amortization........... (3,976) (3,709)
------- -------
$ 4,116 $ 4,526
======= =======
</TABLE>
4. TELEVISION PROGRAM COSTS
Costs for television programs are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Released, less accumulated amortization.................. $91,746 $73,902
In process and development............................... 2,285 742
------- -------
$94,031 $74,644
======= =======
</TABLE>
F-11
<PAGE> 51
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Based on management's estimates of gross revenues as of December 31, 1996,
approximately 70% of the unamortized costs applicable to released television
programming will be amortized during the three years ending December 31, 1999.
Interest capitalized to television program costs during the periods ended
December 31, 1996, 1995 and 1994 was approximately $876,000, $1,249,000 and
$399,000, respectively.
5. NOTES PAYABLE
Notes payable are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Notes payable to banks............................ $ 79,000 $ 77,352
10 7/8% Senior Subordinated Notes................. 100,000 --
6 1/2% Convertible Subordinated Notes............. -- 57,630
-------- --------
$179,000 $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. In connection with the amendment and restatement,
the Company initially utilized $30,000,000 of the Restructured Credit Facility:
(i) to pay notes payable of $15,448,000 (including accrued interest to
Interpublic); (ii) to purchase ($10,000,000) a portion of certain outstanding
Convertible Notes (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, at either: (i) LIBOR
plus 1 1/2% (ranging from 6.19% to 7.0% as of March 10, 1997); 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% (8.75% as of March 10, 1997), subject to increase by 1/2 of 1% in the
event of the Company's failure to satisfy certain financial ratios. As of March
10, 1997, the Company had outstanding borrowings of $78,500,000 under the
Restructured Credit Facility with $60,283,000 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 prior bank consent under the
Restructured Credit Facility. Furthermore, certain conditions must be satisfied
before the funding of each season of certain television series. Loans under the
Restructured Credit Facility may be made as "Domestic Loans" to All American
Communications, Inc. or as "Foreign Loans" to All American Netherlands B.V.,
subject to borrowing base availability. All outstanding loans as of March 10,
1997 are "Domestic Loans." Substantially all of the Company's assets (other than
real property) are pledged as collateral under the Restructured Credit Facility.
F-12
<PAGE> 52
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Senior Subordinated Notes
On October 11, 1996, the Company issued $100,000,000 in aggregate principal
amount 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 the
Company which mature October 15, 2001 and bear interest at 10 7/8% per annum,
payable semi-annually 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 totaled approximately $96,000,000. Net proceeds were used principally to
purchase and redeem the Company's 6 1/2% Convertible Subordinated Notes Due
2003, to repurchase approximately 500,000 shares of the Class B Common Stock and
to temporarily repay bank borrowings. 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
that the Company enters into a letter of intent or makes a public announcement
(a "Sale Transaction Triggering Event") 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, 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 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 ("Exchange
Offer") to the holders of the Original Notes (as defined in the Registration
Rights Agreement). On October 28, 1996, the Company filed a registration
statement on Form S-4 pursuant to its obligations under the Registration Rights
Agreement. On November 12, 1996, the Company amended such Form S-4 which, as
amended, was declared effective by the Securities and Exchange Commission on
such date. As of December 11, 1996 (the expiration date of the Exchange Offer),
the Exchange Offer was completed and, all original notes were exchanged for
publicly tradable notes.
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. On November 27, 1996, the Company redeemed the remaining
outstanding Convertible Notes. Through November 27, 1996, $16,096,000 principal
amount of the Convertible Notes had been converted into the Company's Common
Stock, the
F-13
<PAGE> 53
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Company had purchased and retired $22,914,000 principal amount and redeemed
$20,990,000 principal amount of the Convertible Notes. The Convertible Notes
were redeemed for 104.643% of par plus accrued interest. The net expense of the
redemption and purchase of certain of the Convertible Notes was $2,448,000. Such
cost, net of the related tax benefit of $1,028,000, has been treated as an
extraordinary charge on the statement of operations.
6. CAPITAL STOCK
Through November 27, 1996, $16,096,000 principal amount of the Convertible
Notes had been converted into approximately 1,400,000 shares of Common Stock.
The remaining outstanding Convertible Notes were redeemed as of November 27,
1996 (See Note 5).
In October 1996, the Company repurchased in the open market 528,200 shares
of its Class B Common Stock for $5,366,000. Such repurchased shares are held in
treasury as of December 31, 1996.
In December 1995, the Company sold 3,200,000 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 the
Class B Common Stock is non-voting. Net proceeds from the Stock Offering totaled
approximately $30,535,000 after deducting the underwriters discount of
$2,352,000 and offering expenses of approximately $853,000.
Shares of the Company's Common Stock are reserved for issuance as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
----- ------
(IN THOUSANDS)
<S> <C> <C>
Grants under stock option plans........................ 3,758 1,509
Warrants granted....................................... 219 281
Class B Common Stock -- non-voting..................... 5,720 5,720
6 1/2% Convertible Subordinated Notes.................. -- 5,011
----- ------
9,697 12,521
===== ======
</TABLE>
7. STOCK OPTIONS AND WARRANTS
The Company has granted options to purchase Common Stock and Class B Common
Stock to eligible employees, directors and consultants under various stock
option plans at, or in excess of, market value on the date of grant. The options
generally expire in ten years and become exercisable either: (i) on the
Company's achievement of specific performance targets as established by a
committee appointed by the Board of Directors; or (ii) evenly over a five-year
vesting period.
F-14
<PAGE> 54
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
A summary of stock option activity under all plans for each class of stock
follows:
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------
PRICE PER SHARE
--------------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES RANGE PRICE
--------- ------------- --------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1993................ 401,813 $4.00- 30.00 $ 5.19
Granted....................................... 486,500 7.63- 8.50 8.16
Exercised..................................... --
Forfeited..................................... (325,000) 4.00- 11.00 4.27
---------
Outstanding at December 31, 1994................ 563,313 $7.00- 30.00 $ 8.28
Granted....................................... 456,500 9.13 9.13
Exercised..................................... --
Forfeited..................................... (5,000) 8.50 8.50
---------
Outstanding at December 31, 1995................ 1,014,813 $7.00- 30.00 $ 8.66
Granted....................................... 300,000 9.88- 10.86 10.04
Exercised..................................... (600) 8.50 8.50
Forfeited..................................... (17,463) 8.50- 30.00 12.59
---------
Outstanding at December 31, 1996................ 1,296,750 $7.00- 14.50 $ 8.93
=========
</TABLE>
<TABLE>
<CAPTION>
CLASS B COMMON STOCK
----------------------------------------
PRICE PER SHARE
--------------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES RANGE PRICE
--------- ------------- --------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1995................ -- $ --- -- $ --
Granted....................................... 1,971,000 7.88- 7.88 7.88
Exercised..................................... --
Forfeited..................................... --
---------
Outstanding at December 31, 1996................ 1,971,000 $7.88- 7.88 $ 7.88
=========
</TABLE>
As of December 31, 1996, options for 7,500 shares of Common Stock were
exercisable at $14.50 per share through July 2000. Additionally, options for
50,000 shares of Common Stock, granted during 1996 and expiring February 2001,
have an exercise price of $10.86 per share which is equal to 110% of the market
value on the date of grant. All other options are exercisable, upon vesting, at
prices ranging from $7.00 to $10.52 per share.
The Company has elected, as permitted by FASB Statement No. 123,
"Accounting for Stock Based Compensation" ("FAS 123"), to account for its stock
compensation arrangements under the provisions of Accounting Principles Board
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly,
because the exercise price of the Company's employee stock options equals or
exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FAS 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of such pronouncement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1995, respectively: risk-
F-15
<PAGE> 55
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
free interest rates of 6.0% and 6.2%; dividend yields of 0% and 0%; volatility
factors of the expected market price of the Company's Common Stock of 0.40 and
0.45; volatility factors of the expected market price of the Company's Class B
Common Stock for 1996 of 0.40; and a weighted average expected life of the
options of 3 years.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Pro forma net income before extraordinary
charge........................................ $11,527 $6,737
Pro forma net income............................ $10,107 $6,737
Pro forma earnings per share before
extraordinary charge.......................... $ 0.97 $ 0.81
Pro forma earnings per share.................... $ 0.85 $ 0.81
</TABLE>
As of December 31, 1996, the weighted average remaining contractual life of
options granted is 8.7 years. Assuming the exercise of all outstanding options,
the Company would receive cash and increase equity by approximately $28,000,000,
the exercise value of such options. Options exercisable at years ending December
31, follow:
<TABLE>
<CAPTION>
COMMON STOCK CLASS B COMMON STOCK
----------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- --------- ------- ---------
<S> <C> <C> <C> <C>
1994...................................... 63,063 $8.51 -- --
1995...................................... 123,013 $8.08 -- --
1996...................................... 1,032,750 $9.06 123,000 $7.88
</TABLE>
In addition to stock options, the Company has granted warrants to purchase
its Common Stock. As of December 31, 1996 warrants to purchase 218,750 shares of
Common Stock at $11.00 per share remain outstanding and exercisable. Such
warrants expire in February 1998.
As of July 6, 1994, in connection with the employment agreement of an
officer (such officer also being a Director), the Company granted a Restricted
Stock Award ("RSA") for 30,000 shares with a vesting date of July 5, 1998. The
RSA shares are subject to the terms of the Company's 1994 Stock Incentive Plan,
as amended and the officer's employment agreement. Based on a closing bid price
on July 6, 1994 of $7.25 per share, this grant is expected to generate expense
of approximately $218,000 through July 5, 1998.
8. RELATED PARTY TRANSACTIONS
In November 1996, Jefferson Capital Group ("JCG") exercised warrants for
the purchase of 62,500 shares of Common Stock at $4.00 per share. Such warrants
were originally issued to JCG for investment services provided in connection
with the Company's acquisition of AATV in 1991.
The Company engaged JCG to provide investment banking services to the
Company in connection with the Stock Offering, including advice regarding
valuation and pricing of the transaction for fees and expenses totaling $25,000.
A member of the Company's Board of Directors is the President and a significant
stockholder of JCG. The Company has also agreed to indemnify JCG against any
liabilities that it incurs in connection with the services provided, except due
to JCG's gross negligence or willful misconduct.
F-16
<PAGE> 56
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The Company engaged JCG to provide investment banking services to the
Company in connection with the Fremantle International Acquisition, including
valuation of the transaction, pricing and financing for fees and expenses
totaling $319,000. The Company has also agreed to indemnify JCG against any
liabilities it incurs in connection with the acquisition of Fremantle, except
due to JCG's gross negligence or willful misconduct.
Effective December 15, 1995, the Company entered into the WEA Distribution
Agreement. A Director of the Company is the Chairman/CEO -- Warner Media
Manufacturing & Distribution Group (a division of Time Warner, Inc.) with
responsibility for WEA. Such Director recused himself from the negotiations
between the Company and WEA which resulted in the WEA Distribution Agreement.
Included in recorded music and merchandising revenues for 1995 is $3,000,000
related to a non-refundable, non recoupable advance.
During 1994, the Company loaned $250,000 to Thomas Bradshaw, the Company's
Chief Financial Officer, which loan is secured by a pledge of shares of Common
Stock of the Company owned by Mr. Bradshaw. The loan bears interest at a rate of
8.0% per annum (equal to the rate then in effect under the Company's credit
facility) and has been extended to mature upon expiration of Mr. Bradshaw's
current employment agreement which is currently February 1999. The loan has been
included with other assets in the accompanying consolidated balance sheets at
December 31, 1996 and 1995.
AAEI currently rents a building from two officers/members of the Board of
Directors of the Company at a cost to AAEI of approximately $4,500 per month,
which the Company believes to be a market rate. This building is used for office
and warehouse space for the Company's recorded music operations.
9. INCOME TAXES
The provision for income taxes related to continuing operations is
comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................ $ 8,282 $ 718 $ --
State and local................................ 513 195 13
Foreign........................................ 2,998 1,858 646
------- ------ -----
11,793 2,771 659
------- ------ -----
Deferred:
Federal........................................ (1,579) 2,478 (329)
State.......................................... -- -- --
------- ------ -----
(1,579) 2,478 (329)
------- ------ -----
Taxes provided before extraordinary charge....... 10,214 5,249 330
Tax benefit on redemption of Convertible Notes... (1,028) -- --
------- ------ -----
Total provision for income taxes....... $ 9,186 $5,249 $ 330
======= ====== =====
</TABLE>
F-17
<PAGE> 57
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Components of deferred income taxes as calculated under SFAS 109 as of
December 31, 1996 and 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Amortization and depreciation................. $(3,728) $(4,018) $(9,627)
Accruals not currently deductible for tax
purposes.................................... 2,767 1,660 6,874
Deferred revenues............................. 299 116 103
Net operating loss carryover.................. -- -- 2,466
Foreign tax and investment tax credit
carryover................................... -- -- 1,384
------- ------- -------
(662) (2,242) 1,200
Valuation allowance........................... -- -- (965)
------- ------- -------
$ (662) $(2,242) $ 235
======= ======= =======
</TABLE>
Reconciliation of effective rate of income taxes related to continuing
operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C>
Provision for income taxes at statutory federal
rate of 35%.................................... $ 8,512 $4,374 $ 275
State and local income taxes..................... 333 127 9
Foreign income taxes............................. -- -- 646
Utilization of net operating losses, foreign and
investment tax credits......................... -- 323 (329)
Tax deductible items and other items............. 1,369 425 (271)
------- ------ -----
Provision for income taxes, before extraordinary
charge......................................... $10,214 $5,249 $ 330
======= ====== =====
</TABLE>
Foreign taxes withheld on revenues were utilized for financial reporting
purposes in determining the provision for income taxes. These amounts withheld
in the periods ended December 31, 1996, 1995 and 1994 were $328,000, $246,000,
and $646,000, respectively.
10. COMMITMENTS AND CONTINGENCIES
In December 1996, the Company completed production of 22 one-hour episodes
of Baywatch for the 1996/1997 broadcast season. Additionally, the Company
intends to produce 22 episodes of Baywatch for the 1997/1998 broadcast season
for a production budget of approximately $24,000,000. The total production
budget is expected to be funded primarily through a combination of: (i) barter
advertiser sales; (ii) cash payments from international licensees; and (iii)
working capital, pending receipt of license fees and advertiser sales. There is
no assurance that the Company will be successful in its efforts to fully fund
the production through a combination of the advertiser sales and international
sales.
The Company and Atlantis Releasing B.V. ("Atlantis") have produced 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 a
substantial portion of the production budget, the Company retains exclusive
distribution rights to The Adventures of Sinbad in the United States and Europe
(including the United Kingdom and excluding Scandinavia). The Company, under
certain circumstances, has an annual option to cause Atlantis to produce up to
22 new episodes in each of the three subsequent broadcast seasons, exercisable
on or before February 15 of each of such subsequent broadcast seasons. At the
end of three years, if Atlantis does not exercise its right to continue
producing The Adventures of Sinbad, the right to produce the series reverts to
the
F-18
<PAGE> 58
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Company. The Company has exercised its option to cause Atlantis to produce 22
new episodes of The Adventures of Sinbad for the 1997/1998 broadcast season. The
Company's share of the total production budget (approximately $750,000 of the
$900,000 expected per episode production budget) is expected to be funded
primarily through a combination of: (i) barter advertiser sales; (ii) cash
payments from international licensees; and (iii) working capital, pending
receipt of license fees and advertiser sales. There is no assurance that the
Company will be successful in its efforts to fully fund these productions
through a combination of the advertiser sales and international sales.
The Company has entered into agreements with New Dominion Productions and
Bristol-Myers Squibb to produce 22 one-hour episodes of a new series entitled
Ghost Stories for the 1997/1998 broadcast season with an estimated aggregate
production budget of $7,500,000. The Company's agreement with Bristol-Myers
Squibb provides the latter with a substantial portion of the available barter
advertiser time for $3,500,000, net of agency commissions. The remaining portion
of the production budget is expected to be funded primarily through a
combination of: (i) sales of the remaining barter advertiser time; (ii) cash
payments from international licensees; and (iii) working capital, pending
receipt of license fees and advertiser sales. There is no assurance that the
Company will be successful in its efforts to fully fund the production through a
combination of the advertiser sales and international sales.
The Company has an option to enter into personal service agreements with
Arthel Neville and Fred Roggin, for an initial 13 week period with options for
subsequent periods, for the production of a five day a week talk show program
for the 1997/1998 broadcast season entitled the Arthel/Fred Talk Show. The
estimated production budget will be approximately $300,000 per week for up to 35
weeks. The production budget is expected to be funded primarily through a
combination of: (i) barter advertiser sales; and (ii) working capital, pending
receipt of advertiser sales. There is no assurance that the Company will be
successful in its efforts to fully fund the production through the advertiser
sales.
The Company has entered into a distribution agreement with SAT 1 in Germany
for the distribution of a weekly, one-hour, reality show for the 1997/1998
broadcast season. The estimated budget for this program is approximately
$9,500,000. While the license fee for the program is in excess of the estimated
budget, there is no assurance that the license fee will cover the actual costs
of production.
Minimum commitments for advances to recording artists at December 31, 1996
amounted to approximately $700,000.
On December 12, 1994, Credit Lyonnais Bank Nederland N.V. ("CLBN") made
demand upon SBEI under a Guarantee, dated July 29, 1986 (the "SBEI Guarantee"),
for payment of approximately $3,742,000 plus interest accrued or costs incurred
since November 11, 1994 under a Loan and Security Assignment, dated July 29,
1986, between CLBN and various former subsidiaries of SBEI relating to the
discontinued motion picture operations of the Company. In a letter dated
December 22, 1994, SBEI rejected the foregoing demand based upon, among other
reasons, the following: (i) that in a January 1993 agreement, CLBN agreed to
release all liens and any interests in any property or assets of SBEI, which in
effect released SBEI from any obligations under the SBEI Guarantee; (ii) the
loan purportedly guaranteed has been repaid; and (iii) SBEI is not a party to
and was not bound by a material amendment to the above-referenced Loan and
Security Assignment.
In addition, since approximately November 1993, CLBN and its
representatives have been reviewing certain books and records relating to the
distribution and production of certain motion pictures by Minority Pictures,
Inc. (formerly Scotti Brothers Pictures, Inc.) or its subsidiaries for which
CLBN provided financing. In October 1994, CLBN requested that Minority Pictures,
Inc. and various of its current and former affiliates (including All American
Communications, Inc. and certain of its subsidiaries) execute a tolling
agreement which would have tolled any claims which CLBN may have against such
persons, including but not limited to
F-19
<PAGE> 59
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
causes of action based on such financing. In December 1994, the Company
responded that based upon the information provided by CLBN, or the lack thereof,
it was extremely unclear whether there were any tenable claims against the
Company and its subsidiaries and that the Company was therefore unwilling to
enter into any tolling agreement. The Company and CLBN are currently engaged in
discussions regarding the potential resolution of all of their disputes. While
there is no assurance that these discussions will be successful in terminating
the disputes, the Company believes that CLBN's claims will not have a material
adverse effect on the Company's financial position or results of operations.
The Company is party to legal proceedings which are routine and incidental
to the business. The Company believes that the results of such litigation will
not have a material adverse effect on the Company's financial condition or
results of operations.
The Company leases office and production studio space under operating
leases expiring at various dates through 2005. Renewal options are available on
certain of these leases. The minimum lease payments, under noncancellable
operating leases at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
MINIMUM CONTRACTUAL AMOUNTS
-----------------------------------------
LEASE SUBLEASE NET LEASE
PAYMENTS INCOME PAYMENTS
-------------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
1997.................................... $ 2,123 $ 98 $ 2,025
1998.................................... 1,865 102 1,763
1999.................................... 1,412 106 1,306
2000.................................... 1,033 54 979
2001.................................... 859 -- 859
Thereafter................................ 3,442 -- 3,442
------- ---- -------
$10,734 $360 $10,374
======= ==== =======
</TABLE>
Rent expense of approximately $1,997,000, $1,404,000 and $1,014,000 is net
of sublease income of $94,000, $85,000 and $57,000 and amounts capitalized to
productions of $1,862,000, $774,000 and $288,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
11. FINANCIAL INSTRUMENTS
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, restricted cash and
trade receivables.
The Company maintains its cash balances at various financial institutions.
These financial institutions are throughout the world, and Company policy is
designed to limit exposure to any one institution. The Company performs periodic
evaluations of the relative credit standing of those financial institutions
holding significant account balances. As of December 31, 1996, no significant
concentration of credit risk exists. As of December 31, 1995, a significant
concentration of credit risk existed only with respect to the interest bearing
restricted cash account held, pending resolution of a dispute (which dispute was
resolved in 1996), with a single financial institution other than the Company's
primary lender. The balance of such account is $0 and $2,551,000 at December 31,
1996 and 1995, respectively.
The Company produces and sells television programs and recorded music
product to domestic and foreign distributors. Sales of advertising time retained
in television programming sold are to agencies representing national
advertisers, primarily in the consumer products industry. The Company generally
does not require collateral on trade receivables. Concentrations of credit risk
on trade receivables exist only with
F-20
<PAGE> 60
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
respect to the domestic recorded music trade receivable. The Company's domestic
recorded music trade receivable ($3,521,000 and $5,810,000 at December 31, 1996
and 1995, respectively) is with WEA and BMG, respectively. Credit losses and
returns of recorded music product have consistently been within management's
expectations.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments approximates
their fair value with the exception of the Company's $100,000,000 in principal
amount of 10 7/8% Senior Subordinated Notes ("Senior Notes"). The Senior Notes
had a fair value of approximately $98,320,000 at December 31, 1996. Such fair
value was determined using the quoted market price for the Senior Notes as of
December 31, 1996.
12. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company's activities consist of two business segments -- television
production and distribution, and recorded music and merchandising. Summaries of
financial information by business segment follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------
ADJUSTMENTS
RECORDED AND
TELEVISION MUSIC CORPORATE ELIMINATIONS TOTAL
---------- -------- --------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues..................................... $ 216,139 $ 25,584 $ -- $ (5,265) $236,458
Operating income (loss)...................... 39,279 2,050 (5,825) -- 35,504
Identifiable assets.......................... 324,873 3,834 31,028 -- 359,735
Depreciation and amortization................ 98,397 142 242 -- 98,781
Expenditures for property and equipment...... 710 3 647 -- 1,360
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------
ADJUSTMENTS
RECORDED AND
TELEVISION MUSIC CORPORATE ELIMINATIONS TOTAL
---------- -------- --------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues..................................... $ 206,734 $ 22,026 $ -- $ -- $228,760
Operating income (loss)...................... 26,399 13 (4,720) -- 21,692
Identifiable assets.......................... 281,063 10,726 9,793 -- 301,582
Depreciation and amortization................ 93,528 140 55 -- 93,723
Expenditures for property and equipment...... 947 9 721 -- 1,677
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
-----------------------------------------------------------
ADJUSTMENTS
RECORDED AND
TELEVISION MUSIC CORPORATE ELIMINATIONS TOTAL
---------- -------- --------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues..................................... $ 98,771 $ 16,130 $ -- $ -- $114,901
Operating income (loss)...................... 12,523 (450) (5,612) -- 6,461
Identifiable assets.......................... 190,064 8,949 8,994 -- 208,007
Depreciation and amortization................ 33,783 141 60 -- 33,984
Expenditures for property and equipment...... 377 20 100 -- 497
</TABLE>
F-21
<PAGE> 61
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
A summary of geographic financial information is presented for 1996, 1995
and 1994:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------
ADJUSTMENTS
AND
UNITED STATES EUROPE ELIMINATIONS TOTAL
------------- ------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues............................................ $ 154,943 $86,780 $ (5,265) $236,458
Operating income.................................... 17,610 17,895 -- 35,504
Identifiable assets................................. 266,003 93,732 -- 359,735
Depreciation and amortization....................... 54,140 44,641 -- 98,781
Expenditures for property and equipment............. 1,074 286 -- 1,360
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------
ADJUSTMENTS
AND
UNITED STATES EUROPE ELIMINATIONS TOTAL
------------- ------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues............................................ $ 146,303 $82,457 $ -- $228,760
Operating income.................................... 12,674 9,018 -- 21,692
Identifiable assets................................. 213,767 87,815 -- 301,582
Depreciation and amortization....................... 57,740 35,983 -- 93,723
Expenditures for property and equipment............. 1,228 449 -- 1,677
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
-------------------------------------------------
ADJUSTMENTS
AND
UNITED STATES EUROPE ELIMINATIONS TOTAL
------------- ------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues............................................ $ 83,135 $31,766 $ -- $114,901
Operating income (loss)............................. (388) 6,849 -- 6,461
Identifiable assets................................. 129,231 78,776 -- 208,007
Depreciation and amortization....................... 32,882 1,102 -- 33,984
Expenditures for property and equipment............. 273 224 -- 497
</TABLE>
Revenues related to the television series Baywatch amounted to $53,846,000,
$66,211,000, and $35,328,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
Approximately $53,931,000, $58,868,000, and $15,802,000 of revenues from
the European segment are derived from the Company's operations in Germany for
the years ended December 31, 1996, 1995 and 1994, respectively.
During the years ended December 31, 1996, 1995 and 1994, one customer of
the recorded music segment accounted for 9%, 7% and 11%, respectively, and one
customer of the television segment accounted for 7%, 6%, and 13%, respectively,
of consolidated revenues. Commencing January 1, 1996, the Company entered into
the WEA Distribution Agreement providing for the domestic distribution for all
of the Company's recorded music product (See Note 8).
Included in United States sales are export sales in the years ended
December 31, 1996, 1995 and 1994 of $49,146,000, $29,977,000, and $20,821,000,
respectively.
F-22
<PAGE> 62
ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES
(AMOUNTS IN THOUSANDS)
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ----------- ----------------------------- ------------ ----------
ADDITIONS
-----------------------------
BALANCE AT CHARGED TO CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------- ------------ ---------- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts... $1,030 $ 575 $ -- $ -- $1,605
Allowance for estimated future
returns........................ 1,415 -- 5,854(1) 5,891(2) 1,378
Allowance for makegood reserve.... 535 198 -- -- 733
YEAR ENDED DECEMBER 31, 1995:
Deducted from assets accounts:
Allowance for doubtful accounts... 719 311 -- -- 1,030
Allowance for estimated future
returns........................ 1,169 -- 4,658(1) 4,412(2) 1,415
Allowance for makegood reserves... 1,967 -- -- 1,432(3) 535
YEAR ENDED DECEMBER 31, 1994:
Deducted from assets accounts:
Allowance for doubtful accounts... 432 287 -- -- 719
Allowance for estimated future
returns........................ 965 -- 3,368(1) 3,164(2) 1,169
Allowance for makegood reserves... 1,844 3,757 -- 3,634(3) 1,967
</TABLE>
- ---------------
(1) Charged to recorded music revenues.
(2) Actual sales returns.
(3) Makegood credits issued to customers.
S-1
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly cause this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 26, 1997
ALL AMERICAN COMMUNICATIONS, INC.
By: /s/ ANTHONY J. SCOTTI
------------------------------------
Anthony J. Scotti
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ ANTHONY J. SCOTTI Chairman of the Board and March 26, 1997
- --------------------------------------------- Chief Executive Officer
Anthony J. Scotti (principal executive officer)
/s/ THOMAS BRADSHAW Director, Chief Financial March 26, 1997
- --------------------------------------------- Officer and Treasurer
Thomas Bradshaw (principal financial officer
and principal accounting
officer)
/s/ EUGENE BEARD Director March 26, 1997
- ---------------------------------------------
Eugene Beard
/s/ LAWRENCE E. LAMATTINA Director March 26, 1997
- ---------------------------------------------
Lawrence E. Lamattina
/s/ GORDON C. LUCE Director March 26, 1997
- ---------------------------------------------
Gordon C. Luce
/s/ DAVID A. MOUNT Director March 26, 1997
- ---------------------------------------------
David A. Mount
/s/ R. TIMOTHY O'DONNELL Director March 26, 1997
- ---------------------------------------------
R. Timothy O'Donnell
/s/ MYRON ROTH Director March 26, 1997
- ---------------------------------------------
Myron Roth
/s/ BENJAMIN J. SCOTTI Director March 26, 1997
- ---------------------------------------------
Benjamin J. Scotti
/s/ SYDNEY D. VINNEDGE Director March 26, 1997
- ---------------------------------------------
Sydney D. Vinnedge
</TABLE>
<PAGE> 1
EXHIBIT 9.2.1
SHAREHOLDERS AGREEMENT
Extended Shareholders Agreement, effective as of August 25, 1996, by
and among All American Communications, Inc., a Delaware corporation (the
"Company"), Anthony J. Scotti ("A. Scotti"), Benjamin J. Scotti ("B. Scotti")
(A. Scotti and B. Scotti being hereinafter collectively referred to as the
"Scotti Group"), Thomas Bradshaw ("Bradshaw"), Myron Roth ("Roth"), and Sydney
D. Vinnedge ("Vinnedge") (Bradshaw, Roth and Vinnedge being hereinafter
collectively referred to as the "Management Group").
WHEREAS, the Company, the Management Group and the Scotti Group have
entered into a Shareholders Agreement dated as of February 25, 1991 (the
"Original Shareholders Agreement") regarding the disposition of the Management
Stock (as defined in the Original Shareholders Agreement) and certain other
rights of the Company and the Scotti Group;
WHEREAS, the parties hereto desire to enter into an agreement
regarding their respective rights and obligations with respect to the
Management Stock and certain other matters for an extended term and to provide
for continuity in the operations of the Company as controlled by A. Scotti and
B. Scotti;
NOW, THEREFORE, in consideration of the agreements and mutual
covenants contained herein, the parties hereby agree as follows:
1. Definitions.
1.1 Capitalized Terms. Capitalized terms used herein
without definition shall have the respective meanings set forth in the Original
Shareholders Agreement.
2. Right of First Refusal.
(a) All Management Stock shall be subject to the
following "right of First Refusal" in favor of first A. Scotti and B. Scotti,
and second the Company to the extent that A. Scotti and B. Scotti elect not to
exercise their Right of First Refusal with respect to any shares of Management
Stock subject to such Right of First Refusal.
(b) For a period of five years following the effective
date hereof, no shares of Management Stock may be sold, transferred, pledged,
encumbered or otherwise disposed of (collectively "Transfer") by Bradshaw, Roth
or Vinnedge (as the case may be) without first offering (i) A. Scotti and B.
Scotti and (ii) the Company (to the extent that A. Scotti and B. Scotti elect
not to exercise their right of First Refusal with respect to all such offered
shares) the right to purchase such portion of the Management Stock
<PAGE> 2
sought to be transferred by Bradshaw, Roth or Vinnedge (as the case may be), at
such purchase price and upon such terms as shall have been offered in writing
by a third party. If the proposed consideration is other than cash, the person
who has the Right of First Refusal may elect to pay either (i) cash in lieu of
such other non-cash consideration or (ii) non-cash consideration of equal
value. In that case, the value of the non-cash consideration will be
determined within thirty (30) days by an independent appraiser reasonably
mutually acceptable to the Investor and the person having the Right of First
Refusal, or if the parties are unable to select a mutually acceptable
appraiser, such appraiser shall be selected by the Presiding Judge of the
Superior Court of Los Angeles County and shall determine the value of the
non-cash consideration within thirty (30) days of selection. Any exercise of
these Right of First Refusal must be communicated in writing to Bradshaw, Roth
or Vinnedge (as the case may be) within five (5) business days of notification
to A. Scotti and B. Scotti (or the Company) of the proposed transfer of any
Management Stock.
(c) In the event that Bradshaw, Roth or Vinnedge (as the
case may be) should seek to Transfer any Management Stock owed by him in the
course of an ordinary public market transaction, then the purchase price per
share of Management Stock to be paid by the person electing to exercise the
Right of First Refusal shall be equal to the average of the Closing Prices (as
hereinafter defined) for the 10 consecutive Trading Days (as hereinafter
defined) immediately preceding the date of written notification of the exercise
of the Right of First Refusal ("Exercise Date"). For purposes of the
Shareholders Agreement, the term "Closing Price" shall mean the last reported
sales price regular way for the Common Stock on the National Association of
Securities Dealers Inc. Automated Quotation System ( the "NASDAQ System") if
the Common Stock is then listed thereon or, if not so listed, on the principal
national stock exchange on which the Common Stock is then listed for the 10
consecutive Trading Days immediately preceding the Exercise Date. A "Trading
Day" is a business day in which shares of the Common Stock have actually
traded; provided, that (i) if at the time of any computation pursuant to this
paragraph the Common Stock is not then traded on any trading market or (ii) if
there have not been 10 Trading Days in the last 30 calendar days, the purchase
price for the shares of Management Stock sought to be transferred shall be the
fair value as reasonably determined in good faith by the Board of Directors of
the Company.
(d) Notwithstanding the foregoing, the provisions of this
Section 2 shall not apply to any shares of Common Stock owned by Vinnedge prior
to February 25, 1991.
3. Restrictions on Transfer of Management Stock. No Transfer of
any shares of Management Stock may be made except in compliance with the
provisions of the Shareholders Agreement and all applicable federal, state and
foreign securities laws. No Transfer of Management Stock, other than a
permitted Transfer (as hereinafter defined), shall be made unless (i) the
transferor shall deliver to the Company a written opinion of counsel (which
opinion shall be satisfactory in form and substance to the Company) to the
effect that an exemption from registration under the Securities Act is
available and
<PAGE> 3
that the proposed Transfer will not violate applicable federal, state or
foreign securities laws and (ii) the transferee delivers to the Company a
written agreement (in form and substance reasonably satisfactory to the
Company) providing that such transferee will be bound by the provisions
restricting Transfers set forth in this Section 3. For purposes of this
Section 3, a "Permitted Transfer" is any Transfer made (i) pursuant to an
effective registration statement filed under the Securities Act or (ii) in the
public market in ordinary market transactions regular way.
4. Legend. In addition to any other legend that may appear on
the certificates representing the shares of Common Stock owned by the parties
hereto, the Company agrees to cause all certificates for shares of Management
Stock to bear the following legend:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, HAVE BEEN TAKEN
FOR INVESTMENT AND ARE SUBJECT TO THE PROVISIONS OF A
SHAREHOLDERS AGREEMENT DATED AS OF AUGUST 25, 1996. NEITHER
THIS CERTIFICATE NOR THE SHARES REPRESENTED BY IT ARE
ASSIGNABLE OR OTHERWISE TRANSFERABLE EXCEPT IN ACCORDANCE WITH
THE PROVISIONS OF SUCH AGREEMENT, A COPY OF WHICH IS ON FILE
WITH THE SECRETARY OF THE COMPANY.
5. Irrevocable Proxy. Each of Bradshaw, Vinnedge and Roth hereby
grant to A. Scotti and irrevocable proxy, coupled with an interest, to vote all
shares of Management Stock owned by him with respect to any and all matters
with respect to which a holder of shares of Common Stock is entitled to vote.
In the event that the proxy shall be unenforceable for any reason, each of
Bradshaw, Vinnedge and Roth hereby agree to vote all such shares as directed by
A. Scotti. Notwithstanding the foregoing, the provisions of this Section 5
shall not apply to any shares of Common Stock owned by Vinnedge prior to
February 25, 1991.
6. Termination. Unless otherwise indicated herein, this
Shareholders Agreement shall terminate five years and six months from the date
hereof.
7. Notices. All notices, consents and other communications under
this Shareholders Agreement shall be in writing and shall be deemed to have
been duly given when (a) delivered by hand, (b) sent by telex or telecopier
(with receipt confirmed), provided that a copy is mailed by registered mail,
return receipt requested, or (c) when received by the addressee, if sent by
Express Mail, Federal Express or other express delivery service (receipt
requested), in each case at the principal executive offices of the Company or
to the appropriate addresses, telex numbers and telecopier numbers as a party
may designate as to itself by notice to the other parties).
<PAGE> 4
8. Successors and Assigns. This Shareholders Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns; provided, however, that this
Shareholders Agreement may not be assigned by A. Scotti, B. Scotti, Bradshaw,
Vinnedge or Roth without the express written consent of the company other than
to the respective heirs, legal representative, conservator or guardian of any
party hereto; and, provided, further, that a transferee pursuant to a Permitted
Transfer shall not be deemed to the a successor or assignee of any party
hereto.
9. Entire Agreement; Amendment and Waiver; Counterparts. This
Shareholders Agreement contains the sole and entire understanding of the
parties with respect to its subject matter and all prior negotiations,
discussions, commitments and understandings heretofore had between them with
respect thereto are merged herein. No waivers of, or consents to departures
from, any provision hereof shall be effective as to any party entitled to the
benefits thereof unless given in writing by such party. This Shareholders
Agreement may be executed in two or more counterparts, each of which shall be
deemed an original, but all of which shall constitute one and the same
agreement. This Shareholders Agreement may not be amended as to any party
unless such amendment is consented to in writing by such party.
10. Business Day. Any action which is to be taken on any day
which is not a business day shall be deemed to have been taken on such day if
taken on the next succeeding business day. For purposes of this Shareholders
Agreement, a "business day" shall mean any day excluding any Saturday, Sunday
and any day which is a legal holiday under the laws of the State of New York,
or is a day on which banking institutions located in such state are required or
authorized by law or other governmental action to close.
11. Governing Law. This Shareholders Agreement and all amendments
hereof and waivers and consents hereunder shall be governed by the internal law
of the State of New York without regard to the conflicts of law principles
thereof.
<PAGE> 5
IN WITNESS WHEREOF, the parties have caused this Shareholders
Agreement to be duly executed as of the 25th day of August, 1996.
ALL AMERICAN COMMUNICATIONS, INC.
By: /s/ ANTHONY J. SCOTTI
----------------------------
Anthony J. Scotti, Chief
Executive Officer
"SCOTTI GROUP":
/s/ ANTHONY J. SCOTTI
-------------------------------
Anthony J. Scotti
BENJAMIN J. SCOTTI
--------------------------------
Benjamin J. Scotti
"MANAGEMENT GROUP":
----------------
/s/ THOMAS BRADSHAW
--------------------------------
Thomas Bradshaw
--------------------------------
Myron Roth
/s/ SYDNEY D. VINNEDGE
--------------------------------
Sydney D. Vinnedge
<PAGE> 1
EXHIBIT 11
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS -- EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding........................................ 11,437 8,181 6,135
Assumed exercise of dilutive options and warrants
under the treasury stock method based on average
market price....................................... 592 149 66
------- ------ ------
Weighted average number of common shares and common
share equivalents -- primary....................... (A) 12,029 8,330 6,201
======= ====== ======
Computation of net income for per share purposes:
Net income before extraordinary charge............... $14,106 $7,248 $ 455
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.... 30 -- --
------- ------ ------
Net income before extraordinary charge for per share
computation........................................ (B) 14,136 7,248 455
Extraordinary charge................................. (C) (1,420) -- --
------- ------ ------
Net income for per share computation................. (D) $12,716 $7,248 $ 455
======= ====== ======
Earnings per common and common equivalent share:
Net income before extraordinary charge............. (B) / (A) $ 1.18 $ 0.87 $ 0.07
Extraordinary charge............................... (C) / (A) (0.12) -- --
------- ------ ------
Net income......................................... (D) / (A) $ 1.06 $ 0.87 $ 0.07
======= ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Forms S-3 (No. 333-19765
and No. 33-77782) and in the Registration Statements on Form S-8 (No. 333-19767,
No. 33-42383, and No. 33-64423) of All American Communications, Inc. and
subsidiaries of our report dated February 27, 1997 appearing on page F-1 of
this Form 10-K.
PRICE WATERHOUSE LLP
- -----------------------
Price Waterhouse LLP
Los Angeles, California
March 25, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-19767, No. 33-42383 and No. 33-64423) of All American
Communications, Inc. and in the Registration Statements (Form S-3 No. 333-19765
and No. 33-77782) of All American Communications, Inc. and in the related
Prospectuses of our report dated March 4, 1996, with respect to the consolidated
financial statements and schedule of All American Communications, Inc. included
in the Annual Report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Los Angeles, California
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND FOR THE YEAR THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 33,858
<SECURITIES> 0
<RECEIVABLES> 114,776
<ALLOWANCES> 4,794
<INVENTORY> 94,879
<CURRENT-ASSETS> 0
<PP&E> 8,092
<DEPRECIATION> 3,976
<TOTAL-ASSETS> 359,735
<CURRENT-LIABILITIES> 0
<BONDS> 179,000
0
0
<COMMON> 2
<OTHER-SE> 87,968
<TOTAL-LIABILITY-AND-EQUITY> 359,735
<SALES> 25,584
<TOTAL-REVENUES> 236,458
<CGS> 17,903
<TOTAL-COSTS> 196,352
<OTHER-EXPENSES> 4,602
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,719
<INCOME-PRETAX> 24,320
<INCOME-TAX> 10,214
<INCOME-CONTINUING> 14,106
<DISCONTINUED> 0
<EXTRAORDINARY> (1,420)
<CHANGES> 0
<NET-INCOME> 12,686
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.06
</TABLE>
