<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition from _____________________ to ___________________________
Commission File Number 0-14333
ALL AMERICAN COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 95-3803222
(State of or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
808 Wilshire Boulevard, Santa Monica, California 90401-1810
(Address of principal executive offices) (Zip Code)
</TABLE>
(310) 656-1100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
As of August 5, 1997, there were 7,019,557 shares of $.0001 par
value Common Stock (excluding treasury shares), and 5,149,650 shares of $.0001
par value Common Stock, Class B (excluding treasury shares) outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(unaudited) (Note)
<S> <C> <C>
Cash and cash equivalents $ 38,154 $ 33,858
Trade receivables, less allowances of $3,732 and $3,716 at June 30, 1997
and December 31, 1996, respectively 78,446 106,108
Unbilled receivables, less imputed interest of $697 and $1,078 at June 30, 5,338 3,874
1997 and December 31, 1996, respectively
Inventory, net 855 848
Advances to recording artists, net 508 225
Television program costs, less accumulated amortization of $360,658 and
$322,864 at June 30, 1997 and December 31, 1996, respectively 110,781 94,031
Property and equipment, less accumulated depreciation and amortization 3,911 4,116
Goodwill, less accumulated amortization of $10,513 and $8,241 at June 30,
1997 and December 31, 1996, respectively 109,277 106,990
Other 9,946 9,685
-------- --------
Total assets $357,216 $359,735
======== ========
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
2
<PAGE> 3
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(unaudited) (Note)
<S> <C> <C>
Liabilities:
Accounts payable $ 12,876 $ 9,274
Accrued expenses 34,802 35,310
Royalties payable 5,455 5,386
Deferred revenues 3,527 738
Due to producers
11,142 13,215
Participations payable 24,467 26,600
Notes payable 174,000 179,000
Deferred taxes payable 2,242 2,242
--------- ---------
Total liabilities 268,511 271,765
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares, none issued -- --
Common stock, voting, $.0001 par value, authorized 20,000,000 shares, 1 1
issued 6,943,305 and 6,933,713 in 1997 and 1996, respectively (including
treasury shares)
Common stock, Class B non-voting, $.0001 par value, authorized 1 1
20,000,000 shares, issued 5,727,850 and 5,720,000 in 1997 and 1996,
respectively (including treasury shares)
Additional paid-in capital 74,626 74,486
Common stock in treasury, at cost, 30,000 shares of common stock and
528,200 shares of common stock, Class B in 1997 and 1996 (5,501) (5,501)
Retained earnings 23,198 19,625
Currency translation adjustment (3,620) (642)
--------- ---------
Total stockholders' equity 88,705 87,970
--------- ---------
Total liabilities and stockholders' equity $ 357,216 $ 359,735
========= =========
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
3
<PAGE> 4
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
Revenues:
Television $ 31,107 $ 30,316
Recorded music and merchandising 5,735 9,029
------------ ------------
36,842 39,345
------------ ------------
Expenses:
Television 21,131 22,107
Recorded music and merchandising 2,983 6,573
Selling, general and administrative 7,594 6,631
Goodwill amortization 1,084 1,101
------------ ------------
32,792 36,412
------------ ------------
Operating income 4,050 2,933
Other income (expense):
Interest income 956 368
Interest expense, net of amounts capitalized (4,403) (3,035)
Other (202) (4)
------------ ------------
(3,649) (2,671)
------------ ------------
Income before provision for income taxes 401 262
Provision for income taxes 160 110
------------ ------------
Net income $ 241 $ 152
============ ============
Earnings per common and common equivalent shares:
Net income per share $ 0.02 $ 0.01
============ ============
Weighted average number of common and common equivalent shares
outstanding 13,342,000 12,110,000
============ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE> 5
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1997 1996
------------ -------------
(unaudited)
<S> <C> <C>
Revenues:
Television $ 94,707 $ 71,673
Recorded music and merchandising 9,810 15,815
------------ ------------
104,517 87,488
------------ ------------
Expenses:
Television 68,845 51,465
Recorded music and merchandising 5,348 11,551
Selling, general and administrative 14,337 13,293
Goodwill amortization 2,271 2,186
------------ ------------
90,801 78,495
------------ ------------
Operating income 13,716 8,993
Other income (expense):
Interest income 1,537 799
Interest expense, net of amounts capitalized (8,919) (5,933)
Other (379) (26)
------------ ------------
(7,761) (5,160)
------------ ------------
Income before provision for income taxes 5,955 3,833
Provision for income taxes 2,382 1,610
------------ ------------
Net income $ 3,573 $ 2,223
============ ============
Earnings per common and common equivalent shares:
Net income per share $ 0.27 $ 0.19
============ ============
Weighted average number of common and common equivalent shares
outstanding 13,304,000 11,941,000
============ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
<PAGE> 6
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
--------- --------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,573 $ 2,223
Adjustments to reconcile net income to net cash provided (used):
Depreciation and amortization of property, equipment and goodwill 2,628 3,141
Amortization of television program costs 37,794 29,900
Increase (decrease) in allowance for doubtful accounts (349) 17
Increase in allowance for sales returns 310 600
Increase in make goods reserve 55 39
Decrease in imputed interest discount (381) (723)
Changes in operating assets and liabilities:
Trade receivables, unbilled receivables, inventory and advances to
recording artists 26,273 43,756
Additions to television program costs (54,544) (50,648)
Accounts payable, accrued expenses and royalties payable 3,163 4,527
Due to producers and participations payable (4,206) (11,114)
Deferred revenues 2,789 (161)
Other assets (276) 2,678
-------- --------
Net cash provided by operating activities 16,829 24,235
-------- --------
INVESTING ACTIVITIES
Purchase of property and equipment, net (151) (1,166)
Contingent earn out from purchase of Mark Goodson Productions, LLC (4,544) (3,460)
-------- --------
Net cash used by investing activities (4,695) (4,626)
-------- --------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 140 --
Proceeds from borrowings 12,500 57,600
Repayments of borrowings (17,500) (72,092)
Restricted cash held for repayment of borrowings -- (2,282)
-------- --------
Net cash used by financing activities (4,860) (16,774)
-------- --------
Currency translation adjustment (2,978) (706)
-------- --------
Increase in cash 4,296 2,129
Cash and cash equivalents at beginning of period 33,858 13,126
-------- --------
Cash and cash equivalents at end of period $ 38,154 $ 15,255
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 8,560 $ 6,126
======== ========
Income taxes $ 1,834 $ 1,331
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
6
<PAGE> 7
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business
All American Communications, Inc. ("AAC") and its wholly-owned subsidiaries,
All American Television, Inc. ("AATV"), All American Television Production,
Inc., ("AATP"), All American Entertainment Industries, Inc. ("AAEI"), 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
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 flow or if
there is an event or change in circumstances which establishes the existence of
impairment indicators.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited, condensed, consolidated financial statements
include the accounts of AAC and its subsidiaries; all significant intercompany
balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and the
applicable rules of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results for the
six month period ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997. These
financial statements should be read in conjunction with the consolidated
financial statements and related footnotes included in the Company's latest
Annual Report on Form 10-K.
Recognition of Revenues
Minimum guaranteed 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 when 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.
7
<PAGE> 8
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The portion of recognized revenue to be shared with the producers and owners
of the licensed program material (participations payable and due to producers)
is accrued as the revenue is recognized. In certain instances, the Company
guarantees viewer ratings for its syndicated programs. Applicable revenue is
recorded net of estimated shortfalls, which are settled by giving either
additional advertising time (make goods) or cash refunds to the advertiser. The
Company provides for the full amount of the estimated shortfall.
Domestic revenues from recorded music are recognized as units are shipped to
customers. The Company provides for estimated future returns of recorded music
product at the time when the products are initially sold. These provisions are
based upon historical experience. Actual returns are charged against the
reserve. Foreign distribution of recorded music is effected through a
distributor in exchange for guaranteed nonrefundable advances against future
royalties. Nonrefundable guarantees from foreign sales are recognized as product
is delivered to the Company's foreign distributor.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less and investments in money market funds
to be cash equivalents.
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
estimate of remaining gross revenue to be recognized. The use of estimates which
may ultimately differ from
8
<PAGE> 9
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 reevaluated 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
Earnings per share represents the per share income and is computed based on
the weighted average common shares outstanding and dilutive common stock
equivalents determined using the modified treasury stock method. The fully
diluted per share computations for 1997 and 1996 are materially the same as the
primary per share computations and accordingly have not been presented.
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.
9
<PAGE> 10
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
2. NOTES PAYABLE
Notes payable and amounts due to banks are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------------- --------------
(in thousands)
<S> <C> <C>
Notes payable to banks $ 74,000 $ 79,000
10 7/8% Senior Subordinated Notes 100,000 100,000
-------------- --------------
$ 174,000 $ 179,000
============== ==============
</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. Borrowings under the Restructured Credit Facility
bear interest, at the Company's option, at either: (i) LIBOR plus 1 1/2% (7.13%
as of August 1, 1997 based on a 30 day LIBOR rate); or (ii) the Alternate Base
Rate (which is the greater of The Chase Manhattan Bank's Prime Rate, its Base CD
Rate plus 1%, or the Federal Funds Effective Rate plus 1/2%) plus 1/2% (9.0% as
of August 1, 1997), subject to increase by 1/2 of 1% in the event of the
Company's failure to satisfy certain financial ratios. As of August 1, 1997, the
Company had outstanding borrowings of $77,000,000 under the Restructured Credit
Facility, with $61,113,000 available for borrowing. Amounts repaid under the
Restructured Credit Facility may be reborrowed, subject to the Company having an
adequate borrowing base and meeting the conditions precedent to each borrowing.
The Restructured Credit Facility imposes a number of financial and other
conditions upon the Company, including limitations on indebtedness and changes
in lines of business, restrictions on the disposition of assets, restrictions on
making certain payments (including dividends), restrictions on acquisitions and
certain financial tests, including a minimum net worth test, a leverage test and
an interest coverage ratio test. In particular, consummation of significant
acquisitions may be subject to obtaining bank consent under the Restructured
Credit Facility. Furthermore, certain conditions must be satisfied before the
funding of each season of certain television series. Loans under the
Restructured Credit Facility may be made as "Domestic Loans" to AAC or as
"Foreign Loans" to AAN, subject to borrowing base availability. All outstanding
loans as of August 1, 1997 are "Domestic Loans." Substantially all of the
Company's assets (other than real property) are pledged under the Restructured
Credit Facility.
Senior Subordinated Notes
On October 11, 1996, the Company issued $100,000,000 of 10 7/8% Senior,
Subordinated Notes due 2001 (the "Senior Notes"). The Senior Notes are unsecured
obligations of AAC which mature October 15, 2001 and bear interest at 10 7/8%
per annum, payable semiannually on each April 15 and October 15 (commencing on
April 15, 1997). Proceeds, net of issuance costs and fees, from the issuance of
the Senior Notes totaled approximately $96,000,000. The Senior Notes were issued
pursuant to an Indenture between the Company and U.S. Trust Company of
California, N.A. (the "Indenture"). The Senior Notes are subordinated in right
of payment to the prior payment in full of all Senior Indebtedness (as defined
in the Indenture) of the Company.
The Indenture imposes certain covenants and conditions upon the Company,
including but not limited to restrictions or limits on making certain payments
or investments, limits on certain transactions, limits on liens, limits on
merger, consolidation and sale of assets, limits on senior subordinated debt,
limits on business activities and change of control provisions. In the event
that the Company enters into a letter of intent or makes a public announcement
during the first 18 months after October 4, 1996 with respect to the sale of all
of the Company's capital stock (whether by merger,
10
<PAGE> 11
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
2. NOTES PAYABLE (CONTINUED)
consolidation or otherwise) or all or substantially all of the Company's assets
(a "Sale Transaction"), the Company may, subsequent to the closing of such Sale
Transaction, redeem up to $100,000,000 in principal amount of the Senior Notes
at a redemption price of 110 7/8% of the principal amount thereof, plus accrued
and unpaid interest, provided that the Sale Transaction closes within 120 days
after the date of such letter of intent or public announcement and, provided
further, that notice of such redemption shall be given within 30 days of the
date of the closing of such Sale Transaction. In addition, during the first 18
months after October 4, 1996, the Company may redeem up to $35,000,000 in
principal amount of the Senior Notes at a redemption price of 110 7/8% of the
principal amount thereof, plus accrued and unpaid interest, with the net
proceeds of a public offering of common stock of the Company, provided that at
least $65,000,000 in aggregate principal amount of the Senior Notes remain
outstanding immediately after the occurrence of such redemption and, provided
further, that notice of such redemption shall be given within 30 days of the
date of the closing of such public offering. Following a Change of Control (as
defined in the Indenture), the Company will be required to offer to purchase all
or any part of the Senior Notes tendered at the option of the holders thereof at
101% of the aggregate principal amount thereof, plus accrued and unpaid
interest.
3. TELEVISION PROGRAM COSTS
Costs for television programs are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
---------------- ------------------
(in thousands)
<S> <C> <C>
Released, less accumulated amortization $ 104,990 $ 91,746
In process and development 5,791 2,285
---------------- -----------------
$ 110,781 $ 94,031
================ =================
</TABLE>
The Company capitalizes interest, using the Company's effective borrowing
rate, and overhead on television programs in production. Included in television
program costs for the six months ended June 30, 1997 and year ended December 31,
1996 are: capitalized interest of $406,000 and $876,000, respectively; and
capitalized overhead of $3,621,000 and $5,404,000, respectively.
4. COMMITMENTS AND CONTINGENCIES
The Company has committed to produce 22 episodes of Baywatch for the
1997/1998 broadcast season having a production budget of approximately
$25,000,000. Through August 1, 1997, the Company has commenced production on and
expended $8,600,000 toward production of 10 episodes. 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 has exercised its option to cause Atlantis Releasing B.V.
("Atlantis") to produce 22 new episodes of The Adventures of Sinbad for the
1997/1998 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 a
minimum of 22 new episodes in each of the two subsequent broadcast seasons,
exercisable on or before February 15 of the year prior to each broadcast season.
At the end of the next two 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's share of the total production budget
(approximately $640,000 of the $835,000 expected per episode production budget)
is expected to be funded primarily through a combination of: (i) barter
advertiser sales; (ii)
11
<PAGE> 12
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 advertiser sales and international sales. Through August 1, 1997,
the Company has commenced production on and expended $5,900,000 toward the
production of nine episodes.
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 $8,000,000. The Company's agreement with Bristol-Myers
Squibb provides the latter with a substantial portion of the available barter
advertiser time for $3,475,000, 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 advertiser sales and international sales. Through August 1, 1997,
the Company has commenced production on and expended $2,700,000 toward the
production of 11 episodes.
The Company has entered 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 per week talk show program for the
1997/1998 broadcast season entitled Arthel & Fred. 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 advertiser sales. Through
August 1, 1997, the Company has expended $543,000 toward production.
The Company has entered into a distribution agreement with SAT-1 for the
German distribution of 44 episodes of a weekly, one-hour, German language
reality show for the 1997/1998 broadcast season. The budget for this Company
produced program is approximately $10,000,000. While the license fee for the
program (approximately $11,500,000) is in excess of the budget, there is no
assurance that the license fee will cover the actual costs of production.
Through August 1, 1997, the Company has expended $1,700,000 toward production.
Minimum commitments for advances to recording artists at June 30, 1997
amounted to approximately $430,000.
On December 12, 1994, Credit Lyonnais Bank Nederland N.V. ("CLBN") made a
demand upon SBEI under a Guarantee, dated July 29, 1986 (the "SBEI Guarantee"),
for payment of approximately $3,742,000 plus interest accrued or costs incurred
since November 11, 1994 under a Loan and Security Assignment, dated July 29,
1986, between CLBN and various former subsidiaries of SBEI relating to the
discontinued motion picture operations of the Company. In a letter dated
December 22, 1994, SBEI rejected the foregoing demand based upon, among other
reasons, the following: (i) that in a January 1993 agreement, CLBN agreed to
release all liens and any interests in any property or assets of SBEI, which in
effect released SBEI from any obligations under the SBEI Guarantee; (ii) the
loan purportedly guaranteed has been repaid; and (iii) SBEI is not a party to
and was not bound by a material amendment to the above-referenced Loan and
Security Assignment. The Company and CLBN have reached a settlement agreement in
principle as to the dispute, although there is no assurance that such settlement
will be consummated. While the Company believes that SBEI has good and
meritorious defenses with respect to the SBEI Guarantee and any related claims
by CLBN, and that the ultimate outcome of this matter will not result in a
material adverse effect on the Company's financial condition or results of
operations, there is no assurance that the Company ultimately will prevail.
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.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a diversified entertainment company which produces,
distributes, 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, Smith-Kline Beecham, Kraft/General Foods, Mars, Nestle and RJR Nabisco).
The rates charged by a syndicator for advertising time are typically lower than
the rates charged by the networks for similar demographics since the networks'
coverage of the market is generally greater.
The international broadcast television market is served principally by
independent stations and cable and satellite television operators. The Company
produces and distributes "local" content programming internationally through its
wholly owned subsidiary, AAFI, principally using game and variety show formats
acquired as part of the Mark Goodson acquisition or from third parties or AAO
principally 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), Ghost Stories (worldwide), the Company's
movies-of-the-week and a portion of its library of domestic content programming
are also handled by AAFI. In addition to producing and distributing Company
owned product, AAFI provides television related producer-for-hire and
distributor services for a fee.
In most cases, the Company's domestic and international distribution
revenues are based on a percentage of the net revenues derived from cash license
fees and/or the sale of advertiser sponsorships. The Company normally advances
all distribution costs for items such as advertising, promotion and tape
shipping and duplication and recovers such expenses out of program revenues. The
Company's fee for distribution is generally between 15% and 35% of net revenues,
and its fee for advertising sales representation is generally between 10% and
15% of net revenues. However, each fee arrangement is separately negotiated and
may be subject to variation. Amounts remaining in excess of the Company's
distribution fees and recoupable expenses (including a portion of the amounts
derived from the sale of advertising time) are either remitted in full
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<PAGE> 14
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 and the
1997/1998 broadcast seasons, the Company has made certain commitments to the
producers with respect to The Adventures of Sinbad.
A small number of television programs and musical recordings have
historically accounted for a significant portion of the Company's revenue in any
given fiscal period. In addition, the Company's television division 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.
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 the 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.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1997 AND 1996
The following unaudited table sets forth the percentage relationship to
total revenues of certain items included in the Company's unaudited condensed
consolidated statements of operations for the three months ended June 30, 1997
and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1996
------ ------
<S> <C> <C>
Revenues:
Television 84.4 % 77.1 %
Recorded music and merchandising 15.6 22.9
------- -------
Total 100.0 100.0
Operating expenses:
Television 57.4 56.2
Recorded music and merchandising 8.1 16.7
Selling, general and administrative 20.6 16.8
Goodwill amortization 2.9 2.8
------- -------
Total 89.0 92.5
Other expenses, principally interest 9.9 6.8
------- -------
Income before income taxes 1.1 % 0.7 %
======= =======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Revenues. The Company's total revenues decreased by approximately $2.5
million or 6% to $36.8 million for the three months ended June 30, 1997, from
$39.3 million for the three months ended June 30, 1996. Revenues from television
operations increased to $31.1 million (84% of total revenues) for the three
months ended June 30, 1997, from $30.3 million (77% of total revenues) for the
three months ended June 30, 1996. Revenues from recorded music and merchandising
decreased to $5.7 million (16% of total revenues) for the three months ended
June 30, 1997, from $9.0 million (23% of total revenues) for the three months
ended June 30, 1996.
14
<PAGE> 15
The increase in revenues from television operations of $0.8 million or 3%
for the three months ended June 30, 1997, as compared with the three months
ended June 30, 1996, was due primarily to the delivery of a television movie of
the week and increases in other television distribution revenues, offset by
lower AAFI revenues.
Revenues from On The Line, a television movie of the week, contributed $3.1
million for the three months ended June 30, 1997, as compared with no similar
revenues in the three months ended June 30, 1996. Revenues generated by the
Company's television distribution operations increased by $1.9 million to $7.4
million for the three months ended June 30, 1997, from $5.5 million for the
three months ended June 30, 1996.
Partially offsetting these increased television revenues was a net decrease
in AAFI revenues of $4.7 million to $17.6 million for the three months ended
June 30, 1997, from $22.3 million for the three months ended June 30, 1996, due
principally to the delivery of additional episodes in Germany in the first
quarter of 1997 which resulted in the delivery of fewer episodes in the second
quarter of 1997 as compared to the year ago period. The AAFI revenue decline was
partially offset by the recognition of $1.9 million from the favorable
resolution of production and distribution audit claims in France and the
recognition of $1.4 million from the settlement of certain copyright claims
against a third party involving international distribution.
The Company has committed to the production and domestic distribution of the
eighth season of Baywatch; the production and distribution of the second season
of The Adventures of Sinbad; and the co-production and distribution of new
programing consisting of Arthel & Fred a daily talk show hosted by Arthel
Neville and Fred Roggin and Ghost Stories, an hour long weekly series. These
programs are presently being cleared on independent television stations and
network affiliates for the 1997/1998 broadcast season. Furthermore, AAO, as
producer, 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
$11.5 million. In addition to the above programming, the Company has several
projects in development including, but not limited to, television movies of the
week 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.
Recorded music and merchandising revenues decreased by $3.3 million or 36%
to $5.7 million for the three months ended June 30, 1997, from $9.0 million for
the three months ended June 30, 1996. This decrease was attributable to the year
ago revenue contribution from "Weird Al" Yankovic's platinum selling album Bad
Hair Day, as compared with no comparable new releases in the three months ended
June 30, 1997.
Operating Expenses. Total operating expenses decreased by $3.6 million or
10% to $32.8 million for the three months ended June 30, 1997, from $36.4
million for the three months ended June 30, 1996, due principally to a $3.4
million decrease in recorded music and merchandising operating costs discussed
below.
Television expenses, before overhead and goodwill amortization, decreased by
$1.0 million or 4% to $21.1 million for the three months ended June 30, 1997,
from $22.1 million for the three months ended June 30, 1996. The decrease in
television expenses as a percentage of total television revenues resulted
primarily from the settlement of certain outstanding claims against a third
party as discussed above. Television selling, general and administrative
expenses during the three months ended June 30, 1997 of $4.2 million reflect an
increase of $0.6 million over the three months ended June 30, 1996 due to
planned increases in the Company's television promotion and research departments
and expansion of the Company's international operations to include an office in
Asia.
The Company's recorded music and merchandising expenses, before selling,
general and administrative expenses, decreased $3.6 million or 55% to $3.0
million for the three months ended June 30, 1997, from $6.6 million for the
three months ended June 30, 1996. The decrease in expenses and improvement in
operating margins was due to the decrease in revenues and lower levels of artist
advances and recording and publishing expenditures during the 1997 period as
compared to the 1996 period.
Operating Income. Total operating income for the Company increased $1.2
million or 38% to $4.1 million for the three months ended June 30, 1997, from
$2.9 million for the three months ended June 30, 1996, due to an increase in
television operating income.
Television operating income was $4.6 million (after the deduction of
goodwill amortization of $1.1 million and selling,
15
<PAGE> 16
general and administrative expenses of $4.2 million) for the three months ended
June 30, 1997, as compared to $3.5 million (after the deduction of goodwill
amortization of $1.1 million and selling, general and administrative expenses of
$3.6 million) for the three months ended June 30, 1996. This increase in
television operating income was primarily attributable to the factors discussed
above.
Operating income from recorded music and merchandising operations increased
$0.1 million to $1.0 million for the three months ended June 30, 1997 (after the
deduction of selling, general and administrative expenses of $1.7 million), from
$0.9 million for the three months ended June 30, 1996 (after the deduction of
selling, general and administrative expenses of $1.6 million). This increase in
recorded music and merchandising operating income was primarily attributable to
the factors discussed above.
Goodwill amortization for the quarter ended June 30, 1997 remained constant
at $1.1 million as compared to the three months ended June 30, 1996. The Company
expects to report amortization expense of at least $1.1 million on a quarterly
basis as a result of prior acquisitions, subject to increase based upon the
amount of contingent purchase price payable to the sellers in the Mark Goodson
acquisition and the contingent payments, if any, in connection with the
acquisition of Orbis Entertainment Company, Inc. (the "Orbis Acquisition").
Through June 30, 1997, the Company has recorded contingent purchase price, in
connection with the Mark Goodson acquisition, totaling $14.6 million (including
The Interpublic Group of Companies' share through December 31, 1995 of $0.9
million). As of June 30, 1997, the total remaining contingent earnout payable in
connection with the Mark Goodson acquisition, to the extent such earnout is paid
within five years from the date of acquisition, is $31.7 million.
Foreign Currency Exchange Gain or Loss. The Company recognized a foreign
currency exchange loss of $0.2 million for the three months ended June 30, 1997,
as compared to a nominal foreign currency exchange loss for the three months
ended June 30, 1996, which resulted from the settlement and valuation of certain
licensing agreements, denominated in foreign currencies, into U.S. Dollars as of
June 30, 1997 and 1996, respectively as a result of the increase in value of the
U.S. Dollar. Furthermore, as of June 30, 1997, due to the strengthening dollar
against the German Mark and the Great Britain Pound Sterling, the Company has
recognized a cumulative charge to stockholders' equity of $3.6 million as
compared to $0.6 million at June 30, 1996. 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 continue to record foreign exchange losses and
gains in the future.
Interest Expense. Interest expense, net of capitalized interest ($0.3
million) and interest income ($1.0 million), increased by $0.7 million to $3.4
million for the three months ended June 30, 1997, from $2.7 million, net of
nominal interest capitalized and interest income ($0.4 million), for the three
months ended June 30, 1996, due to increased borrowings as a result of higher
corporate and production borrowings and a higher average cost of borrowing,
primarily in connection with the Company's issuance, in October 1996, of $100.0
million in principal amount of its 10 7/8% Senior Subordinated Notes due 2001
(the "Senior Notes"). The Company expects that the general trend of increased
interest costs over prior periods will continue in part as a result of the
higher interest rates and increased borrowings in connection with continuing
production and the Company's issuance of the Senior Notes ( - see "-- Liquidity
and Capital Resources").
Income Taxes. The Company recorded a tax provision of $0.2 million for the
three months ended June 30, 1997, and $0.1 million during the three months ended
June 30, 1996, representing effective tax rates of approximately 40% and 42%,
respectively.
Net Income. The net income of $0.24 million for the three months ended June
30, 1997, compares with net income of $0.15 million for the three months ended
June 30, 1996. Earnings per share increased to $0.02 per primary and fully
diluted share for the three months ended June 30, 1997, as compared to $0.01 per
primary and fully diluted share for the three months ended June 30, 1996, due to
the quarter to quarter increase in net income (due to the items discussed above)
partially offset by an increase in the outstanding number of weighted average
common shares and common share equivalents. Such increase in shares is due to
the conversion into Common Stock, upon the Company's call for redemption, of the
Company's former Convertible Subordinated Notes partially offset by the
Company's repurchase of 528,200 shares of Class B Common Stock in October 1996.
Effective July 14, 1997, the Company repurchased, at market prices, 50,000
shares of Common Stock for $17.00 per share and 50,000 shares of Class B Common
Stock for $13.50 per share from The Interpublic Group of Companies, Inc. This
repurchase will result in a reduction of the actual outstanding number of shares
used in the Company's future earnings per share computations.
16
<PAGE> 17
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1997 AND 1996
The following unaudited table sets forth the percentage relationship to
total revenues of certain items included in the Company's unaudited condensed
consolidated statements of operations for the six months ended June 30, 1997 and
1996:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Television 90.6 % 81.9 %
Recorded music and merchandising 9.4 18.1
--------- --------
Total 100.0 100.0
Operating expenses:
Television 65.9 58.8
Recorded music and merchandising 5.1 13.2
Selling, general and administrative 13.7 15.2
Goodwill amortization 2.2 2.5
--------- --------
Total 86.9 89.7
Other expenses, principally interest 7.4 5.9
--------- --------
Income before income taxes 5.7 % 4.4 %
========= ========
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenues. The Company's total revenues increased by $17.0 million or 19% to
$104.5 million for the six months ended June 30, 1997, from $87.5 million for
the six months ended June 30, 1996. Revenues from television operations
increased to $94.7 million (91% of total revenues) for the six months ended June
30, 1997, from $71.7 million (82% of total revenues) for the six months ended
June 30, 1996. Revenues from recorded music and merchandising decreased to $9.8
million (9% of total revenues) for the six months ended June 30, 1997, from
$15.8 million (18% of total revenues) for the six months ended June 30, 1996.
The increase in revenues from television operations of $23.0 million or 32%
for the six months ended June 30, 1997, as compared with the six months ended
June 30, 1996, was due to increases in revenue described below.
Revenues from AAFI increased by $9.6 million or 21% to $56.5 million for the
six months ended June 30, 1997, from $46.9 million for the six months ended June
30, 1996. This increase in AAFI revenues was primarily due to increases in
revenues from France of $8.5 million (including $1.9 million from the favorable
resolution of production and distribution audit claims) and the United Kingdom
of $4.6 million, partially offset by decreased revenues in Germany. The
increased AAFI revenues reflect, in large part, the timing of delivery of
programs during the first half of 1997 and are not necessarily indicative of the
results for the full year. Additionally, revenues from the distribution of
Baywatch Nights (currently in its final season) increased by $4.5 million to
$10.3 million for the six months ended June 30, 1997, from $5.8 million for the
six months ended June 30, 1996, due to the delivery of 11 episodes in 1997 as
compared with five episodes in 1996. Furthermore, The Adventures of Sinbad and
the delivery of On The Line, a television movie of the week, contributed $3.8
million and $3.1 million, respectively for the six months ended June 30, 1997
with no comparable revenues in the 1996 period. Revenues from AAG of $7.5
million (excluding intercompany revenues received from AAFI) for the six months
ended June 30, 1997, increased by $0.9 million from $6.6 million (excluding
intercompany revenues received from AAFI) for the six months ended June 30,
1996.
Recorded music and merchandising revenues decreased by $6.0 million or 38%
to $9.8 million for the six months ended June 30, 1997, from $15.8 million for
the six months ended June 30, 1996. This decrease was primarily attributable to
the year ago revenue contribution from "Weird Al" Yankovic's platinum selling
album Bad Hair Day with no comparable release during the six months ended June
30, 1997.
17
<PAGE> 18
Operating Expenses. Total operating expenses increased by $12.3 million or
16% to $90.8 million for the six months ended June 30, 1997, from $78.5 million
for the six months ended June 30, 1996, due to a $18.5 million increase in
television operating costs corresponding to higher television revenues, and
increased selling, general and administrative expenses, partially offset by a
$6.5 million reduction in recorded music and merchandising costs corresponding
to lower recorded music and merchandising revenues.
Television expenses, before overhead and goodwill amortization, increased by
$17.4 million or 34% to $68.8 million for the six months ended June 30, 1997,
from $51.5 million for the six months ended June 30, 1996. Television selling,
general and administrative expenses during the six months ended June 30, 1997,
of $8.3 million reflect an increase of $1.1 million over the six months ended
June 30, 1996 due to planned increases in the Company's television promotion and
research departments and expansion of the Company's international operations
to include an office in Asia.
The Company's recorded music and merchandising expenses, before selling,
general and administrative expenses, decreased $6.3 million or 54% to $5.3
million for the six months ended June 30, 1997, from $11.6 million for the six
months ended June 30, 1996. The decrease in expenses were due to the decrease in
revenues and lower levels of artist advances and recording and publishing
expenditures during the 1997 period as compared to the 1996 period.
Operating Income. Total operating income for the Company increased $4.7
million or 53% to $13.7 million for the six months ended June 30, 1997, from
$9.0 million for the six months ended June 30, 1996, primarily due to an
increase in television operating income.
Television operating income was $15.3 million (after the deduction of
goodwill amortization of $2.3 million and selling, general and administrative
expenses of $8.3 million) for the six months ended June 30, 1997, as compared to
$10.7 million (after the deduction of goodwill amortization of $2.2 million and
selling, general and administrative expenses of $7.3 million) for the six months
ended June 30, 1996.
Operating income from recorded music and merchandising operations increased
$0.5 million to a profit of $1.5 million for the six months ended June 30, 1997
(after the deduction of selling, general and administrative expenses of $3.0
million), from a profit of $1.0 million for the six months ended June 30, 1996
(after the deduction of selling, general and administrative expenses of $3.2
million). This increase in recorded music and merchandising operating income was
primarily attributable to the factors discussed above.
Goodwill amortization for the six months ended June 30, 1997 increased by
$0.1 million to nearly $2.3 million, from $2.2 million for the six months ended
June 30, 1996. The Company expects to continue to report increasing amortization
expense as a result of prior acquisitions.
Foreign Currency Exchange Gain or Loss. The Company recognized a foreign
currency exchange loss of $0.4 million for the six months ended June 30, 1997,
as compared to a nominal foreign currency exchange loss for the six months ended
June 30, 1996, which resulted from the settlement and valuation of certain
licensing agreements, denominated in foreign currencies, into U.S. dollars as of
June 30, 1997 and 1996, 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 continue to record foreign exchange losses and gains in the future.
Interest Expense. Interest expense, net of capitalized interest ($0.4
million) and interest income ($1.5 million), increased by $2.3 million to $7.4
million for the six months ended June 30, 1997, from $5.1 million, net of
interest capitalized ($0.3 million) and interest income ($0.8 million), for the
six months ended June 30, 1996, due to increased borrowings as a result of
higher corporate and production borrowings and a higher average cost of
borrowing, primarily in connection with the Company's October 1996 issuance of
the Senior Notes. The Company expects that the general trend of increased
interest costs over prior periods will continue in part as a result of the
higher interest rates and increased borrowings in connection with continuing
production and expansion and the Company's issuance of the Senior Notes ( - see
"-- Liquidity and Capital Resources").
Income Taxes. The Company recorded a tax provision of $2.4 million for the
six months ended June 30, 1997, and $1.6 million during the six months ended
June 30, 1996, representing effective tax rates of approximately 40% and 42%,
respectively.
18
<PAGE> 19
Net Income. The net income of $3.6 million for the six months ended June 30,
1997, compares with net income of $2.2 million for the six months ended June 30,
1996. The variance is attributable to matters discussed above. Earnings per
share increased to $0.27 per primary and fully diluted share for the six months
ended June 30, 1997, as compared to $0.19 per primary and fully diluted share
for the six months ended June 30, 1996, due to the period to period increase in
net income (due to the items discussed above) partially offset by an increase in
the outstanding number of weighted average common shares and common share
equivalents. Such increase in shares is due to the conversion into Common Stock,
upon the Company's call for redemption, of the Company's former Convertible
Subordinated Notes, partially offset by the Company's repurchase of 528,200
shares of Class B Common Stock in October 1996.
LIQUIDITY AND CAPITAL RESOURCES
This discussion should be read in conjunction with the notes to the
condensed consolidated financial statements and the corresponding information
more fully described in the Company's Form 10-K for the year ended December 31,
1996.
Historically, the Company has financed its cash flow requirements through
cash flows generated from operations, the issuance of securities and third party
and bank financings. The proceeds from these financings were used to finance the
Company's operations, including the production of Baywatch, The Adventures of
Sinbad and Baywatch Nights, and to pay for general operating expenses.
On October 23, 1996, the Company amended and restated its senior secured
credit facility (the "Restructured Credit Facility") with a syndicate of lenders
led by The Chase Manhattan Bank. The amendment and restatement increased the
Company's borrowing capacity up to $155.0 million, subject to borrowing base
limitations (as defined in the Restructured Credit Facility) and extended the
maturity to a four-year term. Borrowings under the Restructured Credit Facility
bear interest, at the Company's option, at either: (i) LIBOR plus 1 1/2% (7.13%
as of August 1, 1997 based on a 30 day LIBOR rate); or (ii) the Alternate Base
Rate (which is the greater of The Chase Manhattan Bank's Prime Rate, its Base CD
Rate plus 1%, or the Federal Funds Effective Rate plus 1/2%) plus 1/2% (9.0% as
of August 1, 1997), subject to increase by 1/2 of 1% in the event of the
Company's failure to satisfy certain financial ratios. As of August 1, 1997, the
Company had outstanding borrowings of $77.0 million under the Restructured
Credit Facility with $61.1 million available for borrowing. Amounts repaid under
the Restructured Credit Facility may be reborrowed, subject to the Company
having an adequate borrowing base and meeting the conditions precedent to each
borrowing.
The Restructured Credit Facility imposes a number of financial and other
conditions upon the Company, including limitations on indebtedness and changes
in lines of business, restrictions on the disposition of assets, restrictions on
making certain payments (including dividends), restrictions on acquisitions and
certain financial tests, including a minimum net worth test, a leverage test and
an interest coverage ratio test. In particular, consummation of significant
acquisitions may be subject to obtaining bank consent under the Restructured
Credit Facility. Furthermore, certain conditions must be satisfied before the
funding of each season of the respective series, and such conditions have been
met for the 1997/1998 broadcast season of Baywatch, The Adventures of Sinbad,
Ghost Stories and Arthel & Fred. Loans under the Restructured Credit Facility
may be made as "Domestic Loans" to AAC or as "Foreign Loans" to AAN, subject to
borrowing base availability. All outstanding loans as of August 1, 1997 are
"Domestic Loans." Substantially all of the Company's assets (other than real
property) are pledged under the Restructured Credit Facility".
On October 11, 1996, the Company issued $100.0 million in principal amount
of 10 7/8% Senior, Subordinated Notes due 2001 (the "Senior Notes"). The Senior
Notes are unsecured obligations of AAC which mature October 15, 2001 and bear
interest at 10 7/8% per annum, payable semiannually on each April 15 and October
15 (commencing on April 15, 1997). Net proceeds, net of issuance costs and fees,
from the issuance of the Senior Notes totaled approximately $96.0 million. The
Senior Notes were issued pursuant to an Indenture between the Company and U.S.
Trust Company of California, N.A. (the "Indenture"). The Senior Notes are
subordinated in right of payment to the prior payment in full of all Senior
Indebtedness (as defined in the Indenture) of the Company.
The Indenture imposes certain covenants and conditions upon the Company,
including but not limited to restrictions or limits on making certain payments
or investments, limits on certain transactions, limits on liens, limits on
merger, consolidation and sale of assets, limits on senior subordinated debt,
limits on business activities and change of control provisions. In the event
that the Company enters into a letter of intent or makes a public announcement
during the first 18
19
<PAGE> 20
months after October 4, 1996 with respect to the sale of all of the Company's
capital stock (whether by merger, consolidation or otherwise) or all or
substantially all of the Company's assets (a "Sale Transaction"), the Company
may, subsequent to the closing of such Sale Transaction, redeem up to $100.0
million in principal amount of the Senior Notes at a redemption price of 110
7/8% of the principal amount thereof, plus accrued and unpaid interest, provided
that the Sale Transaction closes within 120 days after the date of such letter
of intent or public announcement and, provided further, that notice of such
redemption shall be given within 30 days of the date of the closing of such Sale
Transaction. In addition, during the first 18 months after October 4, 1996, the
Company may redeem up to $35.0 million in principal amount of the Senior Notes
at a redemption price of 110 7/8% of the principal amount thereof, plus accrued
and unpaid interest, with the net proceeds of a public offering of common stock
of the Company, provided that at least $65.0 million in aggregate principal
amount of the Senior Notes remain outstanding immediately after the occurrence
of such redemption and, provided further, that notice of such redemption shall
be given within 30 days of the date of the closing of such public offering.
Following a Change of Control (as defined in the Indenture), the Company will be
required to offer to purchase all or any part of the Senior Notes tendered at
the option of the holders thereof at 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest.
During the six months ended June 30, 1997, the Company generated cash of
$16.8 million from its operations, compared with $24.2 million for the six
months ended June 30, 1996. The reduction of positive cash flow from operations
was due primarily to a $3.9 million increase in production spending in the
current period and higher collections from the strip syndication of Baywatch in
the year ago period. The Company used $4.7 million in investing activities
during the six months ended June 1997, which is comparable with the year ago
period, principally for the payment of amounts due in connection with the
contingent earn out from the Company's acquisition of Mark Goodson. The Company
used $4.9 million in financing activities during the first six months of 1997,
down from $16.8 million in the year ago period, primarily due to a decrease in
net borrowings under the Restructured Credit Facility. While cash flows were
positive in the first six months of 1997, the Company expects, from time to
time, to experience negative cash flow from operations. Any such uses of cash
flows are expected to be funded, pending receipt of anticipated licensing
revenues, from the Restructured Credit Facility or from outside sources.
As described more fully below, the Company will have substantial capital
requirements during the next twelve months, principally arising from the
acquisition, production and distribution of television programming, and the
continued release of recorded music requiring related marketing, promotion and
recording expenses. The expanded production of television programming for the
1997/1998 broadcast season is expected to require the Company to incur
substantial production costs in advance of generating revenues and receipts.
Similarly, the Company plans to incur significant costs associated with its
television distribution operations. The Company believes that its existing
working capital, together with anticipated cash flow from operations and other
available funding sources, including the Restructured Credit Facility (subject
to its continued availability), will be sufficient to meet its working capital
needs for at least the next twelve months.
The Company from time to time considers the acquisition of program rights
and the expansion of its business through the acquisition of businesses.
Consummation of any such acquisition or other expansion of the business
conducted by the Company, if beyond the Company's capital resources, would be
subject to the Company securing additional financing to the extent required.
Television Production and Distribution
In order to obtain television programming for distribution, the Company may
be required to make advance cash payments to the producers of such programming.
However, the Company generally attempts to avoid advance payment requirements by
making minimum guarantees to producers or owners in connection with the
acquisition of television programming. In addition, the Company has obtained
letters of credit and other sources of bank financing to facilitate certain
programming acquisitions. The Company may acquire domestic or foreign
distribution rights to a particular television program in exchange for a minimum
guarantee against a specified percentage of future licensing and/or advertising
sales revenue less certain costs of distribution. These guarantees are typically
subject to delivery of the completed programs. While the Company generally
anticipates that it will recoup payments made under its guarantees from
licensing fees and sales of advertising time, the Company often is required to
make payments under such guarantees in advance of generating revenues and
receipts. Any expansion of the Company's business could require the Company to
make substantially increased advance payments or provide guarantees to third
parties. Further, there is no assurance that such amounts will be recouped by
the Company and, if not recouped, that such payments will not have a material
adverse effect on the Company. In addition, the Company's working capital
requirements in connection with its development and production activities
relating to potential television programming are expected to substantially
increase as a result of the Orbis Acquisition and the
20
<PAGE> 21
Company's agreement with The Gerber Company, which provides the services of
television producer David Gerber to the Company for the purpose of developing
and producing television programming. The cost of production of television
programming is typically partially offset by foreign, network or pre-sale
license fees.
The Company has committed to produce 22 episodes of Baywatch for the
1997/1998 broadcast season for a production budget of approximately $25.0
million. Through August 1, 1997, the Company has commenced production on and
expended $8.6 million toward the production of 10 episodes. 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. As of July 28, 1997, the Company has cleared Baywatch for telecast in
approximately 90% of total U.S. television households.
The Company has exercised its option to cause Atlantis Releasing B.V.
("Atlantis") to produce 22 new episodes of The Adventures of Sinbad for the
1997/1998 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 a
minimum of 22 new episodes in each of the two subsequent broadcast seasons,
exercisable on or before February 15 of the year prior to each broadcast season.
At the end of the next two 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's share of the total production budget
(approximately $0.6 million of the $0.8 million 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
the production through a combination of advertiser sales and international
sales. Through August 1, 1997, the Company has commenced production on and
expended $5.9 million toward the production of nine episodes. As of July 28,
1997, the Company has cleared The Adventures of Sinbad for telecast in
approximately 90% of total U.S. television households.
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 $8.0 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 advertiser sales and international sales. Through August 1, 1997,
the Company has commenced production on and expended $2.7 million toward the
production of 11 episodes. As of July 28, 1997, the Company has cleared Ghost
Stories for telecast in excess of 81% of total U.S. television households.
The Company has entered 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 Arthel & Fred. 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 advertiser sales. Through
August 1, 1997, the Company has commenced production on and expended $0.5
million toward production. As of July 28, 1997, the Company has cleared Arthel &
Fred for telecast in excess of 73% of total U.S. television households.
The Company has entered into a distribution agreement with SAT-1 for the
German distribution of 44 episodes of a weekly, one-hour, German language
reality show for the 1997/1998 broadcast season. The budget for this Company
produced program is approximately $10.0 million. While the license fee for the
program (approximately $11.5 million) is in excess of the budget, there is no
assurance that the license fee will cover the actual costs of production.
Through August 1, 1997, the Company has expended $1.7 million toward production.
Recorded Music Operations
The Company is responsible for funding all distribution activities,
including producing, marketing, promoting and
21
<PAGE> 22
manufacturing recorded music for domestic distribution. In order to perform this
responsibility, the Company has significant personnel and other overhead and
marketing expenses which require substantial capital.
The Company currently has a roster of 12 active recording artists.
Additionally, the Company contracts from time to time with other artists or
entities for the production of recorded music for its special projects division.
Such growth has required the Company to fund artist advances and recording
costs. Artist advances, recording costs and other overhead and marketing
expenses are funded with cash flows from operations and by the Company's working
capital credit facility.
Minimum contractual commitments to existing artists totaled approximately
$0.4 Million at June 30, 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.
22
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 12, 1994, Credit Lyonnais Bank Nederland N.V. ("CLBN") made a
demand upon SBEI under a Guarantee, dated July 29, 1986 (the "SBEI Guarantee"),
for payment of approximately $3.7 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. The Company and CLBN have reached a settlement agreement in
principle as to the dispute, although there is no assurance that such settlement
will be consummated. While the Company believes that SBEI has good and
meritorious defenses with respect to the SBEI Guarantee and any related claims
by CLBN, and that the ultimate outcome of this matter will not result in a
material adverse effect on the Company's financial condition or results of
operations, there is no assurance that the Company ultimately will prevail.
The Company is party to certain other legal proceedings which are routine
and incidental to the business. The Company believes that the results of such
litigation will not have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
None
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALL AMERICAN COMMUNICATIONS, INC.
Date: August 13, 1997 By /s/ Anthony J. Scotti
------------------------------------------
Anthony J. Scotti,
Chief Executive Officer
Date: August 13, 1997 By /s/ Thomas Bradshaw
------------------------------------------
Thomas Bradshaw,
Chief Financial Officer and Treasurer
(Principal financial officer and principal
accounting officer)
24
<PAGE> 1
EXHIBIT 11-1
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS - EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------
1997 1996
-------- --------
<S> <C> <C>
Weighted average number of common shares outstanding 12,109 11,539
Assumed exercise of dilutive options and warrants under the
modified treasury stock method based on average market price 1,233 571
------ ------
Weighted average number of common shares and common share
equivalents (B) 13,342 12,110
====== ======
Computation of net income for earnings per share purposes:
Net income $ 241 $ 152
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 -- 21
------ ------
Net income for per share computation (A) $ 241 $ 173
====== ======
Net earnings per share (A) / (B) $ 0.02 $ 0.01
====== ======
</TABLE>
25
<PAGE> 2
EXHIBIT 11-2
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS - EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1997 1996
-------- --------
<S> <C> <C>
Weighted average number of common shares outstanding 12,103 11,468
Assumed exercise of dilutive options and warrants under the
modified treasury stock method based on average market price 1,201 473
-------- --------
Weighted average number of common shares and common share
equivalents (B) 13,304 11,941
======== ========
Computation of net income for earnings per share purposes:
Net income $ 3,573 $ 2,223
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 23 11
-------- --------
Net income for per share computation (A) $ 3,596 $ 2,234
======== ========
Net earnings per share (A) / (B)$ 0.27 $ 0.19
======== ========
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1997 AND FOR THE SIX
MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 38,154
<SECURITIES> 0
<RECEIVABLES> 88,213
<ALLOWANCES> 4,429
<INVENTORY> 111,636
<CURRENT-ASSETS> 0
<PP&E> 8,243
<DEPRECIATION> 4,332
<TOTAL-ASSETS> 357,216
<CURRENT-LIABILITIES> 0
<BONDS> 174,000
0
0
<COMMON> 2
<OTHER-SE> 88,703
<TOTAL-LIABILITY-AND-EQUITY> 357,216
<SALES> 9,810
<TOTAL-REVENUES> 104,517
<CGS> 5,348
<TOTAL-COSTS> 88,530
<OTHER-EXPENSES> 2,271
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,919
<INCOME-PRETAX> 5,955
<INCOME-TAX> 2,382
<INCOME-CONTINUING> 3,573
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,573
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
