<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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 May 5, 1997, there were 6,907,713 shares of $.0001 par value Common
Stock (excluding Treasury shares), and 5,199,050 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>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
Cash and cash equivalents........................................... $ 37,405 $ 33,858
Trade receivables, less allowances of $3,543 and $3,716 at March 31,
1997 and December 31, 1996, respectively.......................... 105,008 106,108
Unbilled receivables, less imputed interest of $863 and $1,078 at
March 31, 1997 and December 31, 1996, respectively................ 2,770 3,874
Inventory, net...................................................... 1,155 848
Advances to recording artists, net.................................. 359 225
Television program costs, less accumulated amortization of $351,508
and $322,864 at March 31, 1997 and December 31, 1996,
respectively...................................................... 100,848 94,031
Property and equipment, less accumulated depreciation and
amortization...................................................... 4,052 4,116
Goodwill, less accumulated amortization of $9,429 and $8,241 at
March 31, 1997 and December 31, 1996, respectively................ 107,767 106,990
Other............................................................... 9,668 9,685
-------- --------
Total assets.............................................. $ 369,032 $359,735
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable.................................................. $ 14,284 $ 9,274
Accrued expenses.................................................. 41,494 35,310
Royalties payable................................................. 6,206 5,386
Deferred revenues................................................. 2,554 738
Due to producers.................................................. 13,082 13,215
Participations payable............................................ 25,422 26,600
Notes payable..................................................... 174,500 179,000
Deferred taxes payable............................................ 2,242 2,242
-------- --------
Total liabilities......................................... $ 279,784 $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, issued 6,935,713 and 6,933,713 in 1997 and 1996,
respectively (including treasury shares)....................... 1 1
Common stock, Class B non-voting, $.0001 par value, authorized
20,000,000 shares, issued 5,726,000 and 5,720,000 in 1997 and
1996, respectively (including treasury shares)................. 1 1
Additional paid-in capital........................................ 74,534 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................................................. 22,957 19,625
Currency translation adjustment................................... (2,744) (642)
-------- --------
Total stockholders' equity................................ 89,248 87,970
-------- --------
Total liabilities and stockholders' equity................ $ 369,032 $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 STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues:
Television.................................................... $ 63,600 $ 41,357
Recorded music and merchandising.............................. 4,075 6,786
----------- -----------
67,675 48,143
----------- -----------
Expenses:
Television.................................................... 47,714 29,358
Recorded music and merchandising.............................. 2,365 4,978
Selling, general and administrative........................... 6,743 6,662
Goodwill amortization......................................... 1,187 1,085
----------- -----------
58,009 42,083
----------- -----------
Operating income................................................ 9,666 6,060
Other income (expense):
Interest income............................................... 581 431
Interest expense, net of amounts capitalized.................. (4,516) (2,898)
Other......................................................... (177) (22)
----------- -----------
(4,112) (2,489)
----------- -----------
Income before provision for income taxes........................ 5,554 3,571
Provision for income taxes...................................... 2,222 1,500
----------- -----------
Net income...................................................... $ 3,332 $ 2,071
=========== ===========
Earnings per common and common equivalent shares:
Net income per share.......................................... $ 0.25 $ 0.18
=========== ===========
Weighted average number of common and common equivalent shares
outstanding................................................ 13,266,000 11,773,000
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
<PAGE> 4
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
-------- --------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................... $ 3,332 $ 2,071
Adjustments to reconcile net income to net cash provided (used):
Depreciation and amortization of property, equipment and
goodwill........................................................ 1,391 1,675
Amortization of television program costs........................... 28,644 16,927
Decrease in allowance for doubtful accounts........................ (21) (28)
Decrease in allowance for sales returns............................ (238) (296)
Increase in make goods reserve..................................... 86 19
Decrease in imputed interest discount.............................. (215) (382)
Changes in operating assets and liabilities:
Trade receivables, unbilled receivables, inventory and advances
to recording artists........................................... 2,151 18,041
Additions to television program costs........................... (35,461) (23,309)
Accounts payable, accrued expenses and royalties payable........ 12,014 9,937
Due to producers and participations payable..................... (1,311) (3,936)
Deferred revenues............................................... 1,816 7
Other assets.................................................... 17 2
-------- --------
Net cash provided by operating activities.................. 12,205 20,728
-------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment, net.............................. (139) (695)
Contingent earn out from purchase of Mark Goodson Productions, LLC... (1,965) (2,180)
-------- --------
Net cash used in investing activities...................... (2,104) (2,875)
-------- --------
FINANCING ACTIVITIES:
Proceeds from exercise of options.................................... 48 --
Proceeds from borrowings............................................. 8,000 24,100
Repayments of borrowings............................................. (12,500) (31,804)
Restricted cash held for repayment of borrowings..................... -- (740)
-------- --------
Net cash used by financing activities...................... (4,452) (8,444)
-------- --------
Currency translation adjustment...................................... (2,102) (439)
-------- --------
Increase in cash..................................................... 3,547 8,970
Cash and cash equivalents at beginning of period..................... 33,858 13,126
-------- --------
Cash and cash equivalents at end of period........................... $ 37,405 $ 22,096
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized............................ $ 1,533 $ 1,608
======== ========
Income taxes.................................................... $ 150 $ 181
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE> 5
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 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"
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 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
three month period ended March 31, 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
5
<PAGE> 6
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
principally of advance payments received on television contracts for which the
program materials are not yet available for broadcast or exploitation.
The portion of recognized revenue to be shared with the producers and
owners of the licensed program material (participations payable and due to
producers) is accrued as the revenue is recognized. In certain instances, the
Company guarantees viewer ratings for its syndicated programs. Applicable
revenue is recorded net of estimated shortfalls, which are settled by giving
either additional advertising time (make goods) or cash refunds to the
advertiser. The Company provides for the full amount of the estimated shortfall.
Domestic revenues from recorded music are recognized as units are shipped
to customers. The Company provides for estimated future returns of recorded
music product at the time when the products are initially sold. These provisions
are based upon historical experience. Actual returns are charged against the
reserve. Foreign distribution of recorded music is effected through a
distributor in exchange for guaranteed nonrefundable advances against future
royalties. Nonrefundable 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
6
<PAGE> 7
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the producers' share of revenues are charged to expense as incurred. Television
program costs, and estimated total costs of participations and residuals, are
amortized under the individual film forecast method in the ratio that current
period revenue recognized bears to management's estimate of remaining gross
revenue to be recognized. The use of estimates which may ultimately differ from
actual results could materially affect the Company's consolidated financial
statements. Such estimates, which are subject to change based on a comparison of
actual to estimated information, are re-evaluated quarterly in connection with a
review of the Company's inventory of television product, and estimated losses,
if any, are provided for in full.
Artist Compensation Cost
Royalties earned by artists from sales of recorded music are charged to
expense as the related revenues are recognized. Advances to artists against
future royalties are recorded as assets if the Company estimates the amount of
the advances will be recoverable from future royalties to be earned by the
artist, based upon the past performance and current popularity of the artist.
Such advances are applied against subsequent royalties earned by the artist.
Depreciation and Amortization
Property and equipment are carried at cost, and depreciation is computed
using accelerated and straight line methods over the estimated useful lives of
the assets: 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
7
<PAGE> 8
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
period. Revenues and expenses are translated at the average exchange rates
prevailing during the period. Adjustments resulting from translating the
financial statements of foreign entities into U.S. dollars are recorded as a
separate component of stockholders' equity.
2. NOTES PAYABLE
Notes payable and amounts due to banks are comprised of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Notes payable to banks........................................... $ 74,500 $ 79,000
10 7/8% Senior Subordinated Notes................................ 100,000 100,000
-------- --------
$ 174,500 $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% (7.19%
as of May 1, 1997); 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 May 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 May 1, 1997, the Company had outstanding borrowings of
$78,000,000 under the Restructured Credit Facility, with $55,800,000 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. 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 semi-annually 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
8
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ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1997
2. NOTES PAYABLE (CONTINUED)
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, 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>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Released, less accumulated amortization.............. $ 93,291 $ 91,746
In process and development........................... 7,557 2,285
-------- -------
$ 100,848 $ 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 three months ended March 31, 1997 and year ended December
31, 1996 are capitalized interest of $99,000 and $876,000, respectively, and
capitalized overhead of $1,770,000 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
$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.
9
<PAGE> 10
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1997
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 up to
22 new episodes in each of the two subsequent broadcast seasons, exercisable on
or before February 15 of each such subsequent 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)
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.
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.
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 per 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 advertiser sales.
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.
Minimum commitments for advances to recording artists at March 31, 1997
amounted to approximately $633,000.
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
10
<PAGE> 11
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1997
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 resolving all of their
various disputes, although there is no assurance that such settlement will be
consummated. While the Company believes that SBEI has good and meritorious
defenses with respect to the SBEI Guarantee and any related claims by CLBN, and
that the ultimate outcome of this matter will not result in a material adverse
effect on the Company's financial condition or results of operations, there is
no assurance that the Company ultimately will prevail.
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.
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<PAGE> 12
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), 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
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<PAGE> 13
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 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 has
historically accounted for a significant portion of the Company's revenues in
any given fiscal period. In addition, the Company's television distribution
revenues have historically been higher in the third and fourth quarters as a
result of the commencement of the television season in the fall of each year. 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 MARCH 31, 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 March 31, 1997
and 1996:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------
1997 1996
----- -----
<S> <C> <C>
Revenues:
Television................................................. 94.0% 85.9%
Recorded music and merchandising........................... 6.0 14.1
----- -----
Total.............................................. 100.0 100.0
Operating expenses:
Television................................................. 70.5 61.0
Recorded music and merchandising........................... 3.5 10.3
Selling, general and administrative........................ 9.9 13.8
Goodwill amortization...................................... 1.8 2.3
----- -----
Total.............................................. 85.7 87.4
Other expense, principally interest.......................... 6.1 5.2
----- -----
Income before income taxes................................... 8.2% 7.4%
===== =====
</TABLE>
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<PAGE> 14
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Revenues. The Company's total revenues increased by approximately $19.6
million or 41% to $67.7 million for the three months ended March 31, 1997, from
$48.1 million for the three months ended March 31, 1996. Revenues from
television operations increased to $63.6 million (94% of total revenues) for the
three months ended March 31, 1997, from $41.4 million (86% of total revenues)
for the three months ended March 31, 1996. Revenues from recorded music and
merchandising decreased to $4.1 million (6% of total revenues) for the three
months ended March 31, 1997, from $6.8 million (14% of total revenues) for the
three months ended March 31, 1996.
The increase in revenues from television operations of $22.2 million or 54%
for the three months ended March 31, 1997, as compared with the three months
ended March 31, 1996, was due primarily to increases in AAFI revenues as well as
increases in other television distribution revenues.
Revenues from AAFI increased by $14.3 million or 58% to $38.9 million for
the three months ended March 31, 1997, from $24.6 million for the three months
ended March 31, 1996. This increase in AAFI revenues was primarily due to
increases in revenues from France of $4.9 million and the United Kingdom of $3.6
million. The increased AAFI revenues reflect, in large part, the timing of
delivery of programs during the first quarter of 1997 and it is expected that
revenues during the balance of the year will be at a level more consistent with
historical results. Additionally, revenues from the distribution of Baywatch
Nights (currently in its contemplated final season) increased by $5.1 million to
$10.2 million for the three months ended March 31, 1997, from $5.1 million for
the three months ended March 31, 1996, due to the delivery of 11 episodes in
1997 as compared with 5 episodes in 1996. Additionally, The Adventures of Sinbad
contributed $3.8 million for the three months ended March 31, 1997 with no
comparable revenues in the 1996 period. Revenues from AAG of $4.4 million
(excluding intercompany revenues received from AAFI) for the three months ended
March 31, 1997, increased by $0.4 million from $4.0 million (excluding
intercompany revenues received from AAFI) for the three months ended March 31,
1996.
Recorded music and merchandising revenues decreased by $2.7 million or 40%
to $4.1 million for the three months ended March 31, 1997, from $6.8 million for
the three months ended March 31, 1996. This decrease was primarily attributable
to higher sales of new releases in the three months ended March 31, 1996, led by
"Weird Al" Yankovic's "Bad Hair Day", as compared with no comparable new
releases in the three months ended March 31, 1997.
The Company has 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 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. 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 increased by $15.9 million or
38% to $58.0 million for the three months ended March 31, 1997, from $42.1
million for the three months ended March 31, 1996, due to an $18.3 million
increase in television operating costs corresponding to higher television
revenues, increased goodwill amortization and increased selling, general and
administrative expenses, including corporate overhead of $0.3 million, partially
offset by a $2.6 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 $18.4 million or 62% to $47.7 million (75% of total television revenues) for
the three months ended March 31, 1997, from $29.3 million (71% of total
television revenues) for the three months ended March 31, 1996. The increase in
television expenses as a percentage of total television revenues was
attributable to revenues recognized from
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<PAGE> 15
programming which has lower gross profit percentages than the overall mix of the
Company's other distributed programming in the prior period. Television selling,
general and administrative expenses during the three months ended March 31, 1997
of $4.1 million reflect an increase of $0.5 million over the three months ended
March 31, 1996 due to planned increases in the Company's television promotion
and research departments.
The Company's recorded music and merchandising expenses, before selling,
general and administrative expenses, decreased $2.6 million or 52% to $2.4
million (58% of total recorded music and merchandising revenues) for the three
months ended March 31, 1997, from $5.0 million (73% of total recorded music and
merchandising revenues) for the three months ended March 31, 1996. The decrease
in expenses and improvement in operating margins was due to lower levels of
artist advances and recording expenditures during the 1997 period as compared to
the 1996 period.
Operating Income. Total operating income for the Company increased $3.6
million or 60% to $9.7 million for the three months ended March 31, 1997, from
$6.1 million for the three months ended March 31, 1996, due to an increase in
television and recorded music and merchandising operating income.
Television operating income was $10.6 million (after the inclusion of
goodwill amortization of $1.2 million and selling, general and administrative
expenses of $4.1 million) for the three months ended March 31, 1997, as compared
to $7.3 million (after the inclusion of goodwill amortization of $1.1 million
and selling, general and administrative expenses of $3.6 million) for the three
months ended March 31, 1996.
Operating income from recorded music and merchandising operations increased
$0.3 million to a profit of nearly $0.5 million for the three months ended March
31, 1997 (after the inclusion of selling, general and administrative expenses of
$1.2 million), from a profit of $0.2 million for the three months ended March
31, 1996 (after the inclusion of selling, general and administrative expenses of
$1.6 million). This increase in recorded music and merchandising operating
income was primarily attributable to the higher operating margins discussed
above.
Goodwill amortization for the quarter ended March 31, 1997 increased by
$0.1 million to nearly $1.2 million, from $1.1 million for the three months
ended March 31, 1996. The Company expects to report amortization expense of at
least $1.2 million on a quarterly basis as a result of prior acquisitions,
subject to increase based upon the amount of contingent purchase price payable
to the sellers in the Mark Goodson acquisition and the contingent payments, if
any, in connection with the acquisition of Orbis Entertainment Company, Inc.
(the "Orbis Acquisition"), or in the event of future acquisitions. Through March
31, 1997, the Company has recorded contingent purchase price, in connection with
the Mark Goodson acquisition, totaling $12.0 million (including Interpublic's
share through December 31, 1995 of $0.9 million).
Foreign Currency Exchange Gain or Loss. The Company recognized a foreign
currency exchange loss of $0.2 million for the three months ended March 31,
1997, as compared to a nominal foreign currency exchange loss for the three
months ended March 31, 1996, which resulted from the settlement and valuation of
certain licensing agreements, denominated in foreign currencies, into U.S.
dollars as of March 31, 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 ($0.1
million) and interest income ($0.6 million), increased by $1.4 million to $3.9
million for the three months ended March 31, 1997, from $2.5 million, net of
interest capitalized ($0.3 million) and interest income ($0.4 million), for the
three months ended March 31, 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 recent issuance of its
$100.0 million principal amount, 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 expansion and the Company's recent issuance of the Senior Notes
(see "-- Liquidity and Capital Resources").
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<PAGE> 16
Income Taxes. The Company recorded a tax provision of $2.2 million for the
three months ended March 31, 1997, and $1.5 million during the three months
ended March 31, 1996, representing effective tax rates of approximately 40% and
42%, respectively.
Net Income. The net income of $3.3 million for the three months ended March
31, 1997 compares with net income of $2.1 million for the three months ended
March 31, 1996. The variance is attributable to matters discussed above.
Earnings per share increased to $0.25 per primary and fully diluted share for
the three months ended March 31, 1997, as compared to $0.18 per primary and
fully diluted share for the three months ended March 31, 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.
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% (7.19%
as of May 1, 1997); 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 May 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 May 1, 1997, the Company had outstanding borrowings of
$78.0 million under the Restructured Credit Facility with $55.8 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
funding of each season of the respective series, and such conditions had been
previously met for the 1996/1997 broadcast season of Baywatch, Baywatch Nights
and The Adventures of Sinbad. Loans under the Restructured Credit Facility may
be made as "Domestic Loans" to AAC or as "Foreign Loans" to AAN, subject to
borrowing base availability. 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 of 10 7/8% Senior,
Subordinated Notes due 2001 ("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 semi-annually 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
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<PAGE> 17
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, 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 three months ended March 31, 1997, the Company generated cash of
$12.2 million from its operations, compared with $20.7 million for the three
months ended March 31, 1996. The reduction of positive cash flow from operations
was due primarily to a net increase in accounts receivable balances as a result
of increased sales activity in the current period, principally from AAFI, as
compared to a net reduction of accounts receivable balances in the year ago
period. The Company used $2.1 million in investing activities during the three
months ended March 31, 1997, which is comparable with the year ago period. The
Company used $4.5 million in financing activities during the first three months
of 1997, down from $8.4 million in the year ago period, primarily due to a
decrease in net repayments of borrowings under the Company's credit facilities.
While cash flows were positive in the first three 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 12 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.
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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 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 $24.0
million. 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 up to
22 new episodes in each of the two subsequent broadcast seasons, exercisable on
or before February 15 of each such subsequent 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.
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.
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 per
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<PAGE> 19
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 advertiser sales.
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.
Recorded Music Operations
The Company is responsible for funding all distribution activities,
including producing, marketing, promoting and manufacturing recorded music for
domestic distribution. In order to perform this responsibility, the Company has
significant personnel and other overhead and marketing expenses which require
substantial capital.
The Company currently has a roster of 12 active recording artists.
Additionally, the Company contracts from time to time with other artists or
entities for the production of recorded music for its special projects division.
Such growth has required the Company to fund artist advances and recording
costs. Artist advances, recording costs and other overhead and marketing
expenses are funded with cash flows from operations and by the Company's working
capital credit facility.
Minimum contractual commitments to existing artists totaled approximately
$0.6 million at March 31, 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.
19
<PAGE> 20
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 resolving all of their various disputes, although there is no
assurance that such settlement will be consummated. While the Company believes
that SBEI has good and meritorious defenses with respect to the SBEI Guarantee
and any related claims by CLBN, and that the ultimate outcome of this matter
will not result in a material adverse effect on the Company's financial
condition or results of operations, there is no assurance that the Company
ultimately will prevail.
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
<TABLE>
<C> <S>
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
None.
20
<PAGE> 21
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: May 15, 1997 By: /s/ ANTHONY J. SCOTTI
------------------------------------
Anthony J. Scotti
Chief Executive Officer
Date: May 15, 1997 By: /s/ THOMAS BRADSHAW
------------------------------------
Thomas Bradshaw,
Chief Financial Officer and
Treasurer (Principal financial
officer and principal accounting
officer)
21
<PAGE> 1
EXHIBIT 11
ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS -- EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
------- -------
<S> <C> <C> <C>
Weighted average number of common shares outstanding....... 12,098 11,398
Assumed exercise of dilutive options and warrants under the
modified treasury stock method based on average market
price.................................................... 1,168 375
------- -------
Weighted average number of common shares and common share
equivalents.............................................. (B) 13,266 11,773
======= =======
Computation of net income for earnings per share purposes:
Net income................................................. $ 3,332 $ 2,071
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 --
------- -------
Net income for per share computation....................... (A) $ 3,355 $ 2,071
======= =======
Net earnings per share..................................... (A) / (B) $ 0.25 $ 0.18
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1997 AND FOR THE
THREE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 37,405
<SECURITIES> 0
<RECEIVABLES> 112,184
<ALLOWANCES> 4,406
<INVENTORY> 102,003
<CURRENT-ASSETS> 0
<PP&E> 8,231
<DEPRECIATION> 4,179
<TOTAL-ASSETS> 369,032
<CURRENT-LIABILITIES> 0
<BONDS> 174,500
0
0
<COMMON> 2
<OTHER-SE> 89,246
<TOTAL-LIABILITY-AND-EQUITY> 369,032
<SALES> 4,075
<TOTAL-REVENUES> 67,675
<CGS> 2,365
<TOTAL-COSTS> 56,822
<OTHER-EXPENSES> 1,187
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,516
<INCOME-PRETAX> 5,554
<INCOME-TAX> 2,222
<INCOME-CONTINUING> 3,332
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,332
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
