UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 33-11101
AMERICAN ENTERTAINMENT PARTNERS II L.P.
Exact name of registrant as specified in its charter
Delaware 13-3388759
State or other jurisdiction of
incorporation or organization I.R.S Employer Identification No.
Attn: Andre Anderson
3 World Financial Center,
New York, New York 29th Floor 10285-2900
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (212) 526-3237
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
DEPOSITARY UNITS OF LIMITED PARTNERSHIP INTEREST
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]
As of December 31, 1997, there were 25,000 depositary units of limited
partnership interest outstanding, of which all but 596.5 of such units were
held by non-affiliates. The aggregate market value of those interests is
not determinable because there is no active public trading in the units.
Documents Incorporated by Reference: Portions of Parts II, III and IV are
incorporated by reference to the Partnership's Annual Report to Unitholders
for the year ended December 31, 1997.
PART I
Item 1. Business
(a) General
American Entertainment Partners II L.P. (the "Partnership") was organized
on December 19, 1986 under the laws of the State of Delaware as a limited
partnership. Through its participation in Amercent Films II (the "Joint
Venture"), a joint venture with Twentieth Century Fox Film Corporation
("Fox"), the Partnership produced, financed, acquired interests in and
continues to exploit feature length motion picture films.
A public offering (the "Offering") of depositary units of limited
partnership interests (the "Units") was completed in June 1987 by the
Partnership. A total of 25,000 Units were sold for aggregate offering
proceeds of $24,940,350 representing 24,403.5 Units at $1,000 per Unit and
596.5 Units at $900 per Unit purchased by the parent company of the general
partner (which amount represents a price of $1,000 per Unit less selling
commission of $100 per Unit which was not payable by the Partnership on
these Units).
The general partner of the Partnership is AEP Premiere Corporation II, a
Delaware corporation (the "General Partner") (See Item 10). The
Partnership has certain consultation rights and, through a committee of the
Joint Venture, may be called upon to make certain determinations with
respect to such films. Fox, however, has day-to-day control of creative
and artistic matters in connection with films in which the Joint Venture
invests.
Joint Venture Films, Participation Films and Additional Films
The films which the Partnership acquired interests or participations in can
be classified into three categories. First, the Joint Venture produced
"Joint Venture Films" pursuant to the product origination agreement with
Fox (the "Product Origination Agreement"). To produce a Joint Venture
Film, the Joint Venture engaged Fox under a production services agreement
(the "Production Services Agreement") to produce such film on behalf of the
Joint Venture and to provide all production services necessary to complete
and deliver the film to the Joint Venture. The second category of films in
which the Joint Venture invested were films in which the Joint Venture
acquired participations ("Participation Films"). Participation Films are
films acquired by another joint venture in which Fox has an interest. The
Joint Venture does not own any of the rights in the Participation Films but
instead the Partnership made capital contributions to the Joint Venture
which were used to acquire participations in such films. The third
category of films, "Additional Films", were films which did not meet the
criteria as a Joint Venture film but which the Joint Venture could have,
upon agreement of Fox and the Partnership, acquired.
The Joint Venture has invested all the net proceeds of the Offering in
films, therefore, no additional investments in films will be made by the
Joint Venture.
Distribution Agreement and Revenues of the Joint Venture
The Joint Venture Films are distributed pursuant to a distribution
agreement between the Joint Venture and Fox (the "Distribution Agreement"),
but Fox is responsible for and makes all decisions with respect to
distribution. A distribution committee of the Joint Venture, consisting of
one designee of Fox and two designees of the Partnership (the "Distribution
Committee"), has the right to consult periodically with Fox concerning the
distribution of Joint Venture Films. Although the Distribution Committee
supervises Fox's performance as a distributor, the Distribution Agreement
does not set forth any objective standards to measure Fox's performance as
a distributor and does not impose minimum commitment obligations with
respect to the distribution and exploitation of Joint Venture Films. The
Distribution Committee, however, is responsible for certain decisions
including, among others, the exercise by the Joint Venture of the Joint
Venture's right not to produce a film by reason of certain interests of
third party participants in the film.
The Joint Venture receives all of the net proceeds from the Joint Venture
Films in accordance with the terms of the Distribution Agreement. The
terms of the Distribution Agreement are disclosed in a Joint Venture
agreement (the "Joint Venture Agreement") which is incorporated by
reference to the Partnership's Registration Statement No. 33-11101 on Form
S-1 as filed with the Securities and Exchange Commission on March 4, 1987.
Films in Release
The Partnership's percentage participation in the films in which the
Partnership has an interest through the Joint Venture and certain other
information, are set forth below:
Amount Partnership's
Contributed Percentage
Release to Joint Participation in
Title Date Venture Net Proceeds
Joint Venture Films:
Less Than Zero November 1987 $ 4,104,543 34.33%
Bad Dreams April 1988 1,387,969 26.43
Big June 1988 6,185,491 29.17
Alien Nation October 1988 3,587,892 19.50
15,265,895
Participation Films:
Predator June 1987 1,166,166 5.00
Revenge of the
Nerds II: Nerds
in Paradise July 1987 497,397 4.98
The Pick-Up
Artist September 1987 805,507 4.84
Wall Street December 1987 889,145 5.01
Broadcast News December 1987 1,333,230 4.93
Off Limits March 1988 594,931 5.00
5,286,376
$20,552,271
Competition
Distribution of motion pictures is a highly competitive business. Fox
competes with several other prominent motion picture distributors, some of
which have substantially greater financial and personnel resources, in
licensing motion pictures to theaters and other markets. The Partnership's
films currently are appearing primarily in ancillary markets such as
domestic and foreign syndication, basic cable and home video. In addition
to distributing the motion pictures of the Joint Venture in these markets,
Fox is distributing other motion pictures produced by or on behalf of Fox
and motion pictures as to which Fox has acquired distribution rights.
These films as well as films released by other motion picture distributors
are competing with films which the Joint Venture produces and films in
which it has participations.
Relationship with Fox
Although Fox had substantial discretion with respect to other aspects of
the films, because all the films have been produced, Fox currently has
substantial discretion only in the distribution of films in which the Joint
Venture has an interest.
The Joint Venture's (and therefore the Partnership's) receipt of net
proceeds from the exploitation of the films is dependent upon the
compliance by Fox with its obligations under agreements entered into
between it and the Joint Venture. The term net proceeds is utilized solely
as a measuring device to calculate amounts payable to the Joint Venture by
Fox and no specific funds will be segregated for payment to the Joint
Venture. Fox's payment obligations are not secured, and the Joint Venture
relies on the general credit of Fox to receive any amounts due to it.
Fox Buy-Out Option
Pursuant to the terms of the Partnership Agreement, Fox has the right and
option to purchase the Partnership's interest in the Joint Venture films at
an appraised fair market value determined by an independent, third-party
appraisal commencing at any time after December 31, 1997. On February 2,
1998, the Partnership received formal notice from Fox that it is
considering a potential buy out of the Partnership's interest in the films
and may exercise this option in the near future. Subsequently, the
Partnership and Fox signed a letter of engagement with an independent third-
party appraiser to provide a value of the Partnership's interest in the
Joint Venture. Pursuant to the Joint Venture agreement, Fox has the
option, but not the obligation, to buy out the Partnership's interest at
this independently appraised value. If Fox exercises its option, the
Partnership will attempt to complete the sale of its interest in the Joint
Venture by the end of the second quarter of 1998 and subsequently make
liquidating distributions and dissolve the Partnership. However, there can
be no assurance that a sale will take place or that a sale will be
completed within this time-frame.
Changes in the Motion Picture Industry
The entertainment business in general, and the motion picture business in
particular, has undergone significant changes, primarily due to
technological developments such as the advent of home video equipment.
While these developments have resulted in the availability of alternative
forms of leisure time entertainment, which may have a negative impact on
the Partnership's films while in domestic theatrical release, the
developments have also resulted in additional sources of revenue for the
Partnership's films. The level of domestic theatrical success, however,
remains a critical factor in generating revenues in these ancillary markets
where the Partnership's films are currently being distributed. Given the
rapidity of technological development and shifting consumer tastes, it is
impossible to predict what effect these technological and other changes
will have on the potential overall revenues for the Partnership's feature
length motion pictures in the future.
Employees
The Partnership has no employees.
Item 2. Properties
The principal offices of the Partnership and the General Partner are
located at 3 World Financial Center, 29th Floor, New York, New York. The
Partnership pays no rent. All other charges for space and administrative
facilities are borne by an affiliate of the General Partner.
Item 3. Legal Proceedings
The Registrant is not a party to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
(a)(b) Market Information and Holders - The Partnership is a limited
partnership and there is no established public market for the
Partnership's Units. As of December 31, 1997, there were 4,843
holders of record ("Unitholders") of the Partnership's Units.
(c) Distributions - Incorporated by reference to the sections "Cash
Distributions", "Financial Highlights" and Note 3 of the Notes to the
Financial Statements of the Partnership's Annual Report to Unitholders
for the year ended December 31, 1997, which is filed as an exhibit
under Item 14 and incorporated herein by reference.
Item 6. Selected Financial Data
Incorporated by reference to the "Financial Highlights" table of the
Partnership's Annual Report to Unitholders for the year ended December 31,
1997.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership's principal source of funds is the proceeds received from
Fox pursuant to the Distribution Agreement, as defined in the Partnership's
prospectus. According to the terms set forth in the Partnership Agreement,
effective January 1993, the Partnership receives proceeds from Fox on an
annual basis. Accordingly, all subsequent cash distributions from the
Partnership's investment in the Joint Venture films have been paid to
limited partners on an annual basis.
Pursuant to the terms of the Partnership Agreement, Fox has the right to
purchase the Partnership's interest in the Joint Venture films at an
appraised fair market value determined by an independent, third-party
appraisal exerciseable at any time after December 31, 1997. On February 2,
1998, the Partnership received a formal notice from Fox that it is
considering a potential buyout of the Partnership's interest in the films
and may exercise this option in the near future. Subsequently, the
Partnership and Fox signed a letter of engagement with an unaffiliated
third-party appraiser to determine a fair market value of the Partnership's
interest in the Joint Venture. Pursuant to the Joint Venture agreement,
Fox has the option, but not the obligation, to buy out the Partnership's
interest at this independently appraised value. If Fox exercises its
option, the Partnership will attempt to complete the sale of its interest
in the Joint Venture by the end of the second quarter of 1998 and
subsequently dissolve the Partnership. However, there can be no assurance
that a sale will take place or that a sale will be completed within this
time-frame.
The Partnership's cash balance at December 31, 1997 was approximately
$937,000 compared to approximately $1,315,000 at December 31, 1996. The
$378,000 decrease is primarily attributable to the payment in 1997 of the
1996 cash distribution of approximately $697,000 in February 1997, the
payment of the Partnership's 1996 annual management fee in 1997 and the
payment of 1997 Partnership expenses and was partially offset by the
receipt of the annual distribution of proceeds from Fox in the amount of
approximately $571,000. The Partnership's cash balance is expected to
provide sufficient liquidity to enable the Partnership to fund cash
distributions and meet its operating expenses.
On February 20, 1998, the Partnership paid the 1997 annual distribution
totaling $303,000 of which $300,000 or $12.00 per Unit was paid to the
Limited Partners and $3,000 was paid to the General Partner.
The Partnership had unearned motion picture revenue at December 31, 1997 of
approximately $24,000 as compared to $92,000 at December 31, 1996. The
decrease is due to receipt of $571,000 from Fox in 1997 partially offset by
revenues recorded for 1997 of $640,000.
Accounts payable and accrued expenses increased from approximately $26,000
at December 31, 1996, to approximately $47,000 at December 31, 1997. The
increase is primarily due to higher audit fees for 1997, as well as the
accrual of certain expenses incurred by an unaffiliated third party service
provider in servicing the Partnership, which were voluntarily absorbed by
affiliates of the General Partner in prior periods, and were reimbursed to
the General Partner and its affiliates.
Results of Operations
1997 compared to 1996
For the year ended December 31, 1997, the Partnership reported net income
of approximately $352,000 as compared to approximately $399,000 for 1996.
The decrease is primarily due to a decrease in revenues generated from
motion picture exploitation in the foreign pay and free television markets.
Motion picture profits are based on current estimates of ultimate film
revenues and costs. These estimates are subject to review periodically as
more information about a film's distribution becomes available. Such
reviews can result in significant adjustments to prior estimates.
For the year ended December 31, 1997, the Partnership recognized revenues
from motion picture exploitation and amortization of motion picture costs
with respect to its investment in the released films of approximately
$640,000 and $14,000, respectively, compared to $675,000 and $50,000 during
1996. The decrease in revenue from motion picture exploitation and
amortization of motion picture costs is primarily due to lower revenue from
the foreign pay and free television markets and domestic syndicated
television market. The Partnership currently receives nearly all of its
revenues from the distribution of the films in ancillary markets.
General and Administrative expenses increased from $44,000 at December 31,
1996 to $77,000 at December 31, 1997 primarily due to certain expenses
incurred by an unaffiliated third party service provider servicing the
Partnership, which were voluntarily absorbed by affiliates of the General
Partner in prior periods, and were reimbursable to the General Partner and
its affiliates, and an increase in professional fees.
1996 compared to 1995
For the year ended December 31, 1996, the Partnership reported net income
of approximately $399,000 as compared to approximately $243,000 for 1995.
The increase in net income was primarily the result of increases in
revenues from motion picture exploitation. Motion picture profits are
based on current estimates of ultimate film revenues and costs. These
estimates are subject to review periodically as more information about a
film's distribution becomes available. Such reviews can result in
significant adjustments to prior estimates.
For the year ended December 31, 1996, the Partnership recognized revenues
from motion picture exploitation and amortization of motion picture costs
with respect to its investment in the released films of approximately
$675,000 and $50,000, respectively, compared to $520,000 and $33,000 during
1995. The increases in revenues from motion picture exploitation and
amortization of motion picture costs were primarily attributable to higher
revenue from international television licenses and from the home video sell-
through market. The Partnership currently receives revenues from the
distribution of the films in ancillary markets.
Professional fees decreased from approximately $34,000 at December 31, 1995
to $19,000 at December 31, 1996 primarily due to lower legal and audit fees
incurred by the Partnership.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to Unitholders
for the year ended December 31, 1997. For a listing of financial
statements and schedules, see Item 14a.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Partnership
The General Partner of the Partnership is AEP Premiere Corporation II, a
Delaware corporation formed on November 18, 1986. It is an affiliate of
Lehman Brothers Inc. ("Lehman Brothers")
Certain officers and directors of the General Partner are now serving (or
in the past have served) as officers or directors of entities which act as
general partners of a number of real estate limited partnerships which have
sought protection under the provisions of the federal Bankruptcy Code. The
partnerships which have filed bankruptcy petitions own real estate which
has been affected adversely by the economic conditions in the markets in
which that real estate is located and, consequently, the partnerships
sought protection of the bankruptcy laws to protect the partnerships'
assets from loss through foreclosure.
Name Office
Jeffrey C. Carter President & Director
Rocco F. Andriola Director
Michael T. Marron Vice President and Chief Financial Officer
Jeffrey C. Carter, 52, is a Senior Vice President of Lehman Brothers in the
Diversified Asset Group. Mr. Carter joined Lehman Brothers in September
1988. From 1972 to 1988, Mr. Carter held various positions with
Helmsley-Spear Hospitality Services, Inc. and Stephen W. Brener Associates,
Inc. including Director of Consulting Services at both firms. From 1982
through 1987, Mr. Carter was President of Keystone Hospitality Services, an
independent hotel consulting and brokerage company. Mr. Carter received
his B.S. degree in Hotel Administration from Cornell University and an
M.B.A. degree from Columbia University.
Rocco F. Andriola, 39, is a Managing Director of Lehman Brothers Inc. in
its Diversified Asset Group and has held such position since October 1996.
Since joining Lehman in 1986, Mr. Andriola has been involved in a wide
range of restructuring and asset management activities involving real
estate and other direct investment transactions. From June 1991 through
September 1996, Mr. Andriola held the position of Senior Vice President in
Lehman's Diversified Asset Group. From June 1989 through May 1991, Mr.
Andriola held the position of First Vice President in Lehman's Capital
Preservation and Restructuring Group. From 1986-89, Mr. Andriola served as
a Vice President in the Corporate Transactions Group of Shearson Lehman
Brothers' office of the general counsel. Prior to joining Lehman, Mr.
Andriola practiced corporate and securities law at Donovan Leisure Newton &
Irvine in New York. Mr. Andriola received a B.A. from Fordham University,
a J.D. from New York University School of Law, and an LL.M in Corporate Law
from New York University's Graduate School of Law.
Michael T. Marron, 34, is a Vice President of Lehman Brothers and has been
a member of the Diversified Asset Group since 1990 where he has actively
managed and restructured a diverse portfolio of syndicated limited
partnerships. Prior to joining Lehman Brothers, Mr. Marron was associated
with Peat Marwick Mitchell & Co. serving in both its audit and tax
divisions from 1985 to 1989. Mr. Marron received his B.S. degree from the
State University of New York at Albany and an M.B.A. from Columbia
University.
Item 11. Executive Compensation
Neither the General Partner nor any of its officers or directors received
any compensation from the Partnership.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners - No person is known
to beneficially own in excess of 5% of the Units of the Partnership.
(b) Security Ownership of Management - No officers or directors of the
General Partner beneficially owned any Units of the Partnership as of
December 31, 1997.
(c) Changes in Control - None.
Item 13. Certain Relationships and Related Transactions
The Partnership's operations relating to the production, acquisition of
interests and participations and exploitation of films through the Joint
Venture involves the following agreements with Fox: Joint Venture
Agreement, Product Origination Agreement, Production Services Agreement
(with respect to Joint Venture Films produced by Fox as the production
services company), Participation Agreement and Distribution Agreement. See
the Joint Venture Agreement which is incorporated by reference to the
Partnership's Registration Statement No. 33-11101 on Form S-1 as filed with
the Securities and Exchange Commission on March 4, 1987.
Beginning with the first quarter of 1997, certain expenses incurred by an
unaffiliated third party in servicing the Partnership, which were
voluntarily absorbed by affiliates of the General Partner in prior years,
were reimbursable to the General Partner and its affiliate in the amount of
$27,460 for the year ended December 31, 1997.
For additional information on related transactions with affiliates, see
notes 5, 6 and 7 of the Notes to the Financial Statements of the
Partnership's Annual Report to Unitholders for the year ended December 31,
1997, which is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports of Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
Balance Sheets
At December 31, 1997 and 1996 (1)
Statements of Partners' Capital
For the years ended December 31, 1997, 1996 and 1995 (1)
Statements of Operations
For the years ended December 31, 1997, 1996 and 1995 (1)
Statements of Cash Flows
For the years ended December 31, 1997, 1996 and 1995 (1)
Notes to the Financial Statements (1)
Report of Independent Auditors (1)
(1) Incorporated by reference to the Partnership's Annual Report to
Unitholders for the year ended December 31, 1997.
2. Financial Statement Schedules
No financial statement schedules have been filed as part of this report
as none are required.
3. Exhibits Exhibit No.
* Certificate of Limited Partnership 3 (a)
* Form of Amended and Restated Agreement of
Limited Partnership 3 (b)
* Form of Joint Venture Agreement 10 (b)
* Form of Distribution Rights Acquisition Agreement 10 (c)
* Form of Production Services Agreement 10 (d)
* Form of Product Origination Agreement 10 (e)
* Form of Participation Agreement 10 (f)
* Form of Guarantee 10 (g)
Annual Report to Unitholders for the year ended December 31, 1997 13 (a)
Financial Data Schedule 27
* Incorporated by reference to the Partnership's Registration Statement
No. 33-11101 on Form S-1 as filed with the Securities and Exchange
Commission on March 4, 1987.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the year
ended December 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
AMERICAN ENTERTAINMENT PARTNERS II L.P.
BY: AEP Premiere Corporation II
General Partner
Date: March 30, 1998 BY: /s/ Jeffrey C. Carter
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
AEP PREMIERE CORPORATION II
General Partner
Date: March 30, 1998 BY: /s/ Jeffrey C. Carter
President and Director
Date: March 30, 1998 BY: /s/ Michael T. Marron
Vice President and
Chief Financial Officer
Date: March 30, 1998 BY: /s/ Rocco F. Andriola
Director
American Entertainment Partners II L.P.
EXHIBIT 13(a)
1997 Annual Report
American Entertainment Partners II L.P.
American Entertainment Partners II L.P. (the
"Partnership") is a limited partnership formed in 1986
for the purpose of contributing funds to a joint
venture (the "Joint Venture") with Twentieth Century
Fox Film Corporation ("Fox"). The Joint Venture
acquired interests in ten feature-length motion
pictures. The Partnership receives a percentage of the
revenue generated by the films as they are distributed
in different markets. To date, cumulative cash
distributions total approximately $1,115 per $1,000
Unit, representing approximately 111% of an investor's
original investment.
Films in Release Release Date
Predator June 1987
Revenge of the Nerds II July 1987
The Pick-Up Artist September 1987
Less Than Zero November 1987
Wall Street December 1987
Broadcast News December 1987
Off Limits March 1988
Bad Dreams April 1988
Big June 1988
Alien Nation October 1988
Contents
1 Message to Investors
2 Financial Overview
3 Financial Statements
6 Notes to the Financial Statements
9 Report of Independent Auditors
Administrative Inquiries Performance Inquiries/Form 10-Ks
Address Changes/Transfers First Data Investor Services Group
Service Data Corporation P.O. Box 1527
2424 South 130th Circle Boston, Massachusetts 02104-1527
Omaha, Nebraska 68144-2596 Attn: Financial Communications
800-223-3464 800-223-3464
Message to Investors
Presented for your review is the 1997 Annual Report for American Entertainment
Partners II L.P. This report provides an update on the status of the
Partnership's investment in the Joint Venture films, financial highlights and
the Partnership's audited financial statements for the year ended
December 31, 1997.
Partnership Update
The Partnership continued to collect revenues from its interests in the Joint
Venture films during 1997. Currently, the Joint Venture films generate
revenues predominantly in domestic and foreign television syndication markets,
which typically represent the final markets to be exploited in a film's life
cycle.
As previously reported, pursuant to the terms of the Joint Venture, commencing
at any time after December 31, 1997, Fox has the right and option to purchase
the Partnership's interest in the Joint Venture films at an appraised fair
market value determined by an independent appraisal firm. On February 2, 1998,
the Partnership received a formal notice from Fox that it is considering
purchase of the Partnership's interest in the Joint Venture and may exercise
this option within the next few months. Subsequently, the Partnership and Fox
signed a letter of engagement with an independent third-party appraiser to
determine a fair market value of the Partnership's interest in the Joint
Venture. Pursuant to the Joint Venture agreement, Fox has the option, but not
the obligation, to buy out the Partnership's interest at the independently
appraised value. If Fox exercises its option, the Partnership will attempt to
complete the sale of its interest in the Joint Venture by the end of the second
quarter of 1998 and subsequently make liquidating distributions and dissolve
the Partnership. However, there can be no assurance that a sale will take
place or that a sale will be completed within this time-frame.
Through October 31, 1997, the Partnership had received payments totaling
$30,583,401 as compared to an original contribution after expenses to the
Joint Venture of $20,552,271. As discussed in prior reports, due to the
mature stage of the films, future revenues received by the Partnership will
most likely further decline.
Cash Distributions
The Partnership's annual distribution for 1997, in the amount of $12.00 per
$1,000 Unit, was paid to Limited Partners on February 20, 1998. Cumulative
cash distributions to date total $1,115.84 per $1,000 Unit, which represents
approximately 111% of an investor's original investment. Currently, cash
distributions are paid on an annual basis.
General Information
As you are probably aware, several third parties have commenced tender offers
to purchase Units of the Partnership at prices which are below the Partnership's
estimate of the fair market value of the Units. In response, we recommended
that Limited Partners reject these offers because we believe that they do not
reflect the underlying value of the Partnership's assets. According to
published industry sources, most of the investors who hold units of limited
partnerships similar to the Partnership have rejected these types of tender
offers due to their inadequacy.
Summary
We will continue our discussions with Fox and will attempt to complete the sale
of the Partnership's interest in the Joint Venture by the end of the second
quarter of 1998 and subsequently dissolve the Partnership. However, there can
be no assurance that a sale will take place or that a sale will be completed
within this time-frame. We will update you on significant events affecting
the Partnership in future correspondence.
Very truly yours,
AEP Premiere Corporation II
General Partner
/s/Jeffrey C. Carter
Jeffrey C. Carter
President
March 30, 1998
Financial Overview
(Graph depicting the following information)
Films in Release
Cumulative Payments
Amount Contributed Received from Fox Through
to Joint Venture October 31, 1997
Predator $1,166,000 $2,705,337
Revenge of the Nerds II 497,000 683,351
The Pick-Up Artist 806,000 484,739
Less Than Zero 4,105,000 2,570,640
Wall Street 889,000 2,028,767
Broadcast News 1,333,000 1,383,623
Off Limits 594,000 506,628
Bad Dreams 1,388,000 800,923
Big 6,185,000 15,831,501
Alien Nation 3,588,000 3,587,892
Financial Highlights
(in thousands except per Unit data)
Years Ended December 31,
1997 1996 1995 1994 1993
Total Assets $985 $1,377 $2,345 $2,893 $2,914
Total Liabilities 574 1,015 1,685 1,031 860
Total Partners' Capital 411 362 660 1,862 2,054
Revenues from motion
picture exploitation 640 675 520 1,027 936
Net Income 352 399 243 601 413
Net Income per
Limited Partnership Unit 13.96 15.68 9.14 23.74 16.27
Cash Distributions per Unit 12.00 27.60 57.25 31.39 24.05
All distributions are paid on an annual basis.
The financial data set forth above reflects the Partnership's pro rata share of
all assets, liabilities, revenues and expenses of the Joint Venture.
Balance Sheets At December 31, At December 31,
(000's omitted - except unit information) 1997 1996
Assets
Cash and cash equivalents $ 937 $1,315
Motion picture released, net of accumulated
amortization of $21,093 in 1997 and
$21,081 in 1996 48 62
Total Assets $ 985 $1,377
Liabilities and Partners' Capital
Liabilities:
Distribution payable $ 303 $ 697
Accrued management fees 200 200
Accounts payable and accrued expenses 47 26
Unearned motion picture revenue 24 92
Total Liabilities 574 1,015
Partners' Capital:
General Partner _ _
Limited Partners (25,000 units outstanding) 411 362
Total Partners' Capital 411 362
Total Liabilities and Partners' Capital $ 985 $1,377
Statements of Partners' Capital
(000's omitted)
For the years ended December 31, 1997,
1996 and 1995 General Limited
Partner Partners Total
Balance at December 31, 1994 $ _ $1,862 $1,862
Net Income 14 229 243
Distributions (14) (1,431) (1,445)
Balance at December 31, 1995 _ 660 660
Net Income 7 392 399
Distributions (7) (690) (697)
Balance at December 31, 1996 _ 362 362
Net Income 3 349 352
Distributions (3) (300) (303)
Balance at December 31, 1997 $ _ $ 411 $ 411
Statements of Operations
(000's omitted - except unit information)
For the years ended December 31, 1997 1996 1995
Net Revenues
Revenues from motion picture exploitation $ 640 $ 675 $ 520
Less: Amortization of motion picture costs 14 50 33
Net Revenues 626 625 487
Other Income (Expenses)
Interest income 33 37 36
Professional fees (30) (19) (34)
General and administrative (77) (44) (46)
Management fees (200) (200) (200)
Net Other Expenses (274) (226) (244)
Net Income $ 352 $ 399 $ 243
Net Income Allocated:
To the General Partner $ 3 7 $ 14
To the Limited Partners 349 392 229
$ 352 $ 399 $ 243
Per limited partnership unit
(25,000 outstanding) $ 13.96 $15.68 $ 9.14
Statements of Cash Flows
(000's omitted)
For the years ended December 31, 1997 1996 1995
Cash Flows From Operating Activities
Net Income $ 352 $ 399 $ 243
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of motion picture costs 14 50 33
Increase (decrease) in cash arising from
changes in operating assets and liabilities
Receivable from Twentieth Century Fox _ 148 1,227
Accounts payable and accrued expenses 21 (14) 1
Unearned motion picture revenue (68) 92 _
Net cash provided by operating activities 319 675 1,504
Cash Flows From Financing Activities
Cash distributions (697) (1,445) (792)
Net cash used for financing activities (697) (1,445) (792)
Net decrease (increase) in cash and cash
equivalents (378) (770) 712
Cash and cash equivalents, beginning of
period 1,315 2,085 1,373
Cash and cash equivalents, end of period $ 937 $1,315 $ 2,085
Notes to the Financial Statements
December 31, 1997, 1996 and 1995
1. Organization
American Entertainment Partners II L.P. (the "Partnership") is a limited
partnership which was organized December 19, 1986 under the laws of the State
of Delaware to produce, finance, acquire interests in and exploit feature
length motion picture films through its participation in Amercent Films II
(the "Joint Venture"), a Joint Venture with Twentieth Century Fox Film
Corporation ("Fox").
AEP Premiere Corporation II, formerly Shearson Lehman Premiere Corporation II,
is the general partner (the "General Partner") of the Partnership and is an
affiliate of Lehman Brothers. On July 31, 1993, certain of Shearson Lehman
Brothers, Inc.'s domestic retail brokerage and management businesses were sold
to Smith Barney, Harris Upham & Co., Inc. Included in the purchase was the
name "Shearson." Consequently, the General Partner's name was changed to
AEP Premiere Corporation II to delete any reference to "Shearson."
A public offering (the "Offering") of depositary units of limited partnership
interests (the "Units") was completed in June 1987 by the Partnership. A
total of 25,000 Units were sold totaling approximately $24,940,000 representing
24,403.5 Units at $1,000 per Unit and 596.5 Units at $900 per Unit purchased
by the parent company of the General Partner (which amount represents a price
of $1,000 per Unit less selling commission of $100 per Unit which was not
payable by the Partnership on these Units).
2. Significant Accounting Policies
Basis of Accounting - The accompanying financial statements have been prepared
on the accrual basis of accounting in accordance with generally accepted
accounting principles. Revenues are recognized as earned and expenses are
recorded as obligations are incurred.
Revenue Recognition - Net revenues from motion picture exploitation consist of
the Partnership's pro rata share of revenues from the licensing of film
exhibition rights, less related expenses for prints and advertising, other
distribution expenses, participations to third parties and distribution fees,
unless deferred (see Note 6).
Cash Equivalents - Cash equivalents consist of short-term highly liquid
investments with maturities of three months or less from the date of issuance.
The carrying amount approximates fair value because of the short maturity of
these instruments.
Concentration of Credit Risk - Financial instruments which potentially subject
the Partnership to a concentration of credit risk principally consist of cash
in excess of the financial institutions' insurance limits. The Partnership
invests available cash with high credit quality financial institutions.
Amortization of Motion Picture Costs - Motion picture costs, including
production administration fees which benefit future periods, are capitalized.
Amortization is computed under the individual-film-forecast method based upon
net revenues recognized in proportion to the Joint Venture's estimate of
ultimate net revenues to be received. Unamortized costs are compared with net
realizable value on a film by film basis, and losses are recognized to the
extent costs exceed estimated net realizable value.
Income Taxes - No provision for income taxes has been made in the financial
statements since such taxes are the responsibility of the individual partners
rather than that of the Partnership.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. Partnership Allocations
The Partnership Agreement ("Agreement") substantially provides the following:
Cash Distributions - Cash distributions will be made at the discretion of the
General Partner and allocated 1% to the General Partner and 99% to the
Unitholders, until such time as the Unitholders have received a return of their
adjusted capital contribution, as defined in the Agreement. Thereafter, cash
will be distributed 15% to the General Partner and 85% to the Unitholders.
Allocation of Losses - Losses in any fiscal year shall be allocated 15% to the
General Partner and 85% to the Unitholders, except that if the Unitholders
have an Unallocated Return, as defined in the Agreement, then 1% shall be
allocated to the General Partner and 99% to the Unitholders. In any event,
losses will not be allocated to Unitholders if such allocation would cause or
increase a deficit in the Unitholders' capital accounts.
Allocation of Profits - Profits in any fiscal year shall be allocated 1% to the
General Partner and 99% to the Unitholders until the Unallocated Return, as
defined in the Agreement, is reduced to zero; thereafter, 15% shall be
allocated to the General Partner and 85% to the Unitholders.
Notwithstanding the foregoing provisions, the Agreement provides that to the
extent the General Partner has a negative capital account at any time, profit
shall first be allocated to the General Partner until the capital account has
been increased to zero.
In 1997, 1996 and 1995, pursuant to the provisions of the Partnership Agreement
described above, income was allocated to the General Partner to increase its
negative capital account to zero.
Dissolution of Partnership - If, upon dissolution of the Partnership, the
General Partner has a negative capital account, it shall contribute capital
equal to the amount of the deficit.
4. Interests and Participations in Motion Pictures
As of December 31, 1988, the Partnership invested approximately $21,143,000 in
ten films of which approximately $20,552,000 was contributed to the Joint
Venture, and approximately $591,000 of production administration fees were
paid by the Partnership to the General Partner. As this represents the total
funds available for investment in films, no further investment in films will
be made by the Partnership.
The Partnership has a participation interest in six films not produced by the
Joint Venture and an interest in four films produced by the Joint Venture. All
of the ten films invested in by the Partnership were released between June 1987
and October 1988.
5. Transactions with Fox
Fox, as distributor of Joint Venture films, has entered into licensing
agreements with other Fox affiliated companies in the United States and United
Kingdom television markets. In the United States, Fox has licensed two
participation films to Fox Television Stations, Inc., a Fox affiliate, and
seven Joint Venture and participation films to Fox Broadcasting Company, a
Fox affiliate, for the free television market. In the United Kingdom, Fox has
licensed all of the Joint Venture films to British Sky Broadcasting, a Fox
affiliate, for the pay television market.
At December 31, 1997 and 1996, the Partnership had unearned motion picture
revenue from Fox as distributor totaling $24,000 and $92,000, respectively.
No interest is charged on amounts receivable from or payable to Fox.
6. Deferred Distribution Fee
Fox, as distributor, retains a distribution fee of 17-1/2% from substantially
all gross receipts of the films. The fee is deferred for a film until the
Joint Venture receives, from the distribution of that film, an amount equal to
its investment in the film. The distribution fees for four films have been
earned since the Joint Venture has received distributions from such films
greater than its investment. A portion of the distribution fee for one of the
remaining six films released has been earned since the Joint Venture has
received distributions from the film equal to its investment. No distribution
fees are expected to be earned by Fox for the other five films.
7. Transactions with Related Parties
The General Partner is entitled to receive an annual management fee of $200,000
from which the General Partner pays certain expenses incurred in connection
with the management of the Partnership. The General Partner waived its right
to management fees from January 1, 1989 through December 31, 1992, which
totaled $800,000. The Partnership paid the General Partner its 1995 management
fee in 1996, and its 1996 management fee in 1997. The Partnership accrued
$200,000 in management fees payable to the General Partner as of
December 31, 1997.
8. Reconciliation of Financial Statement Net Income to Tax Basis Net Income
(Loss)
The Partnership has reported for the year ended December 31, 1997 net income
for federal income tax purposes (tax basis) of approximately $245,000. The
Partnership has reported for the year ended December 31, 1996 net income for
federal income tax purposes (tax basis) of approximately $550,000. The
Partnership has reported for the year ended December 31, 1995 a net loss for
federal income tax purposes (tax basis) of approximately $465,000. Differences
between financial statement net income and tax basis net income (loss) are due
to the timing of revenue recognition and related amortization of motion picture
costs.
9. Subsequent Event - Fox Buy-Out Option
Pursuant to the terms of the Partnership Agreement, Fox's right to purchase the
Partnership's interest in the Joint Venture films at an appraised fair market
value determined by an independent, third-party appraisal commenced on
January 1, 1998. On February 2, 1998, the Partnership received formal notice
from Fox that it is considering a potential buy-out of the Partnership's
interest in the films and may exercise this option in the near future.
Subsequently, the Partnership and Fox signed a letter of engagement with an
independent third-party appraiser to determine a fair market value of the
Partnership's interest in the Joint Venture. Pursuant to the Joint Venture
agreement, Fox has the option, but not the obligation, to buy out the
Partnership's interest at this independently appraised value. If Fox exercises
its option, the Partnership will attempt to complete the sale of its interest
in the Joint Venture by the end of the second quarter of 1998 and subsequently
make a liquidating distribution and dissolve the Partnership. However, there
can be no assurance that a sale will take place or that a sale will be completed
within this time-frame.
Report of Independent Auditors
To Partners
American Entertainment Partners II L.P.
We have audited the accompanying balance sheets of American Entertainment
Partners II L.P. as of December 31, 1997 and 1996, and the related statements
of operations, partners' capital, and cash flows for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Entertainment
Partners II L.P. at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
February 6, 1998
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 937,000
<SECURITIES> 000
<RECEIVABLES> 000
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> 937,000
<PP&E> 000
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<TOTAL-ASSETS> 985,000
<CURRENT-LIABILITIES> 575,000
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000
000
<OTHER-SE> 411,000
<TOTAL-LIABILITY-AND-EQUITY> 985,000
<SALES> 000
<TOTAL-REVENUES> 640,000
<CGS> 000
<TOTAL-COSTS> 14,000
<OTHER-EXPENSES> 274,000
<LOSS-PROVISION> 000
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<INCOME-PRETAX> 352,000
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