-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DiogZhXkUmP0Uqh3wFQ7sayC5l73+SX9AyoY26+LO0bs9nXWkjn4yFR1WW6wwIW4 OI36Jyc/Ld1UNotXCjgZRQ== 0000950148-97-000693.txt : 19970329 0000950148-97-000693.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950148-97-000693 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALL AMERICAN COMMUNICATIONS INC CENTRAL INDEX KEY: 0000783265 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 953803222 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14333 FILM NUMBER: 97566135 BUSINESS ADDRESS: STREET 1: 808 WILSHIRE BLVD CITY: SANTA MONICA STATE: CA ZIP: 90401-1810 BUSINESS PHONE: 310-656-1100 MAIL ADDRESS: STREET 1: 2114 PICO BLVD CITY: SANTA MONICA STATE: CA ZIP: 90405 FORMER COMPANY: FORMER CONFORMED NAME: ALL AMERICAN TELEVISION INC DATE OF NAME CHANGE: 19910306 10-K 1 FORM 10-K 1 ================================================================================ 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 YEAR ENDED DECEMBER 31, 1996, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-14333 ALL AMERICAN COMMUNICATIONS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 95-3803222 STATE OF OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 808 WILSHIRE BOULEVARD 90401-1810 SANTA MONICA, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (310) 656-1100 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT Common Stock, $0.0001 par value Common Stock, Class B, $0.0001 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant is approximately $36,000,000 based upon the closing price of the Common Stock on March 10, 1997. As of March 10, 1997, there were 6,903,713 shares of Common Stock, and 5,191,800 shares of Common Stock, Class B outstanding. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the definitive Proxy Statement of the registrant to be filed with the Commission not later than April 30, 1997, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, are incorporated by reference in Part III of this Form 10-K. Total number of pages Exhibit Index begins on page ================================================================================ 2 PART I ITEM 1. BUSINESS GENERAL All American Communications, Inc. ("AAC") and its wholly-owned subsidiaries, All American Television, Inc. ("AATV"), All American Television Production, Inc, ("AATP"), All American Entertainment, Inc. -- formerly Scotti Brothers Entertainment Industries, Inc. ("AAEI" or "SBEI"), All American Fremantle International, Inc. ("AAFI"), All American FDF Holdings, Inc. ("AAFDF"), All American Goodson, Inc. ("AAG"), All American Orbis, Inc. ("AAO"), All American Consumer Merchandising Group, Inc. ("AACM") and All American Netherlands B.V. ("AAN") (and together with their respective direct or indirect wholly-owned subsidiaries collectively, the "Company" or "All American"), is a diversified worldwide entertainment company with operations in television and recorded music production and distribution. The Company is a leading independent producer and distributor of television programming and believes that it is the largest supplier of game show programming in multiple formats and languages worldwide. The Company's programming includes the Baywatch franchise and over 60 game show formats and other television programming created by the Company's subsidiary Mark Goodson Productions, LLC, including The Price Is Right, the longest running game show in the United States. The Company distributes or owns television programming consisting of 32 series, approximately 30,000 game show episodes, 145 motion pictures and a library of children's programming, documentaries and specials. Additionally, the Company has operated as an independent producer of recorded music since 1981. All American is a global provider of quality television programming. Management believes that ownership of its programming combined with its global production and worldwide distribution capabilities provide important long-term competitive advantages. Opportunistic acquisitions and internal development efforts are expected to remain important elements in the Company's growth strategy. Management believes that the Company is well positioned to take advantage of current trends in the television industry and that recent regulatory changes, local content requirement, and the proliferation of distribution channels via satellite and cable television will increase the demand for programming content. The Company's principal executive offices are located at 808 Wilshire Boulevard, Santa Monica, California 90401-1810, and its telephone number is (310) 656-1100. TELEVISION OPERATIONS The Television Industry The television industry may be broadly divided into three major segments: (i) production, involving the development, financing and making of television shows; (ii) distribution, involving the promotion and exploitation of completed television shows; and (iii) exhibition, involving the airing or broadcast of programming over network affiliated stations, independent stations and cable or satellite television. The U.S. television market is the largest in the world, consisting of the principal broadcast networks and their affiliates, independent television stations and cable television networks. Expanding international television broadcast, cable and satellite delivery systems offer further opportunities for the exploitation of television programming. Domestic Market. The U.S. market for television programming is primarily composed of four submarkets: (i) the broadcast television networks (ABC, CBS, NBC, FOX and emerging networks consisting of UPN and WB); (ii) pay cable services (such as HBO, The Disney Channel and Showtime/The Movie Channel, Inc.); (iii) basic cable services (such as USA Networks, The Discovery Channel, The Arts & Entertainment Network, Lifetime, The Family Channel and Turner Broadcasting Network); and (iv) independent broadcast television stations (not affiliated with the television networks). The U.S. television market currently is dominated by the three major networks, each of which has approximately 200 affiliated stations and the FOX network, which has approximately 170 affiliated stations. The affiliates broadcast network-supplied programming and national commercials in return for payments by the major networks. This relationship results in the networks being able to reach virtually all of the significant television markets in the 2 3 United States. There are also a significant number of independent commercial television stations in the United States. These stations offer an alternative to network distribution through syndication. The network schedule provides affiliates with only a portion of their daily program schedule, and the balance of the time is filled with programs acquired through television syndication companies or produced locally by the station. Cable services generally are classified as being in one of four categories: telephone delivery (e.g., Disney TeleVentures' arrangement with four phone companies to deliver programming over telephone lines); superstations (e.g., Turner Broadcasting Network); pay cable services (e.g., HBO); and basic cable networks (advertiser-supported, e.g., The Discovery Channel). The most successful cable networks reach more than 60% of U.S. television households. Recently developed digital compression technology combined with fiber optics or small-sized satellite dishes may permit cable companies, telephone companies or direct broadcast satellite systems to expand the domestic television market up to 500 or more channels. Domestic Syndication. Independent television stations, during both prime time hours (primarily 8:00 P.M. to 11:00 P.M. in the Eastern and Pacific time zones and 7:00 P.M. to 10:00 P.M. in the Central and Mountain time zones) and non-prime time hours, telecast self-produced programming, off-network programming (reruns) or first-run programming from independent producers or "syndicators." In non-prime time, network affiliates telecast network programming, off-network programming, first-run programming (programming produced for distribution on a syndicated basis), and local programming produced by the local stations themselves. In general terms, a syndicator is a company that sells programming to independent television stations and network affiliates. Programming acquired by stations on a syndicated basis is acquired either for a cash license fee or in exchange for a certain amount of commercial advertising time within the program which is retained by the syndicator for sale to advertisers ("barter"), or for a combination of cash and barter. In general, the Company receives revenues from program license fees paid by broadcasters and/or by selling advertising time for programs distributed on a barter basis. Barter syndication is the process whereby a syndicator obtains agreements from television stations to broadcast a program in certain agreed upon time periods ("clearances"), retains advertising time in the program in lieu of receiving a cash license fee, and sells such retained advertising time for its own account to national advertisers at rates based on projected ratings and viewer demographics. From time to time, certain stations may obtain cash consideration from the Company in addition to programming in exchange for advertising time and/or a commitment for a particular time period. By placing the program with television stations throughout the United States, the syndicator creates an "ad hoc" network of stations that have agreed to carry the program. The creation of this ad hoc network, typically representing a penetration of at least 70% of total U.S. television households (calculated by means of a generally recognized system as measured by Nielsen Media Ratings), enables the syndicator to sell the commercial inventory through advertising agencies to sponsors desiring national coverage (including, but not limited to, Procter & Gamble, Bristol Myers-Squibb, MCI, Smith-Kline Beecham, Kellogg Company, Nestle and RJR Nabisco). The rates charged by a syndicator for advertising time are typically lower than the rates charged by the networks for similar demographics since the networks' coverage of the market is generally greater. International Markets. The number of outlets for television programming outside the United States has been increasing with the worldwide proliferation of broadcast, cable and satellite delivery systems. Over the last ten years, European governments have privatized television systems in several countries, including Germany, Italy, France and Spain. The Company believes that privatized systems are more likely to broadcast U.S. programming than government-owned networks. In addition, both the number of pay and satellite television systems in Europe and the number of subscribers to these systems have increased. Pay television and satellite distribution systems also are developing in other geographic areas, including many Asian and South American countries. In international markets, suppliers of programming may be subject to local content and quota requirements which prohibit or limit the amount of U.S. programming in particular markets. Domestic Television Production In May 1991, the Company acquired the rights to produce the weekly action drama series Baywatch, starring David Hasselhoff. Baywatch is currently one of the highest rated one hour series in first-run syndication in the United States. In December 1991, the Company also acquired the domestic rights to 3 4 distribute the original episodes on a strip basis (i.e., Monday through Friday). The original 23 episodes were produced by a third party and aired on the NBC network during the 1989/1990 broadcast season. Broadcast of the Baywatch episodes produced by the Company commenced in the United States in September 1991. Since it began producing Baywatch for the 1991/1992 broadcast season, the Company has produced and delivered an aggregate of 132 episodes of Baywatch through the 1996/1997 broadcast season. Additionally, the Company intends to produce 22 episodes of Baywatch for the 1997/1998 broadcast season for a production budget of approximately $1.1 million per episode. The total production budget is expected to be funded primarily through a combination of: (i) barter advertiser sales; (ii) cash payments from an international licensee; and (iii) working capital, pending receipt of license fees and advertiser sales. There is no assurance that the Company will be successful in its efforts to fully fund the production through a combination of the advertiser sales and international sales. During 1996, the Company also produced the second season of Baywatch Nights, a spinoff of Baywatch. The Company and Atlantis Releasing B.V. ("Atlantis") produced 22 one-hour live action episodes of a new series entitled The Adventures of Sinbad for the 1996/1997 broadcast season. In consideration for the Company providing a substantial portion of the production budget, the Company retains exclusive distribution rights to The Adventures of Sinbad in the United States and Europe (including the United Kingdom and excluding Scandinavia). The Company has an annual option to cause Atlantis to produce up to 22 new episodes in each of the three subsequent broadcast seasons, exercisable on or before February 15 of each such subsequent broadcast seasons. At the end of three years, if Atlantis does not exercise its right to continue producing The Adventures of Sinbad, the right to produce the series reverts to the Company. The Company has exercised its option to cause Atlantis to produce 22 new episodes of The Adventures of Sinbad for the 1997/1998 broadcast season. The Company's share of the total production budget (approximately $0.7 million of the expected $0.9 million per episode) is expected to be funded primarily through a combination of: (i) barter advertiser sales; (ii) cash payments from international licensees; and (iii) working capital, pending receipt of license fees and advertiser sales. There is no assurance that the Company will be successful in its efforts to fully fund these productions through a combination of the advertiser sales and international sales. The Company has entered into agreements with New Dominion Productions and Bristol-Myers Squibb to produce 22 one-hour episodes of a new series entitled Ghost Stories for the 1997/1998 broadcast season with an estimated aggregate production budget of $7.5 million. The Company's agreement with Bristol-Myers Squibb provides the latter with a substantial portion of the available barter advertiser time for $3.5 million, net of agency commissions. The remaining portion of the production budget is expected to be funded primarily through a combination of: (i) sales of the remaining barter advertiser time; (ii) cash payments from international licensees; and (iii) working capital, pending receipt of license fees and advertiser sales. There is no assurance that the Company will be successful in its efforts to fully fund the production through a combination of the advertiser sales and international sales. The Company has an option to enter into personal service agreements with Arthel Neville and Fred Roggin, for an initial 13 week period with options for subsequent periods, for the production of a five day a week talk show program for the 1997/1998 broadcast season entitled the Arthel/Fred Talk Show. The estimated production budget will be approximately $0.3 million per week for up to 35 weeks. The production budget is expected to be funded primarily through a combination of: (i) barter advertiser sales; and (ii) working capital, pending receipt of advertiser sales. There is no assurance that the Company will be successful in its efforts to fully fund the production through the advertiser sales. In July 1995, the Company entered into an arrangement with The Gerber Company ("TGC") pursuant to which the services of TGC are provided to the Company's television development and production operations for a two-year term through August 1997, subject to a one year renewal option in favor of the Company. Pursuant to this arrangement, David Gerber renders exclusive services to the Company, subject only to his involvement with certain pre-existing projects. Mr. Gerber, formerly a senior executive of both Columbia Pictures Television and MGM Television, has assumed the position of President of AATP. Mr. Gerber is responsible for developing programming for both network television and, to a lesser extent, first-run syndication. While head of television programming at a major studio, Mr. Gerber was responsible for television projects such as thirtysomething and In The Heat of the Night. Mr. Gerber is currently developing 4 5 movies-for-television and episodic series for potential network, first-run syndication and cable exhibition. The Company presently has a network commitment in connection with, and has completed principal photography on, a movie-of-the-week entitled On The Line, starring Linda Hamilton. There is no assurance that the Company will be successful in its efforts to fully fund this production through a combination of the network license fee and international sales. Domestic Television Distribution In addition to producing Baywatch, the Company distributes the show domestically to independent broadcast stations. The 1997/1998 broadcast season will represent the seventh consecutive season for which the Company has produced and domestically distributed the show and the eighth season of the series. Through March 10, 1997, Baywatch had been licensed for the 1996/1997 broadcast season to television stations covering more than 97% of the U.S. television market. In addition to producing Baywatch Nights for the 1996/1997 broadcast season, the Company is distributing the show domestically and internationally. The Company has entered into a sublicensing agreement for the distribution of the show throughout Continental Europe. As of March 10, 1997, Baywatch Nights had been licensed for the 1996/1997 broadcast season to television stations covering more than 93% of the U.S. television market. Through March 10, 1997, The Adventures of Sinbad had been licensed for the 1996/1997 broadcast season to television stations covering more than 90% of the U.S. television market, including an agreement with the Tribune Entertainment Company ("Tribune") whereby Tribune agreed to clear The Adventures of Sinbad on its owned and operated television stations, including those in New York, Los Angeles, Chicago, Philadelphia and Houston, representing more than 35% of the U.S. television market. In consideration for clearing The Adventures of Sinbad on its stations, Tribune retains the right to sell the national advertising time in each weekly telecast of The Adventures of Sinbad for a specified fee. During 1995, the Company launched a domestic rerun ("strip") syndication package of 111 previously aired Baywatch episodes for broadcast during the 1995/1996 and 1996/1997 broadcast seasons ending September 1997 (at which time such episodes are licensed to USA Networks pursuant to the license described below). Domestic rerun syndication typically involves the exhibition of programming five days a week on local television stations and/or cable services after first-run exhibition. Typically, to be successful in rerun syndication, a television series must have at least 66 episodes (the equivalent of three full television seasons). Through March 10, 1997, the rerun syndication package had been licensed to television stations covering more than 93% of the U.S. television market on a cash and barter basis. In May 1995, the Company entered into an exclusive license agreement with USA Networks in regard to the licensing of 110 episodes of Baywatch, 22 episodes of Sirens and 22 episodes of Acapulco H.E.A.T. The license agreement is exclusive in the United States, its territories and possessions (including Puerto Rico) over all forms of transmission by all means (including, without limitation, free over-the-air broadcasts, basic and pay cable, or via video on demand), other than by continuous first-run syndication and other than the rerun strip syndication of the first episodes of Baywatch during the period commencing June 26, 1995 through September 19, 1997. The initial term of the license agreement has already commenced for certain series and will commence in September 1997 for Baywatch, with a common termination date of September 2000 for such series. Revenue has been and will be recognized on commencement of the license period for each show. The minimum license fee aggregates $30.6 million, payable in 36 equal monthly installments of approximately $0.9 million commencing September 1997 through August 2000. The license agreement also provides that if Baywatch is produced for first-run syndication during the 1997/1998 broadcast season and certain conditions concerning the availability of the leading performers (including David Hasselhoff who is currently in negotiations with the Company for the 1997/1998 broadcast season) of the series are met (or waived by USA Networks), USA Networks is obligated to extend the license to include such broadcast seasons, and the minimum license fee is increased by specified amounts. Upon production of Baywatch for the 1997/1998 broadcast season, the license fee would be increased by approximately $3.1 million. USA Networks also has certain options to extend the term of the license for up to four years for additional specified consideration. 5 6 GAME SHOWS The Company believes that it is the largest supplier of game show programming in multiple formats and languages worldwide. The Company has substantially expanded and diversified its television operations in the past two years through the acquisitions of Mark Goodson Productions ("Goodson"), the producer and worldwide copyright owner and licensor of many of the most successful game show formats ever developed, including The Price Is Right, Family Feud, Match Game, What's My Line and Password; and Fremantle International, Inc., which pioneered the international production of American television game show formats in local versions and languages, both for Goodson shows and shows developed by other producers such as Let's Make a Deal and The Dating Game. These two acquisitions represent an aggregate investment by the Company of over $100.0 million in total consideration plus, in the case of the Mark Goodson Acquisition, a contingent earn-out of up to an additional $48.5 million based on a portion of domestic net profits in the five-year period ending October 2000. The earn-out period is subject to extension for an additional five years if total earn-out payments do not equal $48.5 million, in which case the earn-out shall be payable in neither a minimum nor a maximum amount. The Company's current game show line-up consists of The Price Is Right, in its 25th consecutive season on CBS, as well as local versions, in certain cases renewed for multi-year periods, of The Price Is Right and Family Feud in Germany and France. The Company has over 17,000 broadcast hours of rerun game show programming produced by Mark Goodson Productions which are licensed to The Sony Game Show Channel (the "Channel") through October 1997 when such licensing rights revert to the Company. Additionally, the Company has recently acquired the worldwide rights to the game show format Press Your Luck. The Company has also recently expanded into the production and distribution of local versions of U.S. style talk-shows in Europe through its acquisition of Orbis Entertainment Company, Inc. Copyright Ownership of Game Show Formats By way of the Mark Goodson Acquisition, the Company acquired the formats to some of the historically most popular game shows. Since 1946, Goodson has produced approximately 30,000 episodes of television programming, totaling over 17,000 broadcast hours. Goodson was the creator of and, pursuant to the Mark Goodson Acquisition, has transferred ownership rights to its popular game show formats to the Company. The game show formats owned by the Company include: Beat the Clock Get the Message Password Plus That's My Line Blockbusters He Said, She Said Play Your Hunch The Better Sex Body Language Hit the Jackpot Press Your Luck The Match Game By Popular Demand It's News To Me Rate Your Mate The Name's The Same Call My Bluff! Judge For Yourself Say When! The Price Is Right Card Sharks Make The Connection Showoffs To Tell The Truth Child's Play Mindreaders Snap Judgment Trivia Trap Split Choose Up Sides Missing Links Personality Two For The Money Double Dare Now You See It Spin To Win Winner Take All Family Feud Number Please Super Password What's My Line? New Family Feud Password Tattletales What's Going On
6 7 International Production and Distribution Through All American Fremantle International, Inc. ("AAFI"), the Company currently distributes, and, in some cases, locally produces game shows throughout Europe, Asia, Australia and South America. The Company believes that it is one of the world's largest suppliers of television game shows outside of the United States, producing and distributing more than 90 game shows in 29 countries. The Company's programming outside the United States has expanded to include the distribution of the Mark Goodson Productions game show formats which it owns, as well as other shows, including Let's Make A Deal, The $25,000 Pyramid and The Dating Game. AAFI has become one of the leading producers of daytime entertainment in Germany, with three shows (including The Price Is Right and Family Feud) airing on the RTL broadcast network and an additional three shows broadcast on SAT 1. AAFI's franchise is also strong in the United Kingdom and France, and the Company has operations, or is expanding its presence, into the Netherlands, Greece, India, Asia and Australia. The Company distributes and, in some cases, produces game shows pursuant to licensing contracts ("producer contracts") with various producers who control the rights to specific game show formats. The Company licenses the right to create and/or distribute game shows on a local basis in various international territories to terrestrial as well as satellite broadcasters using the successful U.S. formats. Thus, for example, the Company produces German language versions of The Price Is Right, known as Der Press Ist Heiss. The Company licenses the right to produce The Price Is Right in France, where it is known as Le Juste Prix, and Spain, where the show is called El Precio Justo. The rights derived from the producer contracts are sub-licensed to broadcast outlets in mostly Western European territories ("sub-license contracts") with major television exhibitors. These sub-license contracts have terms which generally range from one to three years with renewal options. While the sublicense contracts are generally of a short term nature, the risk of their non-renewal is, as historically determined, largely a function of ratings performance. In a number of cases, the Company's programs are among the top rated programs in their time slots and markets. There is no assurance that the Company can continue to achieve the ratings necessary to cause the programs to be renewed or that the programs will, in fact, be renewed. The third party producer contracts generally include "tail" provisions or are subject to a course of dealing which allow AAFI or the Company to retain distribution rights after the expiration of the original term of the contract (except in certain circumstances where there is a specific outside term) on stations in those territories in which the show is already being broadcast. In such a case, the Company would not have the right to sell the show into new territories unless a new contract was negotiated, thereby limiting certain growth opportunities. The development of strong international distribution capabilities has complemented the Company's existing production business. For example, the Company is distributing Baywatch Nights and The Adventures of Sinbad in both the domestic and international marketplace. AAFI's management is broadly experienced in the various facets of international television production and distribution, and it has strong links with the advertising community. U.S. Production and Distribution Currently, the Company's only game show in initial exhibition is The Price Is Right, in its 25th consecutive season, hosted by Bob Barker and exhibited on the CBS network as a day-time program. The network has extended the series for a period of 52 additional weeks through the 1997/1998 broadcast season and has three annual renewal options, preceding the ensuing broadcast season (exercisable on or prior to March 1), to further extend the term of the series. Concurrently, the Company has extended its contract with Bob Barker for a period of 52 additional weeks through the 1997/1998 broadcast season and has three annual renewal options to further extend such contract. The network has reserved the right, in the event of the unavailability of Bob Barker to serve as host for any reason or cause, to retroactively convert the then term of the series to a 26 week period for the cycle then in progress. In such event, the network has the right of approval with respect to a replacement for Bob Barker and the commitment of a minimum of 26 additional weeks of new programs. 7 8 The Company is also developing updated versions of three other Goodson game show formats for possible network exhibition or first-run syndication In addition to developing new game show programming, the Company is exploiting its library of tapes of previous Goodson game show episodes. This library, which includes over 17,000 broadcast hours of programming and approximately 30,000 episodes, is one of the largest game show libraries in the world. Goodson has maintained high-quality tapes covering a substantial proportion of its production. Prior to the Mark Goodson Acquisition, Goodson entered into a license agreement with the Sony Game Show Channel, which license was assigned to the Company as part of such acquisition. The Channel is a cable service dedicated to the broadcast of game show material. For existing episodes, the Goodson license to the Channel provides for certain exclusivity rights in the United States and Canada in favor of the Channel other than for standard broadcast television. The license also covers new episodes produced by third parties under format licenses. For certain other new game show series, the Channel has certain first negotiation rights for cable exploitation. The term of the license expires on October 11, 1997 unless extended or renewed. There is no assurance that the Company will be successful in its efforts to exploit its game show formats or create new game show formats. See "-- Acquisitions" for a description of the Mark Goodson Acquisition. International Production and Distribution of Talk Shows Through its acquisition of Orbis Entertainment Company, Inc., the Company is seeking to expand the international game show franchise established by AAFI into the talk show area, specifically by creating local versions of U.S. style talk shows and other programming in local languages abroad. For certain talk shows, Procter & Gamble France, SNC retains exclusivity provisions within certain territories subject to the satisfaction of certain contractual thresholds. See "-- Acquisitions." The Company has entered into a distribution agreement with SAT 1 in Germany for the distribution of a weekly, one-hour, reality show for the 1997/1998 broadcast season. The estimated budget for this program is approximately $9.5 million. While the license fee for the program is in excess of the estimated budget, there is no assurance that the license fee will cover the actual costs of production. LIBRARY The Company has been building an extensive library of television programming to support its distribution activities. The Company currently distributes, represents or owns participation interests in 145 motion pictures, 32 television series, a variety of children's programming and live event specials. The Company distributes All American Feature Theatre, a package of feature length motion pictures acquired by the Company in separate agreements with third party producers or distributors. The Company also distributes other programming, including documentary series. In addition, the Company acquired certain programming rights from Blair Entertainment Corporation and John Blair Communications, Inc. in June 1992, including distribution rights to previously aired episodes of Divorce Court. The Company distributes children's television programming consisting of both television series and animated feature films, including Heathcliff and Inspector Gadget. In February 1993, the Company entered into a long term (through 2004) sublicense agreement with The Family Channel for the animated series Heathcliff for the domestic cable and syndication markets. The distribution terms and rights vary as to media and geographic area for each program, but are generally for representation or distribution throughout the United States except for the game shows, which are for distribution both domestically and internationally. Extension of terms may be available in certain cases if the Company meets pre-defined performance standards. The Company intends to seek extensions of the 8 9 distribution periods for these properties on satisfactory economic terms, although there is no assurance that the Company will be able to do so. The table below sets forth certain of these properties as of March 10, 1997: SERIES Baywatch, Baywatch Nights, Acapulco H.E.A.T., The Adventures of Sinbad, America's Top Ten, BeachClash, Divorce Court, Sirens, Stuntmasters, Tales From The Darkside CHILDREN'S SERIES Heathcliff, Inspector Gadget MOTION PICTURES Bad Influence, Care Bears Movie, Care Bears Movie II, Freeze Frame, Ghostwriter, Hansel and Gretel, It Nearly Wasn't Christmas, Wild Orchid BOB HOPE CLASSIC FILMS Cancel My Reservation, The Great Lover, How to Commit Marriage, The Lemon Drop Films Kid, My Favorite Brunette, Paris Holiday, The Private Navy of Sgt. O'Farrell, Road to Bali, Road to Rio, Seven Little Foys, Son of Paleface SPECIALS The Boy King, Christmas at the Movies, The Elvis Files, Exploring Psychic Powers, The JFK Conspiracy, The Kennedy Assassinations, Madonna Exposed, Mysteries of the Pyramids, Remembering Marilyn, Return to the Titanic, The Royal Family -- In Crisis Acquisition of Properties for Distribution The Company generally acquires properties for television distribution by entering into agreements with producers/owners or by producing or co-producing its own programs. The Company's distribution agreements generally provide that the revenues derived from the program are allocated between the producer and the Company on a pre-negotiated basis. Acquisitions are based on projected station demand and acceptance as well as expected advertiser sponsorship. Under some arrangements, the Company will guarantee that the producer's share of the revenue will not be less than a specified dollar amount. In other instances, the Company will provide the producer with a production advance, in which case the Company usually recoups such advance before making any remittance of the producer's share of revenues. Where possible, the Company has endeavored to limit its risk by arranging for other distribution or major station groups to provide production, financing and/or distribution services in exchange for a portion of the Company's fees. In addition to U.S. television broadcast and cable rights, the Company also acquires, where available on acceptable terms, world-wide broadcast television and non-standard television distribution rights (such as cable and videocassette rights) to the programs which it distributes. These acquisitions are typically on a long term exclusive basis, often between three and 12 years, in some cases with various renewal options, and may provide that the Company has the right to undertake production of the program if the producer fails to deliver the contracted programming. Concentration and Competition Competition is intense in the production and distribution of television programming. The Company's programming competes with other first-run programming, network programming reruns, and programs produced by local television stations. The Company competes with many other companies that have been acquiring, producing and distributing programs longer than the Company, most of which have greater financial resources than the Company. These competitors include large television and film studios such as The Walt Disney Company, Paramount Communications, Inc., Columbia Pictures, 20th Century Fox Film Corp., 9 10 Universal, Inc., and Warner Bros, Inc., as well as other television distribution companies such as King World Productions, Inc. and Viacom, Inc. In addition, vertical integration of the television broadcast market and the creation and expansion of new "networks" which create a substantial portion of their own programming, such as UPN (United Paramount Network) and WB (Warner Brothers, Inc.), have decreased the number of available time slots for, and thereby increased the competition among, programs marketed for first-run syndication by independent syndicators like the Company. The Company also competes with companies for the sale of television advertising time, including Tribune Broadcasting Co., Viacom, Inc. and King World Productions, Inc. The Company's success is highly dependent upon such various unpredictable factors as the viewing preferences of television audiences. Public taste is unpredictable, and a shift in demand could cause a loss of appeal in the Company's programming. Television programming also competes for audiences with many other forms of entertainment and leisure time activities, some of which include new areas of technology (e.g., video games and the Internet), the impact of which on the Company's operations cannot be predicted. For the Company to successfully place its syndicated television programming with independent television stations, the Company must generally enter into an agreement with station groups which own stations in the New York, Los Angeles and Chicago markets. The largest of these station groups include Chris Craft and Tribune which own or operate stations covering approximately 19% and 35% of the domestic television market, respectively. During the years ended December 31, 1996, 1995 and 1994, The Fremantle Corporation, a corporation not affiliated with the Company, accounted for 10%, 6% and 13% of consolidated revenues, respectively. RECORDED MUSIC OPERATIONS The Recorded Music Industry According to statistics released by the Recording Industry Association of America, Inc., sales in the U.S. recorded music industry increased 1.7% during 1996 to $12.5 billion, based in part on the shipment of 1.14 billion units of records, tapes, compact discs ("CDs") and music videos. Industry wide unit shipments of CDs grew 8.4% as compared to new shipments in 1995. CDs also generally have a higher wholesale price and per unit gross profit margin than vinyl records and tapes. However, recordable CDs, digital audio tape ("DAT") and digital compact cassette ("DCC") technology enable consumers to make high quality duplicates from original CDs and DATS. In the absence of adequate copyright protection, recordable CD, DAT and DCC technology may affect industry sales of CDs, DATs and DCCs. It is not possible to predict the extent to which sales will be affected. Recorded Music Artists and Catalog The Company's recorded music division has been operating for approximately 15 years, nine years as a custom label and approximately the last six years as a full service operation. During this period, the Company has released approximately 140 albums of individual artists, groups, motion picture soundtracks, and special projects and compilations. The Company's current roster is comprised of 10 active artists, including James Brown and "Weird Al" Yankovic, whose recently released album, entitled Bad Hair Day, went "platinum." 10 11 The Company's music catalog currently has approximately 75 catalog albums in active release. The following table sets forth certain albums in the Company's catalog: "WEIRD AL" YANKOVIC Alapalooza, Bad Hair Day, Dare to be Stupid, Even Worse, The Food Album, Greatest Hits, Greatest Hits Vol. II, In 3-D, Off the Deep End, Permanent Record (Box Set), Polka Party JAMES BROWN Gravity, Greatest Hits of the Fourth Decade, Greatest Hits -- Live, I'm Real, Live at the Apollo, Living in America, Love Overdue, Universal James SKEE-LO I Wish SURVIVOR Caught in the Game, Eye of the Tiger, Greatest Hits, Moment of Truth, Premonition, Vital Signs, When Seconds Count E.L.O. PART II Electric Light Orchestra Part 2, Greatest Hits -- Live THE NYLONS Because, Four on the Floor, Harmony, The Christmas LP, Live to Love SWEET SABLE Old Time's Sake 12 GAUGE 12 Gauge, Let Me Ride Again FREDDIE JACKSON Private Party COUNT BASIE, Jazz Fest Masters SARAH VAUGHN, DIZZY GILLESPIE EDDIE & THE CRUISERS Eddie: The Unreleased Tapes JOHN CAFFERTY & Roadhouse, Tough All Over THE BEAVER BROWN BAND SOUNDTRACKS Another 48 Hours, Baywatch, Cliffhanger, Cobra, Eddie & The Cruisers, Eddie & The Cruisers II: Eddie Lives, Never Talk to Strangers, Rambo III, Revenge of the Nerds, Rocky IV, The Transformers, UHF
Music Distribution Music distribution includes the sale and physical delivery of product to retailers and the collection of the related receivables. Generally, the recorded music industry attempts to restrict the return of products that remain unsold through the use of a penalty percentage on returned product. The Company has operated its recorded music division as a full service label since September 30, 1990, and has obtained certain distribution services, primarily physical delivery of the product, collection of receivables and certain sales functions, from one of the major record distributors. Commencing January 1, 1996, Warner/Elektra/Atlantic Corporation, a division of Time Warner, Inc. ("WEA"), assumed responsibility for these distribution functions in the domestic market pursuant to a distribution agreement with an initial term of five years, under which WEA receives a distribution fee. David A. Mount, a director of the Company, is an executive officer of WEA. The Company is responsible for all other activities, including producing, marketing, promoting and manufacturing recorded music product for domestic distribution. These arrangements require the Company to fund various costs resulting in more risk to the Company, as opposed to a "custom label" arrangement where, for a larger distribution fee, the distributor assumes responsibility for substantially all of the activities currently handled by the Company. The WEA distribution agreement provided a $3.0 million nonrefundable, nonrecoupable payment to the Company as consideration for the Company's entering into the agreement. This agreement may be extended, at WEA's option, if at the end of the initial five year term, net sales of the Company's product through WEA have not reached $150.0 million. Such extension shall only continue until cumulative net sales reach $150.0 million. During the years ended December 31, 1996, 1995 and 1994, total recorded music and merchandising sales accounted for approximately 11%, 10% and 14% of consolidated revenues, respectively. The Company has extended, effective July 1, 1995, its existing foreign distribution agreement with PolyGram S.A. ("PolyGram") solely with respect to its current catalog product for five years, expiring 11 12 June 30, 2000. PolyGram provides the Company with distribution and collection of recorded music sales for which the Company earns a royalty based on recorded music product sold throughout the world (net of reserves for returns), excluding the United States, Canada and Japan. PolyGram is responsible for all costs and expenses in connection with manufacturing, marketing, promotion and distribution in its territories. The Company has also entered into arrangements with other companies for distribution of the Company's recorded music products in Canada (Attic) and Japan (Pony/Canyon, Inc.). The agreement with Pony/Canyon, Inc. expired March 20, 1997. The Company is presently negotiating a new agreement for the continued services of Pony/Canyon, Inc. in Japan and Southeast Asia. These arrangements provide for advances to the Company against royalties to be earned by the Company on recordings sold. The Company is in discussions with other companies concerning the distribution of its new product in the PolyGram territories. The Company owns 64-track digital and 24-track recording facilities which enable the Company to produce recordings at a reduced cost in comparison to the cost of using outside facilities. Marketing and Promotion Marketing involves advertising and otherwise gaining exposure for recordings and artists through public performances and magazines, radio and television, other media and point-of-sale material. Promotion consists of efforts to obtain air play by radio stations of the recordings in coordination with the marketing and distribution programs. Under its WEA distribution agreement, the Company is responsible for all such domestic activities and expenses. Because the success of recording artists and releases is highly dependent upon consumer tastes and critical response, as well as public awareness of recording artists, the level of marketing and promotional activities and expenses necessary in any particular instance cannot be predicted with certainty. The production and distribution of music videos to accompany certain major record releases have become a promotional necessity and an additional financial burden to the releasing company. These videos may significantly increase the losses on any individual release if such recording is not successful, or increase revenues on a successful recording. Concentration and Competition There are six major recorded music distribution companies: WEA, Sony Music, BMG, PolyGram, Capitol Records/EMI (CEMA) and Universal Music Group. The combined sales of these companies (with the inclusion of their independent distribution) represent substantially all of the sales in the recording industry. In recent years, significant consolidation has occurred through the acquisition by these major companies of smaller recorded music companies, such as the acquisitions by PolyGram of A&M, Island Records and Motown Record Corp. The success of any musical release depends upon unpredictable and changing factors such as the individual tastes of critics and consumers. The capital resources, artist rosters and retail penetration of the "major" recorded music companies are significantly greater than those of the Company. The greater capital resources of the "majors" permit them to withstand longer periods of low rates of successful releases. The relatively large number of artists under contract with a "major" could tend to increase the absolute number of profitable records produced by such a company; however, there are also inherent risks of producing relatively large numbers of unsuccessful products. While the Company has several successful artists under contract, each of the "majors" has far larger numbers of such artists under contract and may therefore be less affected than the Company by a single success or failure. Through the Company's arrangements for distribution with WEA and PolyGram (as to catalog items), the Company seeks to take advantage of the distribution facilities of two of the "majors" and their inherently greater market penetration. 12 13 ANCILLARY BUSINESSES The Company generates additional revenue by merchandising certain of its television properties, principally Baywatch, and by developing on-line and interactive applications. The Company also retains music publishing rights with respect to its television and recorded music products to the extent possible. ACQUISITIONS The Company from time to time considers the acquisition of program rights and the expansion of its business through the acquisition of assets or businesses of other entities engaged in operations complementary to the current operations of the Company. This growth through acquisition strategy has contributed significantly to the Company's success. As part of the implementation of its strategy to acquire assets or businesses that increase production and distribution capabilities, the Company significantly expanded its international television production and distribution operations with the acquisition of certain assets of Fremantle International, Inc. in August 1994 (the "Fremantle International Acquisition") and the Mark Goodson Acquisition in October 1995 (completed as to the remaining 50% interest as of January 1996). The price for the Fremantle International Acquisition consisted of $31.5 million in cash, 0.63 million shares of Common Stock and 2.52 million shares of Class B Common Stock. Additionally, the Company incurred transaction costs of $1.0 million. Upon consummation of the Fremantle International Acquisition, certain international programming rights (excluding programming rights under the Goodson contract) were transferred to the Company, and 100% of the non-voting equity (representing 99% of the total outstanding equity) of Fremantle International, Inc. (which held the programming rights under the Goodson contract) was transferred to the Company. The Company has since converted a portion of its non-voting shares into voting shares representing approximately 78.5% of the voting stock of Fremantle International, Inc. As of October 6, 1995, the Company and The Interpublic Group of Companies ("Interpublic") consummated the Mark Goodson Acquisition, pursuant to which Mark Goodson Productions, LLC (the "LLC") acquired substantially all of the assets (excluding those relating to the lottery business) and assumed certain specified liabilities (collectively, with the subsequent IPG/Goodson Agreement described below, the "Mark Goodson Acquisition") of Mark Goodson Productions, L.P. and a related company (collectively, the "Sellers"). The purchase price consisted of payment by the Company of $25.0 million in cash and issuance by Interpublic of $25.0 million in its common stock to the Sellers, together with a contingent earn-out described below. In January 1996, the Company acquired from Interpublic the remaining 50% interest of Mark Goodson Productions, LLC (the "IPG/Goodson Agreement"). Under the earn-out, the LLC will initially pay to an assignee of the Sellers a specified percentage of "Domestic Net Profits" (i.e. generally gross receipts less production costs, if applicable, a distribution fee to the Company under certain circumstances and residual payments) realized from the exploitation in the United States and Canada of the Goodson game shows (currently, primarily The Price Is Right) and other purchased television formats during the five-year period following October 6, 1995, (which period is subject to extension for an additional five years if total earn-out payments do not equal $48.5 million, in which case the earn-out shall be payable in neither a minimum nor a maximum amount). The specified percentage of Domestic Net Profits payable to the Sellers with respect to The Price Is Right is 75% during the network exhibition of the program during the five years after October 6, 1995 and otherwise the specified percentage is generally 50% for other programs. However, the earn-out does not apply to any net profits realized from the international exploitation of any of the purchased game shows or other purchased television formats. Additionally, the Company incurred transaction costs of $0.9 million. As a result of acquiring Interpublic's 50% interest in the LLC, the Company is responsible for the full share of the contingent purchase price, to the extent earned by the Sellers. Such contingent purchase price, which increases goodwill, will be amortized coterminously with the original 25 year period used for amortization of the purchase price. Through December 31, 1996, the accrued contingent purchase price totaled $10.1 million (including Interpublic's share through December 31, 1995 of $0.9 million). The Company has accounted for the Mark Goodson Acquisition under the purchase accounting method effective January 1, 1996. 13 14 As of July 1996, the Company entered into a Stock Purchase Agreement (the "Orbis Agreement"), with Orbis Entertainment Company, Inc. ("Orbis"), a television production company, and the shareholders of Orbis (the "Orbis Acquisition") to purchase all of the outstanding shares of Orbis for an initial purchase price of $2.5 million, which has been paid. In addition to the initial purchase price, the Orbis Agreement, for the first five years, provides for a contingent earn-out payment equal to 50% of net cash flow, as defined, and an additional contingent payment due after year five based on the cash flows of Orbis in years four and five, also as defined. Following the acquisition, the name of Orbis was changed to All American Orbis, Inc. ("AAO"). The Company has accounted for the Orbis Acquisition under the purchase accounting method. As of July 1996, the Company entered into five year employment agreements with the AAO executives. GOVERNMENT REGULATION In a decision released September 6, 1995, the Federal Communications Commission ("FCC") repealed its financial interest and syndication rules effective as of September 21, 1995. Those FCC rules, which were adopted in 1970 to limit television network control over television programming and thereby foster the development of diverse programming sources, had restricted the ability of the three established, major U.S. television networks (i.e., ABC, CBS and NBC) to own and syndicate television programming. The impact of the repeal of the FCC's financial interest and syndication rules on the Company's operations cannot be predicted at the present time, although it is expected that there will be increased in-house production of television programming for the network's own use. It is possible that this change will have a negative impact on the Company's business. Additionally, in international markets, the Company may be subject to local content and quota requirements which effectively prohibit or limit access to particular markets. In a decision released September 1, 1995, the FCC repealed the Prime Time Access Rule, effective August 30, 1996. The Prime Time Access Rule generally prohibited network-affiliated television stations in the top 50 television markets from broadcasting more than three hours of network programs, or programs previously aired on a network, during the four prime time viewing hours (i.e., 7:00 p.m. - 11:00 p.m. Eastern and Pacific time, and 6:00 p.m. - 10:00 p.m. Central and Mountain times). Due to the Prime Time Access Rule, network affiliated television stations often acquired a certain amount of programming (typically including game shows) for exhibition during the prime time access period from independent television producers and syndicators. While the Company's sale of syndicated programming during prime time is primarily to independent television stations rather than to network-affiliated stations, it is possible that the repeal of the Prime Time Access Rule may constrict the market for the Company's television programming, and that the Company might be subject to increased competition. On February 1, 1996, Congress passed the Telecommunications Act of 1996 (the "1996 Act"), and President Clinton signed it into law on February 8, 1996. The 1996 Act is the first comprehensive re-write of the Communications Act of 1934, as amended (the "1934 Act") and dramatically changes the ground rules for competition and regulation in virtually all sectors of the telecommunications industry, from local and long-distance telephone services, to broadcasting, cable television, and equipment manufacturing. The 1996 Act eliminates many entry barriers to the telecommunications business, relaxes concentration and merger rules, and delegates authority for implementing such Act to the FCC. Pursuant to the 1996 Act, the FCC has revised broadcast multiple ownership rules so as to allow a single individual, person or entity to own or control or have a cognizable interest in television stations that reach as much as 35% of the U.S. television market. In addition, as mandated by the 1996 Act, the FCC has eliminated the numerical limits previously set forth in the FCC's rules on the number of television stations that a given individual or entity could own, or have an attributable interest in. Under the 1996 Act, manufacturers of television set equipment will be required to equip all new television receivers with a so-called "V-Chip" which would allow for parental blocking of violent, sexually-explicit or indecent programming based on a rating for any given program that would be broadcast initially along with the program. Unless the television industry establishes a voluntary ratings system by February 1998, the FCC is directed by the 1996 Act to develop a ratings system based upon the recommendations of an advisory committee selected by the FCC. A coalition of various segments of the entertainment industry has devised a 14 15 voluntary industry ratings code for rating video programming with respect to violent, sexual or indecent content. The recent implementation of a voluntary industry ratings code by broadcasters is presently being evaluated and is subject to modification. Other provisions of the 1996 Act allow local exchange telephone companies to offer multichannel video programming service, subject to certain regulatory requirements, and allow for cable companies to offer local exchange telephone service. The 1996 Act thus fosters the development of a larger number of video program distribution sources. The impact on the Company of the changes to the 1934 Act brought about by the 1996 Act and by accompanying changes in FCC rules cannot be predicted at the present time, although it is expected that there will be an increase in the demand for video programming product as a result of the likelihood that these regulatory changes will facilitate the advent of additional exhibition sources for such programming. However, it is possible that recent alliances of certain program producers and television station group owners, coupled with the recent FCC rule revision allowing a single television station licensee to own television stations reaching up to 35% of the nation's television households, may place additional competitive pressures on program suppliers who are unaligned with any television station group owners. EMPLOYEES The Company has approximately 316 full-time employees and 5 part-time employees, of whom 71 are based in its Santa Monica office, 81 are based in its New York and other U.S. offices, 93 are based in Germany, 32 are based in India, 25 are based in London and 19 are based in other countries, principally in Europe. When in production, the Company has approximately 150 temporary employees working on the production of episodic series such as Baywatch and Baywatch Nights. The production season, typically runs from March to December, with post-production activities typically continuing into the following March. Various employees of the Company's subsidiaries working on production of programming are, or were, covered by collective bargaining agreements with various professional guilds, including the Screen Actors Guild, the Writers Guild of America, the American Federation of Television and Recording Artists, the Directors Guild of America and the Association of Canadian Television and Radio Artists, depending upon production locations and various other factors. The Company believes that its relations with employees are good. ITEM 2. PROPERTIES The Company conducts its domestic television production and recorded music operations primarily from its headquarters in Santa Monica, California and conducts its domestic distribution operations primarily from New York, New York. The Company conducts its recording studio operations from Santa Monica, California. The Company conducts its international television production and distribution operations primarily from its administrative offices in New York, New York, Hurth, Germany and London, England. 15 16 The following table sets forth certain information relating to the principal properties of the Company:
SQUARE TERMS OF LOCATION PRIMARY USES FEET OCCUPANCY - -------------------- ------------------------------------------------- -------- -------------- Santa Monica, Executive and administrative offices, Company 32,000 Leased(1) California headquarters New York, AATV executive administrative offices, sales 23,200 Leased(2) New York office New York, Administrative offices 8,000 Leased(3) New York Santa Monica, Administrative offices 2,200 Leased(4) California Marina del Rey, Administrative offices, production studio 29,600 Leased(5) California Marina del Rey, Administrative offices, production studio 13,000 Leased(6) California Santa Monica, Production offices, recording studio 10,000 Owned California London, England Executive and administrative offices 5,000 Leased(7)(18) London, England Executive and administrative offices 2,000 Leased(8)(18) Hurth, Germany Administrative offices, production studio 22,300 Leased(9)(18) Munich, Germany Administrative offices 6,100 Leased(10)(18) Ossendorf, Germany Administrative offices, production studio 12,400 Leased(11)(18) Ossendorf, Germany Administrative offices, production studio 1,400 Leased(12)(18) Paris, France Administrative offices Leased(13)(18) Athens, Greece Administrative offices 3,200 Leased(14)(18) New Delhi, India Administrative offices Leased(15)(18) Hilversum, Administrative offices Leased(16)(18) Netherlands Hong Kong Administrative offices Leased
- --------------- (1) Lease provides for monthly base rent of approximately $69,000 commencing in February 1996, subject to annual increases, and expires in February 2006, with three additional two-year renewal options. (2) Lease provides for monthly base rent of approximately $51,000 commencing on June 1, 1994, subject to annual increases, and expires on May 31, 1999, with an additional three-year renewal option. (3) Lease provides for annual base rent of approximately $166,000 for the first five years and approximately $181,000 for the last five years and expires on March 1, 2001. A portion of this space is subleased to a non-affiliated third party. (4) Lease provides for a monthly base rent of approximately $4,500 commencing in January 1997, subject to annual 5% increases, and expires in April 2001. The property is owned by Anthony J. Scotti and Benjamin J. Scotti. (5) Lease provides for a monthly base rent of approximately $20,500 and expires in June 1997, with four additional one-year renewal options. The Company has executed its renewal option extending the lease through June 1998 for a monthly base rent of approximately $21,500. (6) Lease provides for a monthly base rent of approximately $12,150 commencing in March 1996 and expiring in February 1998. (7) Lease provides for an annual base rent of approximately $98,600 through November 3, 1997, with an additional five-year renewal option. (8) Lease provides for annual base rent of approximately $32,000 through November 4, 1997, with an additional five-year renewal option. 16 17 (9) Lease provides for annual base rent of approximately $279,200 through termination on July 31, 1996. Lease continues month to month under similar terms while being renegotiated. (10) Lease provides for an annual base rent of approximately $109,300 through termination on December 31, 1999. (11) Lease provides for annual base rent of approximately $122,100 through termination on October 1, 2000. (12) Lease provides for annual base rent of approximately $30,600 through termination on December 1, 1997. (13) Lease provides for annual base rent of approximately $46,100 through termination on July 14, 2006, subject to cancellation at the Company's option on or after July 14, 1999. (14) Lease provides for annual base rent of approximately $44,000 through April 14, 1997, with an additional three-year renewal option. (15) Lease provides for annual base rent of approximately $33,500 through August 15, 1999, with an additional two-year renewal option. (16) Lease provides for annual base rent of approximately $20,000 through August 31, 1997, with an additional one-year renewal option. (17) Lease provides for annual base rent of approximately $38,100 through December 15, 1998. (18) Lease rates are based upon prevailing exchange rates and are subject to currency fluctuation. ITEM 3. LEGAL PROCEEDINGS On or about August 19, 1996, the Company's Subsidiary, Mark Goodson Productions, LLC (the "LLC") filed an arbitration claim against Grundy International Operations Limited ("Grundy"), with the American Arbitration Association in New York, Case No. 13 T 153 00742 96. The LLC is the successor-in-interest under a license agreement (the "Agreement") with Grundy whereby the LLC's predecessor licensed to Grundy the rights in certain territories to various television game shows and game show formats. The initial term of the Agreement expired on June 28, 1996, subject to a contractual provision in the Agreement requiring the parties to negotiate in good faith about a possible two year extension of the Agreement during the six months prior to such expiration date. No such extension was agreed upon by the parties during such period. The LLC declared a default in connection with Grundy entering into various license agreements without obtaining the LLC's prior consultation and approval as required under the Agreement, and Grundy took the position that such license agreements were not subject to the consultation and approval provisions of the Agreement and that the LLC did not fulfill the foregoing good faith requirement. The LLC sought a declaration of rights, an accounting of all monies received by Grundy under the licenses and all other appropriate relief. On March 12, 1997, the LLC and Grundy entered into a settlement agreement. Pursuant to the settlement agreement, all rights granted to Grundy under the Agreement reverted to the LLC as of June 29, 1996 except for certain existing rights retained by Grundy. On December 12, 1994, Credit Lyonnais Bank Nederland N.V. ("CLBN") made demand upon SBEI under a Guarantee, dated July 29, 1986 (the "SBEI Guarantee"), for payment of approximately $3.7 million plus interest accrued or costs incurred since November 11, 1994 under a Loan and Security Assignment, dated July 29, 1986, between CLBN and various former subsidiaries of SBEI relating to the discontinued motion picture operations of the Company. In a letter dated December 22, 1994, SBEI rejected the foregoing demand based upon, among other reasons, the following: (i) that in a January 1993 agreement, CLBN agreed to release all liens and any interests in any property or assets of SBEI, which in effect released SBEI from any obligations under the SBEI Guarantee; (ii) the loan purportedly guaranteed has been repaid; and (iii) SBEI is not a party to and was not bound by a material amendment to the above-referenced Loan and Security Assignment. In addition, since approximately November 1993, CLBN and its representatives have been reviewing certain books and records relating to the distribution and production of certain motion pictures by Minority 17 18 Pictures, Inc. (formerly Scotti Brothers Pictures, Inc.) or its subsidiaries for which CLBN provided financing. In October 1994, CLBN requested that Minority Pictures, Inc. and various of its current and former affiliates (including All American Communications, Inc. and certain of its subsidiaries) execute a tolling agreement which would have tolled any claims which CLBN may have against such persons, including but not limited to causes of action based on such financing. In December 1994, the Company responded that based upon the information provided by CLBN, or the lack thereof, it was extremely unclear whether there were any tenable claims against the Company and its subsidiaries and that the Company was therefore unwilling to enter into any tolling agreement. The Company and CLBN are currently engaged in discussions regarding the potential resolution of all of their disputes. While there is no assurance that these discussions will be successful in terminating the disputes, the Company believes that CLBN's claims will not have a material adverse effect on the Company's financial position or results of operations. The Company is party to legal proceedings which are routine and incidental to the business. The Company believes that the results of such litigation will not have a material adverse effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to the Company's stockholders for a vote during the fourth quarter of the fiscal year covered by this report. 18 19 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's Common Stock is traded on the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") National Market ("NNM") under the symbol AACI. The Company's Class B Common Stock is traded on the NNM under the symbol AACIB. The following table sets forth, for the periods indicated, the high and low closing sale prices per share for the Common Stock and the Class B Common Stock. For the period prior to December 14, 1995, the table sets forth the high and low bid price quotations per share of the Common Stock as reported on the NASDAQ SmallCap Market.
CLASS B COMMON COMMON STOCK STOCK ------------------- ------------------ LOW HIGH LOW HIGH ------- ------- ------ ------- YEAR ENDING DECEMBER 31, 1997 First Quarter (through March 10, 1997)............. $12.500 $15.250 $8.750 $11.500 YEAR ENDED DECEMBER 31, 1996 First Quarter...................................... 9.625 12.250 7.750 9.125 Second Quarter..................................... 10.000 11.875 7.375 9.125 Third Quarter...................................... 8.875 11.250 5.250 8.875 Fourth Quarter..................................... 11.500 14.375 8.625 10.750 YEAR ENDED DECEMBER 31, 1995 First Quarter...................................... 6.250 10.000 -- -- Second Quarter..................................... 8.250 11.500 -- -- Third Quarter...................................... 9.750 13.688 -- -- Fourth Quarter (through December 13, 1995)......... 9.875 13.375 -- -- Fourth Quarter (commencing December 14, 1995)...... 9.250 10.625 8.375 10.625 YEAR ENDED DECEMBER 31, 1994 First Quarter...................................... 7.250 9.750 -- -- Second Quarter..................................... 7.000 9.250 -- -- Third Quarter...................................... 7.000 9.750 -- -- Fourth Quarter..................................... 5.250 7.250 -- --
On March 10, 1997, the closing sale prices of the Common Stock and Class B Common Stock as reported on the NNM were $14.75 and $10.75 per share, respectively. As of March 10, 1997, there were 72 holders of record of the Common Stock and 5 holders of record of the Class B Common Stock. DIVIDENDS The Company did not pay dividends on its Common Stock or Class B Common Stock during the years ended December 31, 1996, 1995 or 1994 and currently does not intend to pay any dividends on its Common Stock or Class B Common Stock in the foreseeable future. Further, the Company's credit facilities and Senior Subordinated Notes restrict the payment of dividends to holders of the Company's Common Stock or Class B Common Stock. See "Management's Discussion and Analysis -- Liquidity and Capital Resources." 19 20 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth the Selected Consolidated Financial Data of the Company for the five most recent fiscal years. In February 1993, the Company transferred its ownership of certain indirect film company subsidiaries to a third party. Such transfer has been accounted for as a discontinued operation as of December 31, 1992. In February 1993, the Company acquired the stock of LBS Communications, Inc. ("LBS"). The financial data for periods subsequent to February 1993 reflect the acquisition of LBS. In August 1994, the Company acquired certain assets, non-voting stock and assumed certain liabilities of Fremantle International, Inc. through AAFI. The financial data for periods subsequent to August 1994 reflect the results of AAFI. In October 1995, the Company, in a joint venture with Interpublic, completed the Mark Goodson Acquisition. The financial data for the period from October 6, 1995 through December 31, 1995 reflects the Mark Goodson Acquisition, accounted for using the equity method of accounting. The financial data for periods subsequent to January 1, 1996, the date on which the Company acquired the remaining interest in the joint venture, reflect the results of Mark Goodson, accounted for using the purchase method of accounting. The data should be read in conjunction with the Consolidated Financial Statements, related notes, and Management's Discussion and Analysis included elsewhere in this Form 10-K. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- ------- OPERATING DATA: Revenues: Television......................................... $210,874 $206,734 $ 98,771 $ 57,407 $45,302 Recorded music and merchandising................... 25,584 22,026 16,130 13,215 12,616 -------- -------- -------- -------- ------- 236,458 228,760 114,901 70,622 57,918 -------- -------- -------- -------- ------- Expenses: Television......................................... 152,252 164,764 75,196 42,560 32,078 Recorded music and merchandising................... 17,903 15,803 10,750 9,780 9,250 Selling, general and administrative................ 26,197 24,102 21,523 16,074 13,471 Goodwill amortization.............................. 4,602 2,399 971 133 138 -------- -------- -------- -------- ------- 200,954 207,068 108,440 68,547 54,937 -------- -------- -------- -------- ------- Operating income..................................... $ 35,504 $ 21,692 $ 6,461 $ 2,075 $ 2,981 ======== ======== ======== ======== ======= Income from continuing operations, before extraordinary charge............................... $ 14,106 $ 7,248 $ 455 $ 380 $ 1,863 ======== ======== ======== ======== ======= Net income from continuing operations................ $ 12,686 $ 7,248 $ 455 $ 380 $ 1,863 ======== ======== ======== ======== ======= Income (loss) per share applicable to common stockholders from continuing operations(1): Before extraordinary charge...................... $ 1.18 $ .87 $ .07 $ .87(2) $ (.18)(3) ======== ======== ======== ======== ======= After extraordinary charge....................... $ 1.06 $ .87 $ .07 $ .87(2) $ (.18)(3) ======== ======== ======== ======== ======= BALANCE SHEET DATA: Receivables, net..................................... $109,982 $115,581 $ 62,338 $ 43,226 $27,178 ======== ======== ======== ======== ======= Television program costs, net........................ $ 94,031 $ 74,644 $ 68,437 $ 52,381 $33,993 ======== ======== ======== ======== ======= Total assets......................................... $359,735 $301,582 $208,007 $112,521 $74,130 ======== ======== ======== ======== ======= Notes payable........................................ $179,000 $134,982 $115,343 $ 60,424 $11,234 ======== ======== ======== ======== ======= Total liabilities.................................... $271,747 $233,302 $179,924 $105,018 $51,084 ======== ======== ======== ======== ======= Redeemable stock: Preferred.......................................... $ -- $ -- $ -- $ -- $11,124 ======== ======== ======== ======== ======= Common............................................. $ -- $ -- $ -- $ -- $ 9,241 ======== ======== ======== ======== ======= Stockholders' equity................................. $ 87,988 $ 68,280 $ 28,083 $ 7,503 $ 2,681 ======== ======== ======== ======== =======
- --------------- (1) Fully diluted earnings per share for 1993 through 1996 were restated to reflect the November 1996 redemption of the Company's 6 1/2% Convertible Subordinated Notes. As a result of such restatement, the presentation of fully diluted earnings per share is no longer required for the periods 1993 through 1996. (2) Per share income from continuing operations applicable to common stockholders for the year ended December 31, 1993 includes a gain of $3.9 million, which represents the excess carrying value of the redeemable preferred and common stock formerly outstanding over the price paid for its purchase, net of accretion and dividends on such redeemable stock. (3) Per share loss from continuing operations applicable to common stockholders for the year ended December 31, 1992 includes the effect of $2.7 million of accretion and dividends on redeemable stock. 20 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a diversified entertainment company which produces, distributes, markets and promotes television programs and recorded music both domestically and internationally. The television industry is broadly divided into three major segments: (i) production, involving the development, financing and making of television shows; (ii) distribution, involving the promotion and exploitation of completed television shows; and (iii) broadcast, involving the airing or broadcast of programming over network affiliated stations, independent stations and cable or satellite television. The U.S. broadcast television market is served principally by network affiliated stations, independent stations and cable and satellite television operators. Broadcasters telecast network programming (in the case of network affiliates); self and/or locally produced programming; and off-network programming (reruns) or first-run programming from independent producers or "syndicators" such as the Company. In general terms, a syndicator is a company that sells programming to independent television stations and network affiliates. Programming acquired by stations on a syndicated basis is acquired either for a cash license fee or in exchange for a certain amount of commercial advertising time within the program which is retained by the syndicator for sale to advertisers ("barter"), or for a combination of cash and barter. The Company domestically distributes programming for television produced by the Company or unrelated third parties in the first-run and rerun syndication markets. In general, the Company receives revenues from program license fees paid by broadcasters and/or by selling advertising time for programs distributed on a barter basis. Barter syndication is the process whereby a syndicator obtains clearances from television stations to broadcast a program in certain agreed upon time periods, retains advertising time in the program in lieu of receiving a cash licensing fee, and sells such retained advertising time for its own account to national advertisers at rates based on projected ratings and viewer demographics. From time to time, certain stations may obtain cash consideration from the Company in addition to programming in exchange for advertising time and/or a commitment for a particular time period. By placing the program with television stations throughout the United States, the syndicator creates an "ad hoc" network of stations that have agreed to carry the program. The creation of this ad hoc network, typically representing a penetration of at least 70% of total U.S. television households (calculated by means of a generally recognized system as measured by Nielsen Media Ratings), enables the syndicator to sell the commercial inventory through advertising agencies to sponsors desiring national coverage (including but not limited to Procter & Gamble, Bristol Myers-Squibb, MCI, SmithKline Beecham, Kraft/General Foods, Mars, Nestle and RJR Nabisco). The rates charged by a syndicator for advertising time are typically lower than the rates charged by the networks for similar demographics since the networks' coverage of the market is generally greater. See "Business -- Television Operations -- Domestic Television Distribution." The international broadcast television market is served principally by independent stations and cable and satellite television operators. The Company produces and distributes "local" content programming internationally through its wholly owned subsidiary, AAFI, principally using game and variety show formats acquired as part of the Mark Goodson Acquisition or from third parties and AAO using talk show formats. License agreements for international programming are typically entered into prior to the commencement of production and generally provide for license fees sufficient to cover the costs of production. While the Company has international production facilities in several countries, AAFI's production activities occur primarily in Germany and the United Kingdom. The international distribution and exploitation of Baywatch Nights (worldwide), The Adventures of Sinbad (Europe only, including the United Kingdom and excluding Scandinavia), the Company's movies-of-the-week and a portion of its library of domestic content programming are also handled by AAFI. In addition to producing and distributing Company owned product, AAFI provides television related producer-for-hire and distributor services for a fee. In most cases, the Company's domestic and international distribution revenues are based on a percentage of the net revenues derived from cash license fees and/or the sale of advertiser sponsorships. The Company 21 22 normally advances all distribution costs for items such as advertising, promotion, and tape shipping and duplication and recovers such expenses out of program revenues. The Company's fee for distribution is generally between 15% and 35% of net revenues, and its fee for advertising sales representation is generally between 10% and 15% of net revenues. However, each fee arrangement is separately negotiated and may be subject to variation. Amounts remaining in excess of the Company's distribution fees and recoupable expenses (including a portion of the amounts derived from the sale of advertising time) are either remitted in full to the producer from whom the Company obtained the distribution rights, or, if the Company has a profit participation in the program, are shared between the Company and the producer in accordance with a predetermined allocation. In some instances, the Company will make an advance payment to the producer to cover production costs or will guarantee the producer certain minimum license fees. Such advance payments may reduce the Company's distribution fee or result in a loss if sufficient revenues are not generated. For the 1996/1997 broadcast season, the Company has made certain guarantees to the producers with respect to The Adventures of Sinbad. See "-- Liquidity and Capital Resources." A small number of television programs and musical recordings have historically accounted for a significant portion of the Company's revenues in any given fiscal period. In addition, the Company's television distribution revenues have historically been higher in the third and fourth quarters as a result of the commencement of the television season in the fall of each year. A change in a program's production schedule or ratings from period to period or the discontinuation of certain projects may materially adversely affect a given period's results of operations. Therefore, year-to-year results may not be comparable, and results in any quarter may not be indicative of results for an entire year. The results for 1996 reflect the full consolidation of the LLC, the remaining 50% of which was acquired effective as of January 1, 1996. Except for the historical information contained herein, certain of the matters discussed in this report are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995, which involve certain risks and uncertainties, which could cause actual results to differ materially from those discussed herein, including but not limited to the Company's dependence on a limited number of projects, risks of expansion, acquisitions and new programming, dependence on key personnel, fluctuation in results of operations, and risks relating to the nature of the entertainment industry, government regulation, competition and control by management. See the relevant discussions elsewhere herein, and risk factors set forth in the Company's registration statement on Form S-3 as filed with the Securities and Exchange Commission on January 14, 1997, for a further discussion of these and other risks and uncertainties applicable to the Company's business. 22 23 RESULTS OF OPERATIONS The following table sets forth the percentage relationship to total revenues of certain items included in the Company's Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994:
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 1996 1995 1994 --------------------- --------------------- --------------------- % OF TOTAL % OF TOTAL % OF TOTAL AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE -------- ---------- -------- ---------- -------- ---------- (DOLLARS IN THOUSANDS) Revenues: Television....................... $210,874 89.2% $206,734 90.4% $ 98,771 86.0% Recorded music and merchandising................. 25,584 10.8 22,026 9.6 16,130 14.0 -------- ----- -------- ----- -------- ----- 236,458 100.0 228,760 100.0 114,901 100.0 -------- ----- -------- ----- -------- ----- Expenses: Television....................... 152,252 64.4 164,764 72.0 75,196 65.5 Recorded music and merchandising................. 17,903 7.6 15,803 6.9 10,750 9.4 Selling, general and administrative................ 26,197 11.1 24,102 10.6 21,523 18.7 Goodwill amortization............ 4,602 1.9 2,399 1.0 971 0.8 -------- ----- -------- ----- -------- ----- 200,954 85.0 207,068 90.5 108,440 94.4 -------- ----- -------- ----- -------- ----- Operating income................... 35,504 15.0 21,692 9.5 6,461 5.6 Other expense, net................. 11,184 4.7 9,195 4.0 5,676 4.9 -------- ----- -------- ----- -------- ----- Income before income taxes......... $ 24,320 10.3% $ 12,497 5.5% $ 785 0.7% ======== ===== ======== ===== ======== =====
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1995 Revenues The Company's total revenues increased by $7.7 million, or 3%, to $236.5 million for the year ended December 31, 1996, from $228.8 million for the year ended December 31, 1995. Revenues from television operations increased to $210.9 million (89% of total revenues) for the year ended December 31, 1996, from $206.7 million (90% of total revenues) for the year ended December 31, 1995. Recorded music and merchandising revenues increased to $25.6 million (11% of total revenues) during the year ended December 31, 1996, from $22.0 million (10% of total revenues) for the year ended December 31, 1995. The increase in revenues from television operations of $4.1 million, or 2%, for the year ended December 31, 1996, as compared with the year ended December 31, 1995, was due primarily to growth in the Company's AAFI operations internationally (which increased $4.3 million over 1995, principally from the Company's expansion into France), the availability in 1996 of The Adventures of Sinbad (which contributed $16.7 million on the delivery of 19 episodes) and 22 new Baywatch episodes and the inclusion of a full year of revenues from the Mark Goodson Acquisition, partially offset by the recognition of approximately $22.0 million of higher revenues in 1995 from initial licenses in connection with the strip syndication of Baywatch, a decrease in revenues from certain other programming and the recognition of revenues in 1995 from previously distributed product (principally Sirens and the domestic distribution of Family Feud and Acapulco H.E.A.T.). The Company's AAFI operations contributed revenues of $86.8 million (37% of total revenues) for the year ended December 31, 1996, as compared with $82.5 million (36% of total revenues) for the year ended December 31, 1995. Revenues from German operations of $53.9 million (62% of total AAFI revenues) in 1996 decreased by 8% from $58.9 million (71% of total AAFI revenues) in 1995. Such decrease was more than offset by increases in French licensing revenues to $15.8 million (18% of total AAFI revenues) in 1996 from $6.9 million (8% of total AAFI revenues) in 1995. Contributing to the increased television revenues was the inclusion of 100% of a full year of revenues from the Mark Goodson Acquisition of $19.3 million (after elimination of intercompany revenues) for the year ended December 31, 1996, as compared with the recognition of $3.6 million in revenues under the equity method of accounting from October 6, 1995 (the date of acquisition of 50% of the Mark Goodson assets) 23 24 through December 31, 1995. Mark Goodson revenues, on a pro forma basis giving effect to the Mark Goodson Acquisition as if it occurred on January 1, 1995, increased by $4.8 million from $14.5 million for the year ended December 31, 1995 due to an increase in the number of The Price Is Right episodes delivered over 1995 and non-AAFI international revenues. Recorded music and merchandising revenues increased by $3.6 million, or 16%, to $25.6 million during the year ended December 31, 1996, from $22.0 million for the year ended December 31, 1995. This increase was primarily attributable to higher sales of new releases, led by "Weird Al" Yankovic's "platinum-selling" album entitled Bad Hair Day and an increase in merchandising revenues. The Company has, as of March 10, 1997, completed principal photography on On The Line, a movie-of-the-week ("MOW") licensed for exhibition on the ABC television network for approximately $3.0 million. The Company has also committed, or plans to commit, to the production and distribution of the Arthel/Fred Talk Show, a daily talk show hosted by Arthel Neville and Fred Roggin; and Ghost Stories, an hour long weekly series. Both programs are presently being cleared on independent television stations and network affiliates. Furthermore, AAO has entered into an agreement with SAT 1 in Germany for the distribution of a weekly one-hour reality show for license fees of approximately $11.0 million. In addition to the above programming, the Company has several projects in development including, but not limited to, MOWs and game shows. There is no assurance that the Company's efforts to obtain sufficient clearances with the broadcasters or the Company's development of new programming will be successful. Operating Expenses Total operating expenses decreased by $6.1 million, or 3%, to $201.0 million for the year ended December 31, 1996, from $207.1 million for the year ended December 31, 1995, due to a $12.5 million reduction in television operating costs reflecting higher margins on the revenues from Mark Goodson Productions partially offset by a $2.1 million increase in recorded music and merchandising costs corresponding to higher recorded music and merchandising revenues, a $2.2 million increase in goodwill amortization attributable to the Mark Goodson Acquisition (see " -- Liquidity and Capital Resources") and a $2.1 million increase in selling, general and administrative expenses resulting primarily from expansion of the Company's international operations as well as increased corporate overhead of $1.1 million. Television expenses, before overhead and goodwill amortization, decreased by $12.5 million, or 8%, to $152.3 million (72% of total television revenues) for the year ended December 31, 1996, from $164.8 million (80% of total television revenues) for the year ended December 31, 1995. The decrease in television expenses as a percentage of total television revenues is attributable to revenues recognized from programming (principally related to Mark Goodson Productions and AAFI revenues from certain French licensing agreements) which has higher gross profit percentages than the overall mix of the Company's other distributed programming in the prior period. Television selling, general and administrative expenses during the year ended December 31, 1996 of $14.7 million reflect an increase of $1.6 million over the year ended December 31, 1995 due to planned increases in the AAFI operations and the Company's television promotion and research departments. Goodwill amortization of $4.6 million for the year ended December 31, 1996 increased $2.2 million, as a result of the Mark Goodson Acquisition, from $2.4 million for the year ended December 31, 1995. The Company's recorded music and merchandising expenses, before selling, general and administrative expenses, increased $2.1 million, or 13%, to $17.9 million (70% of total recorded music and merchandising revenues) for the year ended December 31, 1996, from $15.8 million (72% of total recorded music and merchandising revenues) for the year ended December 31, 1995. The improvement in operating margins was due to lower levels of artist advances and recording expenditures during the 1996 period as compared with the 1995 period. Operating Income Total operating income for the Company increased $13.8 million, or 64%, to $35.5 million for the year ended December 31, 1996, from $21.7 million for the year ended December 31, 1995, due to an increase in 24 25 television and recorded music and merchandising operating income offset by increased goodwill amortization and corporate overhead. Television operating income was $39.3 million (after the inclusion of goodwill amortization of $4.6 million and selling, general and administrative expenses of $14.7 million) for the year ended December 31, 1996, as compared to $26.4 million (after the inclusion of goodwill amortization of $2.4 million and selling, general and administrative expenses of $13.2 million) for the year ended December 31, 1995. On a pro forma basis, giving effect to the Mark Goodson Acquisition as if it had occurred on January 1, 1995, television operating income decreased by $6.8 million, or 15%, from the year ago period primarily due to the decreases in Baywatch strip syndication revenues discussed above. Operating income from recorded music and merchandising operations increased to $2.1 million for the year ended December 31, 1996 (after the inclusion of selling, general and administrative expenses of $5.6 million), from $0.01 million for the year ended December 31, 1995 (after the inclusion of selling, general and administrative expenses of $6.2 million). This increase in recorded music and merchandising operating income was primarily attributable to the higher revenues discussed above. Goodwill amortization for the year ended December 31, 1996 increased by $2.2 million to $4.6 million, from $2.4 million for the year ended December 31, 1995, due to the inclusion of a full year of amortization in connection with the Mark Goodson Acquisition. The Company expects to report amortization expense of at least $4.8 million on an annual basis as a result of prior acquisitions, subject to increase based upon the amount of contingent purchase price payable to the Sellers in the Mark Goodson Acquisition and the contingent payments, if any, in connection with the Orbis Acquisition (the Company has no contingent payment obligation through December 31, 1996), or in the event of future acquisitions. Foreign Currency Exchange Gain/(Loss) The Company recognized a foreign currency exchange loss of $0.2 million for the year ended December 31, 1996, as compared to a foreign currency exchange gain of $0.3 million for the year ended December 31, 1995 which results from the settlement and valuation of certain licensing agreements, denominated in foreign currencies, into U.S. dollars as of December 31, 1996 and 1995, respectively. The Company has historically experienced gains and losses as a result of fluctuations in exchange rates. The Company has not entered into foreign currency swap agreements. To the extent that the Company does not enter into foreign currency swap agreements, the Company can expect to record foreign exchange losses and gains in the future. Currency fluctuations impact the Company only to the extent the Company repatriates funds from or provides funds to its offices in foreign countries. The Company, on an ongoing basis, monitors its exposure to foreign currency risk. When, in management's opinion, the foreign currency risk exposure becomes greater than the cost of foreign currency swap agreements, the Company will consider entering into such agreements. As a result of the recent strengthening of the U.S Dollar relative to several European currencies, the Company may suffer declines in the value of future overseas agreements denominated in U.S. Dollars. Interest Expense Interest expense, net of capitalized interest ($0.9 million) and interest income ($1.7 million), increased by $1.7 million to $11.0 million for the year ended December 31, 1996, from $9.3 million, net of capitalized interest ($1.2 million) and interest income ($0.7 million), for the year ended December 31, 1995, due to increased borrowings in connection with the Mark Goodson Acquisition and increased borrowings related to the temporary concurrent outstanding borrowings under the Company's $100.0 million, 10 7/8% Senior Subordinated Notes due 2001 ("Senior Notes") issued in October 1996 and the Company's 6 1/2% Convertible Subordinated Notes due 2003 ("Convertible Notes") prior to the redemption (in November 1996) of such Convertible Notes (resulting in additional interest expense of approximately $0.5 million), partially offset by reduced borrowings as a result of pay downs from operating cash flow and lower corporate and production borrowings. The Company expects that the general trend of increased interest costs will continue, in part as a result of increased borrowings in connection with the Mark Goodson Acquisition, the Orbis Acquisition, 25 26 continuing production and expansion and the Company's recent issuance of its Senior Notes (see " -- Liquidity and Capital Resources"). Income Taxes The Company recorded a tax provision for the year ended December 31, 1996 of $10.2 million and $5.2 million for the year ended December 31, 1995, representing an effective tax rate of approximately 42%. Extraordinary Charge On November 27, 1996, the Company redeemed the balance of the Convertible Notes outstanding. Through November 27, 1996, Convertible Notes with principal amounts totaling $16.1 million had been converted into the Company's Common Stock, the Company had purchased and retired $22.9 million principal amount and redeemed $21.0 million principal amount of the Convertible Notes. The Convertible Notes were redeemed for 104.643% of par plus accrued interest. The net expense of the redemption and purchase of certain of the Convertible Notes was $2.4 million. Such cost, net of the related tax benefit of $1.0 million, has been treated as an extraordinary charge on the statement of operations. Net Income Net income, before the extraordinary charge of $1.4 million discussed above, was $14.1 million for the year ended December 31, 1996, which represents a 95% increase when compared with net income of $7.2 million for the year ended December 31, 1995. The variance is attributable to matters discussed above. Earnings per share increased to $1.06 per share ($1.18 per share before the extraordinary charge) for the year ended December 31, 1996, as compared to $0.87 per share for the year ended December 31, 1995, due to an increase in the net income reported by the Company, partially offset by an increase in the weighted average number of outstanding common shares and common share equivalents. Such increase in shares is due to the full year inclusion of the 3.2 million shares issued in connection with the Company's Class B Common Stock offering in December 1995, the weighted average of 1.4 million shares of Common Stock issued upon conversion of $16.1 million in principal of the Convertible Notes through 1996, as well as an increase in the number of equivalent shares of outstanding options and warrants determined using the modified treasury method. These increases in shares were partially offset by the weighted average of the Class B shares repurchased by the Company in October 1996. In November 1996, the Company redeemed all of the outstanding Convertible Notes. Accordingly, subsequent to such redemption, the fully diluted earnings per share calculation has been recomputed without including the equivalent shares related to the portion of the Convertible Notes which were redeemed or purchased by the Company ($43.9 million) for all periods presented. As a result, fully diluted earnings per share, which now approximates primary earnings per share for all periods presented, is no longer presented. FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1994 Revenues The Company's total revenues increased by $113.9 million, or 99%, to $228.8 million for the year ended December 31, 1995, from $114.9 million for the year ended December 31, 1994. Revenues from television operations increased by $107.9 million, or 109%, to $206.7 million for the year ended December 31, 1995, from $98.8 million for the year ended December 31, 1994. This increase was due primarily to: (i) the inclusion of AAFI revenues of $82.5 million for the year ended December 31, 1995 compared to $31.8 million for five months (from the date of the Fremantle International Acquisition) through December 31, 1994; (ii) the recognition of Baywatch strip syndication revenue of $33.0 million; (iii) the recognition of $19.8 million from the new one-hour series Baywatch Nights, reflecting the delivery of 17 of the 22 episodes for the 1995/1996 broadcast season; and (iv) the recognition of $3.6 million, representing the Company's share of earnings relating to the Mark Goodson Acquisition for the period commencing October 6, 1995 through year-end, before amortization of goodwill and interest charges. AAFI revenues from the production and distribution of television programming in Germany contributed $58.9 million, or 71%, of AAFI revenues. On a pro forma basis, AAFI revenues, assuming a full 1994 year, increased by $20.1 million, or 32%, to $82.5 million for the year ended December 31, 1995, due principally to the commencement of additional production operations in 26 27 Germany during the year and the increased participation of AAFI in the purchase of prize merchandising for its programming. Recorded music and merchandising revenues increased by $5.9 million, or 37%, to $22.0 million during the year ended December 31, 1995, from $16.1 million for the year ended December 31, 1994. This increase was primarily attributable to: (i) higher sales of new releases, led by the new artist Skee-Lo's "gold-selling" album entitled I Wish; (ii) the recognition of a $3.0 million non-refundable, non recoupable advance receivable from WEA upon the signing of a new domestic distribution agreement; and (iii) merchandising revenues of $1.8 million for the year ended December 31, 1995, compared to $.4 million for the year ended December 31, 1994. Partially offsetting these revenue increases was a decrease in foreign licensing advances received for the year ended December 31, 1995, compared with the year ended December 31, 1994. Operating Expenses Total operating expenses increased by $98.7 million, or 91%, to $207.1 million for the year ended December 31, 1995, from $108.4 million for the year ended December 31, 1994. This increase was due primarily to: (i) the inclusion of AAFI operating expenses which increased by $48.5 million, or 195%, to $73.4 million (89% of AAFI revenues) for the year ended December 31, 1995 (including AAFI overhead and $2.0 million of goodwill amortization), from $24.9 million (78% of AAFI revenues) for the five months (from the date of the Fremantle International Acquisition) through December 31, 1994; and (ii) amortization of television program costs of $90.4 million for the year ended December 31, 1995, an increase of $57.9 million (including an increase of $9.0 million in amortization included in AAFI operating expenses above), or 178%, from $32.5 million for the year ended December 31, 1994, due to the higher television revenues. Selling, general and administrative expenses, including corporate overhead and goodwill amortization, increased by $4.0 million, or 18%, to $26.5 million for the year ended December 31, 1995, from $22.5 million for the year ended December 31, 1994. This increase was due principally to the inclusion of AAFI overhead, including goodwill amortization, for the full year in 1995 compared with five months in 1994. The Company's television expenses increased by $89.6 million, or 119%, to $164.8 million (80% of total television revenues) for the year ended December 31, 1995, from $75.2 million (76% of total television revenues) for the year ended December 31, 1994. The increase was primarily due to the increase in AAFI expenses described above, increased amortization of television program costs attributable to increased revenues and increased distribution expenses in connection with the first run and strip syndication of Baywatch. Television selling, general and administrative expenses for the year ended December 31, 1995 increased by $3.1 million, or 31%, to $13.2 million from $10.1 million for the year ended December 31, 1994, due primarily to the $3.1 million increase in AAFI charges of $5.5 million for the year ended December 31, 1995, from $2.4 million for five months (from the date of the Fremantle International Acquisition) through December 31, 1994. On a pro forma basis, AAFI expenses, assuming a full year, increased by $19.2 million, or 35%, to $73.4 million for the year ended December 31, 1995, from $54.2 million for the pro forma year ended December 31, 1994. Such increase was related to the commencement of additional production operations in Germany during the year and the increased participation of AAFI in the purchase of prize merchandising for its programming. Goodwill amortization for the year ended December 31, 1995 increased by $1.4 million, or 140%, to $2.4 million from $1.0 million for the year ended December 31, 1994, due to the inclusion of goodwill amortization related to the Fremantle International Acquisition of $2.0 million for the year ended December 31, 1995, an increase of $1.2 million, or 150%, from $.8 million for the five months (from the date of the Fremantle International Acquisition) ended December 31, 1994. As a result of the agreement by the Company to acquire the balance of the equity of the Goodson LLC effective January 1, 1996, in consideration for $27.8 million in cash and notes, which includes approximately $2.8 million for Interpublic's share of earnings through December 31,1995, additional goodwill amortization of $1.0 million will be recognized per year before consideration of contingent earnout amounts (for which the Company will recognize 100% of the increased amortization). Corporate overhead of $4.7 million for the year ended December 31, 1995 decreased by $.9 million, or 16%, from $5.6 million for the year ended December 31, 1994, due primarily to charges for certain one-time employment terminations taken in 1994. 27 28 The Company's recorded music and merchandising expenses increased $5.0 million, or 47%, to $15.8 million (72% of recorded music and merchandising revenues) for the year ended December 31, 1995, from $10.8 million (67% of music and merchandising revenues) for the year ended December 31, 1994. This increase was primarily due to an increase of $3.7 million in artist related costs to $14.5 million for the year ended December 31, 1995, from $10.8 million for the year ended December 31, 1994, and merchandising costs of $1.3 million compared with no costs in the comparable prior period. Operating Income Total operating income for the Company increased $15.2 million, or 236%, to $21.7 million for the year ended December 31, 1995, from $6.5 million for the year ended December 31, 1994, due principally to increases in television operating income. Operating income from television operations increased by $13.9 million, or 111%, to $26.4 million for the year ended December 31, 1995, from operating income of $12.5 million for the year ended December 31, 1994. Such increase in television operating income, which was primarily attributable to the increases in revenues and expenses discussed above, was partially offset by increases in amortization of goodwill and overhead. The Company's recorded music division recognized operating income of $0.01 million (after inclusion of selling, general and administrative expenses of $6.2 million), for the year ended December 31, 1995, compared to an operating loss of $0.5 million (after inclusion of selling, general and administrative expenses of $5.8 million) for the year ended December 31, 1994. Such increase was primarily attributable to the increased revenue discussed above. Foreign Currency Exchange Gain The Company recognized a foreign currency exchange gain of $0.3 million for the year ended December 31, 1995, compared to a foreign currency exchange gain of $0.1 million at December 31, 1994 which results from the settlement and valuation of certain licensing agreements, denominated in foreign currencies, into U.S. Dollars as of December 31, 1995 and 1994, respectively. The Company has not entered into any foreign currency swap agreements or any other foreign currency hedging activities. The Company has experienced in the past, and may experience in the future, gains and losses as a result of fluctuations in exchange rates. Interest Expense Interest expense, net of interest capitalized ($1.2 million) and interest income ($0.7 million), increased by $3.6 million, or 63%, to $9.3 million for the year ended December 31, 1995, from $5.7 million, net of interest capitalized ($0.4 million) and interest income ($0.2 million), for the year ended December 31, 1994, due to increased borrowings in connection with the Fremantle International Acquisition and as a result of increased production activities. The Company expects that the trend of increased interest costs will continue in part as a result of increased borrowings in connection with the Mark Goodson Acquisition and the purchase of the balance of the equity of the LLC. Income Taxes The Company recorded a tax provision for the years ended December 31, 1995 and 1994 in the amount of $5.2 million and $0.3 million, respectively, which reflects an expected effective tax rate for both 1995 and 1994 of 42%. Net Income Net income increased by $6.7 million to $7.2 million for the year ended December 31, 1995, from a net income of $.5 million for the year ended December 31, 1994, as a result of factors discussed above. Earnings per share increased to $0.87 per share for the year ended December 31, 1995, compared to income of $0.07 per share for the year ended December 31, 1994, due to the period to period increase in net income partially offset by an increase in the outstanding number of weighted average common shares and common share equivalents. 28 29 Such increase of shares was due to the inclusion of the shares of stock issued in connection with the Fremantle International Acquisition for the year through December 1995, compared with five months through December 1994, the issuance of additional shares in a public offering, and an increase in the number of equivalent shares from outstanding options and warrants determined using the treasury method. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has financed its cash flow requirements through cash flows generated from operations, the issuance of securities and bank and other third party financings. The proceeds of these financings were used to complete the Mark Goodson Acquisition, the Fremantle International Acquisition and the LBS Acquisition, to finance the Company's operations, including the production of Baywatch, Baywatch Nights and The Adventures of Sinbad, and for general operating expenses. On October 23, 1996, the Company amended and restated its senior secured credit facility (the "Restructured Credit Facility") with a syndicate of lenders led by The Chase Manhattan Bank. The amendment and restatement increased the Company's borrowing capacity up to $155.0 million, subject to borrowing base limitations (as defined in the Restructured Credit Facility) and extended the maturity to a four year term. In connection with the amendment and restatement, the Company initially utilized $30.0 million of the Restructured Credit Facility: (i) to pay notes payable of $15.4 million, including accrued interest, to Interpublic; (ii) to purchase, for $10.0 million, a portion of certain outstanding Convertible Notes; (iii) to pay closing fees of $2.5 million in connection with the amendment and restatement; and (iv) $2.1 million for production and general corporate purposes. Borrowings under the Restructured Credit Facility bear interest, at the Company's option, either: (i) LIBOR plus 1 1/2% (ranging from 6.19% to 7.0% as of March 10, 1997); or (ii) the Alternate Base Rate (which is the greater of Chase Manhattan Bank's Prime Rate, its Base CD Rate plus 1%, or the Federal Funds Effective Rate plus 1/2%) plus 1/2% (8.75% as of March 10, 1997), subject to increase by 1/2 of 1% in the event of the Company's failure to satisfy certain financial ratios. As of February 28, 1997, the Company had outstanding borrowings of $76.3 million under the Restructured Credit Facility with $60.3 million available for borrowing. As of February 28, 1996, the Company had cash, cash equivalents and borrowing capacity of approximately $87.0 million. Amounts repaid under the Restructured Credit Facility may be reborrowed, subject to the Company having an adequate borrowing base and meeting the conditions precedent to each borrowing. The Restructured Credit Facility imposes a number of financial and other conditions upon the Company, including limitations on indebtedness and changes in lines of business, restrictions on the disposition of assets, restrictions on making certain payments (including dividends), restrictions on acquisitions and certain financial tests, including a minimum net worth test, a leverage test and an interest coverage ratio test. In particular, consummation of significant acquisitions may be subject to obtaining prior bank consent under the Restructured Credit Facility. Furthermore, certain conditions must be satisfied before the funding of each season of certain television series. Loans under the Restructured Credit Facility may be made as "Domestic Loans" to All American Communications, Inc. or as "Foreign Loans" to All American Netherlands B.V., subject to borrowing base availability. All outstanding loans as of March 10, 1997 are "Domestic Loans." Substantially all of the Company's assets (other than real property) are pledged as collateral under the Restructured Credit Facility agreement. On October 11, 1996, the Company issued $100.0 million principal amount of 10 7/8% Senior, Subordinated Notes due 2001 ("Senior Notes") in a private placement offering to Goldman, Sachs & Co. and Chase Securities, Inc. (the "Initial Purchasers"). The Senior Notes are unsecured obligations of the Company which mature October 15, 2001 and bear interest at 10 7/8% per annum, payable semi-annually each April 15 and October 15 (commencing April 15, 1997). Net proceeds, net of issuance costs and fees, from the issuance of the Senior Notes totaled approximately $96.0 million. Net proceeds were used principally to purchase and redeem the Company's 6 1/2% Convertible Subordinated Notes Due 2003, to repurchase approximately 500,000 shares of the Class B Common Stock and to temporarily repay bank borrowings. The Senior Notes were issued pursuant to an Indenture between the Company and U.S. Trust Company of California, N.A. (the "Indenture"). The Senior Notes are subordinated in right of payment to the prior payment in full of all Senior Indebtedness (as defined in the Indenture) of the Company. 29 30 The Indenture imposes certain covenants and conditions upon the Company, including but not limited to restrictions or limits on making certain payments or investments, limits on certain transactions, limits on liens, limits on merger, consolidation and sale of assets, limits on senior subordinated debt, limits on business activities and change of control provisions. In the event the Company enters into a letter of intent or makes a public announcement (a "Sale Transaction Triggering Event") during the first 18 months after October 4, 1996 with respect to the sale of all of the Company's capital stock (whether by merger, consolidation or otherwise), or all or substantially all of the Company's assets (a "Sale Transaction"), the Company may, subsequent to the closing of such Sale Transaction, redeem up to $100.0 million in principal amount of the Senior Notes at a redemption price of 110 7/8% of the principal amount thereof, plus accrued and unpaid interest, provided that the Sale Transaction closes within 120 days after the date of such letter of intent or public announcement and, that notice of such redemption shall be given within 30 days of the date of the closing of such Sale Transaction. In addition, during the first 18 months after October 4, 1996, the Company may redeem up to $35.0 million in principal amount of the Senior Notes at a redemption price of 110 7/8% of the principal amount thereof, plus accrued and unpaid interest, with the net proceeds of a public offering of common stock of the Company, provided that at least $65.0 million in aggregate principal amount of the Senior Notes remain outstanding immediately after the occurrence of such redemption and, that notice of such redemption shall be given within 30 days of the date of the closing of such public offering. Following a Change of Control (as defined in the Indenture), the Company will be required to offer to purchase all or any part of the Senior Notes tendered at the option of the holders thereof at 101% of the aggregate principal amount thereof, plus accrued and unpaid interest. In connection with the private placement offering, the Company entered into a Registration Rights Agreement ("Registration Rights Agreement") with the Initial Purchasers, granting certain exchange registration rights ("Exchange Offer") to the holders of the Original Notes (as defined in the Registration Rights Agreement). As of December 11, 1996 (the expiration date of the Exchange Offer), the Exchange Offer was completed, and all original notes were exchanged for publicly tradable notes. In December 1995, the Company sold 3.2 million newly issued shares of Class B Common Stock through an underwritten stock offering (the "Stock Offering"). The terms of the Class B Common Stock are identical to those of the Company's Class A Common Stock, except the Class B Common Stock is non-voting other than as required by law. Net proceeds from the Stock Offering totaled $30.5 million after deducting the underwriters' discount of $2.4 million and offering expenses of $.7 million. In October 1993, the Company issued its 6 1/2% Convertible Subordinated Notes Due 2003 (the "Convertible Notes") in the aggregate principal amount of $60.0 million. On November 27, 1996, the Company redeemed the remaining outstanding Convertible Notes. Through November 27, 1996, $16.1 million principal amount of the Convertible Notes had been converted into the Company's Common Stock, the Company had purchased and retired $22.9 million principal amount and redeemed $21.0 million principal amount of the Convertible Notes. The Convertible Notes were redeemed for 104.643% of par, plus accrued interest. The net expense of the redemption and purchase of certain of the Convertible Notes, was $2.4 million. Such cost, net of the related tax benefit of $1.0 million, has been treated as an extraordinary charge on the statement of operations. During the year ended December 31, 1996, the Company generated cash of $11.2 million from its operations which was an increase in net cash provided from operations of $28.2 million compared to the $17.0 million of net cash used by its operations during the year ended December 31, 1995. This positive cash flow from operations was due primarily to increased cash flow from earnings of $13.5 million as compared with the 1995 period, a decrease in accounts receivables of $10.8 million (primarily from collections on the strip syndication of Baywatch) and an increase in accounts payable, accrued expenses and royalties payable of $8.4 million, partially offset by net payments to producers and participants of $12.7 million and net additions to television program costs of $111.5 million (primarily related to the 1996/1997 broadcast season) as compared with net additions of $96.6 million in the 1995 period. During the year ended December 31, 1996, the Company utilized $39.9 million from investing activities, principally related to the Mark Goodson Acquisition. The Company experienced a net increase in cash flow from financing activities of $50.0 million during the year, primarily due to the issuance of the Senior Notes, partially offset by the Company's 30 31 redemption of its Convertible Notes. The Company expects, from time to time, to experience negative cash flow from operations. Any such uses of cash flows are expected to be funded, pending receipt of anticipated licensing revenues, out of its lines of credit or outside sources. As described more fully below, the Company will have substantial capital requirements during the next twelve months, principally arising from the acquisition, production and distribution of television programming, the continued release of recorded music product requiring related marketing, promotion and recording expenses and debt servicing costs. The commencement of production of television programming for the 1996/1997 broadcast season has required the Company to incur substantial production costs associated with its television distribution operations. The Company believes that its existing working capital, together with borrowings under its bank line of credit, anticipated cash flows from operations and other available funding sources, will be sufficient to meet its expected working capital needs for at least the next twelve months. The Company, from time to time, considers the acquisition of businesses complementary to its current operations. Consummation of any such acquisition or other expansion of the business conducted by the Company, if beyond the Company's capital resources, would be subject to the Company securing additional financing to the extent required. Television Production and Distribution In order to obtain television programming for distribution, the Company may be required to make advance cash payments to the producers of such programming. However, the Company generally attempts to avoid advance payment requirements by making minimum guarantees to producers or owners in connection with the acquisition of television programming. In addition, the Company has obtained letters of credit and other sources of bank financing to facilitate certain programming acquisitions. The Company may acquire domestic or foreign distribution rights to a particular television program in exchange for a minimum guarantee against a specified percentage of future licensing and/or advertising sales revenue less certain costs of distribution. These guarantees are typically subject to delivery of the completed programs. While the Company generally anticipates that it will recoup payments made under its guarantees from licensing fees and the sale of advertising time, the Company often is required to make payments under such guarantees in advance of generating revenues and receipts. Any expansion of the Company's business could require the Company to make substantially increased advance payments or provide guarantees to third parties. Further, there is no assurance that such amounts will be recouped by the Company and, if not recouped, that such payments will not have a material adverse affect on the Company. In addition, the Company's working capital requirements in connection with its development and production activities relating to potential network programming are expected to increase substantially as a result of the Company's agreement, effective August 1995, with The Gerber Company. The cost of production of network programming is typically partially offset by the related network license fee. See "Business -- Television Operations -- Domestic Television Production." The Company and Atlantis Releasing B.V. ("Atlantis") have produced 22 one-hour live action episodes of a new series entitled The Adventures of Sinbad for the 1996/1997 broadcast season. In consideration for the Company providing $0.7 million of the $0.9 million per episode production budget, the Company retains exclusive distribution rights to The Adventures of Sinbad in the United States and Europe (including the United Kingdom and excluding Scandinavia). The Company, under certain circumstances, has an annual option to cause Atlantis to produce up to 22 new episodes in each of the three subsequent broadcast seasons, exercisable on or before February 15 of each of such subsequent broadcast seasons. At the end of three years, if Atlantis does not exercise its right to continue producing The Adventures of Sinbad, the right to produce the series reverts to the Company. The Company has exercised its option to cause Atlantis to produce 22 new episodes of The Adventures of Sinbad for the 1997/1998 broadcast season. The Company's share of the total production budget is expected to be funded primarily through a combination of: (i) barter advertiser sales; (ii) cash payments from international licensees; and (iii) working capital, pending receipt of license fees and advertiser sales. There is no assurance that the Company will be successful in its efforts to fully fund these productions through a combination of the advertiser sales and international sales. 31 32 The Company has entered into agreements with New Dominion Productions and Bristol-Myers Squibb to produce 22 one-hour episodes of a new series entitled Ghost Stories for the 1997/1998 broadcast season with an estimated aggregate production budget of $7.5 million. The Company's agreement with Bristol-Myers Squibb provides the latter with a substantial portion of the available barter advertiser time for $3.5 million, net of agency commissions. The remaining portion of the production budget is expected to be funded primarily through a combination of: (i) sales of the remaining barter advertiser time; (ii) cash payments from international licensees; and (iii) working capital, pending receipt of license fees and advertiser sales. There is no assurance that the Company will be successful in its efforts to fully fund the production through a combination of the advertiser sales and international sales. The Company has an option to enter into personal service agreements with Arthel Neville and Fred Roggin, for an initial 13 week period with options for subsequent periods, for the production of a five day a week talk show program for the 1997/1998 broadcast season entitled the Arthel/Fred Talk Show. The estimated production budget will be approximately $0.3 million per week for up to 35 weeks. The production budget is expected to be funded primarily through a combination of: (i) barter advertiser sales; and (ii) working capital, pending receipt of advertiser sales. There is no assurance that the Company will be successful in its efforts to fully fund the production through the advertiser sales. The Company has entered into a distribution agreement with SAT 1 in Germany for the distribution of a weekly, one-hour, reality show for the 1997/1998 broadcast season. The estimated budget for this program is approximately $9.5 million. While the license fee for the program is in excess of the estimated budget, there is no assurance that the license fee will cover the actual costs of production. In December 1996, the Company completed production of 22 one-hour episodes of Baywatch for the 1996/1997 broadcast season. The total production budget of approximately $23.0 million for the 1996/1997 broadcast season was funded through a combination of: (i) borrowings under the Restructured Credit Facility; (ii) cash payments by The Fremantle Corporation (a company not related to AAFI and Fremantle) pursuant to its foreign distribution agreement with the Company; (iii) proceeds from the Senior Note offering; and (iv) working capital, pending receipt of license fees and advertiser sales. The Company has exercised its option with the producers of Baywatch to produce 22 episodes of Baywatch for the 1997/1998 broadcast season. The total production budget of approximately $24.0 million for the 1997/1998 broadcast season is expected to be funded primarily through a combination of: (i) borrowings under the Restructured Credit Facility; (ii) cash payments by The Fremantle Corporation; (iii) collection of advertiser sales; and (iv) working capital, pending receipt of license fees and advertiser sales. Through March 10, 1997, the Company completed production on 22 episodes of Baywatch Nights for the 1996/1997 broadcast season. The total production budget of approximately $21.0 million for the 1996/1997 broadcast season was funded through a combination of: (i) borrowings under the Restructured Credit Facility; (ii) cash payments received from international licensees; (iii) collections of license fees and advertiser sales; and (iv) proceeds from the Senior Note offering. Recorded Music Operations The Company is responsible for funding all distribution activities, including producing, marketing, promoting and manufacturing recorded music for domestic distribution. In order to perform this responsibility, the Company has significant personnel and other overhead and marketing expenses, which require substantial capital. The Company currently has a roster of 10 active recording artists. Additionally, the Company contracts from time to time with other artists or entities for the production of recorded music for its special projects division. Such growth has required the Company to fund artist advances and recording costs. Artist advances, recording costs and other overhead and marketing expenses are funded with cash flows from operations and by the Company's working capital credit facility. 32 33 Minimum contractual commitments to existing artists totaled approximately $0.6 million at March 12, 1997, and the Company will be required to spend additional sums for recording and marketing expenses for several artists in its current roster. Inflation The Company believes that the impact of inflation has not been significant to its financial condition or results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by Item 8 are set forth in the pages indicated in Item 14(a)(1). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On June 7, 1996, the Audit Committee (the "Audit Committee") of the Company approved the engagement of Price Waterhouse LLP as its independent accountants as a replacement of the Company's prior independent accountants, Ernst & Young LLP. The audit reports of Ernst & Young LLP on the consolidated financial statements of the Company for the two fiscal years ended December 31, 1995 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. Ernst & Young LLP audited the Company's 1995 and 1994 financial statements in addition to auditing financial statements for certain prior fiscal years. In connection with the Company's two fiscal years ended December 31, 1995 and any subsequent interim period, the Company believes that there were no disagreements with Ernst & Young LLP on any manner of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to their satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their report. However, following discussions with Ernst & Young LLP subsequent to their termination, the Company notes two accounting matters which Ernst & Young LLP believes constitute disagreements within the meaning of Item 304 of Regulation S-K but which were both resolved to Ernst & Young LLP's satisfaction prior to the issuance of their reports on the aforementioned financial statements. The first matter involved certain communications between the Company and Ernst & Young LLP involving the Company's accounting during certain periods prior to the 1994 reporting period for the capitalization and deferral of advance royalties paid to recording artists. As recently as March 1996, the Company contended, subject to the receipt of additional information, that Ernst & Young LLP had recently interpreted such standards differently (and less restrictively) in dealings with another publicly traded music client. Ernst & Young LLP has advised the Company that such standards have been interpreted on a consistent basis in relation to all of its clients in accordance with generally accepted accounting principles. The second matter, in connection with the audit of the financial statements for the year ended December 31, 1995, involved a proposed reduction of $0.7 million by the Company in the reserve accounts in the recorded music segment and an equal increase in the reserve accounts in the television segment. After Ernst & Young LLP informed the Company's management that the full amount of the adjustment could not be supported, the Company did not make such adjustment. In connection with the Company's audit for the current fiscal year, the Company solicited bids from independent accountants, including Ernst & Young LLP, for accounting services to be provided to the Company. Ernst & Young LLP submitted a bid but was not selected, and thus its services have been terminated. The winning bidder was Price Waterhouse LLP. The Company requested Ernst & Young LLP to furnish the Company with a letter addressed to the Securities and Exchange Commission stating whether Ernst & Young LLP agrees with the statements made by the Company in response to this matter and, if not, stating the respects in which Ernst & Young LLP does 33 34 not agree. The letter, as received from Ernst & Young LLP, indicated their agreement with the statements made by the Company in response to this matter. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for in Item 10 of Part III shall be filed not later than 120 days after the Company's fiscal year end (December 31, 1996) in the Company's definitive Proxy Statement in connection with its Annual Meeting of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934 (as amended) or in an amendment to this Annual Report on Form 10-K under Form 10K/A. ITEM 11. EXECUTIVE COMPENSATION The information called for in Item 11 of Part III shall be filed not later than 120 days after the Company's fiscal year end (December 31, 1996) in the Company's definitive Proxy Statement in connection with its Annual Meeting of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934 (as amended) or in an amendment to this Annual Report on Form 10-K under Form 10K/A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for in Item 12 of Part III shall be filed not later than 120 days after the Company's fiscal year end (December 31, 1996) in the Company's definitive Proxy Statement in connection with its Annual Meeting of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934 (as amended) or in an amendment to this Annual Report on Form 10-K under Form 10K/A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for in Item 13 of Part III shall be filed not later than 120 days after the Company's fiscal year end (December 31, 1996) in the Company's definitive Proxy Statement in connection with its Annual Meeting of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934 (as amended) or in an amendment to this Annual Report on Form 10-K under Form 10K/A. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT: (1) FINANCIAL STATEMENTS
PAGE ---- Report of Price Waterhouse LLP, Independent Accountants....................... F-1 Report of Ernst & Young LLP, Independent Auditors............................. F-2 Consolidated Balance Sheets at December 31, 1996 and 1995..................... F-3 Consolidated Statements of Operations for Years Ended December 31, 1996, 1995 and 1994.................................................................... F-4 Consolidated Statements of Stockholders' Equity for Years Ended December 31, 1996, 1995 and 1994......................................................... F-5 Consolidated Statements of Cash Flows for Years Ended December 31, 1996, 1995 and 1994.................................................................... F-6 Notes to Consolidated Financial Statements.................................... F-7
34 35 The following financial statement schedule of the Company and its subsidiaries is included in Item 14(a)(1):
PAGE ---- Schedule II Valuation and Qualifying Accounts............................... S-1
All other financial statement schedules not listed above have been omitted since the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required. (2) EXHIBITS 2.1 Agreement dated as of June 30, 1994 as amended and restated as of August 3, 1994 by and among the Company, Fremantle International, Inc. and The Interpublic Group of Companies, Inc. (incorporated by reference to Exhibit 99.2 of the Registrant's Form 8-K/A dated August 3, 1994). 3.1 Restated Certificate of Incorporation of the Registrant filed on February 25, 1991 with the Secretary of State of the State of Delaware (incorporated by reference to the same numbered Exhibit to the Registrant's March 1991 Form 10-Q). 3.2 Restated Bylaws of the Registrant dated February 25, 1991 (incorporated by reference to the same numbered Exhibit to the Registrant's March 1991 Form 10-Q). 3.3 [Deleted] 3.4 Certificate of Amendment to Restated Certificate of Incorporation of the Registrant filed on March 20, 1992 with the Secretary of State of the State of Delaware (incorporated by reference to the same numbered Exhibit to the Registrant's Amendment No. 1 to Form S-1 Registration Statement filed with the Securities and Exchange Commission on April 3, 1992 (the "Amendment No. 1 to Form S-1")). 3.5 [Deleted] 4.1 Specimen Certificate for Common Stock (incorporated by reference to the same numbered Exhibit to the Amendment No. 1 to Form S-1). 4.2 1994 Stock Incentive Plan (incorporated by reference to the same numbered Exhibit to the Registrant's June 30, 1994 Form 10-Q). 4.3 Purchase Agreement, dated October 4, 1996, by and between All American Communications, Inc. and Goldman, Sachs & Co. (incorporated by reference to the same numbered Exhibit to the Registrant's October 22, 1996 Form 8-K (the "October 22, 1996 Form 8-K")) 4.4 Registration Rights Agreement, dated as of October 11, 1996, by and among All American Communications, Inc., Goldman, Sachs & Co, and Chase Securities, Inc. (incorporated by reference to the same numbered Exhibit to the October 22, 1996 Form 8-K) 4.5 Indenture, dated as of October 11, 1996, by and between All American Communications, Inc. and U.S. Trust Company of California, N.A., and Form of Qualified Institutional Buyer Note, Institutional Accredited Investor Note and Regulation S Temporary Global Note attached thereto as Exhibits (incorporated by reference to the same numbered Exhibit to the October 22, 1996 Form 8-K) 9.1 Shareholders Voting Agreement dated August 3, 1994 between The Interpublic Group of Companies, the Company and certain of the Companies shareholders (incorporated by reference to the same numbered Exhibit to the Registrant's June 30, 1994 Form 10-Q).
35 36 9.2 Shareholders Agreement dated as of February 25, 1991 between the Company, Anthony J. Scotti, Benjamin J. Scotti, Thomas Bradshaw, Myron Roth, Sydney D. Vinnedge, George Back and Joseph E. Kovacs (incorporated by reference to the same numbered Exhibit to the Registrant's December 31, 1990 Form 10-K). 9.2.1 Extended Shareholders Agreement effective as of August 25, 1996 between the Company, Anthony J. Scotti, Benjamin J. Scotti, Thomas Bradshaw and Sydney D. Vinnedge. 10.1 Employment Agreement dated as of February 25, 1991 between All American Communications, Inc. and Anthony J. Scotti (incorporated by reference to the same numbered Exhibit to the Registrant's December 31, 1990 Form 10-K). 10.1.1 Amendment to Employment Agreement dated as of February 25, 1991 between All American Communications, Inc. and Anthony J. Scotti (incorporated by reference to the same numbered Exhibit to the Registrant's Form S-1 Registration Statement filed with the Securities and Exchange Commission on January 27, 1992 as thereafter amended and declared effective on May 7, 1992 (the "1992 Form S-1")). 10.1.2 Second Amendment to Employment Agreement dated as of February 25, 1991 between All American Communications, Inc. and Anthony J. Scotti (incorporated by reference to the same numbered Exhibit to the Registrant's December 31, 1994 Form 10-K). 10.1.3 Third Amendment dated May 1, 1995 to Employment Agreement dated as of February 25, 1991 between All American Communications, Inc. and Anthony J. Scotti (incorporated by reference to the same numbered Exhibit to the Registrant's December 31, 1994 Form 10-K). 10.1.4 Fourth Amendment dated February 26, 1996 to Employment Agreement dated as of February 25, 1991 between All American Communications, Inc. and Anthony J. Scotti (incorporated by reference to the same numbered Exhibit to the Registrant's March 31, 1996 Form 10-Q). 10.2 [Deleted] 10.2.1 [Deleted] 10.3 Employment Agreement dated as of February 12, 1996 between All American Communications, Inc. and Thomas Bradshaw (incorporated by reference to Exhibit 10.3.2 to the Registrant's March 31, 1996 Form 10-Q). 10.3.1 [Deleted] 10.3.2 [Deleted] 10.4 Employment Agreement dated as of February 12, 1996 between All American Communications, Inc. and Benjamin J. Scotti (incorporated by reference to Exhibit 10.4.2 to the Registrant's March 31, 1996 Form 10-Q). 10.4.1 [Deleted] 10.4.2 [Deleted] 10.5 Employment Agreement dated as of February 25, 1991 between All American Communications, Inc. and Sydney Vinnedge (incorporated by reference to the same numbered to the Registrant's December 31, 1990 Form 10-K). 10.5.1 Amendment to Employment Agreement dated as of February 25, 1991 between All American Communications, Inc. and Sydney Vinnedge (incorporated by reference to the same numbered Exhibit to the 1992 Form S-1). 10.5.2 Second Amendment to Employment Agreement dated as of January 7, 1992 between All American Communications, Inc. and Sydney Vinnedge (incorporated by reference to the same numbered Exhibit to the Amendment No. 1 to 1992 Form S-1).
36 37 10.6 Employment Agreement, dated as of July 1, 1990, between All American Television, Inc. and George Back (incorporated by reference to Exhibit 10.1 to the Registrant's June 30, 1990 Form 10-Q). 10.6.1 Second Amendment to Employment Agreement dated January 7, 1992 between All American Communications, Inc. and George Back (incorporated by reference to the same numbered Exhibit to the Amendment No. 1 to Form S-1). 10.7 Shared Facilities and Services Agreement dated as of August 2, 1994 by and between All American Communications, Inc. and Fremantle International, Inc. (incorporated by reference to Exhibit 10.10 to the Registrant's December 31, 1994 Form 10-K). 10.8 Registration Rights Agreement dated as of August 3, 1994 by and between All American Communications, Inc. and the Interpublic Group of Companies, Inc. (incorporated by reference to Exhibit 10.11 to the Registrant's December 31, 1994 Form 10-K). 10.9 Option Letter, dated August 3, 1994, from The Interpublic Group of Companies, Inc., and Fremantle International, Inc. to All American Communications, Inc. (incorporated by reference to Exhibit 10.12 to the Registrant's December 31, 1994 Form 10-K). 10.10 Exclusive License Agreement dated as of December 15, 1994 between The Baywatch Nights Production Company and Taurus Film & Co. (confidential treatment granted) (incorporated by reference to Exhibit 10.13 to the Registrant's December 31, 1994 Form 10-K). 10.11 Letter Agreement dated as of June 10, 1994 to that certain Outline of Terms dated May 10, 1991 as amended by that certain letter dated February 16, 1993 by and between The Baywatch Nights Production Company, on the one hand, and Michael Berk, Douglas Schwartz and Gregory Bonnan, on the other hands (incorporated by reference to Exhibit 10.2 to the Registrant's September 30, 1994 Form 10-Q). 10.12 Standard Industrial Lease Agreement dated October 31, 1994 between All American Communications, Inc and Wilshire Lincoln Properties (incorporated by reference to Exhibit 10.3 to the Registrant's September 30, 1994 Form 10-Q). 10.13 Secured Promissory Note dated October 19, 1994 between All American Communications, Inc. and Thomas Bradshaw (incorporated by reference to Exhibit 10.4 to the Registrant's September 30, 1994 Form 10-Q). 10.14 Second Modification of Warrant and Warrant Agreement dated as of November 5, 1993 between All American Communications, Inc. and Jefferson Capital Group, Ltd. (incorporated by reference to Exhibit 10.35.2 to the 1994 Form S-1). 10.15 Office Building Lease dated December 13, 1991 for 5301 Beethoven Street, Los Angeles, California between All American Communications, Inc. and Harvey Capital Corp. (incorporated by reference to Exhibit 10.6 to the 1992 Form S-1). 10.16 Amendment No. 1 dated April 30, 1992, Amendment No. 2 dated September 14, 1993 and Amendment No. 3 dated March 14, 1994, in each case, to the Office Building Lease dated December 13, 1991 for 5301 Beethoven Street, Los Angeles, California (incorporated by reference to Exhibit 10.40.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993) Amendment No. 4 dated October 11, 1994 and Amendment No. 5 dated November 6, 1994 to the Office and Building Lease dated December 13, 1991 for 5301 Beethoven Street, Los Angeles, California (incorporated by reference to Exhibit 10.19 to the Registrant's December 31, 1994 Form 10-K). 10.16.1 Industrial-Commercial Lease dated May 28, 1991 (and amendment) for 5433 Beethoven Street, Los Angeles, California between The Baywatch Production Company and Jerome Cohen, Trustee of the Fannie Delman 1982 Trust et. al. (incorporated by reference to Exhibit 10.19 to the December 31, 1994 Form S-1).
37 38 10.17 Industrial-Commercial Lease dated May 28, 1991 (and amendment) for 5433 Beethoven Street, Los Angeles, California between The Baywatch Production Company and Jerome Cohen, Trustee of the Fannie Delman 1983 Trust et. al. (incorporated by reference to Exhibit 10.41 to the 1992 Form S-1). 10.18 Modification of Agreement of Sublease, dated as of February 8, 1993, for 875 Third Avenue, New York, New York between Grey Advertising, Inc. and LBS Communications, Inc. (incorporated by reference to Exhibit number 10.62 to the Registrant's December 31, 1992 Form 10-K). 10.19 [Deleted] 10.19.1 [Deleted] 10.20 Lease, dated as of December 7, 1993, for 1325 Avenue of the Americas between All American Television, Inc. and 1325 Limited Partnership (incorporated by reference to the Exhibit 10.13 to the 1994 Form S-1). 10.21 Asset Purchase Agreement dated as of October 6, 1995 between and among Mark Goodson Productions, L.P., the Child's Play Company, Mark Goodson Productions, LLC, The Interpublic Group of Companies, Inc., the Co-Executors of the Estate of Mark Goodson and All American Communications, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated October 12, 1995 (the "October 12, 1995 Form 8-K"). 10.22 License Agreement between Mark Goodson Productions, LLC and All American Goodson, Inc. dated as of October 6, 1995 (incorporated by reference to Exhibit 10.3 to the October 12, 1995 Form 8-K). 10.23 Network License Agreement between All American Goodson, Inc. and Interpublic Game Shows, Inc. dated as of October 6, 1995 (incorporated by reference to Exhibit 10.2 to the October 12, 1995 Form 8-K). 10.24 [Deleted] 10.25 Amended and Restated Operating Agreement among All American Communications, Inc., All American Goodson, Inc., The Interpublic Group of Companies, Inc. and Interpublic Game Shows, Inc. dated as of October 6, 1995 (incorporated by reference to Exhibit 10.6 to the October 12, 1995 Form 8-K). 10.26 Credit, Security, Guaranty and Pledge Agreement dated April 13, 1995 as Amended and Restated as of October 23, 1996, by and among the Company and the lenders named therein (incorporated by reference to the same numbered Exhibit to the Registrant's Current Report on Form 8-K filed November 5, 1996). 10.27 [Deleted] 10.28 Network Production Agreement between Interpublic Game Shows, Inc. and TPIR LLC, dated as of October 6, 1995 (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed October 12, 1995). 10.29 Agreement dated as of May 1, 1995 between USA NETWORKS and All American Television (incorporated by reference to the same numbered Exhibit to the Amendment No. 2 to Form S-2). 10.42 Stock Purchase Agreement, dated July 19, 1996, by and among All American Communications, Inc., Orbis Entertainment Company, Inc., Robert L. Turner, Ethan J. Podell and Alexandra Buhler Jewett (incorporated by reference to Exhibit 10.42 to the Registrant's Current Report on Form 8-K dated July 19, 1996, (incorporated by reference to the same numbered Exhibit to the Registrant's June 30, 1996 Form 10-Q). 11 Statement re Computation of Per Share Earnings. 23.1 Consent of Independent Accountants.
38 39 23.2 Consent of Independent Auditors.
(b) REPORTS ON FORM 8-K: Current Report on Form 8-K, dated October 22, 1996, regarding the Company's placement of $100.0 million principal amount of its 10 7/8% Senior Subordinated Notes due 2001. Current Report on Form 8-K, dated November 5, 1996, regarding the Company's Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of April 13, 1995 as amended and restated as of October 23, 1996, and the Company's notice of redemption dated October 28, 1996 related to its then outstanding 6 1/2% Convertible Subordinated Notes due 2003. 39 40 REPORT OF INDEPENDENT ACCOUNTANTS THE BOARD OF DIRECTORS AND STOCKHOLDERS ALL AMERICAN COMMUNICATIONS, INC. We have audited the accompanying consolidated balance sheet of All American Communications, Inc. and subsidiaries as of December 31, 1996, and the related consolidated statements of operations, of stockholders' equity, and of cash flows for the year then ended. Our audit also included an audit of the financial statement schedule for the year ended December 31, 1996 listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of All American Communications, Inc. and subsidiaries at December 31, 1996, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule for the year ended December 31, 1996 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP Los Angeles, California February 27, 1997 F-1 41 REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND STOCKHOLDERS ALL AMERICAN COMMUNICATIONS, INC. We have audited the accompanying consolidated balance sheet of All American Communications, Inc. and subsidiaries as of December 31, 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1995. Our audits also included the financial information shown for each of the two years in the period ended December 31, 1995 in the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of All American Communications, Inc. and subsidiaries at December 31, 1995, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the financial information shown for each of the two years in the period ended December 31, 1995 in the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Los Angeles, California March 4, 1996 F-2 42 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
DECEMBER 31, --------------------- 1996 1995 -------- -------- Cash and cash equivalents.............................................. $ 33,858 $ 13,126 Restricted cash -- Note 1.............................................. -- 6,968 Trade receivables, less allowances of $3,716 and $2,980 at December 31, 1996 and 1995, respectively.......................................... 106,108 103,896 Unbilled receivables, less imputed interest of $1,078 and $2,354 at December 31, 1996 and 1995, respectively -- Note 1................... 3,874 11,685 Inventory, net......................................................... 848 1,018 Advances to recording artists, net..................................... 225 544 Television program costs, less accumulated amortization of $322,864 and $228,942 at December 31, 1996 and 1995, respectively -- Note 4....... 94,031 74,644 Property and equipment, less accumulated depreciation and amortization -- Note 3............................................... 4,116 4,526 Investment in unconsolidated affiliate -- Note 2....................... -- 29,130 Goodwill, less accumulated amortization of $8,241 and $3,384 at December 31, 1996 and 1995, respectively -- Notes 1 and 2............ 106,990 49,403 Other -- Note 8........................................................ 9,685 6,642 -------- -------- Total assets........................................................... $359,735 $301,582 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable..................................................... $ 9,274 $ 14,293 Accrued expenses..................................................... 35,310 19,823 Royalties payable.................................................... 5,386 4,435 Deferred revenues.................................................... 738 277 Due to producers..................................................... 13,215 26,271 Participations payable............................................... 26,600 30,979 Notes payable -- Note 5.............................................. 179,000 134,982 Deferred taxes payable -- Note 9..................................... 2,242 2,242 -------- -------- Total liabilities...................................................... 271,765 233,302 -------- -------- Commitments and contingencies -- Note 10 Stockholders' equity -- Notes 5, 6, 7 and 8 Preferred stock, authorized 5,000,000 shares..................................................... -- -- Common stock, voting, $.0001 par value, authorized 20,000,000 shares, issued 6,933,713 in 1996 and 5,662,052 in 1995 (including treasury shares)........................................................... 1 1 Common stock, Class B non-voting, $.0001 par value, authorized 20,000,000 shares, 5,720,000 issued in 1996 and 5,720,000 in 1995 (including treasury shares)....................................... 1 1 Additional paid-in capital........................................... 74,486 61,522 Common stock in treasury, at cost, 528,200 shares and 0 shares Common Stock, Class B, respectively and 30,000 shares Common Stock in 1996 and 1995..................................................... (5,501) (135) Retained earnings.................................................... 19,625 6,939 Currency translation adjustment...................................... (642) (48) -------- -------- Total stockholders' equity............................................. 87,970 68,280 -------- -------- Total liabilities and stockholders' equity............................. $359,735 $301,582 ======== ========
See accompanying notes. F-3 43 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ----------------------------------------- 1996 1995 1994 ----------- ---------- ---------- Revenues: Television....................................... $ 210,874 $ 206,734 $ 98,771 Recorded music and merchandising -- Note 8....... 25,584 22,026 16,130 ----------- ---------- ---------- 236,458 228,760 114,901 Expenses: Television....................................... 152,252 164,764 75,196 Recorded music and merchandising................. 17,903 15,803 10,750 Selling, general and administrative.............. 26,197 24,102 21,523 Goodwill amortization............................ 4,602 2,399 971 ----------- ---------- ---------- 200,954 207,068 108,440 Operating income...................................... 35,504 21,692 6,461 Other income (expense): Interest income.................................. 1,706 669 204 Interest expense................................. (12,719) (9,959) (5,929) Other............................................ (171) 95 49 ----------- ---------- ---------- (11,184) (9,195) (5,676) ----------- ---------- ---------- Income before income taxes and extraordinary charge... 24,320 12,497 785 Provision for income taxes -- Note 9.................. 10,214 5,249 330 ----------- ---------- ---------- Net income before extraordinary charge................ 14,106 7,248 455 Extraordinary charge for redemption of Convertible Subordinated Notes, 6 1/2% due 2003, net of income tax benefit of $1,028 -- Notes 5 and 6.............. (1,420) -- -- ----------- ---------- ---------- Net income............................................ $ 12,686 $ 7,248 $ 455 =========== ========== ========== Earnings per common and common equivalent share -- Notes 1, 5 and 6: Net income before extraordinary charge........... $ 1.18 $ 0.87 $ 0.07 Extraordinary charge............................. (0.12) -- -- ----------- ---------- ---------- Net income....................................... $ 1.06 $ 0.87 $ 0.07 =========== ========== ========== Weighted average number of common and common equivalent shares outstanding.................. 12,029,000 8,330,000 6,201,000 =========== ========== ==========
See accompanying notes. F-4 44 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
COMMON STOCK ------------------------------------------- CLASS B COMMON (NON- STOCK AND STOCK VOTING) CLASS B SUBSCRIPTIONS SHARES SHARES ADDITIONAL COMMON RECEIVABLE ISSUED AND ISSUED AND PAID-IN STOCK IN AND DEFERRED OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL TREASURY COMPENSATION ----------- ------ ----------- ------ ---------- --------- ------------ Balance at December 31, 1993....... 4,825,971 $1 -- $ -- $ 9,096 $ (135) $ (695) Stock issued in connection with the Fremantle International Acquisition.................... 630,000 -- 2,520,000 -- 20,000 -- -- Payments on stock subscriptions receivable..................... -- -- -- -- -- -- 137 Amortization of deferred compensation................... -- -- -- -- -- -- 60 Cancellation of deferred compensation................... -- -- -- -- (345) -- 345 Currency translation adjustment.. -- -- -- -- -- -- -- Net income....................... -- -- -- -- -- -- -- -- --------- --------- --- ------- ------- ----- Balance at December 31, 1994....... 5,455,971 1 2,520,000 -- 28,751 (135) (153) -- --------- --------- --- ------- ------- ----- Net proceeds from public offering of Class B common stock........ -- -- 3,200,000 1 30,534 -- -- Conversion of 6 1/2% Convertible Subordinated Notes, net of related costs.................. 206,081 -- -- -- 2,237 -- -- Payments on stock subscriptions receivable..................... -- -- -- -- -- -- 153 Currency translation adjustment.. -- -- -- -- -- -- -- Net income....................... -- -- -- -- -- -- -- -- --------- --------- --- ------- ------- ----- Balance at December 31, 1995....... 5,662,052 1 5,720,000 1 61,522 (135) -- -- --------- --------- --- ------- ------- ----- Issuance of common stock for settlement of trade payables... 15,000 -- -- -- 139 -- -- Issuance of common stock on exercise of vested warrants and stock options.................. 63,100 -- -- -- 255 -- -- Redemption, conversion, repurchase and retirement of 6 1/2% Convertible Subordinated Notes, net of related costs.... 1,193,561 -- -- -- 12,570 -- -- Repurchase of Class B common stock.......................... -- -- -- -- -- (5,366) -- Currency translation adjustment.. -- -- -- -- -- -- -- Net income....................... -- -- -- -- -- -- -- -- --------- --------- --- ------- ------- ----- Balance at December 31, 1996....... 6,933,713 $1 5,720,000 $ 1 $ 74,486 $(5,501) $ -- ========= == ========= === ======= ======= ===== RETAINED EARNINGS CURRENCY (ACCUMULATED TRANSLATION DEFICIT) ADJUSTMENT TOTAL ------------ ---------- ------- Balance at December 31, 1993....... $ (764) $ -- $ 7,503 Stock issued in connection with the Fremantle International Acquisition.................... -- -- 20,000 Payments on stock subscriptions receivable..................... -- -- 137 Amortization of deferred compensation................... -- -- 60 Cancellation of deferred compensation................... -- -- -- Currency translation adjustment.. -- (72) (72) Net income....................... 455 -- 455 ------- ----- ------- Balance at December 31, 1994....... (309) (72) 28,083 ------- ----- ------- Net proceeds from public offering of Class B common stock........ -- -- 30,535 Conversion of 6 1/2% Convertible Subordinated Notes, net of related costs.................. -- -- 2,237 Payments on stock subscriptions receivable..................... -- -- 153 Currency translation adjustment.. -- 24 24 Net income....................... 7,248 -- 7,248 ------- ----- ------- Balance at December 31, 1995....... 6,939 (48) 68,280 ------- ----- ------- Issuance of common stock for settlement of trade payables... -- -- 139 Issuance of common stock on exercise of vested warrants and stock options.................. -- -- 255 Redemption, conversion, repurchase and retirement of 6 1/2% Convertible Subordinated Notes, net of related costs.... -- -- 12,570 Repurchase of Class B common stock.......................... -- -- (5,366) Currency translation adjustment.. -- (594) (594) Net income....................... 12,686 -- 12,686 ------- ----- ------- Balance at December 31, 1996....... $ 19,625 $ (642) $87,970 ======= ===== =======
See accompanying notes. F-5 45 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 --------- --------- -------- OPERATING ACTIVITIES Net income......................................................... $ 12,686 $ 7,248 $ 455 Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization of property and equipment and goodwill....................................................... 5,423 3,322 1,450 Amortization of television program costs......................... 93,358 90,401 32,534 Increase in allowance for doubtful accounts...................... 714 169 287 Increase (decrease) in allowance for sales returns............... (37) 246 204 Increase (decrease) in makegood reserve.......................... 59 (1,290) 123 Increase (decrease) in imputed interest discount................. (1,276) 2,354 -- Equity earnings in unconsolidated affiliate, net................. -- (3,603) -- Extraordinary charge for redemption of Convertible Subordinated Notes, 6 1/2% due 2003, net of tax............................. 1,420 -- -- Changes in operating assets and liabilities net of effects from acquisitions: Restricted cash................................................ 2,628 102 (2,590) Trade receivables, inventory and advances to recording artists...................................................... 11,267 (53,060) (5,423) Deferred income tax benefits................................... -- 235 (235) Accounts payable, accrued expenses and royalties payable....... 8,369 18,596 (1,469) Due to producers and participations payable.................... (12,711) 12,881 4,797 Additions to television program costs.......................... (111,510) (96,608) (43,490) Deferred revenues.............................................. 461 20 (1,680) Deferred taxes payable......................................... -- 2,242 (94) Other assets................................................... 366 (226) 457 --------- --------- -------- Net cash provided (used) by operating activities.......... 11,217 (16,971) (14,674) INVESTING ACTIVITIES Purchase of property and equipment, net of book value of assets retired.......................................................... (1,360) (1,677) (497) Purchase of Orbis, net of cash acquired............................ (2,323) -- -- Purchase of Mark Goodson, net of cash acquired..................... (27,972) (25,785) -- Contingent earn out from purchase of Mark Goodson.................. (8,207) -- -- Purchase of Fremantle, net of cash acquired........................ -- -- (32,527) --------- --------- -------- Net cash used by investing activities..................... (39,862) (27,462) (33,024) FINANCING ACTIVITIES Repurchase of redeemable warrants.................................. -- -- (250) Net proceeds from public offering of Class B common stock.......... -- 30,535 -- Proceeds from issuance of Senior Notes, net of related costs....... 96,213 -- -- Redemption of Convertible Notes.................................... (44,659) -- -- Repurchase of Class B common stock, including related costs........ (5,366) -- -- Payments on stock subscriptions receivable......................... -- 153 137 Proceeds from borrowings........................................... 178,100 273,405 38,768 Repayments of borrowings........................................... (206,457) (276,396) (18,849) Restricted cash held for repayment of borrowings................... 4,340 (4,340) -- Proceeds from borrowings -- purchase of Fremantle, net of issuance costs............................................................ -- -- 33,878 Proceeds from borrowings -- purchase of Mark Goodson............... 27,800 25,000 -- --------- --------- -------- Net cash provided by financing activities................. 49,971 48,357 53,684 Effect of exchange rate changes on cash............................ (594) 24 (72) --------- --------- -------- Increase in cash................................................... 20,732 3,948 5,914 Cash and cash equivalents at beginning of period................... 13,126 9,178 3,264 --------- --------- -------- Cash and cash equivalents at end of period......................... $ 33,858 $ 13,126 $ 9,178 ========== ========== ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest, net of amounts capitalized........................... $ 11,355 $ 9,496 $ 5,552 ========== ========== ========= Income taxes................................................... $ 6,935 $ 1,219 $ 247 ========== ========== =========
See accompanying notes. F-6 46 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 1. SIGNIFICANT ACCOUNTING POLICIES Description of Business All American Communications, Inc. ("AAC") and its wholly-owned subsidiaries, All American Television, Inc. ("AATV"), All American Television Production, Inc, ("AATP"), All American Entertainment, Inc. -- formerly Scotti Brothers Entertainment Industries, Inc. ("AAEI" or "SBEI"), All American Fremantle International, Inc. ("AAFI"), All American FDF Holdings, Inc. ("AAFDF"), All American Goodson, Inc. ("AAG"), All American Orbis, Inc. ("AAO"), All American Consumer Merchandising Group, Inc. ("AACM") and All American Netherlands B.V. ("AAN") (and together with their respective direct or indirect wholly-owned subsidiaries collectively, the "Company" or "All American") produce, distribute and market television programs and recorded music both domestically and internationally. The Company's primary source of revenues is from the production, distribution and promotion of television programs. The Company has operations throughout the world, with activities located principally in the United States and Europe. Intangible Assets It is the Company's policy to evaluate the recovery of its intangible assets (principally goodwill) and to recognize impairment if it is probable that the recorded amounts are not recoverable from future undiscounted cash flows or if there is an event or change in circumstances which establish the existence of impairment indicators. Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements include the accounts of AAC and subsidiaries; all significant intercompany balances and transactions have been eliminated. Recognition of Revenues Minimum guaranteed revenues from domestic cash license agreements typically are recognized when the license period begins and the program becomes available pursuant to the terms of the license agreement. Advertising revenues (i.e., sales of advertising time received by the Company in lieu of cash license fees for the sale of program broadcast rights to a broadcast station ("barter syndication")) are recognized upon the commencement of the license period of the program and the advertising time has been sold pursuant to non-cancelable agreements, provided that the program is available for its first broadcast. Foreign minimum guaranteed amounts or outright fees are recorded as revenues and contracts receivable on the date of the license agreement, unless the program is not yet available for exhibition. Revenues under domestic and foreign production agreements are recognized as completed episodes are delivered. Deferred revenues consist principally of advance payments received on television contracts for which the program materials are not yet available for broadcast or exploitation. The portion of recognized revenue to be shared with the producers and owners of the licensed program material (participations payable and due to producers) is accrued as the revenue is recognized. In certain instances, the Company guarantees viewer ratings for its syndicated programs. Applicable revenue is recorded net of estimated shortfalls, which are settled by giving either additional advertising time (make goods) or cash refunds to the advertiser. The Company provides for the full amount of the estimated shortfall. Domestic revenues from recorded music are recognized as units are shipped to customers. The Company provides for estimated future returns of recorded music product at the time when the products are initially F-7 47 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 shipped. These provisions are based upon historical experience. Actual returns are charged against the reserve. Foreign distribution of recorded music is effected through a distributor in exchange for guaranteed nonrefundable advances against future royalties. Nonrefundable guaranties from foreign sales are recognized as product is delivered to the Company's foreign distributor. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less and investments in money market funds to be cash equivalents. Restricted Cash Pursuant to the Company's lending agreement (prior to its amendment and restatement as of October 23, 1996), subject to certain exceptions for working capital, substantially all cash collected was required to be paid into accounts maintained by the lender and applied to the repayment of the outstanding borrowings as specified in the lending agreement. The cash held for repayment was included as restricted cash as of December 31, 1995. Additionally, amounts held in an interest bearing reserve account with respect to a dispute which has been settled were included as restricted cash in 1995. Unbilled Receivables Unbilled receivables represent amounts due under cash (excluding barter) television syndication contracts which will be billed over the contractual terms of the agreements, generally ranging from one to five years. Imputed Interest Discount The Company records an imputed interest discount on contracted cash (excluding barter) receivables with original payment terms extending beyond one year. The discount is determined using the Company's incremental borrowing rate at the time of revenue recognition. The discount is amortized over the underlying contracts' payment stream using the interest method and is credited to interest income. Inventory Inventory consists of recorded music product and is carried at the lower of cost or estimated net realizable value. Television Program Costs Television program costs consist of direct production costs, production overhead, capitalized interest and certain exploitation costs, less accumulated amortization. Such costs are stated at the lower of unamortized cost or estimated net realizable value. Selling costs and other distribution costs which are not recoverable from the producers' share of revenues are charged to expense as incurred. Television program costs, and estimated total costs of participations and residuals, are amortized under the individual film forecast method in the ratio that current period revenue recognized bears to management's F-8 48 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 estimate of remaining gross revenue to be recognized. The use of estimates which may ultimately differ from actual results could materially affect the Company's consolidated financial statements. Such estimates, which are subject to change based on a comparison of actual to estimated information, are re-evaluated quarterly in connection with a review of the Company's inventory of television product, and estimated losses, if any, are provided for in full. Artist Compensation Cost Royalties earned by artists from sales of recorded music are charged to expense as the related revenues are recognized. Advances to artists against future royalties are recorded as assets if the Company estimates the amount of the advances will be recoverable from future royalties to be earned by the artist, based upon the past performance and current popularity of the artist. Such advances are applied against subsequent royalties earned by the artist. Depreciation and Amortization Property and equipment are carried at cost, and depreciation is computed using accelerated and straight line methods over the estimated useful lives of the assets, specifically thirty years for the Company owned building and ranging from three to ten years for the remaining assets. Leasehold improvements are amortized over the lesser of the term of the lease or the estimated useful lives of the improvements. Goodwill is amortized on a straight-line basis over periods ranging from 10 to 25 years (principally 25 years). Income Taxes The Company records its income tax provision in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Deferred income taxes under the liability method arise primarily from the differences in the timing of the recognition of certain television and recorded music revenue and expense items for book and tax purposes. Stock Based Compensation The Company accounts for its stock compensation arrangements under the provisions of APB 25, "Accounting for Stock Issued to Employees," and intends to continue to do so. Share Information; Earnings Per Share Primary earnings per share represent the per share income applicable to common stockholders and is computed based on the weighted average common shares outstanding and dilutive common stock equivalents determined using the modified treasury stock method. During, 1996 the Company redeemed its outstanding 6 1/2% Convertible Subordinated Notes due 2003 (See Note 5). Accordingly, the fully diluted earnings per share calculations have been recomputed to eliminate the impact of the assumed conversion of the Convertible Notes, which were not considered to be common stock equivalents. The Convertible Notes which converted into shares of common stock have been included in the weighted average number of common shares from the date of such conversion. Fully diluted earnings per share, as recomputed, are materially the same as primary earnings per share and accordingly, have not been presented. F-9 49 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 Foreign Currency The operations of all foreign entities are principally measured in local currencies. Assets and liabilities are translated into United States ("U.S.") dollars using exchange rates in effect at the end of each reporting period. Revenues and expenses are translated at the average exchange rates prevailing during the period. Adjustments resulting from translating the financial statements of foreign entities into U.S. dollars are recorded as a separate component of stockholders' equity. Reclassifications Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the current year's presentation. 2. ACQUISITIONS Orbis Entertainment Company In July 1996, the Company consummated a stock purchase agreement ("Orbis Agreement") with Orbis Entertainment Company, Inc. ("Orbis"), a television production company, and the shareholders of Orbis (the "Orbis Acquisition") to purchase all of the outstanding shares of Orbis for an initial purchase price of $2.5 million, which has been paid. In addition to the initial purchase price, the Orbis Agreement, for the first five years, provides for a contingent earn out payment equal to 50% of net cash flow, as defined, and an additional contingent payment due after the fifth year based on the cash flows of Orbis in the fourth and fifth years, also as defined. Following the acquisition, the name of Orbis was changed to All American Orbis, Inc. ("AAO"). The Company has accounted for the Orbis Acquisition under the purchase accounting method. In July 1996, the Company entered into five year employment agreements with the AAO executives. Mark Goodson Productions In October 1995, the Company and The Interpublic Group of Companies ("Interpublic") consummated an acquisition, pursuant to which Mark Goodson Productions, LLC ((a 50% / 50% joint venture between the Company and Interpublic) the "LLC") acquired substantially all of the assets (excluding those relating to the lottery business) and assumed certain specified liabilities (collectively, with the Company's subsequent acquisition of the remaining 50 % of the LLC as described below, the "Mark Goodson Acquisition") of Mark Goodson Productions, L.P. and a related company (collectively, the "Sellers"). The Sellers were not affiliated with the Company. The purchase price paid by the Company for its undivided 50% interest of the Sellers' net assets acquired ("Mark Goodson Productions") consisted of a cash payment of $25,000,000, transaction costs of $785,000, and an as yet undetermined contingent purchase price. The contingent purchase price, payable to the Sellers, is to be earned and paid based on the income (as defined) resulting from a domestic television network contract and the actual exploitation of certain other domestic television rights. The total contingent purchase price is limited to $48,500,000 if paid (whether earned or not) during the first five years following October 6, 1995. Otherwise, the amount of contingent purchase price is unlimited to the extent that it is earned within the first ten years following October 6, 1995. At the end of ten years, no additional contingent purchase price accrues. In January 1996, the Company acquired from Interpublic the remaining 50% interest of Mark Goodson Productions LLC. As a result, the Company is responsible for the full share of the contingent purchase price, to the extent earned by the Sellers. Such contingent purchase price, which may total $48,500,000 by the fifth anniversary of the initial acquisition in October 1995, will be treated as an increase in goodwill and will be amortized coterminously with the original 25 year period. Through December 31, 1996, accrued contingent purchase price totaled $10,077,000 (including Interpublic's share through December 31, 1995 of $935,000). F-10 50 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 As of December 31, 1996, goodwill, including the total initial purchase price of $53,757,000 (including deal costs of $901,000) and contingent purchase price totals $59,965,000 (before accumulated amortization of $2,657,000). The Company has accounted for its ownership of the LLC under the purchase accounting method effective January 1, 1996. Fremantle International, Inc. In August 1994, the Company acquired (the "Fremantle International Acquisition") certain assets and securities and assumed certain liabilities of Fremantle International, Inc. ("Fremantle") through the Company's newly formed whollyowned subsidiary, All American Fremantle International, Inc. ("AAFI"), from Interpublic (which at such time had no ownership interest in the Company). The consideration for the Fremantle International Acquisition consisted of 630,000 shares of the Company's Common Stock, 2,520,000 shares of nonvoting, $.0001 par value Class B common stock ("Class B Stock") and $31,500,000 in cash funded by a term loan from Chemical Bank (subsequently replaced by the Restructured Credit Facility -- see Note 5). The Company has accounted for the Fremantle International Acquisition as a purchase and has allocated the purchase price based on the estimated fair value of assets and liabilities acquired. The total consideration of $52,527,000 (including expenses related to the acquisition of $1,027,000) exceeds the estimated fair value of net assets acquired by $50,267,000 (goodwill); such goodwill is being amortized over 25 years. Results of operations of AAFII have been included in the Company's results from August 3, 1994. 3. PROPERTY AND EQUIPMENT Property and equipment are comprised of the following:
DECEMBER 31, ------------------- 1996 1995 ------- ------- (IN THOUSANDS) Land..................................................... $ 403 $ 403 Building and improvements................................ 1,704 1,669 Sound studio and related equipment....................... 1,534 1,544 Office furniture and fixtures............................ 4,249 4,417 Automobiles.............................................. 163 163 Other.................................................... 39 39 ------- ------- 8,092 8,235 Less accumulated depreciation and amortization........... (3,976) (3,709) ------- ------- $ 4,116 $ 4,526 ======= =======
4. TELEVISION PROGRAM COSTS Costs for television programs are comprised of the following:
DECEMBER 31, ------------------- 1996 1995 ------- ------- (IN THOUSANDS) Released, less accumulated amortization.................. $91,746 $73,902 In process and development............................... 2,285 742 ------- ------- $94,031 $74,644 ======= =======
F-11 51 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 Based on management's estimates of gross revenues as of December 31, 1996, approximately 70% of the unamortized costs applicable to released television programming will be amortized during the three years ending December 31, 1999. Interest capitalized to television program costs during the periods ended December 31, 1996, 1995 and 1994 was approximately $876,000, $1,249,000 and $399,000, respectively. 5. NOTES PAYABLE Notes payable are comprised of the following:
DECEMBER 31, --------------------- 1996 1995 -------- -------- (IN THOUSANDS) Notes payable to banks............................ $ 79,000 $ 77,352 10 7/8% Senior Subordinated Notes................. 100,000 -- 6 1/2% Convertible Subordinated Notes............. -- 57,630 -------- -------- $179,000 $134,982 ======== ========
Restructured Credit Facility On October 23, 1996, the Company amended and restated its senior secured credit facility (the "Restructured Credit Facility") with a syndicate of lenders led by The Chase Manhattan Bank. The amendment and restatement increased the Company's borrowing capacity up to $155,000,000, subject to borrowing base limitations (as defined in the Restructured Credit Facility) and extended the maturity to a four year term. In connection with the amendment and restatement, the Company initially utilized $30,000,000 of the Restructured Credit Facility: (i) to pay notes payable of $15,448,000 (including accrued interest to Interpublic); (ii) to purchase ($10,000,000) a portion of certain outstanding Convertible Notes (defined below); (iii) to pay closing fees of $2,500,000 in connection with the amendment and restatement; and (iv) $2,052,000 for production and general corporate purposes. Borrowings under the Restructured Credit Facility bear interest, at the Company's option, at either: (i) LIBOR plus 1 1/2% (ranging from 6.19% to 7.0% as of March 10, 1997); or (ii) the Alternate Base Rate (which is the greater of Chase Manhattan Bank's Prime Rate, its Base CD Rate plus 1%, or the Federal Funds Effective Rate plus 1/2%) plus 1/2% (8.75% as of March 10, 1997), subject to increase by 1/2 of 1% in the event of the Company's failure to satisfy certain financial ratios. As of March 10, 1997, the Company had outstanding borrowings of $78,500,000 under the Restructured Credit Facility with $60,283,000 available for borrowing. Amounts repaid under the Restructured Credit Facility may be reborrowed, subject to the Company having an adequate borrowing base and meeting the conditions precedent to each borrowing. The Restructured Credit Facility imposes a number of financial and other conditions upon the Company, including limitations on indebtedness and changes in lines of business, restrictions on the disposition of assets, restrictions on making certain payments (including dividends), restrictions on acquisitions and certain financial tests, including a minimum net worth test, a leverage test and an interest coverage ratio test. In particular, consummation of significant acquisitions may be subject to obtaining prior bank consent under the Restructured Credit Facility. Furthermore, certain conditions must be satisfied before the funding of each season of certain television series. Loans under the Restructured Credit Facility may be made as "Domestic Loans" to All American Communications, Inc. or as "Foreign Loans" to All American Netherlands B.V., subject to borrowing base availability. All outstanding loans as of March 10, 1997 are "Domestic Loans." Substantially all of the Company's assets (other than real property) are pledged as collateral under the Restructured Credit Facility. F-12 52 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 Senior Subordinated Notes On October 11, 1996, the Company issued $100,000,000 in aggregate principal amount of 10 7/8% Senior, Subordinated Notes due 2001 ("Senior Notes") in a private placement offering to Goldman, Sachs & Co. and Chase Securities, Inc. (the "Initial Purchasers"). The Senior Notes are unsecured obligations of the Company which mature October 15, 2001 and bear interest at 10 7/8% per annum, payable semi-annually each April 15 and October 15 (commencing April 15, 1997). Net proceeds, net of issuance costs and fees, from the issuance of the Senior Notes totaled approximately $96,000,000. Net proceeds were used principally to purchase and redeem the Company's 6 1/2% Convertible Subordinated Notes Due 2003, to repurchase approximately 500,000 shares of the Class B Common Stock and to temporarily repay bank borrowings. The Senior Notes were issued pursuant to an Indenture between the Company and U.S. Trust Company of California, N.A. (the "Indenture"). The Senior Notes are subordinated in right of payment to the prior payment in full of all Senior Indebtedness (as defined in the Indenture) of the Company. The Indenture imposes certain covenants and conditions upon the Company, including but not limited to restrictions or limits on making certain payments or investments, limits on certain transactions, limits on liens, limits on merger, consolidation and sale of assets, limits on senior subordinated debt, limits on business activities and change of control provisions. In the event that the Company enters into a letter of intent or makes a public announcement (a "Sale Transaction Triggering Event") during the first 18 months after October 4, 1996 with respect to the sale of all of the Company's capital stock (whether by merger, consolidation or otherwise) or all or substantially all of the Company's assets (a "Sale Transaction"), the Company may, subsequent to the closing of such Sale Transaction, redeem up to $100,000,000 in principal amount of the Senior Notes at a redemption price of 110 7/8% of the principal amount thereof, plus accrued and unpaid interest, provided that the Sale Transaction closes within 120 days after the date of such letter of intent or public announcement and, that notice of such redemption shall be given within 30 days of the date of the closing of such Sale Transaction. In addition, during the first 18 months after October 4, 1996, the Company may redeem up to $35,000,000 in principal amount of the Senior Notes at a redemption price of 110 7/8% of the principal amount thereof, plus accrued and unpaid interest, with the net proceeds of a public offering of common stock of the Company, provided that at least $65,000,000 in aggregate principal amount of the Senior Notes remain outstanding immediately after the occurrence of such redemption and that notice of such redemption shall be given within 30 days of the date of the closing of such public offering. Following a Change of Control (as defined in the Indenture), the Company will be required to offer to purchase all or any part of the Senior Notes tendered at the option of the holders thereof at 101% of the aggregate principal amount thereof, plus accrued and unpaid interest. In connection with the private placement offering, the Company entered into a Registration Rights Agreement ("Registration Rights Agreement") with the Initial Purchasers, granting certain exchange registration rights ("Exchange Offer") to the holders of the Original Notes (as defined in the Registration Rights Agreement). On October 28, 1996, the Company filed a registration statement on Form S-4 pursuant to its obligations under the Registration Rights Agreement. On November 12, 1996, the Company amended such Form S-4 which, as amended, was declared effective by the Securities and Exchange Commission on such date. As of December 11, 1996 (the expiration date of the Exchange Offer), the Exchange Offer was completed and, all original notes were exchanged for publicly tradable notes. Convertible Subordinated Notes In October 1993, the Company issued its 6 1/2% Convertible Subordinated Notes Due 2003 (the "Convertible Notes") in the aggregate principal amount of $60,000,000. On November 27, 1996, the Company redeemed the remaining outstanding Convertible Notes. Through November 27, 1996, $16,096,000 principal amount of the Convertible Notes had been converted into the Company's Common Stock, the F-13 53 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 Company had purchased and retired $22,914,000 principal amount and redeemed $20,990,000 principal amount of the Convertible Notes. The Convertible Notes were redeemed for 104.643% of par plus accrued interest. The net expense of the redemption and purchase of certain of the Convertible Notes was $2,448,000. Such cost, net of the related tax benefit of $1,028,000, has been treated as an extraordinary charge on the statement of operations. 6. CAPITAL STOCK Through November 27, 1996, $16,096,000 principal amount of the Convertible Notes had been converted into approximately 1,400,000 shares of Common Stock. The remaining outstanding Convertible Notes were redeemed as of November 27, 1996 (See Note 5). In October 1996, the Company repurchased in the open market 528,200 shares of its Class B Common Stock for $5,366,000. Such repurchased shares are held in treasury as of December 31, 1996. In December 1995, the Company sold 3,200,000 newly issued shares of Class B Common Stock through an underwritten stock offering (the "Stock Offering"). The Class B Common Stock is identical to the Company's Common Stock, except the Class B Common Stock is non-voting. Net proceeds from the Stock Offering totaled approximately $30,535,000 after deducting the underwriters discount of $2,352,000 and offering expenses of approximately $853,000. Shares of the Company's Common Stock are reserved for issuance as follows:
DECEMBER 31, ---------------- 1996 1995 ----- ------ (IN THOUSANDS) Grants under stock option plans........................ 3,758 1,509 Warrants granted....................................... 219 281 Class B Common Stock -- non-voting..................... 5,720 5,720 6 1/2% Convertible Subordinated Notes.................. -- 5,011 ----- ------ 9,697 12,521 ===== ======
7. STOCK OPTIONS AND WARRANTS The Company has granted options to purchase Common Stock and Class B Common Stock to eligible employees, directors and consultants under various stock option plans at, or in excess of, market value on the date of grant. The options generally expire in ten years and become exercisable either: (i) on the Company's achievement of specific performance targets as established by a committee appointed by the Board of Directors; or (ii) evenly over a five-year vesting period. F-14 54 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 A summary of stock option activity under all plans for each class of stock follows:
COMMON STOCK ---------------------------------------- PRICE PER SHARE -------------------------- WEIGHTED AVERAGE NUMBER EXERCISE OF SHARES RANGE PRICE --------- ------------- -------- Outstanding at December 31, 1993................ 401,813 $4.00- 30.00 $ 5.19 Granted....................................... 486,500 7.63- 8.50 8.16 Exercised..................................... -- Forfeited..................................... (325,000) 4.00- 11.00 4.27 --------- Outstanding at December 31, 1994................ 563,313 $7.00- 30.00 $ 8.28 Granted....................................... 456,500 9.13 9.13 Exercised..................................... -- Forfeited..................................... (5,000) 8.50 8.50 --------- Outstanding at December 31, 1995................ 1,014,813 $7.00- 30.00 $ 8.66 Granted....................................... 300,000 9.88- 10.86 10.04 Exercised..................................... (600) 8.50 8.50 Forfeited..................................... (17,463) 8.50- 30.00 12.59 --------- Outstanding at December 31, 1996................ 1,296,750 $7.00- 14.50 $ 8.93 =========
CLASS B COMMON STOCK ---------------------------------------- PRICE PER SHARE -------------------------- WEIGHTED AVERAGE NUMBER EXERCISE OF SHARES RANGE PRICE --------- ------------- -------- Outstanding at December 31, 1995................ -- $ --- -- $ -- Granted....................................... 1,971,000 7.88- 7.88 7.88 Exercised..................................... -- Forfeited..................................... -- --------- Outstanding at December 31, 1996................ 1,971,000 $7.88- 7.88 $ 7.88 =========
As of December 31, 1996, options for 7,500 shares of Common Stock were exercisable at $14.50 per share through July 2000. Additionally, options for 50,000 shares of Common Stock, granted during 1996 and expiring February 2001, have an exercise price of $10.86 per share which is equal to 110% of the market value on the date of grant. All other options are exercisable, upon vesting, at prices ranging from $7.00 to $10.52 per share. The Company has elected, as permitted by FASB Statement No. 123, "Accounting for Stock Based Compensation" ("FAS 123"), to account for its stock compensation arrangements under the provisions of Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, because the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by FAS 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of such pronouncement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1996 and 1995, respectively: risk- F-15 55 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 free interest rates of 6.0% and 6.2%; dividend yields of 0% and 0%; volatility factors of the expected market price of the Company's Common Stock of 0.40 and 0.45; volatility factors of the expected market price of the Company's Class B Common Stock for 1996 of 0.40; and a weighted average expected life of the options of 3 years. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
1996 1995 ------- ------ Pro forma net income before extraordinary charge........................................ $11,527 $6,737 Pro forma net income............................ $10,107 $6,737 Pro forma earnings per share before extraordinary charge.......................... $ 0.97 $ 0.81 Pro forma earnings per share.................... $ 0.85 $ 0.81
As of December 31, 1996, the weighted average remaining contractual life of options granted is 8.7 years. Assuming the exercise of all outstanding options, the Company would receive cash and increase equity by approximately $28,000,000, the exercise value of such options. Options exercisable at years ending December 31, follow:
COMMON STOCK CLASS B COMMON STOCK ----------------------- --------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE --------- --------- ------- --------- 1994...................................... 63,063 $8.51 -- -- 1995...................................... 123,013 $8.08 -- -- 1996...................................... 1,032,750 $9.06 123,000 $7.88
In addition to stock options, the Company has granted warrants to purchase its Common Stock. As of December 31, 1996 warrants to purchase 218,750 shares of Common Stock at $11.00 per share remain outstanding and exercisable. Such warrants expire in February 1998. As of July 6, 1994, in connection with the employment agreement of an officer (such officer also being a Director), the Company granted a Restricted Stock Award ("RSA") for 30,000 shares with a vesting date of July 5, 1998. The RSA shares are subject to the terms of the Company's 1994 Stock Incentive Plan, as amended and the officer's employment agreement. Based on a closing bid price on July 6, 1994 of $7.25 per share, this grant is expected to generate expense of approximately $218,000 through July 5, 1998. 8. RELATED PARTY TRANSACTIONS In November 1996, Jefferson Capital Group ("JCG") exercised warrants for the purchase of 62,500 shares of Common Stock at $4.00 per share. Such warrants were originally issued to JCG for investment services provided in connection with the Company's acquisition of AATV in 1991. The Company engaged JCG to provide investment banking services to the Company in connection with the Stock Offering, including advice regarding valuation and pricing of the transaction for fees and expenses totaling $25,000. A member of the Company's Board of Directors is the President and a significant stockholder of JCG. The Company has also agreed to indemnify JCG against any liabilities that it incurs in connection with the services provided, except due to JCG's gross negligence or willful misconduct. F-16 56 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 The Company engaged JCG to provide investment banking services to the Company in connection with the Fremantle International Acquisition, including valuation of the transaction, pricing and financing for fees and expenses totaling $319,000. The Company has also agreed to indemnify JCG against any liabilities it incurs in connection with the acquisition of Fremantle, except due to JCG's gross negligence or willful misconduct. Effective December 15, 1995, the Company entered into the WEA Distribution Agreement. A Director of the Company is the Chairman/CEO -- Warner Media Manufacturing & Distribution Group (a division of Time Warner, Inc.) with responsibility for WEA. Such Director recused himself from the negotiations between the Company and WEA which resulted in the WEA Distribution Agreement. Included in recorded music and merchandising revenues for 1995 is $3,000,000 related to a non-refundable, non recoupable advance. During 1994, the Company loaned $250,000 to Thomas Bradshaw, the Company's Chief Financial Officer, which loan is secured by a pledge of shares of Common Stock of the Company owned by Mr. Bradshaw. The loan bears interest at a rate of 8.0% per annum (equal to the rate then in effect under the Company's credit facility) and has been extended to mature upon expiration of Mr. Bradshaw's current employment agreement which is currently February 1999. The loan has been included with other assets in the accompanying consolidated balance sheets at December 31, 1996 and 1995. AAEI currently rents a building from two officers/members of the Board of Directors of the Company at a cost to AAEI of approximately $4,500 per month, which the Company believes to be a market rate. This building is used for office and warehouse space for the Company's recorded music operations. 9. INCOME TAXES The provision for income taxes related to continuing operations is comprised of the following:
YEAR ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 ------- ------ ----- (IN THOUSANDS) Current: Federal........................................ $ 8,282 $ 718 $ -- State and local................................ 513 195 13 Foreign........................................ 2,998 1,858 646 ------- ------ ----- 11,793 2,771 659 ------- ------ ----- Deferred: Federal........................................ (1,579) 2,478 (329) State.......................................... -- -- -- ------- ------ ----- (1,579) 2,478 (329) ------- ------ ----- Taxes provided before extraordinary charge....... 10,214 5,249 330 Tax benefit on redemption of Convertible Notes... (1,028) -- -- ------- ------ ----- Total provision for income taxes....... $ 9,186 $5,249 $ 330 ======= ====== =====
F-17 57 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 Components of deferred income taxes as calculated under SFAS 109 as of December 31, 1996 and 1995 and 1994 are as follows:
DECEMBER 31, ------------------------------- 1996 1995 1994 ------- ------- ------- (IN THOUSANDS) Amortization and depreciation................. $(3,728) $(4,018) $(9,627) Accruals not currently deductible for tax purposes.................................... 2,767 1,660 6,874 Deferred revenues............................. 299 116 103 Net operating loss carryover.................. -- -- 2,466 Foreign tax and investment tax credit carryover................................... -- -- 1,384 ------- ------- ------- (662) (2,242) 1,200 Valuation allowance........................... -- -- (965) ------- ------- ------- $ (662) $(2,242) $ 235 ======= ======= =======
Reconciliation of effective rate of income taxes related to continuing operations:
YEAR ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 ------- ------ ----- (IN THOUSANDS) Provision for income taxes at statutory federal rate of 35%.................................... $ 8,512 $4,374 $ 275 State and local income taxes..................... 333 127 9 Foreign income taxes............................. -- -- 646 Utilization of net operating losses, foreign and investment tax credits......................... -- 323 (329) Tax deductible items and other items............. 1,369 425 (271) ------- ------ ----- Provision for income taxes, before extraordinary charge......................................... $10,214 $5,249 $ 330 ======= ====== =====
Foreign taxes withheld on revenues were utilized for financial reporting purposes in determining the provision for income taxes. These amounts withheld in the periods ended December 31, 1996, 1995 and 1994 were $328,000, $246,000, and $646,000, respectively. 10. COMMITMENTS AND CONTINGENCIES In December 1996, the Company completed production of 22 one-hour episodes of Baywatch for the 1996/1997 broadcast season. Additionally, the Company intends to produce 22 episodes of Baywatch for the 1997/1998 broadcast season for a production budget of approximately $24,000,000. The total production budget is expected to be funded primarily through a combination of: (i) barter advertiser sales; (ii) cash payments from international licensees; and (iii) working capital, pending receipt of license fees and advertiser sales. There is no assurance that the Company will be successful in its efforts to fully fund the production through a combination of the advertiser sales and international sales. The Company and Atlantis Releasing B.V. ("Atlantis") have produced 22 one-hour live action episodes of a new series entitled The Adventures of Sinbad for the 1996/1997 broadcast season. In consideration for the Company providing a substantial portion of the production budget, the Company retains exclusive distribution rights to The Adventures of Sinbad in the United States and Europe (including the United Kingdom and excluding Scandinavia). The Company, under certain circumstances, has an annual option to cause Atlantis to produce up to 22 new episodes in each of the three subsequent broadcast seasons, exercisable on or before February 15 of each of such subsequent broadcast seasons. At the end of three years, if Atlantis does not exercise its right to continue producing The Adventures of Sinbad, the right to produce the series reverts to the F-18 58 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 Company. The Company has exercised its option to cause Atlantis to produce 22 new episodes of The Adventures of Sinbad for the 1997/1998 broadcast season. The Company's share of the total production budget (approximately $750,000 of the $900,000 expected per episode production budget) is expected to be funded primarily through a combination of: (i) barter advertiser sales; (ii) cash payments from international licensees; and (iii) working capital, pending receipt of license fees and advertiser sales. There is no assurance that the Company will be successful in its efforts to fully fund these productions through a combination of the advertiser sales and international sales. The Company has entered into agreements with New Dominion Productions and Bristol-Myers Squibb to produce 22 one-hour episodes of a new series entitled Ghost Stories for the 1997/1998 broadcast season with an estimated aggregate production budget of $7,500,000. The Company's agreement with Bristol-Myers Squibb provides the latter with a substantial portion of the available barter advertiser time for $3,500,000, net of agency commissions. The remaining portion of the production budget is expected to be funded primarily through a combination of: (i) sales of the remaining barter advertiser time; (ii) cash payments from international licensees; and (iii) working capital, pending receipt of license fees and advertiser sales. There is no assurance that the Company will be successful in its efforts to fully fund the production through a combination of the advertiser sales and international sales. The Company has an option to enter into personal service agreements with Arthel Neville and Fred Roggin, for an initial 13 week period with options for subsequent periods, for the production of a five day a week talk show program for the 1997/1998 broadcast season entitled the Arthel/Fred Talk Show. The estimated production budget will be approximately $300,000 per week for up to 35 weeks. The production budget is expected to be funded primarily through a combination of: (i) barter advertiser sales; and (ii) working capital, pending receipt of advertiser sales. There is no assurance that the Company will be successful in its efforts to fully fund the production through the advertiser sales. The Company has entered into a distribution agreement with SAT 1 in Germany for the distribution of a weekly, one-hour, reality show for the 1997/1998 broadcast season. The estimated budget for this program is approximately $9,500,000. While the license fee for the program is in excess of the estimated budget, there is no assurance that the license fee will cover the actual costs of production. Minimum commitments for advances to recording artists at December 31, 1996 amounted to approximately $700,000. On December 12, 1994, Credit Lyonnais Bank Nederland N.V. ("CLBN") made demand upon SBEI under a Guarantee, dated July 29, 1986 (the "SBEI Guarantee"), for payment of approximately $3,742,000 plus interest accrued or costs incurred since November 11, 1994 under a Loan and Security Assignment, dated July 29, 1986, between CLBN and various former subsidiaries of SBEI relating to the discontinued motion picture operations of the Company. In a letter dated December 22, 1994, SBEI rejected the foregoing demand based upon, among other reasons, the following: (i) that in a January 1993 agreement, CLBN agreed to release all liens and any interests in any property or assets of SBEI, which in effect released SBEI from any obligations under the SBEI Guarantee; (ii) the loan purportedly guaranteed has been repaid; and (iii) SBEI is not a party to and was not bound by a material amendment to the above-referenced Loan and Security Assignment. In addition, since approximately November 1993, CLBN and its representatives have been reviewing certain books and records relating to the distribution and production of certain motion pictures by Minority Pictures, Inc. (formerly Scotti Brothers Pictures, Inc.) or its subsidiaries for which CLBN provided financing. In October 1994, CLBN requested that Minority Pictures, Inc. and various of its current and former affiliates (including All American Communications, Inc. and certain of its subsidiaries) execute a tolling agreement which would have tolled any claims which CLBN may have against such persons, including but not limited to F-19 59 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 causes of action based on such financing. In December 1994, the Company responded that based upon the information provided by CLBN, or the lack thereof, it was extremely unclear whether there were any tenable claims against the Company and its subsidiaries and that the Company was therefore unwilling to enter into any tolling agreement. The Company and CLBN are currently engaged in discussions regarding the potential resolution of all of their disputes. While there is no assurance that these discussions will be successful in terminating the disputes, the Company believes that CLBN's claims will not have a material adverse effect on the Company's financial position or results of operations. The Company is party to legal proceedings which are routine and incidental to the business. The Company believes that the results of such litigation will not have a material adverse effect on the Company's financial condition or results of operations. The Company leases office and production studio space under operating leases expiring at various dates through 2005. Renewal options are available on certain of these leases. The minimum lease payments, under noncancellable operating leases at December 31, 1996, are as follows:
MINIMUM CONTRACTUAL AMOUNTS ----------------------------------------- LEASE SUBLEASE NET LEASE PAYMENTS INCOME PAYMENTS -------------- -------- --------- (IN THOUSANDS) 1997.................................... $ 2,123 $ 98 $ 2,025 1998.................................... 1,865 102 1,763 1999.................................... 1,412 106 1,306 2000.................................... 1,033 54 979 2001.................................... 859 -- 859 Thereafter................................ 3,442 -- 3,442 ------- ---- ------- $10,734 $360 $10,374 ======= ==== =======
Rent expense of approximately $1,997,000, $1,404,000 and $1,014,000 is net of sublease income of $94,000, $85,000 and $57,000 and amounts capitalized to productions of $1,862,000, $774,000 and $288,000 for the years ended December 31, 1996, 1995 and 1994, respectively. 11. FINANCIAL INSTRUMENTS Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, restricted cash and trade receivables. The Company maintains its cash balances at various financial institutions. These financial institutions are throughout the world, and Company policy is designed to limit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of those financial institutions holding significant account balances. As of December 31, 1996, no significant concentration of credit risk exists. As of December 31, 1995, a significant concentration of credit risk existed only with respect to the interest bearing restricted cash account held, pending resolution of a dispute (which dispute was resolved in 1996), with a single financial institution other than the Company's primary lender. The balance of such account is $0 and $2,551,000 at December 31, 1996 and 1995, respectively. The Company produces and sells television programs and recorded music product to domestic and foreign distributors. Sales of advertising time retained in television programming sold are to agencies representing national advertisers, primarily in the consumer products industry. The Company generally does not require collateral on trade receivables. Concentrations of credit risk on trade receivables exist only with F-20 60 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 respect to the domestic recorded music trade receivable. The Company's domestic recorded music trade receivable ($3,521,000 and $5,810,000 at December 31, 1996 and 1995, respectively) is with WEA and BMG, respectively. Credit losses and returns of recorded music product have consistently been within management's expectations. Fair Value of Financial Instruments The carrying value of the Company's financial instruments approximates their fair value with the exception of the Company's $100,000,000 in principal amount of 10 7/8% Senior Subordinated Notes ("Senior Notes"). The Senior Notes had a fair value of approximately $98,320,000 at December 31, 1996. Such fair value was determined using the quoted market price for the Senior Notes as of December 31, 1996. 12. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION The Company's activities consist of two business segments -- television production and distribution, and recorded music and merchandising. Summaries of financial information by business segment follow:
YEAR ENDED DECEMBER 31, 1996 ----------------------------------------------------------- ADJUSTMENTS RECORDED AND TELEVISION MUSIC CORPORATE ELIMINATIONS TOTAL ---------- -------- --------- ------------ -------- (IN THOUSANDS) Revenues..................................... $ 216,139 $ 25,584 $ -- $ (5,265) $236,458 Operating income (loss)...................... 39,279 2,050 (5,825) -- 35,504 Identifiable assets.......................... 324,873 3,834 31,028 -- 359,735 Depreciation and amortization................ 98,397 142 242 -- 98,781 Expenditures for property and equipment...... 710 3 647 -- 1,360
YEAR ENDED DECEMBER 31, 1995 ----------------------------------------------------------- ADJUSTMENTS RECORDED AND TELEVISION MUSIC CORPORATE ELIMINATIONS TOTAL ---------- -------- --------- ------------ -------- (IN THOUSANDS) Revenues..................................... $ 206,734 $ 22,026 $ -- $ -- $228,760 Operating income (loss)...................... 26,399 13 (4,720) -- 21,692 Identifiable assets.......................... 281,063 10,726 9,793 -- 301,582 Depreciation and amortization................ 93,528 140 55 -- 93,723 Expenditures for property and equipment...... 947 9 721 -- 1,677
YEAR ENDED DECEMBER 31, 1994 ----------------------------------------------------------- ADJUSTMENTS RECORDED AND TELEVISION MUSIC CORPORATE ELIMINATIONS TOTAL ---------- -------- --------- ------------ -------- (IN THOUSANDS) Revenues..................................... $ 98,771 $ 16,130 $ -- $ -- $114,901 Operating income (loss)...................... 12,523 (450) (5,612) -- 6,461 Identifiable assets.......................... 190,064 8,949 8,994 -- 208,007 Depreciation and amortization................ 33,783 141 60 -- 33,984 Expenditures for property and equipment...... 377 20 100 -- 497
F-21 61 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 A summary of geographic financial information is presented for 1996, 1995 and 1994:
YEAR ENDED DECEMBER 31, 1996 ------------------------------------------------- ADJUSTMENTS AND UNITED STATES EUROPE ELIMINATIONS TOTAL ------------- ------- ------------ -------- (IN THOUSANDS) Revenues............................................ $ 154,943 $86,780 $ (5,265) $236,458 Operating income.................................... 17,610 17,895 -- 35,504 Identifiable assets................................. 266,003 93,732 -- 359,735 Depreciation and amortization....................... 54,140 44,641 -- 98,781 Expenditures for property and equipment............. 1,074 286 -- 1,360
YEAR ENDED DECEMBER 31, 1995 ------------------------------------------------- ADJUSTMENTS AND UNITED STATES EUROPE ELIMINATIONS TOTAL ------------- ------- ------------ -------- (IN THOUSANDS) Revenues............................................ $ 146,303 $82,457 $ -- $228,760 Operating income.................................... 12,674 9,018 -- 21,692 Identifiable assets................................. 213,767 87,815 -- 301,582 Depreciation and amortization....................... 57,740 35,983 -- 93,723 Expenditures for property and equipment............. 1,228 449 -- 1,677
YEAR ENDED DECEMBER 31, 1994 ------------------------------------------------- ADJUSTMENTS AND UNITED STATES EUROPE ELIMINATIONS TOTAL ------------- ------- ------------ -------- (IN THOUSANDS) Revenues............................................ $ 83,135 $31,766 $ -- $114,901 Operating income (loss)............................. (388) 6,849 -- 6,461 Identifiable assets................................. 129,231 78,776 -- 208,007 Depreciation and amortization....................... 32,882 1,102 -- 33,984 Expenditures for property and equipment............. 273 224 -- 497
Revenues related to the television series Baywatch amounted to $53,846,000, $66,211,000, and $35,328,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Approximately $53,931,000, $58,868,000, and $15,802,000 of revenues from the European segment are derived from the Company's operations in Germany for the years ended December 31, 1996, 1995 and 1994, respectively. During the years ended December 31, 1996, 1995 and 1994, one customer of the recorded music segment accounted for 9%, 7% and 11%, respectively, and one customer of the television segment accounted for 7%, 6%, and 13%, respectively, of consolidated revenues. Commencing January 1, 1996, the Company entered into the WEA Distribution Agreement providing for the domestic distribution for all of the Company's recorded music product (See Note 8). Included in United States sales are export sales in the years ended December 31, 1996, 1995 and 1994 of $49,146,000, $29,977,000, and $20,821,000, respectively. F-22 62 ALL AMERICAN COMMUNICATIONS, INC. AND SUBSIDIARIES (AMOUNTS IN THOUSANDS) SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ----------- ----------------------------- ------------ ---------- ADDITIONS ----------------------------- BALANCE AT CHARGED TO CHARGED TO OTHER BALANCE AT BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD ----------- ------------ ---------- ---------------- ------------ ---------- YEAR ENDED DECEMBER 31, 1996: Deducted from asset accounts: Allowance for doubtful accounts... $1,030 $ 575 $ -- $ -- $1,605 Allowance for estimated future returns........................ 1,415 -- 5,854(1) 5,891(2) 1,378 Allowance for makegood reserve.... 535 198 -- -- 733 YEAR ENDED DECEMBER 31, 1995: Deducted from assets accounts: Allowance for doubtful accounts... 719 311 -- -- 1,030 Allowance for estimated future returns........................ 1,169 -- 4,658(1) 4,412(2) 1,415 Allowance for makegood reserves... 1,967 -- -- 1,432(3) 535 YEAR ENDED DECEMBER 31, 1994: Deducted from assets accounts: Allowance for doubtful accounts... 432 287 -- -- 719 Allowance for estimated future returns........................ 965 -- 3,368(1) 3,164(2) 1,169 Allowance for makegood reserves... 1,844 3,757 -- 3,634(3) 1,967
- --------------- (1) Charged to recorded music revenues. (2) Actual sales returns. (3) Makegood credits issued to customers. S-1 63 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly cause this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 26, 1997 ALL AMERICAN COMMUNICATIONS, INC. By: /s/ ANTHONY J. SCOTTI ------------------------------------ Anthony J. Scotti Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ ANTHONY J. SCOTTI Chairman of the Board and March 26, 1997 - --------------------------------------------- Chief Executive Officer Anthony J. Scotti (principal executive officer) /s/ THOMAS BRADSHAW Director, Chief Financial March 26, 1997 - --------------------------------------------- Officer and Treasurer Thomas Bradshaw (principal financial officer and principal accounting officer) /s/ EUGENE BEARD Director March 26, 1997 - --------------------------------------------- Eugene Beard /s/ LAWRENCE E. LAMATTINA Director March 26, 1997 - --------------------------------------------- Lawrence E. Lamattina /s/ GORDON C. LUCE Director March 26, 1997 - --------------------------------------------- Gordon C. Luce /s/ DAVID A. MOUNT Director March 26, 1997 - --------------------------------------------- David A. Mount /s/ R. TIMOTHY O'DONNELL Director March 26, 1997 - --------------------------------------------- R. Timothy O'Donnell /s/ MYRON ROTH Director March 26, 1997 - --------------------------------------------- Myron Roth /s/ BENJAMIN J. SCOTTI Director March 26, 1997 - --------------------------------------------- Benjamin J. Scotti /s/ SYDNEY D. VINNEDGE Director March 26, 1997 - --------------------------------------------- Sydney D. Vinnedge
EX-9.2.1 2 EXHIBIT 9.2.1 1 EXHIBIT 9.2.1 SHAREHOLDERS AGREEMENT Extended Shareholders Agreement, effective as of August 25, 1996, by and among All American Communications, Inc., a Delaware corporation (the "Company"), Anthony J. Scotti ("A. Scotti"), Benjamin J. Scotti ("B. Scotti") (A. Scotti and B. Scotti being hereinafter collectively referred to as the "Scotti Group"), Thomas Bradshaw ("Bradshaw"), Myron Roth ("Roth"), and Sydney D. Vinnedge ("Vinnedge") (Bradshaw, Roth and Vinnedge being hereinafter collectively referred to as the "Management Group"). WHEREAS, the Company, the Management Group and the Scotti Group have entered into a Shareholders Agreement dated as of February 25, 1991 (the "Original Shareholders Agreement") regarding the disposition of the Management Stock (as defined in the Original Shareholders Agreement) and certain other rights of the Company and the Scotti Group; WHEREAS, the parties hereto desire to enter into an agreement regarding their respective rights and obligations with respect to the Management Stock and certain other matters for an extended term and to provide for continuity in the operations of the Company as controlled by A. Scotti and B. Scotti; NOW, THEREFORE, in consideration of the agreements and mutual covenants contained herein, the parties hereby agree as follows: 1. Definitions. 1.1 Capitalized Terms. Capitalized terms used herein without definition shall have the respective meanings set forth in the Original Shareholders Agreement. 2. Right of First Refusal. (a) All Management Stock shall be subject to the following "right of First Refusal" in favor of first A. Scotti and B. Scotti, and second the Company to the extent that A. Scotti and B. Scotti elect not to exercise their Right of First Refusal with respect to any shares of Management Stock subject to such Right of First Refusal. (b) For a period of five years following the effective date hereof, no shares of Management Stock may be sold, transferred, pledged, encumbered or otherwise disposed of (collectively "Transfer") by Bradshaw, Roth or Vinnedge (as the case may be) without first offering (i) A. Scotti and B. Scotti and (ii) the Company (to the extent that A. Scotti and B. Scotti elect not to exercise their right of First Refusal with respect to all such offered shares) the right to purchase such portion of the Management Stock 2 sought to be transferred by Bradshaw, Roth or Vinnedge (as the case may be), at such purchase price and upon such terms as shall have been offered in writing by a third party. If the proposed consideration is other than cash, the person who has the Right of First Refusal may elect to pay either (i) cash in lieu of such other non-cash consideration or (ii) non-cash consideration of equal value. In that case, the value of the non-cash consideration will be determined within thirty (30) days by an independent appraiser reasonably mutually acceptable to the Investor and the person having the Right of First Refusal, or if the parties are unable to select a mutually acceptable appraiser, such appraiser shall be selected by the Presiding Judge of the Superior Court of Los Angeles County and shall determine the value of the non-cash consideration within thirty (30) days of selection. Any exercise of these Right of First Refusal must be communicated in writing to Bradshaw, Roth or Vinnedge (as the case may be) within five (5) business days of notification to A. Scotti and B. Scotti (or the Company) of the proposed transfer of any Management Stock. (c) In the event that Bradshaw, Roth or Vinnedge (as the case may be) should seek to Transfer any Management Stock owed by him in the course of an ordinary public market transaction, then the purchase price per share of Management Stock to be paid by the person electing to exercise the Right of First Refusal shall be equal to the average of the Closing Prices (as hereinafter defined) for the 10 consecutive Trading Days (as hereinafter defined) immediately preceding the date of written notification of the exercise of the Right of First Refusal ("Exercise Date"). For purposes of the Shareholders Agreement, the term "Closing Price" shall mean the last reported sales price regular way for the Common Stock on the National Association of Securities Dealers Inc. Automated Quotation System ( the "NASDAQ System") if the Common Stock is then listed thereon or, if not so listed, on the principal national stock exchange on which the Common Stock is then listed for the 10 consecutive Trading Days immediately preceding the Exercise Date. A "Trading Day" is a business day in which shares of the Common Stock have actually traded; provided, that (i) if at the time of any computation pursuant to this paragraph the Common Stock is not then traded on any trading market or (ii) if there have not been 10 Trading Days in the last 30 calendar days, the purchase price for the shares of Management Stock sought to be transferred shall be the fair value as reasonably determined in good faith by the Board of Directors of the Company. (d) Notwithstanding the foregoing, the provisions of this Section 2 shall not apply to any shares of Common Stock owned by Vinnedge prior to February 25, 1991. 3. Restrictions on Transfer of Management Stock. No Transfer of any shares of Management Stock may be made except in compliance with the provisions of the Shareholders Agreement and all applicable federal, state and foreign securities laws. No Transfer of Management Stock, other than a permitted Transfer (as hereinafter defined), shall be made unless (i) the transferor shall deliver to the Company a written opinion of counsel (which opinion shall be satisfactory in form and substance to the Company) to the effect that an exemption from registration under the Securities Act is available and 3 that the proposed Transfer will not violate applicable federal, state or foreign securities laws and (ii) the transferee delivers to the Company a written agreement (in form and substance reasonably satisfactory to the Company) providing that such transferee will be bound by the provisions restricting Transfers set forth in this Section 3. For purposes of this Section 3, a "Permitted Transfer" is any Transfer made (i) pursuant to an effective registration statement filed under the Securities Act or (ii) in the public market in ordinary market transactions regular way. 4. Legend. In addition to any other legend that may appear on the certificates representing the shares of Common Stock owned by the parties hereto, the Company agrees to cause all certificates for shares of Management Stock to bear the following legend: THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, HAVE BEEN TAKEN FOR INVESTMENT AND ARE SUBJECT TO THE PROVISIONS OF A SHAREHOLDERS AGREEMENT DATED AS OF AUGUST 25, 1996. NEITHER THIS CERTIFICATE NOR THE SHARES REPRESENTED BY IT ARE ASSIGNABLE OR OTHERWISE TRANSFERABLE EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF SUCH AGREEMENT, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 5. Irrevocable Proxy. Each of Bradshaw, Vinnedge and Roth hereby grant to A. Scotti and irrevocable proxy, coupled with an interest, to vote all shares of Management Stock owned by him with respect to any and all matters with respect to which a holder of shares of Common Stock is entitled to vote. In the event that the proxy shall be unenforceable for any reason, each of Bradshaw, Vinnedge and Roth hereby agree to vote all such shares as directed by A. Scotti. Notwithstanding the foregoing, the provisions of this Section 5 shall not apply to any shares of Common Stock owned by Vinnedge prior to February 25, 1991. 6. Termination. Unless otherwise indicated herein, this Shareholders Agreement shall terminate five years and six months from the date hereof. 7. Notices. All notices, consents and other communications under this Shareholders Agreement shall be in writing and shall be deemed to have been duly given when (a) delivered by hand, (b) sent by telex or telecopier (with receipt confirmed), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by Express Mail, Federal Express or other express delivery service (receipt requested), in each case at the principal executive offices of the Company or to the appropriate addresses, telex numbers and telecopier numbers as a party may designate as to itself by notice to the other parties). 4 8. Successors and Assigns. This Shareholders Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided, however, that this Shareholders Agreement may not be assigned by A. Scotti, B. Scotti, Bradshaw, Vinnedge or Roth without the express written consent of the company other than to the respective heirs, legal representative, conservator or guardian of any party hereto; and, provided, further, that a transferee pursuant to a Permitted Transfer shall not be deemed to the a successor or assignee of any party hereto. 9. Entire Agreement; Amendment and Waiver; Counterparts. This Shareholders Agreement contains the sole and entire understanding of the parties with respect to its subject matter and all prior negotiations, discussions, commitments and understandings heretofore had between them with respect thereto are merged herein. No waivers of, or consents to departures from, any provision hereof shall be effective as to any party entitled to the benefits thereof unless given in writing by such party. This Shareholders Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement. This Shareholders Agreement may not be amended as to any party unless such amendment is consented to in writing by such party. 10. Business Day. Any action which is to be taken on any day which is not a business day shall be deemed to have been taken on such day if taken on the next succeeding business day. For purposes of this Shareholders Agreement, a "business day" shall mean any day excluding any Saturday, Sunday and any day which is a legal holiday under the laws of the State of New York, or is a day on which banking institutions located in such state are required or authorized by law or other governmental action to close. 11. Governing Law. This Shareholders Agreement and all amendments hereof and waivers and consents hereunder shall be governed by the internal law of the State of New York without regard to the conflicts of law principles thereof. 5 IN WITNESS WHEREOF, the parties have caused this Shareholders Agreement to be duly executed as of the 25th day of August, 1996. ALL AMERICAN COMMUNICATIONS, INC. By: /s/ ANTHONY J. SCOTTI ---------------------------- Anthony J. Scotti, Chief Executive Officer "SCOTTI GROUP": /s/ ANTHONY J. SCOTTI ------------------------------- Anthony J. Scotti BENJAMIN J. SCOTTI -------------------------------- Benjamin J. Scotti "MANAGEMENT GROUP": ---------------- /s/ THOMAS BRADSHAW -------------------------------- Thomas Bradshaw -------------------------------- Myron Roth /s/ SYDNEY D. VINNEDGE -------------------------------- Sydney D. Vinnedge EX-11 3 EXHIBIT 11 1 EXHIBIT 11 ALL AMERICAN COMMUNICATIONS, INC. & SUBSIDIARIES STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS -- EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ----------------------------- 1996 1995 1994 ------- ------ ------ Weighted average number of common shares outstanding........................................ 11,437 8,181 6,135 Assumed exercise of dilutive options and warrants under the treasury stock method based on average market price....................................... 592 149 66 ------- ------ ------ Weighted average number of common shares and common share equivalents -- primary....................... (A) 12,029 8,330 6,201 ======= ====== ====== Computation of net income for per share purposes: Net income before extraordinary charge............... $14,106 $7,248 $ 455 Add: After tax reduction of interest expense for assumed reduction of borrowings from aggregate proceeds on options and warrants assumed to have been exercised in excess of 20% of the outstanding shares under the modified treasury stock method.... 30 -- -- ------- ------ ------ Net income before extraordinary charge for per share computation........................................ (B) 14,136 7,248 455 Extraordinary charge................................. (C) (1,420) -- -- ------- ------ ------ Net income for per share computation................. (D) $12,716 $7,248 $ 455 ======= ====== ====== Earnings per common and common equivalent share: Net income before extraordinary charge............. (B) / (A) $ 1.18 $ 0.87 $ 0.07 Extraordinary charge............................... (C) / (A) (0.12) -- -- ------- ------ ------ Net income......................................... (D) / (A) $ 1.06 $ 0.87 $ 0.07 ======= ====== ======
EX-23.1 4 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Forms S-3 (No. 333-19765 and No. 33-77782) and in the Registration Statements on Form S-8 (No. 333-19767, No. 33-42383, and No. 33-64423) of All American Communications, Inc. and subsidiaries of our report dated February 27, 1997 appearing on page F-1 of this Form 10-K. PRICE WATERHOUSE LLP - ----------------------- Price Waterhouse LLP Los Angeles, California March 25, 1997 EX-23.2 5 EXHIBIT 23.2 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-19767, No. 33-42383 and No. 33-64423) of All American Communications, Inc. and in the Registration Statements (Form S-3 No. 333-19765 and No. 33-77782) of All American Communications, Inc. and in the related Prospectuses of our report dated March 4, 1996, with respect to the consolidated financial statements and schedule of All American Communications, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP Los Angeles, California March 24, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-1-1996 DEC-31-1996 33,858 0 114,776 4,794 94,879 0 8,092 3,976 359,735 0 179,000 0 0 2 87,968 359,735 25,584 236,458 17,903 196,352 4,602 0 12,719 24,320 10,214 14,106 0 (1,420) 0 12,686 1.06 1.06
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