-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, aJjYRxttoiFJpPEK7/vxJj+WQqQ3OSR2FUoj7BLDCj97Owbo2T4y6pLtkV7EGYPW ZXY5+n+5Ol7jj5eNLHn0fw== 0000950144-94-000225.txt : 19940207 0000950144-94-000225.hdr.sgml : 19940207 ACCESSION NUMBER: 0000950144-94-000225 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19940124 ITEM INFORMATION: 7 FILED AS OF DATE: 19940203 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TURNER BROADCASTING SYSTEM INC CENTRAL INDEX KEY: 0000100240 STANDARD INDUSTRIAL CLASSIFICATION: 4833 IRS NUMBER: 580950695 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 34 SEC FILE NUMBER: 001-08911 FILM NUMBER: 94504394 BUSINESS ADDRESS: STREET 1: ONE CNN CENTER STREET 2: 100 INTERNATIONAL BLVD CITY: ATLANTA STATE: GA ZIP: 30303 BUSINESS PHONE: 4048271700 MAIL ADDRESS: STREET 1: P O BOX 105366 CITY: ATLANTA STATE: GA ZIP: 30348-5366 FORMER COMPANY: FORMER CONFORMED NAME: TURNER COMMUNICATIONS CORP DATE OF NAME CHANGE: 19791016 FORMER COMPANY: FORMER CONFORMED NAME: RICE BROADCASTING CO INC DATE OF NAME CHANGE: 19700909 8-K/A 1 TURNER BROADCASTING SYSTEM, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported) January 24, 1994 TURNER BROADCASTING SYSTEM, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Georgia --------------------------------------- (State of incorporation or organization) 0-9334 58-0950695 ------------------------ ------------------------------------ (Commission File Number) (I.R.S. Employer Identification No.) One CNN Center, Atlanta, Georgia 30303 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (404) 827-1700 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) 2 ITEM 7. EXHIBITS (c) Exhibits 12(c) -- Statement re: computation of ratio of earnings to fixed charges for interim period 12(d) -- Statement re: computation of pro forma ratio of earnings to fixed charges 23(d) -- Consent of Price Waterhouse 23(e) -- Consent of Ernst & Young 99(a) -- Audited New Line Cinema Corporation consolidated balance sheets as of December 31, 1992 and 1991, and the related consolidated statements of operations, shareholders' equity and cash flows for the three years ending December 31, 1992. 99(b) -- Unaudited New Line Cinema Corporation condensed consolidated balance sheet as of September 30, 1993 and the condensed consolidated statements of operations and cash flows for the nine months ended September 30, 1993 and 1992. -2- 3 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. TURNER BROADCASTING SYSTEM, INC. (Registrant) Date: February 3, 1994 By: /s/ WILLIAM S. GHEGAN ------------------------------------ Name: William S. Ghegan Title: Vice President and Controller and Chief Accounting Officer -3- 4 EXHIBIT INDEX Exhibits Page -------- ---- 12(c) -- Statement re: computation of ratio of earnings to fixed charges for interim period 12(d) -- Statement re: computation of pro forma ratio of earnings to fixed charges 23(d) -- Consent of Price Waterhouse 23(e) -- Consent of Ernst & Young 99(a) -- Audited New Line Cinema Corporation consolidated balance sheets as of December 31, 1992 and 1991, and the related consolidated statements of operations, shareholders' equity and cash flows for the three years ending December 31, 1992. 99(b) -- Unaudited New Line Cinema Corporation condensed consolidated balance sheet as of September 30, 1993 and the condensed consolidated statements of operations and cash flows for the nine months ended September 30, 1993 and 1992. These exhibit numbers may not in all cases correspond to those in Item 601 of Regulation S-K because of special requirements applicable to EDGAR filers. EX-12.C 2 TBS STATEMENT RE COMPUTATION OF RATIOS 1 EXHIBIT 12(C) TURNER BROADCASTING SYSTEM, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES FOR INTERIM PERIOD
NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 1992 1993 -------- -------- (IN THOUSANDS, EXCEPT RATIO AMOUNTS) (A) Income before provision for income taxes, extraordinary items and the cumulative effect of a change in accounting for income taxes(a)............................................... $ 61,060 $113,008 -------- -------- -------- -------- Fixed charges Interest expense(b)........................................... $159,462 $156,179 Interest capitalized.......................................... 0 0 Interest associated with rental agreements(c)................. 19,951 21,268 -------- -------- (B) Total fixed charges..................................... 179,413 177,447 Less interest capitalized..................................... 0 0 -------- -------- (C) Total fixed charges exclusive of interest capitalized... $179,413 $177,447 -------- -------- -------- -------- (D) Earnings before income taxes, extraordinary items, the cumulative effect of a change in accounting for income taxes and fixed charges exclusive of interest capitalized (A+C)..... $240,473 $290,455 -------- -------- -------- -------- Ratio of earnings to fixed charges (D/B)........................ 1.34 1.64 -------- -------- -------- --------
- --------------- (a) Excludes losses of less-than-fifty-percent owned entities for the nine-month period ended September 30, 1993 of $13,848,000. (b) Includes the Company's proportionate share of interest expense for the nine-month periods ended September 30, 1992 and 1993 of $5,896,000 and $5,421,000 associated with a joint venture. (c) This charge represents one-third of consolidated rent expense, which the Company believes to be a reasonable approximation of the interest factor. EX-12.D 3 TBS STATEMENT RE COMPUTATION OF PRO FORMA 1 EXHIBIT 12(D) TURNER BROADCASTING SYSTEM, INC. COMPUTATION OF PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1992 1993 -------------------- -------------------- PRO FORMA PRO FORMA FOR THE ACQUISITIONS FOR THE ACQUISITIONS AND THE NEW LINE AND THE NEW LINE MERGER MERGER -------------------- -------------------- (IN THOUSANDS, EXCEPT RATIO AMOUNTS) (A) Income before gain on issuance of stock, provision for income taxes, extraordinary items and the cumulative effect of a change in accounting for income taxes(a)..................................... $ 46,516 $ 81,584 ----------- ----------- ----------- ----------- Fixed charges Interest expense.................................... $237,340 $177,074 Interest capitalized................................ 6,454 4,435 Interest associated with rental agreements(b)....... 22,910 21,738 ----------- ----------- (B) Total fixed charges........................... 266,704 203,247 Less interest capitalized........................... 6,454 4,435 ----------- ----------- (C) Total fixed charges exclusive of interest capitalized.............................. $260,250 $198,812 ----------- ----------- ----------- ----------- (D) Earnings before gain on issuance of stock, provision for income taxes, extraordinary items, the cumulative effect of a change in accounting for income taxes and fixed charges exclusive of interest capitalized (A+C)................................... $306,766 $280,396 ----------- ----------- ----------- ----------- Ratio of earnings to fixed charges (D/B).............. 1.15 1.38 ----------- ----------- ----------- -----------
- --------------- (a) Excludes earnings of less-than-fifty-percent owned entities for the pro forma year ended December 31, 1992 of $6,690,000 and losses of less-than-fifty-percent owned entities for the pro forma nine-month period ended September 30, 1993 of $11,952,000. (b) This charge represents one-third of consolidated rent expense, which the Company believes to be a reasonable approximation of the interest factor. EX-23.D 4 TBS CONSENT OF PRICE WATERHOUSE 1 EXHIBIT 23(D) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus Supplement constituting part of this Registration Statement on Form S-3 of our report dated February 15, 1993, which appears on page 65 of the 1992 Annual Report to Shareholders of Turner Broadcasting System, Inc., which is incorporated by reference in Turner Broadcasting System, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992. We also consent to the incorporation by reference of our report on the Financial Statement Schedules, which appears on page 36 of such Annual Report on Form 10-K. We also consent to the references to us under the headings "Experts" and "Selected Historical Financial Information" in such Prospectus Supplement. However, it should be noted that Price Waterhouse has not prepared or certified such "Selected Historical Financial Information." PRICE WATERHOUSE Atlanta, Georgia January 21, 1994 EX-23.E 5 TBS CONSENT OF ERNST & YOUNG 1 EXHIBIT 23(E) CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Prospectus Supplement accompanying the Prospectus constituting part of the Registration Statement (Form S-3, No. 33-62218) of Turner Broadcasting System, Inc. ("TBS"), and to the incorporation by reference therein of our reports dated February 9, 1993, with respect to the consolidated financial statements and schedules of New Line Cinema Corporation included in the Current Report on Form 8-K of TBS, filed with the Securities and Exchange Commission on January 24, 1994. We further consent to the incorporation by reference therein of our report dated February 25, 1993, with respect to the financial statements of Castle Rock Entertainment (A California General Partnership) included in the Current Report on Form 8-K of TBS filed with the Securities and Exchange Commission on December 28, 1993. ERNST & YOUNG New York, New York January 24, 1994 2 REPORT OF INDEPENDENT AUDITORS BOARD OF DIRECTORS AND STOCKHOLDERS NEW LINE CINEMA CORPORATION We have audited the accompanying consolidated balance sheets of New Line Cinema Corporation and subsidiaries as of December 31, 1991 and 1992, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1992. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules 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 New Line Cinema Corporation and subsidiaries at December 31, 1991 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1992 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. ERNST & YOUNG New York, New York February 9, 1993 EX-99.A 6 TBS AUDITED NEW LINE CINEMA CORP FINANCIALS 1 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
Exhibit 99(a) December 31, ------------------------------------- 1991 1992 ---- ---- ASSETS Cash and cash equivalents $ 4,333,485 $ 1,849,698 Accounts receivable, less allowance for doubtful accounts of 37,036,691 35,968,253 approximately $515,000 in 1991 and $640,000 in 1992 Film inventories (Note 1) 136,437,632 147,775,148 Property and equipment, less accumulated depreciation and amortization of approximately $3,616,000 in 1991 and $5,425,000 in 1992 5,121,414 10,309,209 Note receivable from officers and other related parties (Note 11) 1,895,000 1,965,000 Other assets 3,787,310 6,540,881 Investment in affiliated company (Note 2) 10,728,021 17,937,997 ----------- ----------- Total assets $ 199,339,553 222,346,186 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses $ 17,728,699 8,218,481 Third party participations payable (Note 1) 29,528,547 23,834,301 Note payable to bank (Note 3) -- 58,500,000 Long-term debt (Note 4) 30,000,000 30,000,000 Defered income 49,825,702 21,702,987 Deferred income taxes (Note 5) 6,618,203 7,800,121 ----------- ----------- Total liabilities 133,701,151 150,055,890 Commitments and contingencies (Notes 6 and 7) Stockholders' equity (Notes 8,9, and 10): Preferred Stock, par value $.01 per share; 300,000 shares authorized; none outstanding -- -- Common Stock, $.01 par value; 50,000,000 shares authorized, issued: 1991, 12,671,651 shares; 1992, 12,728,560 shares 126,716 127,285 Capital in excess of par value 37,592,837 37,825,947 Retained earnings 28,134,133 34,552,348 ----------- ----------- 65,853,686 72,505,580 Treasury Stock, 64,677 shares at cost (215,284) (215,284) ------------ ----------- Total stockholders' equity 65,638,402 72,290,296 ------------ ----------- Total liabilities and stockholders' equity $ 199,339,553 $ 222,346,186 ============ ===========
See accompanying notes to consolidated financial statements. -1- 2 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, -------------------------------------------------- 1990 1991 1992 ---- ---- ---- Revenue $133,141,090 $225,686,168 $227,001,696 Costs relating to revenue 109,720,831 192,190,621 194,653,113 ----------- ----------- ----------- Gross income 23,420,259 33,495,547 32,348,583 Operating expenses: General and administrative 12,170,368 17,510,275 21,980,853 Selling 683,166 912,367 1,406,224 Depreciation and amortization 876,908 1,820,875 2,809,025 ----------- ----------- ----------- 13,730,442 20,243,517 26,196,102 ----------- ----------- ----------- Income from operations 9,689,817 13,252,030 6,152,481 Interest expense (Notes 3 and 4) 575,000 227,397 3,685,197 Other charges 148,676 323,841 248,771 ----------- ----------- ----------- Income before equity in income of, and gain on issuance of stock by affiliated company and provision for income taxes 8,966,141 12,700,792 2,218,513 Equity in income of affiliated company (Note 2) 700,000 1,065,000 2,355,000 Gain on issuance of stock by affiliated company (Note 2) -- -- 4,334,864 ----------- ----------- ----------- Income before provision for income taxes 9,666,141 13,765,792 8,908,377 Provision for income taxes (Note 5) 3,407,000 4,824,000 2,490,162 ----------- ----------- ----------- Net income $ 6,259,141 $ 8,941,792 $ 6,418,215 ========== ========== ========== Primary net income per share of Common Stock $.58 $.66 $.45 ==== ==== ==== Fully diluted net income per share of Common Stock $.58 $.64 $.45 ==== ==== ==== Primary weighted average number of shares of outstanding Common Stock 10,861,045 13,592,804 14,282,039 ========== ========== ========== Fully diluted weighted average number of shares of outstanding Common Stock 10,861,045 13,880,687 14,326,653 ========== ========== ==========
See accompanying notes to consolidated financial stataments. -2- 3 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1990, 1991 AND 1992
Capital in Common Common Excess of Retained Stock Held in Stock Par Value Earnings Treasury Total ------ ---------- -------- ----------- ----- Balance, January 1, 1990 $62,483 $ 9,929,197 $12,933,200 $(280,943) $22,643,937 Issuance of 104,820 shares of Common Stock upon exercise of options 1,048 143,400 -- -- 144,448 Sale of 600,000 shares of Common Stock 6,000 5,840,465 -- -- 5,846,465 Issuance of 7,577 shares of Common Stock held in treasury to Employee Stock Ownership Plan -- (9,623) -- 55,085 45,462 Issuance of 1,718,214 shares of Common Stock upon declaration of 25% stock dividend 17,182 (17,070) -- (112) -- Effect of issuance of 1,734,247 shares of Common Stock upon declaration of 20% stock dividend 17,342 (17,231) -- (111) -- Net income -- -- 6,259,141 -- 6,259,141 ------- --------- --------- --------- ---------- Balance, December 31, 1990 104,055 15,869,138 19,192,341 (226,081) 34,939,453 Issuance of 165,670 shares Common Stock upon exercise of options 1,656 1,010,954 -- -- 1,012,610 Sale of 1,910,000 shares of Common Stock 19,100 18,744,489 -- -- 18,763,589 Issuance of 190,500 shares of Common Stock 1,905 1,953,720 -- -- 1,955,625 Issuance of 2,226 shares of Common Stock held in treasury to Employee Stock Ownership Plan -- 14,536 -- 10,797 25,333 Net income -- -- 8,941,792 -- 8,941,792 ------- --------- --------- --------- ---------- Balance, December 31, 1991 126,716 37,592,837 28,134,133 (215,284) 65,638,402 Issuance of 56,909 shares of Common Stock upon exercise of options 569 233,110 -- -- 233,679 Net income -- -- 6,418,215 -- 6,418,215 ------- --------- --------- --------- ---------- Balance, December 31, 1992 $127,285 $37,825,947 $34,552,348 $(215,284) $72,290,296 ======== =========== =========== ========= ===========
See accompanying notes to consolidated financial statements. -3- 4 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, --------------------------------------------------- 1990 1991 1992 ------------ ------------- ------------- OPERATING ACTIVITIES Net income $ 6,259,141 $ 8,941,792 $ 6,418,215 Adjustments to reconcile net income to net cash used in operating activities: Increase (decrease) in bad debt allowance (117,347) 68,968 124,655 Amortization of film inventories 59,945,508 93,588,978 131,678,221 Depreciation and other amortization 876,908 1,820,875 2,809,025 Shares of Common Stock issued to Employee Stock Ownership Plan 45,462 25,333 -- Undistributed earnings from affiliated company (700,000) (1,065,000) (2,355,000) Non cash gain on issuance of stock by affiliated company -- -- (4,897,476) Deferred income taxes 2,551,000 1,931,000 1,181,918 Changes in other assets and liabilities: (Increase) decrease in: Accounts receivable (8,119,666) (14,452,030) 943,783 Gross film inventories (88,054,387) (154,848,255) (143,015,737) Other assets (423,811) 520,016 (3,338,290) (Decrease) increase in: Accounts payable and accrued expenses 2,789,303 12,921,129 (9,510,218) Third party participations payable -- net 19,933,728 524,600 (5,694,246) Deferred income 4,583,094 40,239,776 (28,122,715) ------------ ------------- ------------- Cash used in operating activities (431,067) (9,782,818) (53,777,865) INVESTING ACTIVITIES Purchase of property and equipment (1,503,806) (3,684,956) (6,996,958) Investment in affiliated company (8,843,584) (119,437) -- Notes receivable from officers and other related parties (950,000) (745,000) (70,000) ------------ ------------- ------------- Cash used in investing activities (11,297,390) (4,549,393) (7,066,958) FINANCING ACTIVITIES Net proceeds from borrowings on note payable 49,066,189 43,308,301 62,127,357 Repayment of note payable (42,700,000) (76,200,000) (4,000,000) Net proceeds from issuance of long-term debt -- 28,840,171 -- Net proceeds from issuance of shares of Common Stock 5,990,913 21,731,824 233,679 ------------ ------------- ------------- Cash provided by financing activities 12,357,102 17,680,296 58,361,036 ------------ ------------- ------------- Increase (decrease) in cash and cash equivalents 628,645 3,348,085 (2,483,787) Cash and cash equivalents at beginning of period 356,755 985,400 4,333,485 ------------ ------------- ------------- Cash and cash equivalents at end of period 985,400 $ 4,333,485 $ 1,849,698 ============ ============= =============
See accompanying notes to consolidated financial statements. -4- 5 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1992 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Principles of Consolidation New Line Cinema Corporation (the "Company") is a motion picture production and distribution company. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Film Inventories Film inventories consist of the cost of the Company's productions, acquired films, prints and certain exploitation costs including advertising costs expected to benefit the films in future markets, the cost of acquiring certain rights for domestic home video and foreign distribution of certain films and capitalized interest and overhead related to production of films and acquisition of film rights. Such inventories are stated at the lower of unamortized costs or net realizable value generally on a film-by-film basis. The costs of films released are amortized using the individual-film-forecast - -computation method which amortizes costs in the same ratio that current gross revenues bear to anticipated total gross revenues. The costs of distribution rights are amortized in the same ratio that fees earned in the current period from the rights bear to anticpated total fees. Such anticipated total gross revenues and fees are estimated by management. The anticipated total gross revenue and fees are reviewed periodicially, which may result in revised amortization rates and, when applicable, write-downs to net realizable value. Film inventories, net of accumulated amortization, approximated the following (in thousands): December 31, --------------------------------- 1991 1992 ---- ---- Films released $ 76,029 $ 62,784 Films completed but not released 22,549 41,519 Films in process 21,488 30,557 Distribution rights 16,372 12,915 ------- ------- $ 136,438 $ 147,775 ======= ======= Based on the Company's anticipated total gross revenue estimates, over 95% of released film inventories at December 31, 1992 will be amortized within the three-year period ending December 31, 1995. Property and Equipment; Depreciation and Amortization Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimate useful life used for property and equipment is ten years, while the life used for computer hardware and software is three years. Leasehold improvements are amortized over the estimated useful lives of the related assets or the term of the lease, whichever is shorter. Revenue Recognition Revenue from theatrical exhibition of films is reflected in the accompanying consolidated financial statements when the film is exhibited. Revenue from the sale of film rights, principally for the -5- 6 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) home video, syndicated television and pay cable television markets is recognized when the film is available for showing or exploitation. Amounts received prior to the film's availability are classified as deferred income. Films with theatrical releases (which generally may continue for up to six months) are generally made available for release in other media as follows: Months After Approximate Market Initial Release Release Period ------ --------------- -------------- Domestic home video 4-6 months -- Domestic pay-per-view 6-9 months 3 months Domestic pay television 10-18 months 12-21 months Domestic network or basic cable 30-36 months 18-36 months Domestic syndication 30-36 months 3-15 years Foreign theatrical -- 4-6 months Foreign home video 6-12 months -- Foreign television 18-24 months 18-30 months For the years ended December 31, 1990, 1991 and 1992 approximately 71%, 63% and 44%, respectively, of the Company's total revenue was attributable to two films, four films and six films, respectively. Foreign revenue related to the Company's films approximated 12%, 11% and 24% of total revenue for the years ended Decmeber 31, 1990, 1991 and 1992, respectively. Third Party Participations Total expected third party participations are charged to expense in the same ratio as current gross revenues bear to anticipated total gross revenues. At December 31, 1992, the portion of third party participations payable within one year was approximately $5,487,000. Concentration of Credit Risks The Company licenses various rights in its motion pictures to distributors throughout the world. Generally payment is received in full or in part, or letters of credit are obtained, prior to the Company's release of the films to its distributors. Income Taxes Deferred income taxes result from timing differences between the amounts reported for financial reporting and income tax purposes. These differences related primarily to the gain on issuance of stock by an affiliated company, advertising and print expenditures, third party participations, and film amortization. Common Stock Data Primary and fully diluted net income per share of Common Stock and Common Stock equivalents are based on the weighted average number of shares of Common Stock and Common Stock equivalents outstanding. Transactions in Shares of Affiliated Companies The Company recognizes as separate non-operating income, gains, and losses arising from sales of previously unissued stock by a subsidiary or affiliate to outside investors when such sales change the Company's percentage of ownership in such companies. -6- 7 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fair Value of Financial Instruments Long-Term Debt: The fair value of the Company's long-term debt is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The Company believes the carrying amounts reported in the balance sheet for these instruments is approximately equal to their fair value. Reclassification Certain amounts in 1990 and 1991 have been reclassified to conform to the 1992 presentation. 2. INVESTMENT IN AFFILIATED COMPANY On October 26, 1990, the Company acquired from RHI Entertainment, Inc. ("RHI") 52.6% of RHI's outstanding capital stock for $8,700,000. A portion of the excess of cost over the Company's equity in RHI, consists of goodwill of $850,000 which is being amortized over a 20-year period and an option valued at $1,270,000 to acquire additional shares of RHI capital stock. The investment is accounted for under the equity method, as the Company does not have majority voting control of RHI. The Company has the right to designate two of the five members of RHI's board of directors and all major decisions as to the financing and operations of RHI require a super majority vote of the board of directors of RHI. RHI is a leading producer of movies-of-the-week, mini-series and other programming for the United States television market. RHI has acquired the worldwide television rights of Qintex Entertainment Inc., including Hal Roach and Robert Halmi titles. In April 1992, in exchange for $561,000 paid by the Company to one of the principals of RHI, such principal cancelled an option to acquire shares of Common Stock of RHI owned by the Company. On July 29, 1992, RHI issued 2,315,000 shares of its common stock at $10 per share, in an initial public offering, resulting in aggregate gross proceeds of $23,150,000. This issuance reduced the Company's interest in the capital stock of RHI to 37.4%. As a result, the Company recognized a gain of $4,335,000 (before provision for income taxes of $1,647,000) which reflects a reduction by $3,512,000 in the carried amount of its investment which was deemed sold. Income taxes provided on the gain are not payable until the gain is recognized for tax purposes, such as from an actual sale of RHI stock by the Company. Summary financial information for RHI as of and for the years ended December 31, 1990, 1991 and 1992 is as follows: 1990 1991 1992 ------- ------- ------- Cash $ 964,000 $ 752,000 $241,000 Accounts receivable 11,647,000 8,607,000 29,654,000 Film production costs 27,537,000 41,853,000 55,681,000 Total assets 42,146,000 55,337,000 90,049,000 Notes payable to bank 19,391,000 21,234,000 17,384,000 Deferred revenue 4,454,000 12,667,000 17,796,000 Shareholders' equity 13,405,000 15,902,000 42,367,000 Revenue 13,325,000 33,252,000 56,472,000 Film costs 8,811,000 22,285,000 42,037,000 Net income 1,569,000 2,498,000 5,646,000 The Company's consolidated retained earnings at December 31, 1992 includes $4,120,000 related to the equity in income of RHI. Equity in income of RHI is considered permanently reinvested since RHI is restricted from paying dividends in accordance with its credit agreements and therefore, the Company has not provided income taxes on this amount. -7- 8 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. NOTE PAYABLE TO BANK The Company's Credit Facility provides revolving credit of $75,000,000 secured by all assets of the Company currently owned or acquired in the future. Interest is payable quarterly at a rate equal to the Alternate Base Rate (as defined) plus a margin or the London InterBank Offered Rate plus a margin in the case of a Eurodollar loan. A commitment fee of 3/8 of 1% is charged on the average unused annual balance. In addition, the Company is required to maintain $5,000,000 of insurance on the life of the Chief Executive Officer of the Company. The credit facility terminates on June 30, 1993. The credit facility contains various covenants which, among other things, (i) provide that minimum consolidated tangible net worth, as defined, must be maintained by the Company, (ii) limit the incurrence of additional indebtedness, (iii) prohibit the payment of cash dividends as long as an outstanding loan balance exists, (iv) limit the amount of certain capital expenditures, (v) limit the amount of certain production and preproduction costs per film in active production or preproduction, for a maximum of eight such films at any one time and no more than three such films to be in principal photography at any one time, (vi) restrict the amount to be paid to acquire rights in films produced by others and (vii) require that the Company's Chief Executive Officer maintain his ownership of the Company, as defined, and remain as its Chief Executive Officer. Other information relating to the note payable under the existing and prior credit facilities during the three year period ended December 31, 1992 is summarized below:
1990 1991 1992 ---- ---- ---- Maximum amount of borrowings outstanding during year $34,000,000 $39,000,000 $62,500,000 Daily average amount of borrowings outstanding each year $14,728,000 $14,533,000 $38,273,000 Weighted average interest rate for year 11.0% 9.5% 6.4% Interest rate at December 31 10.5% 7.5% 7.0% Interest expense, net of capitalized amounts $ 575,000 $ 99,000 $ 708,000 Capitalized interest $ 1,185,000 $ 1,379,000 $ 1,885,000
Interest paid under the credit facility (net of capitalized amounts) amounted to approximately $575,000, $99,000, and $437,000 in 1990, 1991 and 1992, respectively. In 1992, the Company also incurred approximately $2,900,000 of interest related to a $40,000,000 advance received from Columbia TriStar Home Video. Commitment fees under the agreements were immaterial for each of the three years in the period ended December 31, 1992. In February 1993, the Company received a commitment for the replacement of the existing credit facility with a new credit facility which would provide up to $150,000,000 of available credit with a syndicate of banks. The new credit facility is subject to certain conditions, including final documentation. Except for the increase in principal amount and a restriction on the amount of permitted increase in selling, general and administrative expenses, the terms for the proposed new facility would not materially differ from the existing facility's terms. The Company has in the past been able to renew or extend the maturities on its credit facilities, although there can be no assurance that the new credit facility will be obtained. 4. LONG-TERM DEBT On November 14, 1991, the Company issued $30,000,000 of convertible subordinated debentures which are convertible at the option of the holder into shares of the Company's common stock at $16 7/8 per share, for a total of 1,777,778 shares. The debentures are payable with interest at 6 1/2% payable -8- 9 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LONG-TERM DEBT (CONTINUED) semi-annually and are due November 15, 2006. Annual sinking fund payments of $3,500,000, commencing November 15,2000, are calculated to retire 70% of the debentures prior to maturity. The debentures are redeemable at the option of the Company, in whole or in part, at the following redemption prices together with accrued and unpaid interest commencing on each November 15 in the years set forth below: 1993 104% 1994 103% 1995 102% 1996 101% 1997 and thereafter 100% The debentures are not redeemable by the Company before November 15, 1993 and from that date until November 15, 1994, are not redeemable unless the average price of the Company's common stock for a defined period exceeds 150% of the conversion price. For the years ended December 31, 1991 and 1992, the Company incurred interest charges of $243,750 and $1,950,000, respectively, of which approximately $215,000 and $1,853,000 was capitalized. Interest paid (net of capitalized amounts) amounted to $97,000 in 1992. 5. INCOME TAXES The provision for income taxes approximated the following:
Year ended December 31, ------------------------------------------------------------------------------------------------------------- 1990 1991 1992 ------------------------------------------------------------------------------------------------------------- Current Deferred Total Current Deferred Total Current Deferred Total -------- -------- -------- -------- -------- -------- -------- -------- -------- Federal $ --- $2,099,000 $2,099,000 $2,099,000 $814,000 $2,913,000 $ 863,000 $ 57,000 $ 920,000 Foreign withholding 763,000 --- 763,000 1,146,000 --- 1,146,000 1,185,000 --- 1,185,000 State and local 93,000 452,000 545,000 610,000 155,000 765,000 270,000 115,000 385,000 -------- ---------- ---------- ---------- -------- ---------- ---------- -------- ----------- $856,000 2,551,000 3,407,000 3,855,000 $969,000 $4,824,000 $2,318,000 $172,000 2,490,000 ======== ========== ========== ========== ======== ========== ========== ======== ===========
The difference between the statutory federal income tax rate of 34% and the taxes actually provided for the years ended December 31, 1990, 1991 and 1992, approximated the following:
Year ended December 31, ----------------------------------------- 1990 1991 1992 --------- ---------- ---------- Taxes based on statutory federal income tax rate $3,287,000 $4,681,000 $3,029,000 Add (deduct): Equity in income of affiliated company permanently reinvested (235,000) (362,000) (801,000) State and local taxes, net of federal tax benefit 360,000 505,000 252,000 Other (5,000) --- 10,000 ---------- ---------- ---------- $3,407,000 $4,824,000 $2,490,000 ========== ========== ==========
-9- 10 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) The deferred tax provision for the years ended December 31, 1990, 1991 and 1992 includes the following tax effects of timing differences which are expensed or recognized as revenue in different periods for financial statement and tax purposes:
1990 1991 1992 ---------- ---------- ---------- Advertising and print expenditures $2,642,000 $2,003,000 $ 26,000 Amortization of film inventories 226,000 2,203,000 (785,000) Gain on issuance of stock by affiliated company --- --- 1,647,000 Third party participations --- (3,375,000) (445,000) Foreign tax credits (269,000) 269,000 --- Depreciation of fixed assets (125,000) (159,000) (163,000) Allowance for bad debts --- --- (48,000) Other 77,000 28,000 (60,000) ---------- ---------- ---------- $2,551,000 $ 969,000 $ 172,000 ========== ========== ==========
Income taxes paid amounted to approximately $1,512,000, $798,000 and $2,165,000 in 1990, 1991 and 1992, respectively. In February 1992, the Financial Accounting Standards Board ("FASB") issued Statement No. 109, "Accounting for Income Taxes," which the Company is required to adopt in 1993. Under the new rules, deferred taxes are recognized using the liability method, whereby tax rates are applied to cumulative temporary differences based on when and how they are expected to affect the tax return. Deferred tax assets and liabilities are adjusted for tax rate changes. Under the rules presently being applied (APB Opinion 11), deferred taxes are measured using tax rates for the year in which timing differences arise. Deferred taxes are not adjusted for tax rate changes. The Company has accumulated the necessary information and will apply the new rules starting the first quarter of 1993. Application of the new rules will not have a material impact on the Company's financial statements. The Company has determined that it will record the cumulative effect of the change in 1993 and will not restate prior years' financial statements to reflect adoption of the new rules. 6. RENT EXPENSE AND LEASE COMMITMENTS The Company occupies office space under various operating leases. In addition to the base annual rental, the leases provide for certain escalation charges based on increases in operating expenses of the buildings. Rent expense amounted to approximately $543,000, $868,000 and $1,245,000 for the years ended December 31, 1990, 1991, and 1992, respectively. At December 31, 1992, minimum noncancellable commitments under these leases were as follows: 1993 $ 1,584,000 1994 1,621,000 1995 1,636,000 1996 1,696,000 1997 1,201,000 Thereafter 9,805,000 ----------- $17,543,000 =========== -10- 11 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES Legal Matters In December 1992, the Company, its Chairman, President and another officer of the Company, were named as defendants in an action brought by Troma, Inc. in the Supreme Court of the State of New York, County of New York. The action seeks unspecified damages in an amount "no less than $50 million" for breach of an agreement which allegedly required the Company to produce and distribute a film based upon the characters owned by the plaintiff. No answer has yet been filed, and the Company is considering its possible counterclaims against the plaintiff and its principal officers. The claims in the action against the Company's officers are covered by the Company's directors' and officers' liability insurance policy. In May 1992, the Company, Allied Vision, Ltd. ("Allied") and Innovation Books, a division of the Innovative Corporation, were named as defendants in an action brought by Stephen King in the United States District Court for the Southern District of New York. The action sought to ban the use of Mr. King's name in connection with the film "The Lawnmower Man" (the "Film"). Mr. King seeks unspecified damages under the Lanham Act and New York common law. The Company owns the Film's North American distribution rights. The Film has completed its theatrical release in the United States, and had its home video release on August 26, 1992. The United States Court of Appeals for the Circuit Court has partly reversed an order of the District Court, and as a result the defendants have been able to continue to refer to the Film as based upon a short story written by Mr. King, but are prohibited from further use of Mr. King's name in a "possessory credit" in the title of the Film. The Company's defense and indemnification of up to $1 million is being provided under a liability insurance policy provided in connection with the Film. In June 1990, an action was brought against the Company in the Supreme Court, New York County, by Smart Egg Pictures, SA, one of the joint venturers with the Company in the first two "Nightmare on Elm Street" films. The plaintiff alleges that the Company wrongfully induced it to enter into an agreement diminishing its rights in the joint venture assets. The action seeks an accounting and damages of at least $5,000,000, together with punitive damages and treble damages under the RICO laws, in connection with the series of "A Nightmare on Elm Street" films. The Company and its subsidiaries are parties to various other legal proceedings, all of which are considered routine and incidental to the business of the Company and are not material to the financial condition and operation of the business. In management's opinion, the ultimate outcome of these legal proceedings, as well as the lawsuits discussed above, will not have a material adverse effect on the results of operations in any one year. At this time, the Company cannot predict the outcome nor estimate the range of loss for the lawsuits discussed above. Acquisition of Distribution Rights In addition to the film inventories recorded on the Consolidated Balance Sheet at December 31, 1992, the Company is contractually committed to advancing funds, in accordance with contract terms, for the acquisition rights to films which will be completed subsequent to December 31, 1992. These unrecorded contractual commitments were approximately $36,000,000 at December 31, 1992. 8. EMPLOYEE BENEFIT PLANS Pension Expense Certain employees of certain subsidiaries of the Company are covered under collective bargaining agreements. All such union employees are covered by multiemployer defined benefit pension plans. The Company makes contributions to such plans based on amounts specified in the related union contracts. The unions have informed the Company that they are unable to provide the actuarial present values of accumulated plan benefits or the plans' net assets available for benefits with respect -11- 12 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. EMPLOYEE BENEFIT PLANS (CONTINUED) to any individual firm, including the Company. The Company contributed approximately $462,000, $755,000 and $1,531,000 during the years ended December 31, 1990, 1991, and 1992, respectively, to such plans. Employee Stock Ownership Plan The Employee Stock Ownership Plan ("ESOP") enables participating employees to acquire a proprietary interest in the Company. The Company may make annual contributions to the ESOP not to exceed 15% of the compensation paid or accrued during the plan year to all members. Payment of benefits may be in the form of either shares of Common Stock or cash, or partly in cash and stock. If a cash distribution is made in lieu of stock, it will be based on the market value of shares of the Company's Common Stock. Approximately $24,000 was accrued by the Company for the ESOP in 1992. No contributions were made by the Company to the ESOP in 1992. The Company issued to the ESOP 7,577 and 2,226 shares of Common Stock in 1990 and 1991, respectively. Executive Benefit Trust Effective November 1, 1991, the Company established the New Line Cinema Corporation Executive Benefit Trust (the "Trust") to provide incentive compensation to certain executive employees. The Trust is not intended to provide retirement income to employees, or to provide for a deferral of income by employees for periods extending to the termination of covered employment or beyond. 401(k) Plan In December 1992, the Company adopted a 401(k) defined contribution plan (the "Plan") for certain of its employees. Employees can make voluntary contributions to the plan subject to certain limitations. Eligible employees are those who have reached age 21 and have worked at least 1,000 hours. No contribution was made to the Plan by the Company in 1992. 9. CAPITAL STOCK Stock Dividend On July 18, 1990, the Board of Directors declared a 25% stock dividend accounted for as a five for four share stock split on all of the Company's outstanding Common Stock to holders of record as of June 27, 1990. On February 5, 1991, the Board of Directors declared a 20% stock dividend to be accounted for as a six for five share stock split on all of the Company's outstanding Common Stock to holders of record as of February 14, 1991. Reserved Shares of Common Stock At December 31, 1991 and 1992, the Company had reserved 2,722,003 and 3,083,637 shares, respectively, of Common Stock for grant and exercise of stock options. In addition, shares reserved for future issuance include 1,777,778 shares for the conversion of the 6.5% convertible subordinated debentures (see note 4) and 250,000 shares reserved for Nelson Holdings International, Ltd. (see note 11). Solely as a result of the completion of a proposed public offering of 2,000,000 shares of Common Stock pursuant to a registration statement on Form S-3 filed in January 1993, the Company's Chairman will be granted options to purchase approximately 659,600 additional shares of Common Stock at the market price of the Common Stock on March 31, 1993, pursuant to the operation of the provisions of his Employment Agreement. The terms of this Employment Agreement provide the Company's Chairman the ability to maintain his holdings at approximately 25% of the outstanding Common Stock of the Company (as defined). -12- 13 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. STOCK OPTIONS Qualified Stock Option Plan In July 1986, the Company adopted an incentive stock option plan (the "Plan") which was designed to qualify under Section 422A of the Internal Revenue Code of 1954, as amended. Under the Plan, a committee of independent members of the Board of Directors is authorized to grant options to purchase up to 577,500 shares of Common Stock to officers and employees of the Company at a price per share equal to at least 100% of the fair market value of Common Stock on the date of the grant (110% of such fair market value for optionees who directly or indirectly possess more than 10% of the total combined voting power or value of all classes of the stock of the Company or any parent or subsidiary thereof ("10% Stockholder")). Each qualified option granted is exercisable for such time as determined by the Board of Directors but, in no event more than ten years from the date of grant (no more than five years from the date of a qualified option to 10% Stockholders). The Plan will terminate upon the earlier of (i) the date on which all shares available for issuance have been issued pursuant to the valid exercise of options granted thereunder and (ii) May 15, 1996. 1990 Stock Option Plan On February 18, 1990, the Company adopted the 1990 Stock Option Plan (the "1990 Plan") under which a committee of independent members of the Board of Directors is authorized to grant options for 750,000 shares under the 1990 Plan, to any full-time employee, subject to adjustment for stock splits, stock dividends and certain other events. The 1990 Plan is similar to the 1986 Plan, except that options under the 1990 Plan may be incentive stock options and the grant may allow options to be exercised by the surrender of Common Stock or options to acquire Common Stock having a market value equal to the aggregate exercise price of the option. As of December 31, 1992, options for a total of 554,199 shares of Common Stock were granted under the 1990 Plan, all of which were outstanding. 1991 Stock Option Plan On January 14, 1992, the Company's Board of Directors adopted a new Stock Option Plan (the "1991 Plan"), which is identical to the 1990 Plan except that options for a total of 250,000 shares of the Company's Common Stock may be granted thereunder. As of December 31, 1992, options for a total of 200,000 shares of Common Stock were granted under the 1991 Plan, all of which are outstanding. -13- 14 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATMENTS (CONTINUED) 10. STOCK OPTIONS (CONTINUED) Summary The activity in stock options during the three-year period ended December 31, 1992 is summarized below. The information takes into account the 25% stock dividend issued on June 27, 1990 and the 20% stock dividend issued on February 28, 1991.
Nonqualified Stock Options Qualified Stock Options -------------------------- ------------------------ Aggregate Aggregate Shares Amount Shares Amount ---------- ----------- ----------- ---------- Options outstanding at January 1, 1990 973,453 $ 496,083 282,276 $1,002,187 Granted (from $5.32 to $6.83 and from $4.50 to $11.77 per share) 1,070,357 6,470,729 393,430 2,359,953 Exercised (at $.47 and from $2.88 to $4.24 per share) (104,098) (49,238) (24,152) (78,817) ---------- ----------- ----------- ---------- Options outstanding at December 31, 1990 1,939,712 6,917,574 651,554 3,283,323 Granted (from $10.13 to $16.00 and from $9.81 to $13.38 per share) 255,063 2,960,393 41,425 499,429 Exercised (at $.47 and from $3.33 to $5.42 per share) (111,374) (52,680) (54,377) (299,727) ---------- ----------- ----------- ---------- Options outstanding at December 31, 1991 2,083,401 9,825,287 638,602 3,553,025 Granted (from $11.25 to $15.00 and from $12.25 to $15.75 per share) 309,982 4,395,156 112,351 1,545,308 Exercised (at $5.42 and from $2.05 to $6.04 per share) (10,000) (54,170) (46,909) (179,354) Forfeited --- --- (3,790) (18,393) ---------- ----------- ----------- ---------- Options outstanding at December 31, 1992 2,383,383 $14,166,273 700,254 $4,900,586 ========== ========== =========== ==========
At December 31, 1992, 1,644,207 of the nonqualified stock options were exercisable at prices ranging from $.47 to $16.00 per share or an aggregate amount of $7,532,585. 11. RELATED PARTY TRANSACTIONS Media Buying Service The Company employs a media buying service to place its television and radio advertising. The President of the Company is the beneficial owner of 25% of the capital stock of such service. In addition, a director of the Company is an officer and the beneficial owner of a total of 25% of the capital stock of such service. During the years ended December 31, 1990, 1991 and 1992, such buying service placed a total of approximately $25,072,000, $30,695,000 and $19,079,000, respectively, in broadcast advertising for the Company for fees totaling approximately $999,000, $1,228,000 and $753,600, respectively. Legal Services A director of the Company is a principal of the Company's primary legal counsel. Until his appointment as President of the Company on September 27, 1990, the President of the Company was a principal of that law firm. Although he is currently "of counsel" to such firm, he has no financial interest therein. Until his appointment as Senior Vice President -- Business Affairs of the Company on February 1, 1993, a director of the Company approximated $698,000, $1,049,000 and $732,000 during the years ended December 31, 1990, 1991, and 1992, respectively. -14- 15 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. RELATED PARTY TRANSACTIONS (CONTINUED) Notes Receivable From Officers and Other Related Parties Notes receivable from officers include a note receivable from the Chairman of the Company for $750,000 advanced to him in connection with the purchase and renovation of his residence. The loan is unsecured, without interest and is repayable on demand or upon the sale of the residence. In addition, there is a note receivable from the President of the Company for $575,000, which bears no interest and is repayable solely from bonus compensation to which he may become entitled through 1995, with any remaining balance payable on December 31, 1995. There are additional notes receivable from several Senior Vice-Presidents of the Company and a former officer aggregating approximately $640,000. These loans also are interest-free and are payable on demand of the Company. Distribution Fee Arrangement In May 1991, pursuant to an agreement with NHI Nelson Holdings International, Ltd. ("NHI") and Credit Lyonnais Bank Nederland, N.V ("CLBN"), the Company became the distributor of existing and future film properties of NHI's film entertainment group ("Sultan Entertainment Holdings Inc.") including foreign distribution rights and domestic home video distribution rights to up to 11 motion pictures to be produced by Castle Rock Entertainment from 1992 through 1995. The Company paid approximately $15 million in cash and issued to NHI certain securities of the Company comprised of 150,000 shares of Common Stock and five-year warrants to purchase 250,000 shares of Common Stock at $13.87 per share to obtain these rights. Fees earned in 1991 and 1992 by the Company under its arrangement with Sultan Entertainment Holdings, Inc. amounted to $5,558,000 and $12,027,000 respectively. Pursuant to this agreement, CLBN refinanced certain long-term debt of Sultan Entertainment Holdings Inc. and also agreed to provide a new credit facility to a newly-formed subsidiary within Sultan Entertainment Holdings Inc., CR Memorandum. The proceeds of the new facility will be used to fund the acquisition of foreign distribution rights and domestic home video distribution rights to the 11 motion pictures to be produced by Castle Rock Entertainment through 1995 ("Castle Rock Pictures"). The Company's financial obligations with respect to CLBN's advances are limited to a guaranty of a percentage of the unpaid loan balance, the dollar amount of which guaranty cannot be determined at this time but which the Company in good faith estimates will not exceed $1,000,000 for those rights which had been acquired prior to December 31, 1992. There can be no assurance that funds will be available under the CLBN facility for the purchase of rights in connection with a Castle Rock Picture. The Company's ability to distribute the remaining Castle Rock Pictures is predicated upon the continued availability of funds from CLBN or from other sources. On November 27, 1991, the Company acquired the stock of Sultan Entertainment Holdings Inc. for $100,000 in cash and contributed the stock to the New Line Cinema Corporation Executive Benefit Trust (see Note 8). -15- EX-99.B 7 TBS UNAUDITED NEW LINE CINEMA CORPORATION FINANCIA 1
Exhibit 99(b) NEW LINE CINEMA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS DECEMBER 31, SEPTEMBER 30, 1992 1993 (DERIVED FROM AUDITED FINANCIAL STATEMENTS) (UNAUDITED) -------------- -------------- CASH AND CASH EQUIVALENTS $ 1,849,698 $ 6,737,170 ACCOUNTS RECEIVABLE, LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS OF APPROXIMATELY $640,000 IN 1992 AND $972,000 IN 1993 35,968,253 73,144,937 FILM INVENTORIES 147,775,148 190,014,728 PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION OF APPROXIMATELY $5,425,000 IN 1992 AND $6,947,000 IN 1993 10,309,209 10,372,895 NOTES RECEIVABLE FROM OFFICERS AND OTHER RELATED PARTIES 1,965,000 2,010,000 OTHER ASSETS 6,540,881 6,516,644 INVESTMENT IN AFFILIATED COMPANY 17,937,997 19,833,997 -------------- -------------- TOTAL ASSETS $ 222,346,186 $ 308,630,371 ============== ==============
SEE ACCOMPANYING NOTES. -1- 2 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, SEPTEMBER 30, 1992 1993 (DERIVED FROM AUDITED FINANCIAL STATEMENTS) (UNAUDITED) -------------- -------------- NOTE PAYABLE TO BANK $ 58,500,000 $ 89,800,000 ACCOUNTS PAYABLE AND ACCRUED EXPENSES 8,218,481 20,042,980 THIRD PARTY PARTICIPATIONS PAYABLE 23,834,301 33,612,893 LONG-TERM DEBT 30,000,000 30,000,000 DEFERRED INCOME 21,702,987 11,167,858 DEFERRED INCOME TAXES 7,800,121 9,479,121 -------------- -------------- TOTAL LIABILITIES 150,055,890 194,102,852 STOCKHOLDERS' EQUITY: PREFERRED STOCK, PAR VALUE $.01 PER SHARE; 300,000 SHARES AUTHORIZED; NONE OUTSTANDING --- --- COMMON STOCK, $.01 PAR VALUE; 50,000,000 SHARES AUTHORIZED; ISSUED AND OUTSTANDING: 12,728,560 IN 1992 AND 15,799,726 IN 1993 127,285 157,997 CAPITAL IN EXCESS OF PAR VALUE 37,825,947 70,593,844 RETAINED EARNINGS 34,552,348 43,984,305 -------------- -------------- 72,505,580 114,736,146 TREASURY SHARES, 64,677 IN 1992 AND 62,677 IN 1993, AT COST (215,284) (208,627) -------------- -------------- TOTAL STOCKHOLDERS' EQUITY 72,290,296 114,527,519 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 222,346,186 $ 308,630,371 ============== ==============
SEE ACCOMPANYING NOTES. -2- 3 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
NINE MONTHS ENDED THREE MONTHS ENDED --------------------------------- ------------------------------ SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1992 1993 1992 1993 --------------- ------------ ------------- ------------ REVENUE $ 161,939,967 $ 238,693,989 $ 60,684,302 $ 62,209,752 COSTS RELATING TO REVENUE 140,143,193 198,934,042 56,479,774 49,791,850 ------------- ----------- ----------- ------------ GROSS INCOME 21,796,774 39,759,947 4,204,528 12,417,902 OPERATING EXPENSES: GENERAL AND ADMINISTRATIVE 16,905,719 20,433,096 6,249,418 6,546,390 SELLING 901,961 1,107,019 369,736 467,919 DEPRECIATION AND AMORTIZATION 1,867,978 2,775,000 718,171 786,000 ------------- ----------- ----------- ------------ 19,675,658 24,315,115 7,337,325 7,800,309 ------------- ----------- ----------- ------------ INCOME (LOSS) FROM OPERATIONS 2,121,116 15,444,832 (3,132,797) 4,617,593 INTEREST EXPENSE (1,657,640) (2,527,525) (1,157,795) (888,613) OTHER CHARGES (132,568) (388,623) (24,938) (164,522) ------------- ----------- ----------- ------------ INCOME (LOSS) BEFORE EQUITY INCOME OF, AND GAIN ON ISSUANCE OF STOCK BY, AFFILIATED COMPANY AND PROVISION FOR INCOME TAXES 330,908 12,528,684 (4,315,530) 3,564,458 EQUITY IN INCOME OF AFFILIATED COMPANY 1,325,000 1,896,000 575,000 1,741,000 GAIN ON ISSUANCE OF STOCK BY AFFILIATED COMPANY 4,334,867 -- 4,334,867 -- ------------- ----------- ----------- ------------ INCOME BEFORE PROVISIONS FOR INCOME TAXES 5,990,775 14,424,684 594,337 5,305,458 PROVISION (BENEFIT) FOR INCOME TAXES 1,758,946 4,992,727 (6,000) 1,587,132 ------------- ----------- ----------- ----------- NET INCOME $ 4,231,829 $ 9,431,957 $ 600,337 $ 3,718,326 ============= =========== =========== =========== PRIMARY NET INCOME PER SHARE OF COMMON STOCK $ 0.30 $ 0.56 $ 0.04 $ 0.21 ============= =========== =========== =========== FULLY DILUTED NET INCOME PER SHARE OF COMMON STOCK $ 0.30 $ 0.53 $ 0.04 $ 0.20 ============= =========== =========== =========== PRIMARY WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING 14,327,274 16,892,165 14,170,934 18,086,977 ============= =========== =========== =========== FULLY DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING 14,327,274 19,479,971 14,170,934 20,279,126 ============= =========== =========== ===========
SEE ACCOMPANYING NOTES. -3- 4 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1992 AND NINE MONTHS ENDED SEPTEMBER 30, 1993
COMMON CAPITAL IN STOCK COMMON EXCESS OF RETAINED HELD IN STOCK PAR VALUE EARNINGS TREASURY TOTAL ------ --------- -------- -------- ----- BALANCE, DECEMBER 31, 1991 (AUDITED) $ 126,716 $ 37,592,837 $ 28,134,133 $ (215,284) $ 65,638,402 ISSUANCE OF 56,909 SHARES OF COMMON STOCK UPON EXERCISE OF OPTIONS 569 233,110 -- -- 233,679 NET INCOME -- -- 6,418,215 -- 6,418,215 ----------- ----------- ---------- --------- ----------- BALANCE, DECEMBER 31, 1992 (AUDITED) $ 127,285 $ 37,825,947 $ 34,552,348 $ (215,284) $ 72,290,296 ISSUANCE OF 175,076 SHARES OF COMMON STOCK UPON EXERCISE OF OPTIONS 1,751 627,820 -- -- 629,571 SALE OF 2,875,000 SHARES OF COMMON STOCK 28,750 31,821,079 -- -- 31,849,829 ISSUANCE OF 21,090 SHARES OF COMMON STOCK 211 318,998 -- -- 319,209 SALE OF 2,000 SHARES OF TREASURY STOCK -- -- -- 6,657 6,657 NET INCOME -- -- 9,431,957 -- 9,431,957 ----------- ----------- ---------- --------- ----------- BALANCE, SEPTEMBER 30, 1993 (UNAUDITED) $ 157,997 $ 70,593,844 $ 43,984,305 $ (208,627) $ 114,527,519 =========== =========== ========== ========= ===========
SEE ACCOMPANYING NOTES. -4- 5 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED
NINE MONTHS ENDED ----------------------------------- SEPTEMBER 30, SEPTEMBER 30, 1992 1993 ------------- ------------- OPERATING ACTIVITIES: NET INCOME $ 4,213,829 $ 9,431,957 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: INCREASE IN ALLOWANCE FOR DOUBTFUL ACCOUNTS 218,000 332,000 AMORTIZATION OF FILM INVENTORIES 80,379,843 113,678,266 DEPRECIATION AND OTHER AMORTIZATION 1,867,978 2,775,000 UNDISTRIBUTED EARNINGS FROM AFFILIATED COMPANY (1,325,000) (1,896,000) GAIN ON ISSUANCE OF STOCK BY AFFILIATED COMPANY (4,897,476) --- DEFERRED INCOME TAXES 1,350,527 1,679,000 CHANGES IN OTHER ASSETS AND LIABILITIES: (INCREASE) DECREASE IN: ACCOUNTS RECEIVABLE (2,718,167) (37,508,684) GROSS FILM INVENTORIES (95,229,336) (155,917,846) OTHER ASSETS (3,257,149) 1,726,186 INCREASE (DECREASE) IN: ACCOUNTS PAYABLE AND ACCRUED EXPENSES (4,443,778) 11,824,499 THIRD PARTY PARTICIPATIONS PAYABLE (6,438,246) 9,778,592 DEFERRED INCOME (22,096,285) (10,535,129) ------------- -------------- TOTAL ADJUSTMENTS (56,589,089) (64,064,116) ------------- -------------- CASH USED IN OPERATING ACTIVITIES (52,357,260) (54,632,159) ------------- -------------- INVESTING ACTIVITIES: PURCHASE OF PROPERTY AND EQUIPMENT (5,881,052) (1,585,686) NOTES RECEIVABLE FROM OFFICERS AND OTHER RELATED PARTIES 48,000 (45,000) ------------- -------------- CASH USED IN INVESTING ACTIVITIES (5,833,052) (1,630,686) ------------- -------------- FINANCING ACTIVITIES: NET PROCEEDS FROM BORROWINGS ON NOTE PAYABLE 55,638,624 96,845,051 REPAYMENT OF NOTE PAYABLE --- (68,500,000) PROCEEDS FROM ISSUANCE OF SHARES OF COMMON STOCK 138,522 32,805,266 ------------- -------------- CASH PROVIDED BY FINANCING ACTIVITIES 55,777,146 61,150,317 ------------- -------------- DECREASE IN CASH AND CASH EQUIVALENTS (2,413,166) 4,887,472 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,333,485 1,849,698 ------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,920,319 $ 6,737,170 ============= ==============
SEE ACCOMPANYING NOTES. -5- 6 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1993 NOTE 1 - UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and nine-month periods ended September 30, 1993 are not necessarily indicative of the results that may be expected for the year ending December 31, 1993. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1992. NOTE 2 - FILM INVENTORIES Film inventories, net of accumulated amortization, were approximately as follows (in thousands): December 31, September 30, 1992 1993 ------------ ------------- Films Released $ 62,784 $101,437 Films Completed but Not Released 41,519 4,926 Films in Process 30,557 73,997 Distribution Rights 12,915 9,655 -------- -------- $147,775 $190,015 ======== ======== -6- 7 NEW LINE CINEMA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - CHANGE IN METHOD OF ACCOUNTING FOR INCOME TAXES Effective January 1, 1993, the Company adopted FASB Statement No. 109, "Accounting for Income Taxes." Under Statement 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. These differences relate primarily to the gain on issuance of stock by an affiliated company, advertising and print expenditures, third party participations, and film amortization. Prior to the adoption of Statement 109, income tax expense was determined using the deferred method. Deferred tax expense was based on items of income and expense that were reported in different years in the financial statements and tax returns and were measured at the tax rate in effect in the year the difference originated. As permitted by Statement 109, the Company has elected not to restate financial statements for any prior years. The effect of the change on pretax income from continuing operations and the cumulative effect of the change for the three- and nine-month periods ended September 30, 1993 was not material. NOTE 4- SUMMARIZED INCOME STATEMENT INFORMATION OF AFFILIATED COMPANY The Company currently owns a 37.4% investment in RHI Entertainment, Inc. ("RHI"), accounted for using the equity method. Prior to July 29, 1992, the Company owned 52.6% of RHI. At December 31, 1992, RHI was significant as defined by applicable regulations of the Securities and Exchange Commission. The following summarizes the income statement of RHI for the three- and nine-month periods ended September 30, 1992 and 1993 (in thousands), respectively:
Nine Months Ended Three Months Ended September 30, September 30, ------------------- ------------------ 1992 1993 1992 1993 ---- ---- ---- ---- Revenue $39,642 $70,745 $21,324 $48,728 Costs and expenses 34,313 61,581 19,032 40,663 ------ ------ ------ ------ Income from operations 5,329 9,164 2,292 8,065 Interest expense, net 625 472 92 286 ------ ------ ------ ------ Income before income taxes 4,704 8,692 2,200 7,779 Provision for income taxes 1,812 3,424 847 3,073 ----- ----- ------ ------ Net income $2,892 $5,268 $1,353 $4,706 ====== ====== ====== ====== Company's share of net income $1,325 $1,896 $ 575 $1,741 ====== ====== ====== ======
-7- 8 NOTE 5 - NOTE PAYABLE TO BANK On March 26, 1993, the Company entered into a new credit facility (the "Credit Facility") providing a revolving credit of $150,000,000 for a period of three years. Except for the increase in principal amount and a restriction on the amounts of permitted increases in selling, general and administrative expenses, the terms of the Credit Facility do not materially differ from the Company's previous credit facility. NOTE 6 - COMMON STOCK On March 5, 1993, the Company issued 2,875,000 shares of Common Stock through a public offering. The net proceeds from this offering approximated $32,000,000. NOTE 7 - CONTINGENCIES Legal Matters An action is pending against the Company in the Supreme Court of the State of New York, County of New York, by Smart Egg Pictures, S.A. one of the joint venture partners with the Company in the initial "Nightmare on Elm Street" film, for an accounting and damages of at least $5,000,000, together with punitive damages in connection with the series of Nightmare on Elm Street films, and for treble damages under the RICO laws. The Company believes that there are good and meritorious defenses to the claims. The Writers Guild of America, West, Inc. and the Directors Guild of America, Inc. and Screen Actors Guild have each filed a demand for arbitration against the Company seeking payment of residual compensation to writers, directors and actors, respectively, involved in various productions, and interest thereon. The claims do not specify damages. The Company has been recouping amounts it believes were overpaid from residual compensation otherwise payable. Such recoupment is also the subject of the arbitration claims. Management believes that the Company has good defenses to the claims and that its position on recoupment of overpayments is correct. In May 1992, the Company, Allied Vision, Ltd. ("Allied") and innovation Books, a division of the Innovative Corporation, were named as defendants in an action brought by Stephen King in the United States District Court for the Southern District of New York. The action sought to ban the use of Mr. King's name in connection with the film "The Lawnmower Man" (the Film"). The Film completed its theatrical release in the United States and had its home video release on August 26, 1992. The action was settled in May 1993 involving a payment by the Company of $200,000 and an agreement to make no further use of Mr. King's name in connection with the Film. The Plaintiff, however, is seeking to hold the Company in contempt for violation of a consent decree entered into as part of the settlement, dealing principally with restrictions in the continued use of Mr. King's name. -8- 9 In this connection, the plaintiff is seeking unspecified damages, recall of certain home video cassettes packages and legal fees. In January 1993, Troma, Inc. commenced an action against the Company, certain of its officers and directors and a former officer seeking damages in excess of $50,000,000 for alleged failure to produce and release a motion picture based upon the plaintiff's "Toxic Crusaders" characters. The named officers and directors are entitled to coverage by the Company's policies of liability insurance. The Company has obtained an order dismissing the tort claims asserted by the plaintiff and expects to commence discovery shortly. The Company and its subsidiaries are parties to various other legal proceedings, all of which are considered routine and incidental to the business of the Company and are not material to the financial condition and operation of the business. In management's opinion, the ultimate outcome of these legal proceedings, as well as the lawsuits discussed above, will not have a material adverse effect on the financial position of the Company but, although not probable, could have a material adverse effect on the results of operations in any one year. At this time, the Company cannot predict the outcome nor estimate the range of loss for the lawsuits discussed above. NOTE 8 - SUBSEQUENT EVENT On October 15, 1993, Turner Broadcasting System, Inc. ("TBS") and the Company jointly announced that the two companies have entered into a definitive merger agreement providing for the tax-free merger of the Company with a wholly-owned subsidiary of TBS. Under the terms of the merger agreement, each outstanding share of the Company's Common Stock will be converted into the right to receive 0.96386 share of TBS Class B Common Stock. Based upon the Company's outstanding shares, options, warrants, and convertible debt securities, TBS would issue up to approximately 21 million shares of its Class B Common Stock in the merger. Consummation of the merger agreement is subject to the approval of the Company's stockholders and customary conditions to closing. TBS is one of the world's leading suppliers of entertainment and information programming. The merger is scheduled to close immediately following a special meeting of the Company's stockholders, currently expected to be held in December 1993. 9 -----END PRIVACY-ENHANCED MESSAGE-----