-----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, GIdc4aMgUhx/u8nDebbdp16ioXBx2GsFumSPU27CB2u5cA+BO0dAQ0s+BT/tw0P5 gAL9fjCTcVLnSGGtxe4U1g== 0000910680-98-000350.txt : 19980929 0000910680-98-000350.hdr.sgml : 19980929 ACCESSION NUMBER: 0000910680-98-000350 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLARK DICK PRODUCTIONS INC CENTRAL INDEX KEY: 0000805370 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 232038115 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15192 FILM NUMBER: 98716002 BUSINESS ADDRESS: STREET 1: 3003 W OLIVE AVE CITY: BURBANK STATE: CA ZIP: 91510 BUSINESS PHONE: 818-841-3003 MAIL ADDRESS: STREET 1: 3003 W. OLIVE AVENUE CITY: BURBANK STATE: CA ZIP: 91505 10-K 1 DICK CLARK PRODUCTIONS FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER : 33-79356 dick clark productions, inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 23-2038115 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3003 W. Olive Avenue, Burbank, California 91510-7811 ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code Common Stock, par value - --------------------------------------------------- ---------------------------- (818) 841-3003 $.01 (Title of Class) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None 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, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] or 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. Yes [X] or No [ ] The aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant computed by reference to the closing sales price as quoted on NASDAQ on September 18, 1998, was approximately $ 21,091,000. As of September 18, 1998, 8,020,828 shares of Registrant's $.01 par value common stock and 787,500 shares of the Registrant's $.01 par value Class A common stock were outstanding. Documents Incorporated by Reference Portions of the Proxy Statement relating to the Annual Meeting of Shareholders to be held November 10, 1998, are incorporated by reference into Part I and Part III of this Report. PART I ITEM 1. BUSINESS BACKGROUND - ---------- dick clark productions, inc. was incorporated in California in 1977 and was reincorporated in November 1986 as a Delaware corporation. As used in this Report, unless the context otherwise expressly requires, the term "Company" refers to dick clark productions, inc. and its predecessors and their respective subsidiaries. The Company develops and produces a wide range of television programming for television networks, first-run domestic syndicators (which provide programming for independent and network affiliated stations), cable networks and advertisers. Since 1957, the Company has been a significant supplier of television programming and has produced thousands of hours of television entertainment, including series, annual, recurring and one-time specials and movies for television. The Company also licenses the rebroadcast rights to some of its programs, licenses certain segments of its programming to third parties and from time to time produces home videos. In addition, the Company, on a limited basis, develops and produces theatrical motion pictures, which are generally produced in conjunction with third parties who provide the financing for such motion pictures. Since fiscal 1990, the Company has operated entertainment-themed restaurants known as Dick Clark's American Bandstand Grill(R). In fiscal 1992, the first restaurant developed by the Company was opened in Overland Park, Kansas, a suburb of Kansas City. Since that time, the Company has opened eight additional locations, most recently in Grapevine Mills, near Dallas, Texas. The Company is also a majority owner in a joint venture that in 1993 opened a dance-club-only version of the restaurant, "Dick Clark's American Bandstand Club," located in Reno, Nevada. Although the dance club concept has been successful, the Company has chosen to focus its expansion efforts primarily on the restaurant concept, which the Company believes has a broader market appeal and greater potential for future revenue growth. It is the Company's long-term objective to continue to develop its entertainment-themed restaurant concept by opening additional Company-operated restaurants in strategically desirable markets. The Company is actively negotiating for additional sites for new restaurants for this growing national chain. In January 1991, the Company established a subsidiary, dick clark corporate productions, inc. ("dccp"), in order to enter the corporate productions and communications business. This subsidiary specializes in the development and execution of non-traditional marketing communications programs, corporate meetings and special events, new product introductions, trade shows and exhibits, event marketing, film, video and leisure attractions. The Company's strategy is to provide value to its clients by accessing the wide range of talent and production resources the Company utilizes for television production and by providing a level of creativity, production quality and efficiency that is uncommon in this market. Since its inception, the Company's principal stockholder has been Richard ("Dick") W. Clark, who the Company believes to be one of the best-known personalities in the entertainment industry. Many of the Company's television and corporate programs involve the executive producing services and creative input of Mr. Clark. However, Mr. Clark's performance services are not exclusive to the Company. The Company also employs other experienced producers who are actively involved in the Company's television production business and dccp's business. The Company's principal lines of business according to industry segments are television production and related activities (including, without limitation, the aforementioned operations of dccp) and restaurant operations (dick clark restaurants, inc. and its wholly owned subsidiaries). For financial information about the Company's industry segments with respect to each of the fiscal years in the three-year period ended June 30, 1998, see Note 9 "Business Segment Information" to the Company's Consolidated Financial Statements on page 33 of the Company's 1998 Annual Report. -2- DESCRIPTION OF BUSINESS TELEVISION PRODUCTION AND RELATED BUSINESS ------------------------------------------ Introduction Historically, the Company has produced entertainment television programming for daytime, primetime and late night telecast and has become one of the most versatile independent production companies in the entertainment business today. The Company's programming mix includes awards shows, entertainment and comedy specials and series, children's programming, talk and game show series, movies-for-television, and dramatic series. Many of the established television specials are produced annually and have become an expected television event. This breadth of production, together with the Company's reputation for developing high-quality, popular shows on budget, distinguishes the Company as a unique and highly regarded programming provider. This is particularly significant with the growing demand for cost-efficient, original programming from new cable networks, advertisers and syndicators. The Company has generally been able to fund its production costs from license fees paid by the recipients of the programming. However, increasing consolidation in the entertainment industry has resulted in many of the Company's traditional customers (such as the television networks) merging with its competitors who provide entertainment production services. As a result, the Company's ability to market its programming expertise has been reduced. In addition, the proliferation of cable networks over the last decade has also resulted in smaller license fees being paid by networks and other broadcasters. In particular, the development and production of situation comedies and dramatic series generally now require substantial deficit financing because the license fees payable for such programs do not cover production costs. Consequently, the Company is selective in its development efforts in the dramatic and situation comedy series area. Programming in which the Company owns the distribution rights and which are not subject to restrictions associated with the initial license agreement may be marketed by the Company in ancillary markets which include, among others, cable television, foreign and domestic rerun syndication and home video. Successful television series and television movies can have significant rerun syndication and other ancillary value. However, a television series must normally be broadcast for at least three or four television seasons before rerun syndication is feasible. Consequently, a relatively low percentage of television series are successful enough to be syndicated. Television Market, Production and Licensing Market. The market for television programming is composed primarily of the broadcast television networks (ABC, CBS, NBC, Fox Broadcasting Company, United Paramount Network and Warner Bros., a division of Time Warner Entertainment Company L.P.), syndicators of first-run programming (such as Columbia, Inc. and Buena Vista Television) which license programs on a station-by-station basis, and basic and pay cable networks (such as The Family Channel, The Nashville Network and VH-1). The Company also deals directly with companies such as Busch Entertainment Corp., Universal Studios Hollywood and SFM Entertainment, which finance the production of specials and other programming on which they intend to advertise their products. The Company also works closely with dccp to provide television expertise to those corporations seeking television outlets for their events and promotions. Production. The production of television programming involves the development of a format based on a creative concept or literary property into a television script or teleplay, the selection of talent and, in most cases, the filming or taping and technical and post-production work necessary to create a finished product. The Company is continuously engaged in developing and acquiring concepts and literary properties. The most promising of these serve as the basis of a plot or concept which may include a description of the principal characters or performers, and in the case of a dramatic presentation, may contain sample dialogue. The development of a project often begins with a meeting of the Company's development personnel, producers, directors and/or writers for the purpose of reviewing a concept. Many of the Company's projects originate with its own staff, although due to the Company's reputation in the television industry, concepts for development are frequently presented to the Company by unaffiliated parties. If a concept is attractive, the Company will present it to a prospective licensee: either -3- one of the television networks, a first-run syndicator, a cable network or an advertiser. Alternatively, a prospective licensee, in particular, an advertiser, will often request that the Company develop a concept for a particular time period or type of audience. If a concept is accepted for further development, the prospective licensee will usually commission and pay for a script prior to committing itself to the production of a program. However, in the case of the Company's entertainment programming as well as its awards specials, the licensee will generally order production of the program based on the initial presentation. Only a small percentage of the concepts and scripts presented each year are selected to be produced. Generally, the network or other licensee retains the right to approve the principal creative elements of a television production. Once a script and/or a concept is approved by the licensee, a license fee is negotiated and pre-production and production activities are undertaken. In the case of a game show, a finished pilot episode usually is submitted for acceptance as a series before additional episodes are ordered. A production order for a series is usually for a specified number of episodes, with the network or other licensee retaining an option to renew the license. The production of additional episodes for a series or additional versions of a special is usually dependent on the ratings obtained by the initial run of episodes of the program or by the original special, respectively. Licensing. A majority of the Company's revenue is derived from the production and licensing of television programming. The Company's television programming is licensed to the major television networks, cable networks, domestic and foreign syndicators and advertisers. The Company also receives production fees from programming buyers who retain ownership of the programming. The Company has sold or licensed its programs to all of the major networks and to a number of first-run syndicators, cable broadcasters and advertisers. During fiscal 1998, revenue from a recurring annual special represented approximately 11% of total revenue and revenue from two different television series each represented approximately 11% of total revenue. During fiscal 1997, revenue from a recurring annual special represented approximately 14% of total revenue. During fiscal 1996, revenue from a series represented approximately 15% of total revenue and revenue from a recurring annual special represented approximately 12% of total revenue. See Note 2 "Summary of Significant Accounting Policies" to the Company's Consolidated Financial Statements on page 27 of the Company's 1998 Annual Report. The Company is not committed exclusively to any one network, syndicator, cable network or other licensee for the licensing of the initial broadcast rights to all or any substantial part of any other Company's programming. The Company's strategy is to develop programming that does not require deficit financing, such as reality and variety series and award and other event specials, which have the potential to be profitable in the first year of release as well as to be renewed annually. The typical license agreement for this type of programming provides for a fixed license fee to be paid in installments by the licensee to the Company for the right to broadcast a program or series in the United States for a specified number of times during a limited period of time. In some instances, the Company shares its percentage of net profits from distribution with third parties who contributed to the production of the program. In the case of license agreements involving specials or music, variety or game show series, the fixed license fee is ordinarily in excess of production and distribution costs. For selected projects, however, the Company may elect to produce programming for which the initial license fees will not cover its production and distribution costs in the first year of a project's release. The Company incurred deficit financing in connection with the production of a children's series that was delivered in fiscal 1998. The Company does not anticipate incurring any material deficit financing obligation with respect to any programs which are currently in development. During the term of a first-run broadcast license, the Company generally retains all other distribution rights associated with the program, including all foreign distribution rights. In the case of television movies, the Company will often pre-sell domestic, foreign and other rights in order to cover all of the production and distribution costs for the television movie. From time to time, the Company has entered into non-exclusive agreements with distribution companies (such as Alfred Haber, Inc. and World International Network, LLC) for the foreign distribution of certain of its series, specials and television movies. The Company also occasionally licenses its programming directly to foreign broadcasters. After the expiration of a first-run broadcast license, the Company makes the program available for other types of -4- domestic distribution in cases where the Company has retained ownership and/or distribution rights to the program. In fiscal 1997, the Company licensed 118 half-hour episodes of its " Super Bloopers and Practical Jokes" series (which had previously been broadcast on NBC as one hour shows) to the Family Channel. In fiscal 1996, the Company licensed 22 episodes of "Super Bloopers and Practical Jokes" (previously broadcast on NBC) to the Family Channel along with 23 hours of specials for a three-year term. The Company also licensed to VH-1, the cable music network, the exclusive rights to re- broadcast 50 episodes from the original "American Bandstand" series in fiscal 1996 and an additional 50 episodes in fiscal 1997. The Company has retained the rights to the clips in these shows for use in its own productions as well as the ability to continue to market the clips to its media archive customers. The Company also licenses the syndication rights to television movies from its library, which the Company is often able to syndicate a number of times over a period of many years. For example, in each of fiscal 1996, 1997 and 1998, the Company licensed the previously broadcast television movie "The Man in the Santa Claus Suit". The Company has also used its library of entertainment and music specials to create new programming. Television Programming The Company has in development and production numerous television projects for broadcast on network television, first-run syndication and cable television. The Company has an established reputation among the major networks, cable broadcasters and other licensees as a premier producer of television awards programming. The Company is also strongly committed to the ongoing development of entertainment specials and series which include music, variety, dramatic and comedy programming formats as well as reality-based programming. The Company employs experienced producers responsible for the development and production in each of these varied programming formats. The Company's staff is supplemented on a project basis by industry professionals utilized to expand the Company's own production resources. Annual, Recurring and Other Specials. The Company is a leading television producer of award specials, which are a significant part of the Company's television production business and contribute and provide an ongoing foundation of consistent revenue each fiscal year. Many of the Company's award specials have enjoyed sustained growth, and certain of its specials have been produced by the Company for as many as 25 years. The Company's award specials during fiscal 1998 included "The 25th Annual American Music Awards" (ABC), the Company's most enduring award special and again was rated number one in its time period; "The 55th Annual Golden Globe Awards" (NBC), the Company's sixteenth annual production for the Hollywood Foreign Press Association, acknowledging excellence in television and motion pictures; "The 13th Annual Soap Opera Awards" (NBC), produced for the eleventh consecutive year; "The 33rd Annual Academy of Country Music Awards" (CBS), another popular, long running awards production; and "The 25th Annual Daytime Emmy Awards" (NBC), the sixth year of production of this special presented by the National Academy of Television Arts & Sciences. The Company has agreements for several recurring and annual specials subject to long-term license agreements which expire between 1999 and 2001. In addition to producing award specials for television, the Company develops new concepts for television specials. Two important aspects of the Company's production of specials are that the specials may serve as pilots for the development of series programming and that specials may be produced on an annual or recurring basis. For instance, the Bloopers programs evolved from an entertainment special to a series and is still in production as television specials for NBC. The Company produced the following entertainment specials in fiscal 1998: "Dick Clark's New Year's Rockin' Eve(R) '98" (ABC), which was the Company's 26th year of production; one Bloopers special entitled "All-New, All-Star TV Censored 'When Bloopers Attack'" (NBC); "A Merry Christmas" (TNN) with Collin Raye and Pam Tillis; "Tribute to Aaron Spelling" (ABC); "AMC Salute to Film Noir" (AMC) hosted by Michael Keaton; "Meet Hanson" (ABC); and our fourth episode of "Will You Marry Me?" (ABC) hosted by Daisy Fuentes. In addition to the production of new programming, the Company markets material from previously produced programs for new development projects. Programs such as "The American Music Awards 20th Anniversary Special" and -5- "The Golden Globes 50th Anniversary Celebration" produced and delivered in fiscal 1994 for NBC, utilized footage from previous programs. Series. The Company is actively developing programs and ideas for potential series production and represents the most important area of development in terms of potential revenue and profit growth for the Company. Series programming presents many opportunities for long-term commitments and, in some cases, rerun potential. In fiscal 1998, 13 new episodes of the primetime, one-hour dramatic anthology series, "Beyond Belief: Fact or Fiction" were produced for the Fox Broadcasting Company. "Star Trek's" Jonathan Frakes hosted the second season. In fiscal 1997, the initial six episodes of "Beyond Belief" were produced for Fox. James Brolin hosted the first season, which began broadcasting in May 1997. The company has received a commitment and production is underway on a minimum of 13 additional episodes of "Beyond Belief," scheduled for broadcast in the 1998/1999 production season. During fiscal 1998, the company produced nine episodes of the comedy/reality series "TV Censored Bloopers '98" for NBC. Production continued for TNN's "Prime Time Country", a live 60-minute, weeknight, country music entertainment and variety series, which premiered in January 1996. The show originates from The Nashville Network Studio in Opryland USA. The Company is finalizing an agreement to produce the show through December 1999. Late in fiscal 1998, the Company began production of 65 episodes of a children's game show, "Mad Libs", which began airing on the Disney Channel in July, 1998. During fiscal 1998, the Company executive produced a pilot for a talk show featuring Donny and Marie Osmond. The Company also has been retained to executive produce the series, which is being distributed by Columbia Tristar Television Distribution and premiered in September 1998. Movies. Television movies are continually under development and can be an important source of profitability and cash flow over the life of their distribution. In fiscal 1998, we produced "Alien Abduction," a one-hour taped drama for the Paramount Broadcast Network (UPN). A two-hour version of "Alien Abduction" is being distributed in foreign markets by World International Network (WIN). By working with major studios that can provide financing, the Company also develops theatrical film projects on a limited basis. The Company is currently developing a motion picture utilizing the "American Bandstand" concept with Jersey Films for theatrical release by Universal Pictures. "Tenth Justice" is in development as a feature film for Fox 2000, based on the New York Times best seller. Live Shows "American Bandstand" has been licensed for use as a theme name and logo for live stage shows. In fiscal 1997, we entered into a three-year license agreement for a new live show produced by Opryland Productions, Inc. at its Opryland USA Theme Park, a family-oriented entertainment facility in Nashville. Media Archives and Home Video The Company believes that it owns one of the largest collections of musical performance footage, including 16mm films that have been enhanced and transferred to video tape. The Company keeps an updated, computerized index of available material in order to be able to easily access the performance footage. The Company also occasionally acquires from others the rights to license classic performances by popular recording artists. These rights are acquired from the -6- copyright holders and then licensed for television, film, cable and home video. Although the Company's archives are used as source material for the Company's productions, the Company actively licenses footage from its archives to third parties as well. In fiscal 1998, the Company licensed footage from its library to: de passe Entertainment's "Motown's 40th Anniversary", Time-Life Music for use in various infomercials, and MTV's "BioRhythm", among many others. The Company also uses its media archives to produce programs intended directly for the home video market. The Company's previously produced home videos include "The Rock & Roll Collection: Dick Clark's Golden Greats", a compilation of episodes from the series of the same name; "Best of Bandstand Volumes I & II", a collection of clips from the American Bandstand series; "Elvis, The Movie"; and several other television movies from the Company's library. These home video releases are distributed by various independent distribution companies. In fiscal 1997, a special direct-to-home video was produced called "Kid Talk 2000," which was distributed by MVP Entertainment in fiscal 1998. Other Businesses dick clark corporate productions, inc. The Company's wholly-owned subsidiary, dick clark corporate productions, inc., specializes in development and execution of non-traditional marketing communications programs, corporate meetings and special events, new product introductions, trade shows and exhibits, event marketing, film, video and leisure attractions. dccp's strategy is to provide its clients the benefit of a range of talents and production resources available to the television production business - - offering a distinct, new level of creativity, production quality and expertise to this market. This access, together with the Company's budgetary controls, provides higher entertainment quality at an efficient cost. Using the entertainment resources of the Company, dccp is able to provide solutions to businesses seeking alternatives to the traditional forms of communication to reach their intended audiences. During fiscal 1998, dccp produced and delivered the following: The Boeing/McDonnell Douglas Merger - A public launch event heralding the merger of these two aerospace giants to the international press and 220,000 employees. We combined a video documenting the vision of the new company with a live international telecast and press conference linking to more than 50 different sites; National Space Symposium - Boeing asked us to kick off the "Year of the International Space Station" for an audience of 1,000 space, corporate, government and media professionals. Incorporated into the opening ceremony was a video entitled "At Home in Space"; Model Year '98 Lexus National Dealer Meeting - - Our "Hollywood" connections served us well as we developed the National Dealer Meeting to include a first-time performance to a corporate audience by the legendary Quincy Jones conducting an orchestra for a special musical medley celebrating the event; Honda Motorcycle 50th Anniversary Dealer Convention - We created the show "Celebrating the Dream" retracing Honda's journey over five decades with original arrangements of popular music at New York's Radio City Music Hall; AT&T PocketNet Product Launch - Using our strategic entertainment skills, we created an interactive customer and PR launch event to help the service rise above noise in a high-decible industry. Record business. In fiscal 1994, the Company established the CLICK Records(R) Inc. ("CLICK") label. During fiscal 1996, the Company entered into an agreement with Castle Communications (U.S.), Inc. for worldwide distribution of CLICK's recordings. In 1997, Castle Communications filed for bankruptcy. As a result, CLICK has not produced any new recordings and remains dormant. -7- DESCRIPTION OF BUSINESS RESTAURANT OPERATIONS --------------------- Introduction The Company's restaurant operations are conducted by dick clark restaurants, inc. ("dcri"), a wholly-owned subsidiary of the Company, and dcri's wholly-owned subsidiaries. The restaurant operations include food and beverage service as well as music, dancing and merchandising activities. Capitalizing on the popularity of the American Bandstand television show and over 40 years of contemporary music, "Dick Clark's American Bandstand Grill" ("Grill") entertainment theme restaurants are an extension of the Company's entertainment business. Elements of the theme include: the "Great American Food Experience(R)", a unique menu concept featuring a variety of delicious regional specialties from around the country; a design featuring a one-of-a-kind entertainment atmosphere based on the American Bandstand television show and the music industry over the last four decades; a dance club area within the restaurant with a state-of-the-art audio-visual entertainment system; and signature "American Bandstand Grill" merchandise for customers to purchase. Each "Dick Clark's American Bandstand Grill" also features memorabilia and other items generally associated with rock n' roll and the Company's activities throughout the years, including vintage photos, gold and platinum albums, original stage costumes, concert programs, rock stars' musical instruments and rare posters. Currently, the Company has operations in nine locations: Overland Park, Kansas, a suburb of Kansas City, which opened in August 1992; Indianapolis, Indiana and Columbus, Ohio, which opened in April/May 1994; Cincinnati, Ohio, which opened in March 1996; St Louis, Missouri, which opened in November 1996; Austin, Texas, which opened in May 1997; King of Prussia, Pennsylvania, which opened in June 1997; Grapevine Mills, Texas which opened in January 1998; and a dance-club-only variation of the concept in Reno, Nevada which opened in August 1993. The Company is developing additional locations which could open in the second half of fiscal 1999. dcri and Harmon Entertainment Corporation, a New Jersey corporation ("Harmon"), were originally partners in Entertainment Restaurants, a New York partnership (the "Partnership"), which was created to own, operate and manage "Dick Clark's American Bandstand Grill" restaurants and which developed the first restaurant in Miami, Florida. The Partnership purchased Harmon's interest in the Partnership in the spring of 1990, whereupon dcri became the sole owner of all of the assets of the Partnership. The Overland Park, Kansas restaurant was the Company's first owned and operated "Dick Clark's American Bandstand Grill" restaurant. The Company agreed to reimburse Harmon for capital expenditures made in connection with the Miami restaurant and to pay Harmon a royalty over time of 1.5% of gross revenues from restaurant operations, up to an aggregate of $10,000,000, for its interest in the Partnership. The Company has satisfied in full this obligation by an advance payment of $1,000,000 in the spring of 1990 and a final payment of $3,128,000 in December 1994. dcri has numerous memorabilia displayed in its restaurants and such memorabilia are an integral part of the restaurant's theme. Some of the memorabilia is owned by Olive Enterprises, Inc., and is loaned to dcri without charge. Olive Enterprises, Inc., a Pennsylvania Corporation ("Olive"), is controlled by Mr. Clark. During most of fiscal 1998, Mr. Francis C. La Maina, the Company's president and chief operating officer, also was a shareholder in Olive. His interest was sold to Mr. Clark in March 1998. In fiscal 1995, dcri began acquiring certain memorabilia for its own use and has invested $412,000 to date for current and future grills. Operations Significant resources are devoted to ensure that "Dick Clark's American Bandstand Grill" restaurants offer the highest quality food and service. Through its managerial personnel, the Company standardizes specifications for the preparation and service of its food, the maintenance and repair of its premises and the appearance and conduct of its employees. Operating specifications and procedures are documented in a series of manuals. Emphasis is placed on ensuring that quality ingredients are delivered to the restaurants, continuously developing and improving restaurant food production systems, and ensuring that all employees are dedicated to consistently delivering high-quality food and service. -8- The primary commodities purchased by the "Dick Clark's American Bandstand Grill" restaurants are beef, poultry, seafood and produce. The Company monitors the current and future prices and availability of the primary commodities purchased by the Company to minimize the impact of fluctuations in price and availability and to make advance purchases of commodities when considered to be advantageous. However, purchasing remains subject to price fluctuations in certain commodities, particularly produce. All essential food and beverage products are available, or upon short notice can be made available, from alternative qualified suppliers. The Company maintains centralized financial and accounting controls for "Dick Clark's American Bandstand Grill" restaurants, which it believes are important in analyzing profit margins. The restaurants utilize a computerized POS system which provides point-of-sale transaction data and accumulation of pertinent marketing information. Sales data are collected and analyzed on a daily basis by management. Locations. The success of any restaurant depends, to a large extent, on its location. The site selection process for the Company's restaurants consists of three main phases: strategic planning, site identification and detailed site review. The strategic planning phase ensures that restaurants are located in population areas with demographics that support the entertainment concept. In the site identification phase, the major trade areas within a market area are analyzed and a potential site is identified. The final and most time-consuming phase is the detailed site review. In this phase, the site's demographics, traffic and pedestrian counts, visibility, building constraints, and competition are studied in detail. A detailed budget and return-on-investment analysis are also completed. Senior management inspects and approves each restaurant site prior to its lease, acquisition or construction. Six of the Company's first nine locations average 10,000 square feet in size. The Company is developing alternate configurations and sizes which increase the flexibility in choosing locations and expands the potential of the restaurant group. As an example, the Grill opened in Austin, Texas, is an 8,500 square-foot unit that is designed with a dance club area which will accommodate full dining during lunch and early dinner hours when not in use as a dance club. In addition, the Grills opened in St. Louis and Grapevine Mills, which are 7,600 and 6,300 square feet, respectively, are the Company's first units without a dance floor. The smaller and varied restaurant formats that we have developed should make a greater number of locations available for future consideration, expanding the overall potential of the restaurant group. In particular, smaller units should provide increased opportunities for growth as the investment in individual restaurants will be less and the site alternatives will be more numerous. The Company is also planning to test future Grills of approximately 6,500 - 7,000 square feet without a dance club area. These smaller units may provide increased profitability relative to their investment costs and should make the search for prime locations easier. Accordingly, many more locations with the right market and demographic mix will be available for consideration, including locations in malls where appropriate. Intended as a market test, the Company, through a joint venture, opened a dance-club only variation of the "Dick Clark's American Bandstand Grill" in the legendary Harold's Club in Reno, Nevada. Although the concept has been profitable, the Company has chosen to focus its expansion efforts on restaurants, which the Company believes have a broader market appeal and greater potential for future revenue growth. -9- GENERAL INFORMATION ------------------- Joint Ventures The Company from time to time enters into joint ventures with parties not otherwise affiliated with the Company whose purpose is the production of entertainment programming and other entertainment related activities associated with the Company's business. The C&C Joint Venture was organized by the Company and Freedom Productions in 1983 to develop and produce the Bloopers series. In December 1988, the Company acquired a controlling interest in the C&C Joint Venture, and the Company's share of net profits and losses in that venture is now 51%. Dick Clark's American Bandstand Club, a joint venture between Reno Entertainment, Inc., a wholly-owned subsidiary of dcri, and RLWH, Inc., was organized to own and operate a dance club version of "Dick Clark's American Bandstand Grill" in Reno, Nevada. Through its ownership in dcri, the Company owns a 51% controlling interest in this venture. Trademarks The United States registered service mark American Bandstand(R) was transferred from Olive to the Company in fiscal 1998. As part of this license, the Company utilizes the service marks and trademarks American Bandstand Grill(R), Dick Clark's American Bandstand Grill(R) and AB (Stylized). The Company also owns many other trademarks and service marks, including federal registration for trademarks and service marks related to its television programming and other businesses. Certain of the Company's trademarks and service marks may be considered to be material to the Company, such as the trademarks and service marks used in connection with the Company's restaurant operations. Backlog and Deferred Revenue The Company's backlog consists of orders by networks, first-run syndicators and cable networks for television programming to be delivered for the 1998/1999 television season as well as contractual arrangements for the services of dccp. At June 30, 1998, the Company had received orders for 3 series, 8 specials, and 3 corporate production events which are expected to total $36,550,000. At June 30, 1997, the Company had received orders for 2 series, 10 specials and 6 corporate production events which were expected to total $34,047,000. At June 30, 1996, the Company had received orders for 3 series, 11 specials, and 3 corporate production events which were expected to total $29,425,000. The Company receives payment installments in advance of and during production of its television programs. These payments are included in deferred revenue in the Company's consolidated balance sheets and are recognized as revenue when the program is delivered to the licensee. At June 30, 1998, 1997 and 1996, such deferred revenue totaled $1,861,000, $2,768,000, and $726,000, respectively. Competition Competition in the television industry is intense. The most important competitive factors include quality, variety of product and marketing. Many companies compete to obtain the literary properties, production personnel, and financing, which are essential to market acceptance of the Company's products. Competition for viewers of the Company's programs has been heightened by the proliferation of cable networks, which has resulted in the fragmentation of the viewing audience. The Company also competes for distribution and pre-sale arrangements, as well as the public's interest in, and acceptance of its programs. The Company's success is highly dependent upon such unpredictable factors as the viewing public's taste. Public taste changes, and a shift in demand could cause the Company's present programming to lose its appeal. Therefore, acceptance of future programming cannot be assured. Television and feature films compete with many other forms of -10- entertainment and leisure time activities, some of which involve new areas of technology, including the proliferation of internet services and new media games. The Company's principal competitors in television production are the television production divisions of the major television networks, motion picture companies, which are also engaged in the television and feature film distribution business, and many independent producers. Many of the Company's principal competitors have greater financial resources and more personnel engaged in the acquisition, development, production and distribution of television programming. At present there is substantial competition in the first-run syndication marketplace, resulting in fragmentation of ratings and advertising revenues. Certain of the Company's customers and the television networks are considered competitors of the Company in that they produce programming for themselves. While the Federal Communications Commission (the "FCC") promulgated the Financial Interest and Syndication Rule (the "FinSyn Rule") in 1970 in order to restrict network ownership of programming and syndication activities, the FinSyn Rule, as later amended in 1992, expired on September 21, 1995, thereby eliminating such restrictions. As a consequence, the 40% cap on network in-house productions previously imposed in 1992 was eliminated, thereby permitting the major networks to produce and syndicate, in house, all of their primetime entertainment schedule. With the elimination of such restrictions, the major networks have increased the amount of programming they produce through their own production companies. Numerous consolidations have also occurred, further restricting the Company's ability to sell its entertainment programming. As a result of the elimination of the FinSyn Rule, the Company has encountered increased competition in the domestic and foreign syndication of future television programming, and the Company's rerun syndication revenues could be adversely impacted by such modification. In addition, there is increased competition from emerging networks, which were previously exempt from any restrictions under the FinSyn Rule. The Company believes, however, that it can continue to compete successfully in the highly-competitive market for television programming. This belief is based on management's extensive experience in the industry, the Company's reputation for prompt, cost-efficient completion of production commitments and the Company's ability to attract creative talents. The restaurant industry is a highly-competitive industry that is affected by many factors including changes in the economy, changes in socio-demographic characteristics of areas in which restaurants are located, changes in customer tastes and preferences, and increases in the number of restaurants in which the Company's restaurants are located. The degree to which such factors may affect the restaurant industry, however, are not generally predictable. Competition in the restaurant industry can be divided into three main categories: fast food, casual dining, and fine dining. The casual dining segment (which includes the Company's restaurant operations) includes a much smaller number of national chains than the fast-food segment but does include many local and regional chains as well as thousands of independent operators. The fine dining segment consists primarily of small independent operations in addition to several regional chains. The market for corporate production services is large with many companies vying for market share. In fact, competition in the corporate production services segment is fierce. Most customers require bids on a competitive basis and some of the Company's competition have larger staffs and a greater global reach for information. dccp's principle competitors are other producers of corporate events and films (including Jack Morton Productions and Carabiner International, Inc.), which have been in business longer and are more established. The Company believes that dccp can compete successfully in this market by utilizing the Company's experience in producing live events for television and its existing talent and business relationships. Employees - Television Production & Related Activities At June 30, 1998, the Company had approximately 100 full-time employees in connection with the Company's television production and related activities. The Company meets a substantial part of its personnel needs in this business segment by retaining directors, actors, technicians and other specialized personnel on a per production, weekly or per diem -11- basis. Such persons frequently are members of unions or guilds and generally are retained pursuant to the rules of such organizations. The Company is a signatory to numerous collective bargaining agreements relating to various types of employees such as directors, actors, writers and musicians. The Company's union wage scales and fringe benefits follow prevailing industry standards. The Company is a party to one contract with the American Federation of Television and Radio Artists, which expired in November 1997 and was extended until November 1998, two contracts with the American Federation of Musicians which will expire in May 1999, two contracts with the Directors Guild of America, which expire in June 1999, one contract with the Writers Guild of America which expires in May 2001 and two contracts with the Screen Actors Guild, both of which expire in June 2001. The renewal of these union contracts does not depend on the Company's activities or decisions alone. If the relevant union and the industry are unable to come to new agreements on a timely basis, any resulting work stoppage could adversely affect the Company. Employees - Restaurants At June 30, 1998, the Company had approximately 700 employees in its restaurant operations. Employees are paid on an hourly basis, except restaurant managers and certain senior executives involved in the restaurant operations. A majority of the employees are employed on a part-time, hourly basis to provide services necessary during peak periods of restaurant operations. The Company's restaurant operations have not experienced any significant work stoppages and believes its labor relations are good. ITEM 2. PROPERTIES. The Company leases from Olive under a triple net lease approximately 30,000 square feet of office space and equipment in two buildings located in Burbank, California, for its principal executive offices. The current annual base rent is $638,000 and the lease expires on December 31, 2000. The lease agreement provides for rental adjustments every two years, commencing January 1, 1992, based on increases in the Consumer Price Index during the two-year period. The Company subleases approximately 10,000 square feet of space to third parties and affiliated companies on a month-to-month basis. The Company believes that the subleases to affiliated companies are no less favorable to the Company than could be obtained from unaffiliated third parties on an arms-length basis. The Company is also party to an Agreement with Olive, wherein Olive provides records management services, including storage, retrieval and inventory of customer records, files and other personal property. The term of the Agreement extends through September 30, 1999. See note 6 to the financial statements for further details. The Company has entered into lease agreements with respect to numerous restaurant sites that terminate at varying dates through November 30, 2013. The Company believes the properties and facilities it leases are suitable and adequate for the Company's present business and operations. ITEM 3. LEGAL PROCEEDINGS. The Company is involved in certain litigation in the ordinary course of its business, none of which, in the opinion of management, is material to the Company's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. -12- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is quoted on the National Association of Securities Dealers' Automated Quotation ("NASDAQ") National Market under the symbol dcpi. The following table sets forth the high and low bid prices for the Common Stock during each quarter of fiscal 1998, 1997 and 1996 as reported by NASDAQ. The prices reported reflect inter-dealer quotations, may not represent actual transactions and do not include retail mark-ups, mark-downs or commissions. Price Range Fiscal 1998 Fiscal 1997 Fiscal 1996 High Low High Low High Low - -------------------------------------------------------------------------------- 1st Quarter $14.50 $12.00 $14.25 $11.00 $10.00 $8.25 2nd Quarter 15.38 12.00 12.00 10.50 10.25 9.00 3rd Quarter 15.00 12.25 12.25 10.00 13.00 8.75 4th Quarter 19.13 12.00 14.00 11.38 15.00 12.00 As of September 18, 1998, there were 8,020,828 shares of Common Stock outstanding held by 539 holders of record and 787,500 shares of Class A Common Stock outstanding. On April 23, 1998, the Board of Directors of the Company declared a five percent (5%) dividend of the Common Stock and Class A Common Stock outstanding as of the close of business on May 4, 1998, which dividend was distributed on May 15, 1998. The Company did not declare or pay dividends on its Common Stock or Class A Common Stock during the 1997 and 1996 fiscal years. The declaration of dividends in the future will be at the election of the Board of Directors and will depend upon the earnings, capital requirements and financial position of the Company, general economic conditions, state law requirements and other relevant factors. -13- ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share data)
Income Statement 1998 1997 1996 1995 1994 ============================================================================================================ Revenue $86,251 $66,129 $73,819 $46,645 $58,296 Gross profit 17,174 14,217 11,969 9,094 10,681 General & administrative expenses 5,821 4,975 4,339 4,145 4,113 Minority interest 97 672 351 107 507 Interest and other income 2,079 1 ,937 1,788 1,711 1,455 Income before provision for income taxes 13,335 10,507 9,067 6,553 7,516 Provision for income taxes 5,101 3,993 3,469 2,461 2,640 Net income 8,234 6,514 5,598 4,092 5,138 ============================================================================================================ Balance Sheet 1998 1997 1996 1995 1994 ============================================================================================================ Working capital1 $39,115 $30,017 $29,573 $27,260 $27,136 Program costs, net 5,963 4,615 1,741 4,306 1,474 Total assets 73,215 63,298 52,711 48,308 44,317 Stockholders' equity 58,953 50,319 43,494 37,792 33,693 Weighted average number of shares outstanding 8,806 8,744 8,693 8,692 8,679 Weighted average number of shares and equivalents outstanding 8,940 8,870 8,860 8,851 8,791 Number of shares outstanding at year end 8,808 8,800 8,717 8,693 8,691 Per share data Basic earnings per share .94 .74 .64 .47 .59 Diluted earnings per share .92 .73 .63 .46 .58 Net book value 6.69 5.72 4.99 4.35 3.88 ============================================================================================================ Other Operating Data 1998 1997 1996 1995 1994 ============================================================================================================ EBITDA2 $14,502 $10,565 $8,663 $5,761 $7,043 ============================================================================================================
- ------------------------ 1 Represents the sum of cash, marketable securities and accounts receivable less accounts payable. 2 EBITDA is earnings before interest and other income, taxes, depreciation, amortization and cumulative affects of accounting changes. EBITDA is presented supplementally because management believes it allows for a more complete analysis of results of operations. This information should not be considered as an alternative to any measure of performance or liquidity as promulgated under generally accepted accounting principles (such as net income or cash provided by or used in operating, investing and financing activities) nor should it be considered as an indicator of the overall financial performance of the Company. The Company's calculation of EBITDA may be different from the calculation used by other companies and therefore comparability may be limited. -14- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of the following discussion and analysis is to explain the major factors and variances between periods of the Company's results of operations. This analysis should be read in conjunction with the financial statements and the accompanying notes which begin on page 19. Introduction A majority of the Company's revenue is derived from the production and licensing of television programming. The Company's television programming is licensed to the major television networks, cable networks, program distributors, domestic and foreign syndicators and advertisers. The Company also receives production fees from program buyers who retain ownership of the programming. In addition, the Company derives revenue from the rerun broadcast of its programs on network and cable television and in foreign markets as well as the licensing of its media and film archives to third parties for use in theatrical films and television movies, specials and commercials. The Company, on a limited basis, also develops theatrical films in association with established studios that generally provide the financing necessary for production. The Company also derives substantial revenue from its restaurant business (dick clark restaurants, inc. and its subsidiaries). This business segment contributed approximately 27%, 24 % and 18% to the Company's consolidated revenue for the fiscal years ended June 30, 1998, 1997 and 1996, respectively. License fees for the production of television programming are generally paid to the Company pursuant to license agreements during production and upon availability and delivery of the completed program or shortly thereafter. Revenue from network and cable television license agreements is recognized for financial statement purposes upon availability and delivery of each program or episode in the case of a series. Revenue from rerun broadcast (both domestic and foreign) is recognized for each program when it becomes contractually available for broadcast. Production costs of television programs are capitalized and charged to operations on an individual program basis in the ratio that the current year's gross revenue bears to management's estimate of the total revenue for each program from all sources. Substantially all television production costs are amortized in the initial year of delivery, except for those successful television series and television movies where there is likely to be future revenue earned in domestic and foreign syndication and other markets. Successful television series and television movies can achieve substantial revenue from rerun broadcasts in both foreign and domestic markets after their initial broadcast, thereby allowing a portion of the production costs to be amortized against future revenue. Distribution costs of television programs are expensed in the period incurred. Depending upon the type of contract, revenue for dick clark corporate productions, inc. is recognized when the services are completed for a live event, when a tape or film is delivered to a customer, when services are completed pursuant to a particular phase of a contract which provides for periodic payments, or as may be otherwise provided in a particular contract. Costs of individual corporate event productions are capitalized and expensed as revenue is recognized. Liquidity and Capital Resources The Company's capital resources are more than adequate to meet its current working capital requirements. The Company had cash and marketable securities of approximately $39,303,000 as of June 30, 1998 compared to $31,754,000 as of June 30, 1997. The Company has no outstanding bank borrowings or other indebtedness for borrowed money. Marketable securities consist primarily of investments in United States Treasury Bills and Treasury Notes. The Company classifies investments in marketable securities as "held-to-maturity", and carries its investments at cost in accordance with Statement of Financial Accounting Standards No. 115. This Statement requires investments in debt and equity securities, other than debt securities classified as "held-to-maturity", to be reported at fair value. Historically, the Company has funded its investment in television program costs primarily through installment -15- payments of license fees and minimum guaranteed license payments from program buyers. To the extent the Company produces television movies and television series, the Company may be required to finance the portion of its program costs for these programs not covered by guaranteed license payments from program buyers (known in the television industry as "deficit financing"). The Company incurred deficit financing in connection with the production of a children's series delivered in fiscal 1998. None of the Company's television production in fiscal 1997 required material deficit financing by the Company. No programs which are currently in development are anticipated to require material deficit financing. Net cash provided by operating activities was approximately $9.4 million, $8.6 million and $5.8 million in fiscal 1998, 1997 and 1996, respectively. Net cash used in investing activities was approximately $6.0 million, $6.6 million and $8.2 million in fiscal 1998, 1997 and 1996, respectively. The fluctuations in cash provided by operations and cash used for investing activities for those years primarily reflect changes in production activity and the construction of one "Dick Clark's American Bandstand Grill" restaurant in fiscal 1998, three restaurants in fiscal 1997 and one restaurant in fiscal 1996. The Company expects that the opening of additional American Bandstand Grill restaurants will be financed from available capital and/or alternative financing methods such as joint ventures and limited recourse borrowings. Capital requirements for the Company's corporate events and communications business, dick clark communications, inc., are anticipated to be immaterial to the Company's overall capital position in fiscal 1999. The Company expects that its available capital base and cash generated from operations will be more than sufficient to meet its cash requirements for the foreseeable future. Results of Operations Revenue - Revenue for the year ended June 30, 1998 was $86,251,000 compared to $66,129,000 for the year ended June 30, 1997 and $73,819,000 for the year ended June 30, 1996. The increase in revenue in fiscal 1998 as compared to fiscal 1997 is primarily due to increased revenues from television series and specials programming as well as revenues from additional restaurants which were not operating for a comparable period of time in fiscal 1997. The decrease in revenue in fiscal 1997 as compared to fiscal 1996 is primarily attributable to decreased revenue associated with the television series "Tempestt" which completed production during fiscal 1996 as well as decreased revenue associated with the Company's communications business. This decrease was offset in part by increased revenue associated with the opening of three additional restaurants during fiscal 1997 as well as the inclusion of revenue from an additional restaurant which was operating for only four months during fiscal 1996. During fiscal 1998, revenue from a recurring annual special represented approximately 11% of total revenue and revenue from two different television series each represented approximately 11% of total revenue. During fiscal 1997, revenue from a recurring annual special represented approximately 14% of total revenue. During fiscal 1996, revenue from a five-day per week talk show series represented approximately 15% of total revenue and revenue recognized from a recurring annual special represented approximately 12% of total revenue. No other production or project accounted for more than 10% of total revenue for fiscal 1998, 1997 or 1996. Gross Profit -- Gross profit as a percentage of revenue was 20%, 21% and 16% for fiscal 1998, 1997 and 1996, respectively. The decrease in gross profit as a percentage of revenue in fiscal 1998 as compared to fiscal 1997 is primarily a result of decreased profitability recognized from television specials programming and restaurant operations. The increase in gross profit as a percentage of revenue in fiscal 1997 as compared to fiscal 1996 is primarily attributable to increased profitability of the Company's television series production activities. During fiscal 1996, the Company produced a five-day per week television talk show series which earned a small gross profit as a percentage of sales. This syndicated five-day per week talk show series was canceled by the end of fiscal 1996 and, as a consequence, gross profit as a percentage of sales increased in fiscal 1997. The increase in gross profit as a percentage of sales is further explained by the production and delivery of a new dramatic series for Fox Broadcasting Company during fiscal 1997. -16- General & Administrative -- General and administrative expense increased in fiscal 1998 and fiscal 1997 compared to the corresponding periods in the previous fiscal years primarily as a result of increased personnel costs associated with the expansion of the restaurant business. Other - Minority interest expense decreased in fiscal 1998 compared to fiscal 1997 as no major sales of the Company's previously-produced "Super Bloopers and New Practical Jokes" were made in fiscal 1998. The C & C Joint Venture, of which the Company has a 51% interest, produced the "Super Bloopers and New Practical Jokes" television specials. Minority interest expense increased in fiscal 1997 compared to fiscal 1996 primarily as a result of the licensing of the rebroadcast rights to 118 episodes of "Super Bloopers and New Practical Jokes." The Bloopers Specials currently being produced by the Company do not include the practical joke segments and are owned 100% by the Company and there is, therefore, no minority interest expense associated with their production. Other Operating Data EBITDA is earnings before interest and other income, taxes, depreciation, amortization, and cumulative effects of accounting changes. EBITDA is presented supplementally because management believes it allows for a more complete analysis of results of operations. This information should not be considered as an alternative to any measure of performance or liquidity as promulgated under generally accepted accounting principles (such as net income or cash provided by or used in operating, investing and financing activities) nor should it be considered as an indicator of the overall financial performance of the company. The company's calculation of EBITDA may be different from the calculation used by other companies and therefore comparability may be limited. Year 2000 The Company has assessed and continues to assess the impact of the Year 2000 Issue on its reporting systems and operations. The Year 2000 Issue exists because computer systems and applications were historically designed to use two digit fields to designate a year, and date sensitive systems may not recognize 2000 at all, or if recognized, as 1900. Information technology systems account for most of the Year 2000 work and include all computer systems and technology managed by the Company. All core systems have been assessed and work is being undertaken to test and implement changes where required. Information Technology vendors and suppliers have been contacted as to their Year 2000 compliance and their responses have been factored into the Company's plans. Normal software version upgrades and hardware replacements have solved a majority of the Company's Year 2000 Issues. Based on the nature of the Company's business, it is not expected that any non-financial software applications and hardware that may be impacted by the Year 2000 Issue would cause any interruption in operations. The Company is communicating with its significant customers and vendors to understand their Year 2000 issues and how they might prepare themselves to manage those issues as they relate to the Company. To date, no significant customers or vendors have informed the Company that a material Year 2000 issue exists which will have a material effect on the Company. The Company expects to complete any changes required to overcome the Year 2000 Issue during fiscal 1999, and, the total cost to remediate will not be material to the Company's results of operations, liquidity or capital resources. The Company does not currently have a Year 2000 contingency plan but intends to create one during fiscal 1999. Disclosure Regarding Private Securities Litigation Reform Act of 1995 This report contains certain forward-looking statements with respect to the future performance of the Company that involve risks and uncertainties. Various factors could cause actual results to differ materially from those projected in such statements. These factors include, but are not limited to, the Company's ability to develop and sell television programming, -17- timely completion of negotiations for new restaurant sites and the ability to construct, finance and open new restaurants and to attract new corporate productions clients, and such competitive and other business risks as from time to time may be detailed in the Company's Securities and Exchange Commission reports. Item 8. Financial Statements and Supplementary Data. The information required by this item is set forth in the Financial Statements, commencing on page 19 included herein. -18- CONSOLIDATED BALANCE SHEETS - ---------------------------
YEAR ENDED JUNE 30, Assets 1998 1997 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 7,092,000 $ 3,322,000 Marketable securities 32,211,000 28,432,000 Accounts receivable 6,673,000 4,221,000 Program costs, net 5,963,000 4,615,000 Prepaid royalty, net 3,041,000 3,128,000 Property, plant and equipment, net 16,339,000 16,711,000 Goodwill and other assets, net 1,896,000 2,869,000 - --------------------------------------------------------------------------------------------------------------- Total assets $ 73,215,000 $ 63,298,000 - --------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity - --------------------------------------------------------------------------------------------------------------- Liabilities: Accounts payable $ 6,861,000 $ 5,958,000 Accrued residuals and participations 3,241,000 2,410,000 Production advances and deferred revenue 1,861,000 2,768,000 Current and deferred income taxes 1,570,000 936,000 - --------------------------------------------------------------------------------------------------------------- Total liabilities 13,533,000 12,072,000 Commitments and contingencies Minority interest 729,000 907,000 Stockholders' Equity: Class A common stock, $.0l par value, 2,000,000 shares authorized 787,000 shares outstanding 8,000 7,000 Common stock, $.01 par value, 20,000,000 shares authorized 8,021,000 shares outstanding at June 30, 1998 and 80,000 76,000 8,013,000 shares outstanding at June 30, 1997 Additional paid-in capital 13,831,000 8,205,000 Retained earnings 45,034,000 42,031,000 - --------------------------------------------------------------------------------------------------------------- Total stockholders' equity 58,953,000 50,319,000 - --------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 73,215,000 $ 63,298,000 - ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. -19- CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------
YEAR ENDED JUNE 30, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Revenue $ 86,251,000 $ 66,129,000 $ 73,819,000 Costs related to revenue 69,077,000 51,912,000 61,850,000 - ----------------------------------------------------------------------------------------------------------------------------------- Gross profit 17,174,000 14,217,000 11,969,000 General and administrative expense 5,821,000 4,975,000 4,339,000 Minority interest expense 97,000 672,000 351,000 Interest and other income (2,079,000) (1,937,000) (1,788,000) - ----------------------------------------------------------------------------------------------------------------------------------- Income before provision for income taxes 13,335,000 10,507,000 9,067,000 Provision for income taxes 5,101,000 3,993,000 3,469,000 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 8,234,000 $ 6,514,000 $ 5,598,000 Per share data: Basic earnings per share $ 0.94 $ 0.74 $ 0.64 Diluted earnings per share $ 0.92 $ 0.73 $ 0.63 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 8,806,000 8,744,000 8,693,000 Weighted average number of shares and equivalents outstanding 8,940,000 8,870,000 8,860,000 - ----------------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
-20-
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - ------------------------------------------------ Class A Additional Total Common Stock Common Stock Paid-in Retained Stockholder's Shares Amount Shares Amount Capital Earnings Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1995 750,000 $7,000 7,528,500 $76,000 $7,790,000 $29,919,000 $37,792,000 Net income --- --- --- --- --- 5,598,000 5,598,000 Exercise of stock options --- --- 23,000 --- 104,000 --- 104,000 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1996 750,000 7,000 7,551,500 76,000 7,894,000 35,517,000 43,494,000 Net income --- --- --- --- --- 6,514,000 6,514,000 Exercise of stock options --- --- 80,000 --- 311,000 --- 311,000 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1997 750,000 7,000 7,631,500 76,000 8,205,000 42,031,000 50,319,000 Net income --- --- --- --- --- 8,234,000 8,234,000 Exercise of stock options --- --- 7,500 --- 400,000 --- 400,000 Stock dividend 37,500 1,000 382,000 4,000 5,226,000 (5,231,000) --- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1998 787,500 $8,000 8,021,000 $80,000 $13,831,000 $45,034,000 $58,953,000 ====================================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. -21-
CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED JUNE 30, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ Cash flows from operating activities Net income $ 8,234,000 $ 6,514,000 $ 5,598,000 Adjustments to reconcile net income to net cash Provided by operations Amortization expense 47,083,000 22,239,000 47,778,000 Depreciation expense 2,441,000 1,468,000 1,123,000 Investment in program costs (47,626,000) (24,586,000) (44,952,000) Minority interest, net (178,000) 290,000 93,000 Disposals of property, plant and equipment 158,000 150,000 73,000 Changes in assets and liabilities Accounts receivable (2,452,000) 492,000 (2,410,000) Other assets 255,000 (1,414,000) (114,000) Accounts payable, accrued residuals and participations 1,734,000 1,096,000 1,725,000 Production advances and deferred revenue (907,000) 2,042,000 (3,371,000) Current and deferred income taxes payable 634,000 334,000 254,000 -------------------------------------------------- Net cash provided by operations 9,376,000 8,625,000 5,797,000 -------------------------------------------------- Cash flows from investing activities Purchases of marketable securities (24,413,000) (29,068,000) (17,348,000) Sales of marketable securities 20,634,000 29,555,000 14,198,000 Expenditures on property, plant and equipment (2,227,000) (7,054,000) (5,095,000) -------------------------------------------------- Net cash used for investing activities (6,006,000) (6,567,000) (8,245,000) -------------------------------------------------- Cash flows from financing activities Exercise of stock options 400,000 311,000 104,000 -------------------------------------------------- Net cash provided by financing activities 400,000 311,000 104,000 -------------------------------------------------- Net increase (decrease) in cash and cash equivalents 3,770,000 2,369,000 (2,344,000) Cash and cash equivalents at beginning of the year 3,322,000 953,000 3,297,000 -------------------------------------------------- Cash and cash equivalents at end of the year $ 7,092,000 $ 3,322,000 $ 953,000 - ------------------------------------------------------------------------------------------------------ Supplemental Disclosures of Cash Flow Information Cash paid during the year for income taxes $ 4,189,000 $ 3,664,000 $ 3,186,000 ======================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. -22- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 -- Basis of Financial Statement Presentation The consolidated financial statements include the accounts of dick clark productions, inc., its wholly-owned subsidiaries and majority owned joint ventures, collectively referred to as the "Company". For financial statement reporting purposes, the accounts are consolidated using historical data. All significant inter-company balances and transactions have been eliminated in consolidation. The common stock of the Company is entitled to one vote per share on all the matters submitted to a vote of stockholders, and the Class A common stock is entitled to 10 votes per share. Holders of Class A common stock are entitled to a dividend equal to 85% of any declared cash dividends on the shares of common stock. On liquidation of the Company, holders of the common stock are entitled to receive $2.00 per share before any payment is made to the holders of Class A common stock, and thereafter the holders of Class A common stock are entitled to share ratably with the holders of common stock in the net assets available for distribution. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. 2 - Summary of Significant Accounting Policies Revenue -- Revenue from television program licensing agreements is recognized when each program becomes contractually available for broadcast and delivery. Revenue earned currently which is to be received in future periods is discounted to present value. Depending on the type of contract, revenue for dick clark corporate productions, inc. is recognized when services are completed for a live event or when a tape or film is delivered to a customer or when services are completed pursuant to a phase of a contract which provides for periodic payment. Revenue from restaurant operations is recognized upon provision of goods and services to customers. Revenue by significant customer as a percentage of total revenue is as follows: YEAR ENDED JUNE 30, Significant Customers 1998 1997 1996 - -------------------------------------------------------------------------------- NBC entertainment 20% 15% 13% ABC entertainment 12% 17% 13% Columbia Tristar Television 0% 0% 15% Fox Television 10% 7% 1% The Company produces television programming in relation to several awards shows subject to long-term license agreements which expire between 1999 and 2001. While the existence of each long-term agreement enhances the future financial performance of the Company, the non-renewal of certain such agreements at their respective expiration dates could have a material adverse impact on the Company's financial performance. Program Costs -- Program costs, which include acquired rights, indirect production costs (production overhead), residuals and third-party participations, are charged to operations on an individual program basis in the ratio that the current year's revenue for each program bears to management's estimate of total ultimate revenue for the current and future years for that program from all sources. This method of accounting is commonly referred to as the individual film forecast method. For the fiscal years ended June 30, 1998, 1997 and 1996 there was $5,689,000, $5,237,000 and $4,825,000, respectively, of production overhead included within program costs. -23- Upon distribution of acquired film rights, the Company uses the individual film forecast method set forth in Statement of Financial Accounting Standards (SFAS) No. 53 to amortize these program costs, together with the participants' share and residuals costs, based upon the ratio of revenue earned in the current period to the Company's estimate of total revenue to be realized. Management periodically reviews its estimates on a program-by-program basis and, when unamortized costs exceed net realizable value for a program, that program's unamortized costs are written down to net realizable value. When estimates of total revenue indicate that a program will result in an ultimate loss, the entire loss is recognized. The Company periodically reviews the status of projects in development. If, in the opinion of the Company's management, any such projects are not planned for production, the costs and any reimbursements and earned advances related thereto are charged to the appropriate profit and loss accounts. Substantially all production and distribution costs are amortized in the initial year of availability, except with respect to successful television series and television movies which have the capacity for significant future revenue. Income Taxes -- Income taxes are accounted for in accordance with SFAS No. 109, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Cash and Cash Equivalents -- Cash equivalents consist of investments in interest bearing instruments issued by banks and other financial institutions with original maturities of 90 days or less. Such investments are stated at cost, which approximates market value. Accounts Receivable --Accounts receivable represent unsecured balances due from the Company's various customers and the Company is at risk to the extent such amounts become uncollectible. The Company performs credit evaluations of each of its customers and maintains allowances for potential credit losses, if deemed necessary. Marketable Securities -- Marketable securities consist primarily of investments in United States Treasury Bills and Treasury Notes. The Company classifies its investments in marketable securities as "held-to-maturity ", and carries the investments at cost in accordance with SFAS No. 115. This statement requires investments in debt and equity securities, other than debt securities classified as "held- to-maturity", to be reported at fair value. The cost of these investments as of June 30, 1998 and 1997 was $32,211,000 and $28,432,000, respectively, and the market value as of June 30, 1998 and 1997 was $31,980,000 and $28,133,000, respectively. As of June 30, 1998, the recorded costs of marketable securities maturing in fiscal 1999, 2000, 2001 and thereafter were $18,507,000, $5,583,000, $5,554,000 and $2,567,000, respectively. -24- Property, Plant and Equipment - Property, plant and equipment consist of the following:
As of June 30, 1998 1997 - ------------------------------------------------------------------------------------------- Land $ 2,018,000 $ 1,993,000 Buildings 4,920,000 4,464,000 Leasehold improvements 5,907,000 5,889,000 Furniture and fixtures 7,144,000 6,210,000 Production and other equipment 3,477,000 2,920,000 Construction in process 14,000 73,000 $23,480,000 $21,549,000 Less: accumulated depreciation (7,141,000) (4,838,000) ---------------------------------------- Property, plant and equipment, net $16,339,000 $16,711,000 =================-----------------------
Depreciation is calculated using the straight-line method based on estimated useful lives of the applicable property or asset. Useful lives range from 3 to 30 years for buildings and leasehold improvements and 5 to 7 years for furniture and fixtures and other equipment. The cost of normal maintenance and repairs to properties and assets is charged to expense when incurred. Major improvements to properties and assets are capitalized and depreciated over the estimated useful life of the improvements. Goodwill and Other Assets -- Goodwill resulting from the Company's acquisition of Harmon Entertainment Restaurants (see Note 4) in fiscal 1990 is being amortized on a straight-line basis over 20 years. Other assets include capitalized organizational costs, pre-opening costs and liquor license costs. Organizational costs and pre-opening costs are being amortized over 5 years and 12 months, respectively. Organizational costs include legal and other expenses relating primarily to the Company's various restaurant locations. Pre-opening costs are limited to direct, incremental costs relating to start-up activities associated with the Company's restaurant business. Liquor license costs at June 30, 1998 and 1997 of $143,000 and $143,000, respectively, are not being amortized. Accumulated amortization of goodwill and other assets at June 30, 1998 and 1997 was $2,673,000 and $1,966,000, respectively. Unclassified Balance Sheet --In accordance with the provisions of SFAS No. 53, the Company has elected to present an unclassified balance sheet. Joint Ventures --The Company has a controlling interest in several joint venture arrangements in which the Company's share of profits and losses exceed 50%. As a result, the assets, liabilities, revenues and expenses of such joint ventures are included in the consolidated balance sheets and statements of operations of the Company with the amounts due to others shown as minority interest. Reclassifications -- The consolidated financial statements of prior years reflect certain reclassifications to conform with classifications adopted in the current year. Earnings Per Share -- In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings Per Share", which was implemented by the Company in the quarter ended December 31, 1997. As a result, the Company's reported earnings per share for all prior periods were restated. Basic earnings per share were computed by dividing net income by the weighted average number of shares of stock outstanding during the year. Diluted earnings per share were determined by applying the treasury stock method to compute dilution for common stock equivalents. On April 23, 1998, the Company declared a 5% stock dividend to stockholders of record on May 4, 1998. Accordingly, share data have been adjusted to include the effect of the stock dividend. -25- New Accounting Pronouncements -- In February, 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure", which is effective for the Company's fiscal year ending June 30, 1998. This statement establishes standards for disclosing information about an entity's capital structure. The Company has been in compliance with the requirements of SFAS No. 129 and as such no additional disclosures are required. In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" which is effective for the Company's fiscal year ending June 30, 1999. This statement established standards for the reporting and display of comprehensive income and its components in financial statements and thereby reports a measure of all changes in equity of an enterprise that result from transactions and other economic events other than transactions with owners. In June, 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of An Enterprise and Related Information", which is effective for the Company's fiscal year ending June 30, 1999. This statement changes the requirements under which public businesses report disaggregated information. In April 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities." This SOP requires that all nongovernmental entities expense costs of start-up activities (pre-opening, pre-operating and organizational costs) as those costs are incurred and requires the write-off of any unamortized balances upon implementation. SOP 98-5 is effective for financial statements issued for periods beginning after December 15, 1998. The Company expects to adopt SOP 98-5 in the first quarter of the fiscal year ending June 30, 2000. The Company has not yet determined the financial impact of SOP 98-5. 3 - Program Costs The Company is engaged, as one of its principal activities, in the development and production of a wide range of television and corporate programming. Management's estimate of forecasted revenue related to released programs exceeds the unamortized costs on an individual program basis. Such forecasted revenue is subject to revision in future periods if warranted by changing conditions such as market appeal and availability of new markets. The Company currently anticipates that all of such revenue and related amortization will be recognized under the individual-film-forecast method where programs are available for broadcast in certain secondary markets in years ranging from 1998 through 2003. While management can forecast ultimate revenue based on experience and current market conditions, specific annual amortization charges to operations are not predictable because revenue recognition is dependent upon various external factors including expiration of network license agreements and availability for broadcasting in certain secondary markets. Program costs associated with corporate productions are amortized as projects, or identifiable elements pursuant to a contract, are delivered. Based on management's estimates of gross revenues as of June 30, 1998, approximately 62% of the $4,325,000 of unamortized program costs applicable to released programs will be amortized during the three fiscal years ending June 30, 2001. -26-
Capitalized program costs consist of the following: As of June 30, 1998 1997 - ------------------------------------------------------------------------------------------------------ Released, since inception Movies for television $ 24,911,000 $ 23,795,000 Television programs 220,199,000 178,563,000 Corporate projects 51,488,000 45,556,000 296,598,000 247,914,000 Less: accumulated amortization (292,273,000) (246,322,000) 4,325,000 1,592,000 =========================---------------------------- In process Television programs 882,000 1,872,000 Corporate projects 77,000 437,000 ----------------------------------------------------- 959,000 2,309,000 =========================---------------------------- Project development costs Movies for theatrical release 102,000 86,000 Movies for television 471,000 511,000 Television programs 76,000 80,000 Corporate projects 30,000 37,000 679,000 714,000 =========================---------------------------- Program costs, net $ 5,963,000 $ 4,615,000 =========================----------------------------
-27- 4 - Prepaid Royalty Pursuant to a redemption and settlement agreement dated June 14, 1990 (the "Redemption Agreement"), between Harmon Entertainment Corporation ("Harmon"), a previous co-venturer with the Company in its restaurant business, the Company, dick clark restaurants, inc. ("dcri") and certain other parties, the Company had an obligation to pay Harmon a royalty of up to $10,000,000 at a rate of 1.5% of all restaurant revenue of which $1,000,000 was advanced to Harmon at the time the Redemption Agreement was entered into by the parties thereto. Pursuant to a modification dated December 31, 1994 to the Redemption Agreement, the Company paid Harmon $3,128,000 as pre-payment of the remaining portion of this obligation. In fiscal 1998, the Company began amortizing the prepaid royalty of $3,128,000 at the rate of 1.5% of revenue. Amortization of the royalty totaled $87,000 for fiscal 1998. 5 - Income Taxes The provision for income taxes consists of the following:
Year ended June 30, 1998 1997 1996 - -------------------------------------------------------------------------------------------------------- Current Federal $4,027,000 $3,539,000 $3,174,000 State 461,000 376,000 367,000 Foreign 252,000 170,000 192,000 -------------------- -------------------- -------------------- $4,740,000 $4,085,000 $3,733,000 Deferred Federal 320,000 (87,000) (230,000) State 41,000 (5,000) (34,000) 361,000 (92,000) (264,000) -------------------- -------------------- -------------------- $5,101,000 $3,993,000 $3,469,000 ==================== --------------------- --------------------
A reconciliation of the difference between the statutory federal tax rate and the Company's effective tax rate on a historical basis is as follows:
Year ended June 30, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------- Statutory federal rate 34% 34% 34% State taxes, net of federal income tax benefit 4 4 4 ----------------------------------------------------- Effective tax rate 38% 38% 38% -----------------------------------------------------
-28- The components of current and deferred income taxes are as follows:
As of June 30, 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Deferred tax assets Accrued residuals and participations $ 593,000 $ 311,000 Rent abatement 21,000 29,000 Pre-opening costs 277,000 214,000 Depreciation 61,000 68,000 Bonus accrual 242,000 362,000 Miscellaneous 50,000 35,000 Total deferred tax assets $ 1,244,000 $ 1,019,000 ======================= ----------------------- Deferred tax liabilities Difference between book and tax accounting for program costs $ (389,000) $ (481,000) Prepaid royalty (1,163,000) (1,189,000) Tax deductible goodwill (239,000) (257,000) ---------------------------------------------- Total deferred tax liabilities $ (1,791,000) $ (1,927,000) Net deferred tax liability (547,000) (908,000) ======================= ----------------------- Current taxes payable (1,023,000) (28,000) ----------------------- ----------------------- Total current and deferred taxes payable $ (1,570,000) $ (936,000) ======================= -----------------------
6 -- Related Party Transactions The Company is a tenant under a triple net lease (the "Burbank Lease") with Olive Enterprises, Inc. ("Olive"), a company owned by the Company's principal stockholder, covering the premises occupied by the Company in Burbank, California (see Note 7 for a summary of the terms of the Burbank Lease). The Company subleases a portion of the space covered by the Burbank Lease to Olive and to unrelated third parties on a month-to-month basis. In fiscal years 1998, 1997 and 1996 the sublease income paid by Olive was $12,000 per year. The Company believes that the terms of the Burbank Lease and sublease to Olive are no less favorable to the Company than could have been obtained from unaffiliated third parties on an arms-length basis. No significant leasehold improvements were made in fiscal years 1998 or 1997. The Company also paid Olive $151,000, $156,000 and $142,000 for storage services during the fiscal years 1998, 1997 and 1996, respectively. The Company provided management and other services to Olive and other companies owned by the Company's principal stockholder for which the Company received $177,000, $150,000 and $158,000 for the fiscal years 1998, 1997 and 1996, respectively. The Company retained the services of Dick Clark as host for certain of its television programs and other talent services during fiscal 1998, 1997 and 1996 for which the Company paid him host fees of $687,000, $435,000 and $735,000, respectively. Management believes that the fees paid by the Company are no more than it would have paid to an unaffiliated third party on an arms-length basis. -29- 7 - Commitments and Contingencies The Company has entered into employment agreements with certain key employees requiring payment of annual compensation of $3,214,000, $2,231,000, $1,607,000, $1,607,000 and $1,607,000 for the years ending June 30, 1999, 2000, 2001, 2002 and 2003, respectively. Several agreements also provide for the payment by the Company of certain profit participations based upon the profits from specific programs, and/or individual subsidiaries or the Company as a consolidated entity, as provided in the applicable employment agreements. Several agreements have renewal options of up to two additional years. The Company renegotiated its Burbank Lease with Olive for the term commencing June 1, 1989 and terminating December 31, 2000. The Burbank Lease expense for the years ended June 30, 1998, 1997 and 1996 was $625,000, $616,000 and $612,000, respectively. The Burbank Lease provides for rent increases every two years commencing January 1, 1992 based on increases in the Consumer Price Index during the two-year period. The Company has entered into lease agreements with respect to restaurants that terminate at varying dates through November 30, 2013. Total lease expense for the Company for the years ended June 30, 1998, 1997 and 1996 was $1,538,000, $1,282,000 and $1,104,000, respectively. The various operating leases to which the Company is presently subject require minimum lease payments as follows: Year ended June 30, - ------------------------------------------------------- 1999 $1,596,000 2000 1,567,000 2001 1,264,000 2002 957,000 2003 828,000 Thereafter 5,612,000 - ------------------------------------------------------- 8 - Stock Options In August 1996, the Company's Board of Directors approved changes to the Company's 1987 employee stock option plan. The 1996 plan was ratified by the stockholders in November 1996. The plan provides for issuance of up to 1,000,000 shares of the Company's common stock. Options granted under the plan may be either incentive stock options or non-qualified stock options, with a maximum limit of 250,000 shares to any employee during any calendar year. The exercise price of the incentive and non-qualified stock options must be equal to at least 100 percent of the fair market value of the underlying shares as of the date of grant. No incentive stock options were granted to employees in fiscal 1998. During fiscal years 1997 and 1996, respectively, 18,300 and 1,000 incentive stock options were granted to certain employees of the Company to purchase shares at prices ranging from $9.50 to $14.00. As of June 30, 1998, 193,831 of all stock options granted, vested and outstanding are exercisable at prices ranging from $3.69 to $13.33. 8,557 additional options will become exercisable in fiscal years 1999 and 2000. During fiscal 1998, 1997 and 1996, 7,500, 80,000 and 23,000 options, respectively, were exercised. The Company applies APB Opinion 25 and related interpretations in accounting for its stock-based compensation plans. Accordingly, compensation expense recognized was different than what would have otherwise been recognized under the fair value based method defined in SFAS No. 123, "Accounting for Stock-Based Compensation." Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated as follows: -30-
(in thousands, except per share amounts) 1998 1997 1996 - ---------------------------------------- --------- ---- ----- Net Income $ 8,234 $ 6,514 $ 5,598 As reported Pro forma 8,210 6,484 5,575 Earnings per share As reported Basic .94 .74 .64 Diluted .92 .73 .63 Pro forma Basic .93 .74 .64 Diluted .92 .73 .63
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998 and 1997: dividend yield of zero percent for both years; expected volatility of 35 to 46 percent; risk-free interest rates of 6.32 to 6.57 percent and expected lives of 3.60 to 9.10 years. A summary of the status of the Company's stock option plans as of June 30, 1998, 1997 and 1996, and changes during the years ending on those dates is presented below:
Options Price Range Weighted Options Available (Per Share) Average Price Outstanding For Grant ------------------- ------------- ----------- --------- Balance at June 30, 1995 $ 3.88 - 10.38 $ 4.27 303,950 677,550 Granted 9.50 - 9.50 9.50 1,000 (1,000) Exercised 4.50 - 4.50 4.50 (23,000) --- Cancelled 6.50 - 6.50 6.50 (20,000) 20,000 Balance at June 30, 1996 3.88 - 10.38 4.10 261,950 696,550 Granted 11.00- 14.00 12.16 18,300 (18,300) Exercised 3.88 - 4.00 3.91 (80,000) ---- Cancelled ---- ---- ---- ---- Balance at June 30, 1997 3.88 - 14.00 4.91 200,250 678,250 Granted ---- --- --- --- Exercised 7.50 - 7.50 7.50 (7,500) --- Cancelled ---- --- --- --- Stock Dividend 3.69 -13.33 4.58 9,638 (9,638) Balance at of June 30, 1998 $3.69 -13.33 $4.58 202,388 668,612
The following table summarizes information about stock options outstanding at June 30, 1998: Options Outstanding Options Exercisable -31-
Number Weighted Average Number Range of Outstanding Remaining Weighted Average Exercisable Weighted Average Exercise Price At 06-30-98 Contractual Life Exercise Price At 06-30-98 Exercise Price - -------------------- -------------------------------------------------------------------------------------------------- $ 3.69 - 4.29 178,973 4.16 $ 3.70 178,973 $ 3.70 9.05 - 9.89 4,200 5.31 9.67 4,200 9.67 10.48 - 13.33 19,215 3.45 11.58 10,658 11.33 - -------------------- -------------------------------------------------------------------------------------------------- $ 3.69 - 13.33 202,388 4.11 $ 4.58 193,831 $ 4.26 - -------------------- --------------------------------------------------------------------------------------------------
-32- 9 -- Business Segment Information The Company's business activities consist of two business segments: entertainment operations and restaurant operations. The revenue and gross profit of each of these business segments are reported in the following table. Inter-segment revenue is insignificant. Business Segments (in thousands) Entertainment Restaurants Total - -------------------------------------------------------------------------------- 1998 Revenue $63,310 $22,941 $86,251 Gross profit+ 16,035 1,139 17,174 Identifiable assets 50,847 22,368 73,215 Depreciation 213 2,228 2,441 Capital expenditures 455 1,772 2,227 1997 Revenue $50,547 $15,582 $66,129 Gross profit+ 13,352 865 14,217 Identifiable assets 40,529 22,769 63,298 Depreciation 150 1,318 1,468 Capital expenditures 229 6,825 7,054 1996 Revenue $60,287 $13,532 $73,819 Gross profit+ 11,295 674 11,969 Identifiable assets 35,595 17,116 52,711 Depreciation 142 981 1,123 Capital expenditures 245 4,850 5,095 - -------------------------------------------------------------------------------- +Does not include corporate overhead of $3,580,000, $3,476,000, and $3,471,000, for entertainment and $2,241,000, $1,499,000, and $868,000 for the restaurant segment during the years 1998, 1997, and 1996, respectively. Gross profit also excludes minority interest expense and interest and other income. Results of Operations by Quarter (In thousands, except per share amounts) (unaudited)
Basic Diluted 1st Quarter Earnings Earnings (ending September 30) Revenue Gross Profit Net Income Per Share Per Share - ---------------------------------------------------------------------------------------------------------------- 1997 $14,055 $ 988 $ 115 .01 .01 1996 $10,909 $1,251 $ 303 .03 .03 ----------- ---------------------- ----------------- -------------- -------------- 2nd Quarter (ending December 31) - --------------------------- 1997 $13,371 $1,874 $ 737 .08 .08 1996 $ 9,907 $2,031 $ 698 .08 .08 ----------- ---------------------- ----------------- -------------- -------------- 3rd Quarter (ending March 31) - --------------------------- 1998 $36,247 $10,279 $5,706 .65 .64 1997 $22,243 $ 8,532 $4,464 .51 .50 ----------- ---------------------- ----------------- -------------- -------------- 4th Quarter (ending June 30) - --------------------------- 1998 $22,578 $4,033 $1,676 .19 .19 1997 $23,069 $2,404 $1,049 .12 .12 ----------- ---------------------- ----------------- -------------- --------------
Market and Dividend Information
Price Range Fiscal 1998 Fiscal 1997 - --------------------------------- -------------------------------------- --------------------------------- High Low High Low ---- --- ---- --- 1st Quarter $14.50 $12.00 $14.25 $11.00 2nd Quarter 15.38 12.00 12.00 10.50 3rd Quarter 15.00 12.25 12.25 10.00 4th Quarter 19.13 12.00 14.00 11.38 ==================== ------------------ ---------------- ------------------
The Company's common stock is traded over-the-counter and is quoted on the Nasdaq National Market System (symbol DCPI). The preceding table sets forth the range of prices (which represent actual transactions) by quarters as provided by the National Association of Securities Dealers, Inc. -33- Report of Independent Public Accountants To the Stockholders of dick clark productions, inc.: We have audited the accompanying consolidated balance sheets of dick clark productions, inc. (a Delaware corporation) and subsidiaries as of June 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 financial position of dick clark productions, inc. and subsidiaries as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Los Angeles, California August 19, 1998 -34- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant. Item 11. Executive Compensation. Item 12. Security Ownership of Certain Beneficial Owners and Management. Item 13. Certain Relationships and Related Transactions. The information required by each of the items of Part III is omitted from this Report. Pursuant to the General Instruction G(3) to From 10-K, the information is included in the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders to be held on November 10, 1998, and is incorporated herein by reference. The Company intends to files such Proxy Statement with the Securities and Exchange Commission not later than 120 days subsequent to June 30, 1998. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following represents a listing of all financial statements, financial statement schedules exhibits filed as part of this Report. (1) Financial Statements (see index to the consolidated financial statements). (2) Financial Statement Schedules (see index to the consolidated financial statements). (3) Exhibits Number Description of Document ------ ----------------------- 3.1 Certificate of Incorporation of the Registrant dated October 31, 1986 and Certificate of Correction dated November 3, 1986, (incorporated by reference to Exhibit 3.1 of the Registrant's Registration Statement No. 33-9955 on Form S-1 (the "Registration Statement"). 3.2 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 of the Registration Statement). 4.1 Form of certificate for shares of the Registrant's Common Stock (incorporated by reference to Exhibit 4.2 of the Registration Statement). 9.1 Agreement dated October 31, 1986, between Richard W. Clark and Karen W. Clark with form of voting trust agreement attached (incorporated by reference to Exhibit 9.1 of the Registration Statement). 10.1 Lease dated November 1, 1986, between the Registrant and Olive (incorporated by reference to Exhibit 10.5 of the Registration Statement). 10.2 Shareholders' Agreement dated as of December 23, 1986, among Richard W. Clark, Karen W. Clark and Francis C. La Maina (incorporated by reference to Exhibit 10.14 of the Registration Statement). -35- Number Description of Document 10.3 Lease Amendment No. 1 dated June 30, 1989, between Olive Enterprises, Inc. and the Registrant amending Lease referred to as Exhibit 10.5 (incorporated by reference to Registrant's Annual Report on Form 10-K for 1989). 10.4 Employment Agreement dated as of July 1, 1997, between the Registrant and Richard W. Clark (incorporated by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1997). 10.5 Employment Agreement dated as of July 1, 1997, between the Registrant and Karen W. Clark ((incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1997). 10.6 Joint Venture Agreement dated as of June 22, 1993, between Reno Entertainment, Inc. and RLWH, Inc (incorporated by to Registrants Annual Report on Form 10-K for 1994). 10.7 Agreement dated December 31, 1994 to amend the Redemption Agreement dated June 30, 1990 between Harmon Entertainment Corporation, a New Jersey corporation and dick clark restaurants, inc. (incorporated by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1995). 10.8 Employment Agreement dated as of July 1, 1997, between the Registrant and Francis C. La Maina (incorporated by reference to Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1997). 10.9 Employment Agreement dated as of January 29, 1997, between the Registrant and William S. Simon (incorporated by reference to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1997). 10.10 1996 Employee Stock Option . * 10.11 Assignment dated March 31, 1998 between dick clark productions, inc. and Olive Enterprises, Inc. * 21.1 List of subsidiaries. * 23.1 Accountants' consent * 27.1 Financial Data Schedule - ---------------- * Filed herewith (4) Reports on Form 8-K None. -36- SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. dick clark productions, inc. By: /s/ Richard W. Clark ------------------------------------ Richard W. Clark Chairman and Chief Executive Officer September 25, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been executed below by the following persons on behalf of the Registrant and in the Capacities and on the date indicated.
Signature Title Date - --------- ----- ---- /s/Richard W. Clark - --------------------------- Richard W. Clark Chairman September 25, 1998 Chief Executive Officer and Director (Principal Executive Officer) /s/ Francis C. La Maina - --------------------------- Francis C. La Maina President, Chief Operating Officer September 25, 1998 and Director /s/ Karen W. Clark - --------------------------- Karen W. Clark Director September 25, 1998 /s/ Lewis Klein - --------------------------- Lewis Klein Director September 25, 1998 /s/ Enrique F. Senior - --------------------------- Enrique F. Senior Director September 25, 1998 /s/ Jeffrey B. Logsdon - --------------------------- Jeffrey B. Logsdon Director September 25, 1998 /s/ Robert A. Chuck - --------------------------- Robert A. Chuck Director September 25, 1998 /s/ William S. Simon - --------------------------- William S. Simon Chief Financial Officer September 25, 1998
-37- List of Exhibits ---------------- Number Description of Document 3.1 Certificate of Incorporation of the Registrant dated October 31, 1986 and Certificate of Correction dated November 3, 1986, (incorporated by reference to Exhibit 3.1 of the Registrant's Registration Statement No. 33-9955 on Form S-1 (the "Registration Statement"). 3.2 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 of the Registration Statement). 4.1 Form of certificate for shares of the Registrant's Common Stock (incorporated by reference to Exhibit 4.2 of the Registration Statement). 9.1 Agreement dated October 31, 1986, between Richard W. Clark and Karen W. Clark with form of voting trust agreement attached (incorporated by reference to Exhibit 9.1 of the Registration Statement). 10.1 Lease dated November 1, 1986, between the Registrant and Olive (incorporated by reference to Exhibit 10.5 of the Registration Statement). 10.2 Shareholders' Agreement dated as of December 23, 1986, among Richard W. Clark, Karen W. Clark and Francis C. La Maina (incorporated by reference to Exhibit 10.14 of the Registration Statement). 10.3 Lease Amendment No. 1 dated June 30, 1989, between Olive Enterprises, Inc. and the Registrant amending Lease referred to as Exhibit 10.5 (incorporated by reference to Registrant's Annual Report on Form 10-K for 1989). 10.4 Employment Agreement dated as of July 1, 1997, between the Registrant and Richard W. Clark (incorporated by reference to Registrant's Annual Report on Form 10-K for 1991). 10.5 Employment Agreement dated as of July 1, 1997, between the Registrant and Karen W. Clark (incorporated by reference to Registrants Annual Report on Form 10-K for 1994). 10.6 Joint Venture Agreement dated as of June 22, 1993, between Reno Entertainment, Inc. and RLWH, Inc (incorporated by to Registrants Annual Report on Form 10-K for 1994). 10.7 Agreement dated December 31, 1994 to amend the Redemption Agreement dated June 30, 1990 between Harmon Entertainment Corporation, a New Jersey corporation and dick clark restaurants, inc. 10.8 Employment Agreement dated as of July 1, 1997, between the Registrant and Francis C. La Maina. 10.9 Employment Agreement dated as of January 29, 1997, between the Registrant and William S. Simon. 10.10 1996 Employee Stock Option. 10.11 Assignment dated March 31, 1998 between dick clark productions, inc. and Olive Enterprises, Inc. * 21.1 List of subsidiaries. 23.1 Accountants' consent * 27.1 Financial Data Schedule * Filed herewith -38- EX-10.11 2 ASSIGNMENT Exhibit 10.11 ASSIGNMENT THIS ASSIGNMENT dated as of June 23, 1998 (the "Assignment"), by OLIVE ENTERPRISES, INC., a Pennsylvania corporation having an address at 3003 West Olive Avenue, Burbank, CA 91505-4590 (the "Assignor"), in favor of dick clark productions, inc., a Delaware corporation having an address at 3003 West Olive Avenue, Burbank, CA 91505-4590 (the "Assignee"). WHEREAS, the Assignor is the owner of service marks set forth on Schedule A annexed hereto (the "Marks") and made a part hereof; and WHEREAS, the Assignee is desirous of acquiring the Marks, and the goodwill of the business associated therewith; NOW, THEREFORE, in consideration of the payment of $10.00 and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Assignor, does hereby assign, transfer and set over to the Assignee and its successors and assigns, the Assignor's entire right, title and interest in and to the Marks and the federal registration therefor, together with the goodwill of the business in connection with which the Marks are used and which is symbolized by the Marks, as fully and entirely as the same would have been held and enjoyed by the Assignor if this Assignment had not been made. The Assignor further agrees that the Assignor shall on the date hereof and from time to time thereafter, upon the written request of the Assignee, perform or cause to be performed such acts and execute, acknowledge and deliver, such documents and other instruments the Assignee may reasonably consider to be required to evidence or effectuate the sale, conveyance, assignment, transfer and delivery to the Assignee of the Marks or for the performance by the Assignor of any of its obligations hereunder. IN WITNESS WHEREOF, the Assignor has executed this Assignment on this 23rd day of June, 1998. OLIVE ENTERPRISES, INC. By: /s/ Francis La Maina -------------------- Francis La Maina President -39- Acknowledged and Accepted on this 2nd day of April, 1998 dick clark productions, inc. By: /s/ William S. Simon ------------------------ William S. Simon V.P. of Finance -40- SCHEDULE A ----------
Registered Marks Registration Number Serial Number - ---------------- ------------------- ------------- AB 1858166 74-369721 AB 1497134 73-677650 American Bandstand 1849271 74-367348 American Bandstand 1482459 73-677646 American Bandstand 1284690 73-427619 American Bandstand Grill 1657686 74-098778 American Bandstand Grill 1705020 74-096954 American Bandstand Grill 1705050 74-096955 American Bandstand Grill 1685367 74-096956 American Bandstand Grill 1685393 74-096957 American Bandstand Grill 1715566 74-096958 American Bandstand Grill 1740325 74-096975 American Bandstand Grill 1656414 74-096831 Bandstand 1923443 74-561585 Bandstand 1285617 73-429507 Dick Clark 1984016 74-693478 Dick Clark's American AB Bandstand Grill 1703376 74-132981 Dick Clark's American Bandstand Grill AB 1822805 74-381562 Dick Clark's American Bandstand Grill AB 1818728 74-381563 Dick Clark's American Bandstand Grill AB 1783029 74-144598 Dick Clark's American Bandstand Grill AB 1859174 74-133002 Dick Clark's American Bandstand Grill AB 1798675 74-801208 Dick Clark's American Bandstand Grill AB 1692014 74-096806 Good Ol' Rock 'N' Roll 1297287 73-438725 Rock, Roll and Remember 1922002 74-596351 Rock, Roll & Remember 1284667 73-406040 The Great American Dance Experience! 1908964 74-466647 -41- The Great American Food Experience 1916232 74-561584 The Great American Food Experience 1880977 74-415202 Applications Serial Number - ------------ ------------- America's Oldest Living Teenager 74-589078 America's Oldest Living Teenager 74-589000 America's Oldest Living Teenager 74-588998 America's Oldest Living Teenager 74-588999 Baby Bandstand 74-526111 Bandstand 74-570808 Bandstand USA 74-432873 Dick Clark Presents the Soundtrack of Your Life 75-061011 Dick Clark Presents the Soundtrack of Your Life 75-061010 I like the Beat 75-293361 I like the Beat 74-590358 I like the Beat 74-590354 I like the Beat 74-590365 I like the Beat and It's Easy to Dance to 74-588992 I like the Beat and It's Easy to Dance to 74-588991 The Oldest Living Teenager 74-588993 The Oldest Living Teenager 74-588995 The Oldest Living Teenager 74-588996 The Oldest Living Teenager 74-588997 The Soundtrack of Your Life 75-407625 The Soundtrack of Your Life 75-363787
-42- EX-21.1 3 SUBSIDIARIES & AFFILIATES Exhibit 21.1 dick clark productions, inc. Subsidiaries & Affiliates dick clark film group, inc. dick clark presentations, inc. dick clark media archives, inc. dick clark restaurants, inc. C & C Joint Venture dick clark corporate productions, inc. Metcalf Restaurants, Inc. Reno Entertainment, Inc. Dick Clark's American Bandstand Club-Reno Buckeye Restaurants, Inc. Hoosier Entertainment, Inc. Kenwood Entertainment, Inc. King of Prussia Entertainment, Inc. dick clark company - nashville, inc. St. Ann Entertainment, Inc. Austin ABG, Ltd. Austin ABG Partners, Inc. ABG Operating (Austin), Inc. Austin Concessions, Inc. Maybe Productions, Inc. Family Secrets Productions, Inc. Bandstand Holdings, Inc. Matt Jon Productions, Inc. Click Records, Inc. Grapevine ABG, Ltd. ABG Operating (Grapevine), Inc. dc entertainment, inc. CPI Productions, Inc. American Bandstand Records, Inc. EX-27 4 FINANCIAL DATA SCHEDULE
5 0000805370 dick clark production 1,000 JUN-30-1998 JUL-01-1997 JUN-30-1998 YEAR 7,092 32,211 6,673 0 5,963 45,976 23,480 7,141 73,215 8,722 0 13,919 0 0 45,034 73,215 86,251 86,251 69,077 69,077 5,918 0 (2,079) 13,335 5,101 8,234 0 0 0 8,234 0.94 0.92
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