1
EXHIBIT 99.1
CONSOLIDATED FINANCIAL STATEMENTS
NEW LINE CINEMA CORPORATION
AND SUBSIDIARIES
Years ended December 31, 1993 and 1992
with Report of Independent Auditors
2
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1992
CONTENTS
Report of Independent Auditors........................................................... 1
Consolidated Balance Sheets.............................................................. 2
Consolidated Statements of Income........................................................ 3
Consolidated Statements of Stockholders' Equity.......................................... 4
Consolidated Statements of Cash Flows.................................................... 5
Notes to Consolidated Financial Statements............................................... 6
3
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
New Line Cinema Corporation
We have audited the accompanying consolidated balance sheets of New Line Cinema
Corporation and subsidiaries as of December 31, 1993 and 1992, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1993. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of New
Line Cinema Corporation and subsidiaries at December 31, 1993 and 1992, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993 in conformity with generally
accepted accounting principles.
ERNST & YOUNG
February 25, 1994
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NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
----------------------------
1993 1992
------------ ------------
ASSETS
Cash and cash equivalents $ 4,399,632 $ 1,849,698
Accounts receivable, less allowance for doubtful accounts of
approximately $945,000 in 1993 and $640,000 in 1992 72,455,218 35,968,253
Film inventories 221,449,926 147,775,148
Property and equipment, less accumulated depreciation and
amortization of approximately $7,491,000 in 1993 and
$5,425,000 in 1992 10,333,511 10,309,209
Notes receivable from officers 2,010,000 1,965,000
Other assets 10,060,609 6,540,881
Investment in affiliated company 21,833,997 17,937,997
------------ ------------
Total assets $342,542,893 $222,346,186
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable to bank $126,800,000 $ 58,500,000
Accounts payable and accrued expenses 23,061,943 8,218,481
Third-party participations payable 24,271,197 23,834,301
Long-term debt 29,125,000 30,000,000
Deferred income 8,399,517 21,702,987
Deferred income taxes 5,954,000 7,800,121
------------ ------------
Total liabilities 217,611,657 150,055,890
------------ ------------
Stockholders' equity:
Preferred stock, par value $.01 per share; 300,000 shares
authorized; none outstanding -- --
Common stock, par value $.01 per share; 50,000,000 shares
authorized; issued and outstanding: 16,775,733 in 1993 and
12,728,560 in 1992 167,757 127,285
Capital in excess of par value 79,894,787 37,825,947
Retained earnings 45,077,319 34,552,348
------------ ------------
125,139,863 72,505,580
Treasury shares, 62,677 in 1993 and 64,677 in 1992, at cost (208,627) (215,284)
------------ ------------
Total stockholders' equity 124,931,236 72,290,296
------------ ------------
Total liabilities and stockholders' equity $342,542,893 $222,346,186
------------ ------------
------------ ------------
See accompanying notes.
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NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
------------------------------------------
1993 1992 1991
------------ ------------ ------------
Revenue $306,335,494 $227,001,696 $225,686,168
Costs relating to revenue 258,590,878 194,653,113 192,190,621
------------ ------------ ------------
Gross income 47,744,616 32,348,583 33,495,547
Operating expenses;
General and administrative 27,408,560 21,980,853 17,510,275
Selling 1,536,355 1,406,224 912,367
Depreciation and amortization 3,819,000 2,809,025 1,820,875
------------ ------------ ------------
32,763,915 26,196,102 20,243,517
------------ ------------ ------------
Income from operations 14,980,701 6,152,481 13,252,030
Interest expense (3,071,474) (3,685,197) (227,397)
Other charges (562,309) (248,771) (323,841)
------------ ------------ ------------
Income before equity in income of, and gain on
issuance of stock by, affiliated company and
provision for
income taxes 11,346,918 2,218,513 12,700,792
Equity in income of affiliated company 3,896,000 2,355,000 1,065,000
Gain on issuance of stock by affiliated company -- 4,334,864 --
------------ ------------ ------------
Income before provision for income taxes 15,242,918 8,908,377 13,765,792
Provision for income taxes 4,717,947 2,490,162 4,824,000
------------ ------------ ------------
Net income $ 10,524,971 $ 6,418,215 $ 8,941,792
------------ ------------ ------------
------------ ------------ ------------
Primary net income per share of common stock $ 0.60 $ 0.45 $ 0.66
------------ ------------ ------------
------------ ------------ ------------
Fully diluted net income per share of common stock $ 0.58 $ 0.45 $ 0.64
------------ ------------ ------------
------------ ------------ ------------
Primary weighted average number of shares of common
stock outstanding 17,403,370 14,282,039 13,592,804
------------ ------------ ------------
------------ ------------ ------------
Fully diluted weighted average number of shares of
common stock outstanding 18,108,792 14,326,653 13,880,687
------------ ------------ ------------
------------ ------------ ------------
See accompanying notes.
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NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
CAPITAL IN COMMON
COMMON EXCESS OF RETAINED STOCK HELD
STOCK PAR VALUE EARNINGS IN TREASURY TOTAL
-------- ----------- ----------- ----------- ------------
Balance, January 1, 1991 $104,055 $15,869,138 $19,192,341 $(226,081) $ 34,939,453
Issuance of 165,670 shares of common
stock upon exercise of options 1,656 1,010,954 -- -- 1,012,610
Sale of 1,910,000 shares of common stock 19,100 18,744,489 -- -- 18,763,589
Issuance of 190,500 shares of common
stock 1,905 1,953,720 -- -- 1,955,625
Issuance of 2,226 shares of common stock
held in treasury to Employee Stock
Ownership Plan -- 14,536 -- 10,797 25,333
Net income -- -- 8,941,792 -- 8,941,792
-------- ----------- ----------- ----------- ------------
Balance, December 31, 1991 126,716 37,592,837 28,134,133 (215,284) 65,638,402
Issuance of 56,909 shares of common stock
upon exercise of options 569 233,110 -- -- 233,679
Net income -- -- 6,418,215 -- 6,418,215
-------- ----------- ----------- ----------- ------------
Balance, December 31, 1992 127,285 37,825,947 34,552,348 (215,284) 72,290,296
Issuance of 1,099,232 shares of common
stock upon exercise of options 10,992 2,427,955 -- -- 2,438,947
Sale of 2,875,000 shares of common stock 28,750 31,821,079 -- -- 31,849,829
Issuance of 21,090 shares of common stock 211 318,998 -- -- 319,209
Sale of 2,000 shares of treasury stock -- -- -- 6,657 6,657
Issuance of 51,851 shares of common stock
upon conversion of long-term debt 519 874,481 -- -- 875,000
Tax benefit of stock option exercises of
968,937 options -- 6,626,327 -- -- 6,626,327
Net income -- -- 10,524,971 -- 10,524,971
-------- ----------- ----------- ----------- ------------
Balance, December 31, 1993 $167,757 $79,894,787 $45,077,319 $(208,627) $124,931,236
-------- ----------- ----------- ----------- ------------
-------- ----------- ----------- ----------- ------------
See accompanying notes.
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NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
----------------------------------------------
1993 1992 1991
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 10,524,971 $ 6,418,215 $ 8,941,792
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Increase in allowance for doubtful accounts 305,000 124,655 68,968
Amortization of film inventories 152,502,400 131,678,221 93,588,978
Depreciation and other amortization 3,819,000 2,809,025 1,820,875
Shares of common stock issued to employee stock
ownership plan -- -- 25,333
Undistributed earnings from affiliated company (3,896,000) (2,355,000) (1,065,000)
Gain on issuance of stock by affiliated company -- (4,897,476) --
Deferred income taxes (1,846,121) 1,181,918 1,931,000
Changes in other assets and liabilities:
(Increase) decrease in:
Accounts receivable (36,791,965) 943,783 (14,452,030)
Gross film inventories (226,177,178) (143,015,737) (154,848,255)
Other assets (2,307,782) (3,338,290) 520,016
Increase (decrease) in:
Accounts payable and accrued expenses 14,843,462 (9,510,218) 12,921,129
Third party participations payable 436,896 (5,694,246) 524,600
Deferred income (13,303,470) (28,122,715) 40,239,776
------------ ------------ ------------
Total adjustments (112,415,758) (60,196,080) (18,724,610)
------------ ------------ ------------
Cash used in operating activities (101,890,787) (53,777,865) (9,782,818)
------------ ------------ ------------
INVESTING ACTIVITIES
Purchase of property and equipment (2,090,302) (6,996,958) (3,684,956)
Investment in affiliated company -- -- (119,437)
Notes receivable from officers (45,000) (70,000) (745,000)
------------ ------------ ------------
Cash used in investing activities (2,135,302) (7,066,958) (4,549,393)
------------ ------------ ------------
FINANCING ACTIVITIES
Net proceeds from borrowings on note payable 142,835,054 62,127,357 43,308,301
Repayment of note payable (77,500,000) (4,000,000) (76,200,000)
Net proceeds from issuance of long-term debt -- -- 28,840,171
Proceeds from issuance of shares of common stock 41,240,969 233,679 21,731,824
------------ ------------ ------------
Cash provided by financing activities 106,576,023 58,361,036 17,680,296
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 2,549,934 (2,483,787) 3,348,085
Cash and cash equivalents at beginning of period 1,849,698 4,333,485 985,400
------------ ------------ ------------
Cash and cash equivalents at end of period $ 4,399,632 $ 1,849,698 $ 4,333,485
------------ ------------ ------------
------------ ------------ ------------
See accompanying notes.
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NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
New Line Cinema Corporation (the "Company") is a motion picture production and
distribution company. The accompanying consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
FILM INVENTORIES
Film inventories consist of the cost of the Company's productions, acquired
films, prints and certain exploitation costs including advertising costs
expected to benefit the films in future markets, the cost of acquiring certain
rights for domestic home video and foreign distribution of certain films and
capitalized interest and overhead related to production of films and acquisition
of film rights. Such inventories are stated at the lower of unamortized costs or
net realizable value generally on a film-by-film basis. The costs of films
released are amortized using the individual-film-forecast-computation method
which amortizes costs in the same ratio that current gross revenues bear to
anticipated total gross revenues. The costs of distribution rights are amortized
in the same ratio that fees earned in the current period from the rights bear to
anticipated total fees. Such anticipated total gross revenues and fees are
estimated by management.
The anticipated total gross revenue and fees are reviewed periodically, which
may result in revised amortization rates and, when applicable, write-downs to
net realizable value.
Film inventories, net of accumulated amortization, approximated the following:
DECEMBER 31,
---------------------------
1993 1992
------------ ------------
Films released $104,269,000 $ 62,784,000
Films completed but not released 18,712,000 41,519,000
Films in process 88,813,000 30,557,000
Distribution rights 9,656,000 12,915,000
------------ ------------
$221,450,000 $147,775,000
------------ ------------
------------ ------------
Based on the Company's anticipated total gross revenue estimates, over 95% of
released film inventories at December 31, 1993 will be amortized within the
three-year period ending December 31, 1996.
PROPERTY AND EQUIPMENT; DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. The
estimated useful life used for property and equipment is ten years, while the
life used for computer hardware and software is three years. Leasehold
improvements are amortized over the estimated useful lives of the related assets
or the remaining term of the lease, whichever is shorter.
REVENUE RECOGNITION
Revenue from theatrical exhibition of films is reflected in the accompanying
consolidated financial statements when the film is exhibited. Revenue from the
sale of film rights, principally for the home video, domestic and
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NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
foreign syndicated television and domestic pay cable television markets is
recognized when the film is available for showing or exploitation. Amounts
received prior to the film's availability are classified as deferred income.
Films with theatrical releases (which generally may continue for up to six
months) are generally made available for release in other media as follows:
MONTHS AFTER
INITIAL APPROXIMATE
MARKET RELEASE RELEASE PERIOD
------------------------------------------------------- -------------- --------------
Domestic home video 4-6 months --
Domestic pay-per view 6-9 months 3 months
Domestic pay television 10-18 months 12-21 months
Domestic network or basic cable 30-36 months 18-36 months
Domestic syndication 30-36 months 3-15 years
Foreign theatrical -- 4-6 months
Foreign home video 6-12 months --
Foreign television 18-24 months 18-30 months
For the years ended December 31, 1993, 1992 and 1991, approximately 39%, 44% and
63%, respectively, of the Company's total revenue was attributable to four
films, six films and four films, respectively.
Foreign revenue related to the Company's films approximated 19%, 24% and 11% of
total revenue for the years ended December 31, 1993, 1992 and 1991,
respectively.
THIRD-PARTY PARTICIPATIONS
Total expected third-party participations are charged to expense in the same
ratio as current gross revenues bear to anticipated total gross revenues. At
December 31, 1993, the portion of third-party participations payable within one
year was approximately $13 million.
CONCENTRATION OF CREDIT RISKS
The Company licenses various rights in its motion pictures to distributors
throughout the world. Generally, payment is received in full or in part, or
letters of credit are obtained, prior to the Company's release of the films to
its distributors.
INCOME TAXES
Deferred income taxes result from timing differences between the amounts
reported for financial reporting and income tax purposes. These differences
relate primarily to the gain on issuance of stock by an affiliated company,
advertising and print expenditures, third-party participations, and film
amortization.
COMMON STOCK DATA
Primary and fully diluted net income per share of common stock and common stock
equivalents are based on the weighted average number of shares of common stock
and common stock equivalents outstanding.
TRANSACTIONS IN SHARES OF AFFILIATED COMPANIES
The Company recognizes as separate nonoperating income, gains and losses arising
from sales of previously unissued stock by a subsidiary or affiliate to outside
investors when such sales change the Company's percentage of ownership in such
companies.
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NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Long-Term Debt: The fair values of the Company's long-term debt is estimated
using discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. The Company
believes the carrying amounts reported in the balance sheet for these
instruments is approximately equal to their fair value.
RECLASSIFICATION
Certain amounts in 1991 and 1992 have been reclassified to conform to the 1993
presentation.
2. INVESTMENT IN AFFILIATED COMPANY
On October 26, 1990, the Company acquired from RHI Entertainment, Inc. ("RHI")
52.6% of RHI's outstanding capital stock for $8,700,000. A portion of the excess
of cost over the Company's equity in RHI, consists of goodwill of $850,000 which
is being amortized over a 20-year period and an option valued at $1,270,000 to
acquire additional shares of RHI capital stock. The investment is accounted for
under the equity method, as the Company does not have majority voting control of
RHI. The Company has the right to designate two of the five members of RHI's
board of directors and all major decisions as to the financing and operations of
RHI require a super majority vote of the board of directors of RHI. RHI is a
leading producer of movies-of-the-week, mini-series and other programming for
the United States television market. RHI has acquired the worldwide televisions
rights of Qintex Entertainment Inc., including Hal Roach and Robert Halmi
titles. In April 1992, in exchange for $561,000 paid by the Company to one of
the principals of RHI, such principal cancelled an option to acquire shares of
common stock of RHI owned by the Company.
On July 29, 1992, RHI issued 2,315,000 shares of common stock at $10 per share,
in an initial public offering, resulting in aggregate gross proceeds of
$23,150,000. This issuance reduced the Company's interest in the capital stock
of RHI to 37.4%. As a result, the Company recognized a gain of $4,335,000
(before provision for income taxes of $1,647,000) which reflects a reduction by
$3,512,000 in the carried amount of its investment which was deemed sold. Income
taxes provided on the gain are not payable until the gain is recognized for tax
purposes, such as from an actual sale of RHI stock by the Company.
Summary financial information for RHI as of and for the years ended December 31,
1993, 1992 and 1991 is as follows:
1993 1992 1991
------------ ----------- -----------
Cash $ 1,283,000 $ 241,000 $ 752,000
Accounts receivable 54,494,000 29,654,000 8,607,000
Film production costs 119,031,000 55,681,000 41,853,000
Total assets 181,352,000 90,049,000 55,337,000
Notes payable to bank 36,050,000 17,384,000 21,234,000
Deferred revenue 22,970,000 17,796,000 12,667,000
Shareholders' equity 52,456,000 42,367,000 15,902,000
Revenue 119,625,000 56,472,000 33,252,000
Film costs 95,508,000 42,037,000 22,285,000
Net income 10,089,000 5,646,000 2,498,000
The Company's consolidated retained earnings at December 31, 1993 includes
$8,016,000 related to the equity income of RHI.
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NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTE PAYABLE TO BANK
On March 26, 1993, the Company entered into a new credit facility (the "Credit
Facility") providing a revolving credit facility of $150,000,000 for a period of
three years. Except for the increase in principal amount and a restriction on
the amounts of permitted increases in selling, general and administrative
expenses, the terms of the Credit Facility do not materially differ from the
Company's previous credit facility.
The Credit Facility contains various covenants which, among other things, (i)
provide that minimum consolidated tangible net worth, as defined, must be
maintained by the Company, (ii) limit the incurrence of additional indebtedness,
(iii) prohibit the payment of cash dividends as long as an outstanding loan
balance exists, (iv) limit the amount of certain capital expenditures, (v) limit
the amount of certain production and preproduction costs per film in active
production or preproduction, for a maximum of eight such films at any one time
and no more than three such films to be in principal photography at any one
time, (vi) restrict the amount to be paid to acquire rights in films produced by
others, and (vii) require that the Company's Chief Executive Officer maintain
his ownership of the Company, as defined, and remain as its Chief Executive
Officer.
Other information relating to the note payable under the existing and prior
credit facilities during the three year period ended December 31, 1993 is
summarized as follows:
1993 1992 1991
------------ ----------- -----------
Maximum amount of borrowings outstanding $126,800,000 $62,500,000 $39,000,000
Daily average amount of borrowings
outstanding each year $ 69,606,000 $38,273,000 $14,533,000
Weighted average interest rate for year 5.6% 6.4% 9.5%
Interest rate at December 31 6.0% 7.0% 7.5%
Interest expense, net of capitalized
amounts $ 1,181,683 $ 558,000 $ 99,000
Capitalized interest $ 2,712,000 $ 1,885,000 $ 1,379,000
Interest paid under the Credit Facility (net of capitalized amounts) amounted to
approximately $1,535,000, $437,000 and $99,000 in 1993, 1992 and 1991,
respectively.
In 1993, the Company also paid approximately $74,000 of interest related to a
$40,000,000 advance received from Columbia TriStar Home Video and $324,000
relating to other funds.
Commitment fees under the agreements were $562,000, $249,000 and $234,000 for
each of the three years ended December 31, 1993, 1992 and 1991, respectively.
On January 28, 1994, the Company repaid all amounts owed under the Credit
Facility with funds received from the Turner Broadcasting System, Inc. ("TBS").
(See Note 12).
4. LONG-TERM DEBT
On November 14, 1991, the Company issued $30,000,000 of convertible subordinated
debentures which are convertible at the option of the holder into shares of the
Company's common stock at $16 7/8 per share, for a total of 1,777,778 shares.
The debentures are payable with interest at 6 1/2% payable semiannually and are
due November 15, 2006. Annual sinking fund payments of $3,500,000, commencing
November 15, 2000, are calculated to retire 70% of the debentures prior to
maturity. The debentures are redeemable at the option of
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NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company, in whole or in part, at the following redemption prices together
with accrued and unpaid interest commencing on each November 15 in the years set
forth as follows:
1994 103%
1995 102%
1996 101%
1997 and thereafter 100%
The debentures were not redeemable by the Company before November 15, 1993 and
from that date until November 15, 1994, are not redeemable unless the average
price of the Company's common stock for a defined period exceeds 150% of the
conversion price.
In December 1993, certain holders converted $875,000 of the debentures into
51,851 shares of common stock. The Company accounted for the conversion using
the book method where the converted value of the debt is equal to the increase
in equity. $29,125,000 of debentures were outstanding at December 31, 1993.
For the years ended December 31, 1993, 1992 and 1991, the Company incurred
interest charges of $1,950,000, $1,950,000 and $244,000, respectively, of which
approximately $1,852,000, $1,853,000 and $215,000 was capitalized. Interest paid
(net of capitalized amounts) amounted to $100,000 in 1993.
5. INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by FASB
Statement No. 109, "Accounting for Income Taxes". As permitted under the new
rules, prior years' financial statements have not been restated.
The cumulative effect of adopting Statement 109 as of January 1, 1993 was not
material. As of December 31, 1993 the Company has a federal net operating loss
carryforward of approximately $16 million for income tax purposes that expires
in the year 2008. This carryforward resulted primarily from a deduction related
to the exercise of employee stock options.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1993 and
1992 are as follows:
1993 1992
----------- -----------
Deferred tax assets:
Participations $ 4,587,000 $ 3,605,000
Fixed assets 837,000 670,000
Deferred revenue 3,372,000 --
NOL Carryforward 6,070,000 --
Other 582,000 456,000
----------- -----------
Total deferred tax assets $15,448,000 $ 4,731,000
----------- -----------
----------- -----------
Deferred tax liabilities:
Film inventory $19,662,000 $10,857,000
RHI Equity 1,740,000 1,674,000
----------- -----------
Total deferred tax liabilities $21,402,000 $12,531,000
----------- -----------
----------- -----------
Net deferred tax liability $ 5,954,000 $ 7,800,000
----------- -----------
----------- -----------
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NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes approximated the following:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------
1993 1992 1991
------------------------------------ ---------------------------------- ----------------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
---------- ---------- ---------- ---------- -------- ---------- ---------- -------- ----------
Federal $ 439,000 $2,611,000 $3,050,000 $ 863,000 $ 57,000 $ 920,000 $2,099,000 $814,000 $2,913,000
Foreign
withholding 950,000 -- 950,000 1,185,000 -- 1,185,000 1,146,000 -- 1,146,000
State and local 267,000 451,000 718,000 270,000 115,000 385,000 610,000 155,000 765,000
---------- ---------- ---------- ---------- -------- ---------- ---------- -------- ----------
$1,656,000 $3,062,000 $4,718,000 $2,318,000 $172,000 $2,490,000 $3,855,000 $969,000 $4,824,000
---------- ---------- ---------- ---------- -------- ---------- ---------- -------- ----------
---------- ---------- ---------- ---------- -------- ---------- ---------- -------- ----------
The difference between the statutory federal income tax rate of 34% for 1991 and
1992 and 35% for 1993 and the taxes actually provided for those years,
approximated the following:
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1992 1991
----------- ---------- ----------
Taxes based on statutory federal income tax rate $ 5,335,000 $3,029,000 $4,681,000
Add (deduct):
Equity in income of affiliated company permanently
reinvested -- (801,000) (362,000)
Dividends received deduction (1,091,000) -- --
State and local taxes, net of federal tax benefit 467,000 252,000 505,000
Other 7,000 10,000 --
----------- ---------- ----------
$ 4,718,000 $2,490,000 $4,824,000
----------- ---------- ----------
----------- ---------- ----------
6. RENT EXPENSE AND LEASE COMMITMENTS
The Company occupies office space under various operating leases. In addition to
the base annual rental, the leases provided for certain escalation charges based
on increases in operating expenses of the buildings. Rent expense amounted to
approximately $1,358,000, $1,245,000 and $868,000 for the years ended December
31, 1993, 1992 and 1991, respectively. At December 31, 1993, minimum
noncancellable commitments under these leases were as follows:
1994 $ 1,670,000
1995 1,727,000
1996 1,788,000
1997 1,301,000
1998 1,062,000
Thereafter 9,390,000
-----------
$16,938,000
-----------
-----------
7. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
In December 1992, the Company was named as a defendant in an action brought by
Troma, Inc. in the Supreme Court of the State of New York, County of New York.
The action seeks unspecified damages in an amount "no less than $50 million" for
breach of an agreement which allegedly required the Company to produce and
distribute a film based upon the characters owned by the plaintiff. No answer
has yet been filed, and the Company is considering its possible counterclaims
against the plaintiff and its principal officers.
In June 1990, an action was brought against the Company in the Supreme Court,
New York County, by Smart Egg Pictures, S.A., one of the joint ventures with the
Company in the first two "Nightmare on Elm
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NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Street" films. The plaintiff alleges that the Company wrongfully induced it to
enter into an agreement diminishing its rights in the joint venture assets. The
action seeks an accounting and damages of at least $5,000,000, together with
punitive damages and treble damages under the RICO laws, in connection with the
series of "A Nightmare on Elm Street" films.
The Company and its subsidiaries are parties to various other legal proceedings,
all of which are considered routine and incidental to the business of the
Company and are not material to the financial condition and operation of the
business. Neither the Company nor any of its subsidiaries is a party to any
litigation, including the matters described above, which is expected to have a
material adverse effect upon the Company's business.
ACQUISITION OF DISTRIBUTION RIGHTS
In addition to the Film inventories recorded on the Consolidated Balance Sheet
at December 31, 1993, the Company is contractually committed to advancing funds,
in accordance with contract terms, for the acquisition rights to films which
will be completed subsequent to December 31, 1993. These unrecorded contractual
commitments were approximately $56 million at December 31, 1993.
8. EMPLOYEE BENEFIT PLANS
PENSION EXPENSE
Certain employees of certain subsidiaries of the Company are covered under
collective bargaining agreements. All such union employees are covered by
multiemployer defined benefit pension plans. The Company makes contributions to
such plans based on amounts specified in the related union contracts. The unions
have informed the Company that they are unable to provide the actuarial present
values of accumulated plan benefits or the plan's net assets available for
benefits with respect to any individual firm, including the Company. The Company
contributed approximately $2,498,000, $1,531,000 and $755,000 during the years
ended December 31, 1993, 1992 and 1991, respectively, to such plans.
EXECUTIVE BENEFIT TRUST
Effective November 1, 1991, the Company established the New Line Cinema
Corporation Executive Benefit Trust (the "Trust") to provide incentive
compensation to certain executive employees. The Trust is not intended to
provide retirement income to employees, or to provide for a deferral of income
by employees for periods extending to the termination of covered employment or
beyond.
401(k) PLAN
In December 1992, the Company adopted a 401(k) defined contribution plan (the
"Plan") for certain of its employees. Employees can make voluntary contributions
to the Plan subject to certain limitations. Eligible employees are those who
have reached age 21 and have worked at least 1,000 hours. No contribution was
made to the Plan by the Company in 1992 or 1993.
9. CAPITAL STOCK
RESERVED SHARES OF COMMON STOCK
At December 31, 1993, 1992 and 1991, the Company had reserved 3,359,616,
3,083,637 and 2,722,003 shares, respectively, of common stock for grant and
exercise of stock options. In addition, shares reserved for future issuance
include 1,725,926 shares for the conversion of the 6.5% convertible subordinated
debentures (see Note 4) and 250,000 shares reserved for Nelson Holdings
International, Ltd. (see Note 11). Solely as a result of the completion of a
proposed public offering of 2,875,000 shares of common stock pursuant to a
registration statement on Form S-3 filed in February 1993, the Company's
Chairman was granted options to purchase
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15
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately 925,305 additional shares of common stock at the market price of
the common stock on February 26, 1993, pursuant to the operation of the
provisions of his Employment Agreement. The terms of this Employment Agreement
provide the Company's Chairman the ability to maintain his holdings at
approximately 25% of the outstanding common stock of the Company (as defined).
10. STOCK OPTIONS
1990 STOCK OPTION PLAN
On February 18, 1990, the Company adopted the 1990 Stock Option Plan (the "1990
Plan") under which a committee of independent members of the Board of Directors
is authorized to grant options for 750,000 shares under the 1990 Plan, to any
full-time employee, subject to adjustment for stock splits, stock dividends and
certain other events. The 1990 Plan is similar to the 1986 Plan, except that
options under the 1990 Plan may be incentive stock options and the grant may
allow options to be exercised by the surrender of common stock or options to
acquire Common stock having a market value equal to the aggregate exercise price
of the option. As of December 31, 1993, options for a total of 709,199 shares of
common stock had been granted of which 675,354 were outstanding.
1991 STOCK OPTION PLAN
On January 14, 1992, the Company's Board of Directors adopted a new Stock Option
Plan (the "1991 Plan"), which is identical to the 1990 Plan except that options
for a total of 250,000 shares of the Company's Common Stock may be granted
thereunder. As of December 31, 1993, options for a total of 200,000 shares of
common stock had been granted under the 1991 Plan, all of which are outstanding.
SUMMARY
The activity in stock options during the three year period ended December 31,
1993 is summarized below. The information has been adjusted for the 20% stock
dividend issued on February 28, 1991.
NONQUALIFIED STOCK
OPTIONS QUALIFIED STOCK OPTIONS
------------------------ -----------------------
AGGREGATE AGGREGATE
SHARES AMOUNT SHARES AMOUNT
--------- ----------- -------- -----------
Options outstanding at January 1, 1991 1,939,712 $ 6,917,574 651,554 $ 3,283,323
Granted (from $10.13 to $16.00 and from
$9.81 to $13.38 per share) 255,063 2,960,393 41,425 499,429
Exercised (at $.47 and from $3.33 to $5.42
per share) (111,374) (52,680) (54,377) (229,727)
--------- ----------- -------- -----------
Options outstanding at December 31, 1991 2,083,401 9,825,287 638,602 3,553,025
Granted (from $11.25 to $15.00 and from
$12.25 to $15.75 per share) 309,982 4,395,156 112,351 1,545,308
Exercised (at $5.42 and from $2.05 to $6.04
per share) (10,000) (54,170) (46,909) (179,354)
Forfeited -- -- (3,790) (18,393)
--------- ----------- -------- -----------
Options outstanding at December 31, 1992 2,383,383 14,166,273 700,254 4,900,586
Granted (from $12.00 to $16.88 and from
$12.00 to $15.13 per share) 1,238,752 15,826,710 146,459 2,022,157
Exercised (from $.47 to $10.13 and from
$2.05 to $14.75 per share) (891,865) (1,309,000) (207,367) (1,129,946)
Forfeited (2,656) (26,892) (7,344) (74,358)
--------- ----------- -------- -----------
Options outstanding at December 31, 1993 2,727,614 $28,657,091 632,002 $ 5,718,439
--------- ----------- -------- -----------
--------- ----------- -------- -----------
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16
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1993, 1,975,082 of the nonqualified stock options were
exercisable at prices ranging from $1.273 to $16.875 per share for an aggregate
amount of $20,880,753.
11. RELATED PARTY TRANSACTIONS
MEDIA BUYING SERVICE
The Company employs a media buying service to place its television and radio
advertising. The President of the Company is the beneficial owner of 25% of the
capital stock of such service. In addition, a director of the Company is an
officer and the beneficial owner of a total of 25% of the capital stock of such
service. During the years ended December 31, 1993, 1992 and 1991, such buying
service placed a total of approximately $28,728,000, $19,079,000 and
$30,695,000, in broadcast advertising for the Company for fees totaling
approximately $1,335,000, $754,000 and $1,228,000, respectively.
LEGAL SERVICES
A director of the Company is a principal of the Company's primary legal counsel.
Until his appointment as President of the Company on September 27, 1990, the
President of the Company was a principal of that law firm. Although he is
currently "of counsel" to such firm, he has no financial interest therein. Until
his appointment as Senior Vice President -- Business Affairs of the Company on
February 1, 1993, a director of the Company was also a principal of this same
law firm. Fees for legal services performed by such law firm on behalf of the
Company approximated $1,471,000, $732,000 and $1,049,000 during the years ended
December 31, 1993, 1992 and 1991, respectively.
NOTES RECEIVABLE FROM OFFICERS
Notes receivable from officers include a note receivable from the Chairman of
the Company for $750,000 advanced to him in connection with the purchase and
renovation of his residence. The loan is unsecured, without interest and is
repayable on demand or upon the sale of the residence. In addition, there is a
note receivable from the President of the Company for $625,000, which bears no
interest and is repayable solely from bonus compensation to which he may become
entitled through 1995, with any remaining balance payable on December 31, 1995.
There are additional notes receivable from several Senior Vice Presidents of the
Company aggregating approximately $635,000. These loans also are interest-free
and are payable on demand of the Company.
DISTRIBUTION FEE ARRANGEMENT
In May 1991, pursuant to an agreement with NHI Nelson Holdings International,
Ltd. ("NHI") and Credit Lyonnais Bank Nederland, N.V. ("CLBN"), the Company
became the distributor of existing and future film properties of NHI's film
entertainment group ("Sultan Entertainment Holdings Inc.") including foreign
distribution rights and domestic home video distribution rights to up to 11
motion pictures to be produced by Castle Rock Entertainment from 1992 through
1995. The Company paid approximately $15 million in cash and issued to NHI
certain securities of the Company comprised of 150,000 shares of common stock
and five-year warrants to purchase 250,000 shares of common stock at $13.87 per
share to obtain these rights. Fees earned in 1993 and 1992 by the Company under
its arrangement with Sultan Entertainment Holdings, Inc. amounted to $8,794,000
and $12,027,000, respectively.
Pursuant to this agreement, CLBN refinanced certain long-term debt of Sultan
Entertainment Holdings Inc. and also agreed to provide a new credit facility to
a newly-formed subsidiary with Sultan Entertainment Holdings Inc., CR
Memorandum. The proceeds of the new facility will be used to fund the
acquisition of foreign distribution rights and domestic home video distribution
rights to the 11 motion pictures to be produced by Castle Rock Entertainment
through 1995 ("Castle Rock Pictures"). The Company's financial
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17
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
obligations with respect to CLBN's advances are limited to a guaranty of a
portion of this loan. There can be no assurance that funds will be available
under the CLBN facility for the purchase of rights in connection with a Castle
Rock Picture. The Company's ability to distribute the remaining Castle Rock
Pictures is predicted upon the continued availability of funds from CLBN or from
other sources.
On November 27, 1991, the Company acquired the stock of Sultan Entertainment
Holdings Inc. for $100,000 in cash and contributed the stock to the New Line
Cinema Corporation Executive Benefit Trust (see Note 8).
12. SUBSEQUENT EVENTS -- MERGER WITH TBS
On January 28, 1994, the shareholders of the Company approved the merger of the
Company into NL Acquisition Corp., a Delaware corporation which is a
wholly-owned subsidiary of TBS. The closing of the merger took place after the
shareholders' meeting and each outstanding share of the Company's common stock
was converted into the right to receive 0.96386 shares of TBS Class B Common
Stock.
15