analysing the exhibitor payments

Hi Gse,
In a sign of the times, your comment about hoping that the "missus enjoys her jewellery if you got it wrong . lol lol lol lol lol lol" has now come back to haunt me. I finally relented and bought her a diamond and ruby necklace last week at Paul Brams. Damn this market, and those prophecies!!!!


Hi Alpha,
I have no doubt that the $4.881m payment included at Item 1.10 was an exhibitor linked payment for outstanding rentals, as opposed to the payment of any employee entitlements.

My reasons for saying this are as follows:

1)
Item 5.3 classifies the payment as "consideration for ... disposal" (ie: of the Val Morgan business). If the characteristic of this payment had been employee linked, then I doubt very much that Item 5.3 was the appropriate place for inclusion of the payment.

2)
Employee entitlements are personal to the employees concerned. Therefore, any payment made would either flow directly to the employee, or be made to the Exhibitors as an employee linked provision, but not as "consideration for the disposal of a business asset".

3)
The FY02 accounts included employee entitlements of $3.636m (Note 34), comprising $3.09m current (Note 20), and $546K non-current (Note 23). Even with Val Morgan accounting for 2/3's of total TMS employment numbers, this only accounted for a VM-linked provision entitlement of $2.4m. As at 30 June 2002, TMS had 628 employees (Note 34), including Head Office, of 9 (Note 34), and Global Television, including OmniLab, ~180 (web site). This left 439 staff in VM linked ventures. In FY01, TMS has 491 employees, and in FY00, the number was 450. In other words, of the 439 VM linked employees, ~100 (net) came over through the MEG acquisition.

4)
The USA exit (announced, late September, and accounted for in the Appendix 4C Monthly Report for September) also included substantial staff transfers and some redundancies. No payment, however, was included at Item 5.3 on account of the employee staff costs, although there was a discrepancy between the Item 5.3 disposal consideration value of $7.314m, and the Item 1.10b disposal proceeds value of $5.681m.

5)
In ASX-R181002, TMS stated that "(a) standstill agreement would be entered into, pursuant to which the Exhibitors will agree to a moratorium on outstanding cinema rentals and a reduction in the rentals for the period from 1 October 2002 until the restructure is completed or terminated. An interim standstill agreement for the period from 1 October 2002 to 25 October 2002 has been agreed". A moratorium is a deferral of the liability commitment, not a reduction in that commitment.

6)
In Notes 9 (Current) and 16 (non-Current) of AR02, TMS recorded pre-payments of $4.581m and $1.291m (ie: total of $5.872m). At the time of re-negotiating the theatre rental contracts, TMS made substantial upfront payments to the Exhibitors, as is illustrated by the following:

In FY01, TMS' pre-payment commitments were $21.2m non-current (Note 16), and $8.8m current (Note 9), for a total of $30.0m. By 30 June 2002, however, this amount had been progressively reduced to $5.9m, thus indicating a consumed amounted of $24.1m during the FY01 financial year.

7)
ASX-R181002 also stated that "TMS would transfer the loss making Val Morgan and MEG Australian and New Zealand cinema advertising businesses ("Advertising Businesses") to major creditors of the Advertising Businesses (being the cinema exhibitors Hoyts, Greater Union and Village) ("Exhibitors") in return, particularly, for the release of existing and future liabilities under cinema advertising agreements". In the end, the Exhibitors also picked up the UAE, Chilean, Argentinian, and Hong Kong cinema advertising operations. The significant point from the release, however, was the observation that TMS would be "release(d) of existing and future liabilities under cinema advertising agreements."

If this was so, then 2 things should be borne in mind:
a)
the outstanding pre-payments of $5.9m; and
b)
the additional payment contribution of $4.881m.

That makes for ~$10.8m in rental benefits that the Exhibitors have so far received in FY03 in return for the "release of existing and future liabilities under cinema advertising agreements".

With $57m otherwise due in theatre rental contracts during FY03, ~$25m of which was attributable to the USA (and covered off against as part of the USA exit), this suggests that the non-USA VM theatre rental commitments in FY03 are ~$32m (max, including Singapore before the exit), of which $5.9m had been pre-paid and a further $4.881m was paid out during December.

In 1H03, the theatre rental commitment should have approximated $16m at the time of transfer (less, if during December). With theatre rental payments having been suspended (ie: the moratorium) since September and a reduced payment amount in place for 2Q03 (ASX-R181002), it appears that TMS first consumed the $4.581 in FY03 linked pre-payments, then brought forward the $1.291m in non-current pre-payments which essentially paid for the July, August and part-September commitments.

TMS then stopped making any further payments, before receiving the benefit of the payment moratorium, and a reduced rental commitment, from October onwards.

Assuming a 40% rate of reduction, this would have translated to a further $4.8m in rental commitments during 2Q03. In other words, with a little interpretation of the figures, a case can be made for the $4.881m disposal payment being linked to outstanding Exhibitor payments (ie: to theatre rentals).

8)
The contrast for what has transpired between the USA exit and the Val Morgan transfer is stark, to say the least. In relation to the former, a net asset payment was made, and TMS still stands to pick up additional payments in FY03, FY04, and (Malco cinema circuit, only) in FY05. In addition, the existing theatre rental contracts were transferred at nil additional cost to TMS.
All things considered:
*
the stronger conclusion is that the $4.881m payment was Exhibitor linked (not employee linked); and
*
in return for the release of these and future commitments, TMS handed to the Exhibitors more (not less) assets, including the UAE, Hong Kong and South American operations, as well as paying out against its FY03 rental commitments.

In light of recent comments by Terry Savage (formerly, Executive Chairman, Val Morgan), TMS management still need to explain:
a)
the restructure,;
b)
the Exhibitor transfers;
c)
the nature of the $4.881m payment; and
d)
the fact that TMS cash at 31/12 had been reduced to ~$600K, and its banking facilities had to be increased, in spite of the following comment from the September monthly report:

"In relation to Item 3.1, subsequent to 30 september 2002, the loan facilities amount was reduced to $56,381,000, loan drawings in excess of this amount require approval of the lender".

At 31/12/02, TMS' had oustanding loans of $56,311,000, and had increased its facilities to $59,481,000.

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B&T Marketing
Nine’s Yarwood replaces Savage at Val Morgan
Danielle Veldre

FORMER Nine Melbourne managing director Graeme Yarwood has been appointed to the top job at embattled cinema advertising company Val Morgan.

Yarwood made a surprise exit from GTV Nine at the end of last year after Ian Johnson was relocated to the station following a stint at Nine in Sydney.

Val Morgan was acquired last year from its parent company Television Media Services by a joint venture company formed by cinema exhibitors Hoyts, Greater Union and Village Roadshow after it experienced major financial losses.

Yarwood replaces Terry Savage who is leaving Val Morgan after 31 years to head up the Cannes Lions International Advertising Festival.

Savage, who leaves Val Morgan next month, said the company had “failed to absorb the takeover of Media Entertainment Group”.

He said cinema advertising was as strong as ever, and Commercial Economic Advisory Service of Australia (CEASA) figures showed it had grown 56% in the past five years.

“In the last six months, cinema was the fastest-growing of any medium,” Savage added.

“Obviously, some of the issues of the past four or five months created the impression the medium was suffering. The important thing to remember is it’s been delivering strong revenue growth.”

Savage said he was confident the marketplace knew there was a team of strong executives in place at Val Morgan and said with its corporate troubles behind it, Val Morgan was in a strong position.

“There are 100 million people attending the cinema in this country each year.”

Meanwhile, Val Morgan MD and Savage’s wife Cheryl Wannell is also leaving Val Morgan. Wannell will join Savage in London, where she will consult to the Screen Advertising World Association.

29 January 2003