SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the quarterly period ended NOVEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 0-1461
THE TODD-AO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-1679856
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
900 N. SEWARD STREET, HOLLYWOOD, CALIFORNIA 90038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (323) 962-5304
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares of common stock outstanding at January 5, 2000 was:
8,944,775 Class A Shares and 1,747,178 Class B Shares.
THE TODD-AO CORPORATION
QUARTERLY REPORT ON FORM 10-Q
NOVEMBER 30, 1999
INDEX
- ---------------------------------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION Page
- -----------------------------
Item 1- FINANCIAL STATEMENTS
The following financial statements are filed herewith:
Consolidated Balance Sheets, August 31, 1999 and November 30, 1999 3
Consolidated Statements of Income and Retained Earnings for the
Three Months Ended November 30, 1998 (restated) and 1999 5
Consolidated Statements of Cash Flows for the Three Months Ended
November 30, 1998 (restated) and 1999 6
Notes to Consolidated Financial Statements for the Three Months
Ended November 30, 1999 8
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
PART II - OTHER INFORMATION
- ---------------------------
Item 1 - Legal Proceedings 15
Item 6 - Exhibits and Reports on Form 8-K 15
Signature 15
2
THE TODD-AO CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
AUGUST 31, NOVEMBER 30,
1999 1999
---------- ------------
CURRENT ASSETS:
Cash and cash equivalents.............................................. $ 9,739 $ 8,855
Marketable securities.................................................. 1,317 400
Trade receivables
(net of allowance for doubtful accounts of $1,215 at
August 31, 1999 and $1,429 at November 30, 1999) ................... 18,169 22,340
Income tax receivable.................................................. 634 492
Inventories (first-in first-out basis)................................. 856 773
Deferred income taxes.................................................. 755 755
Prepaid deposits and other............................................. 3,005 3,013
----------- -------------
Total current assets................................................... 34,475 36,628
----------- -------------
INVESTMENTS............................................................ 892 2,688
----------- -------------
PROPERTY AND EQUIPMENT - At Cost:
Land................................................................... 4,270 4,270
Buildings.............................................................. 17,688 17,688
Leasehold improvements................................................. 18,603 18,636
Lease acquisition costs................................................ 2,187 2,187
Equipment.............................................................. 79,651 85,443
Equipment under capital leases......................................... 1,151 1,151
Construction in progress............................................... 4,803 2,072
----------- -------------
Total.................................................................. 128,353 131,447
Accumulated depreciation and amortization.............................. (48,305) (51,485)
----------- -------------
Property and equipment - net........................................... 80,048 79,962
----------- -------------
GOODWILL
(net of accumulated amortization of $2,875 at
August 31, 1999 and $3,217 at November 30, 1999).................... 33,875 33,533
----------- -------------
OTHER ASSETS........................................................... 3,890 3,724
----------- -------------
TOTAL.................................................................. $153,180 $156,535
=========== =============
See notes to consolidated financial statements.
3
THE TODD-AO CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
AUGUST 31, NOVEMBER 30,
1999 1999
------------ -------------
CURRENT LIABILITIES:
Accounts payable....................................................... $ 5,465 $ 4,004
Accrued liabilities:
Payroll and related taxes........................................... 3,089 3,456
Interest............................................................ 762 829
Equipment lease..................................................... 1,588 2,033
Other............................................................... 4,706 3,650
Income taxes payable.............................................. 2,247 1,893
Current maturities of long-term debt................................... 979 851
Capitalized lease obligations - current................................ 336 341
Deferred income........................................................ 914 1,004
------------ -------------
Total current liabilities.............................................. 20,086 18,061
------------ -------------
LONG-TERM DEBT......................................................... 65,520 69,948
DEFERRED COMPENSATION AND OTHER........................................ 1,439 1,383
DEFERRED GAIN ON SALE/LEASEBACK TRANSACTIONS........................... 4,046 3,839
DEFERRED INCOME TAXES.................................................. 3,254 3,254
------------ -------------
Total liabilities...................................................... 94,345 96,485
------------ -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock:
Class A; authorized 30,000,000 shares of $0.01 par value;
issued 8,124,333 at August 31, 1999 and 8,160,785 at
November 30, 1999................................................... 82 83
Class B; authorized 6,000,000 shares of $0.01 par value;
issued and outstanding 1,747,178.................................... 17 17
Additional capital..................................................... 37,887 38,154
Treasury stock (6,000 shares at cost as of August 31, 1999
and November 30, 1999)............................................. (47) (47)
Retained earnings...................................................... 21,432 22,440
Accumulated other comprehensive income (loss) ......................... (536) (597)
------------ -------------
Total stockholders' equity............................................. 58,835 60,050
------------ -------------
TOTAL.................................................................. $153,180 $156,535
============ =============
See notes to consolidated financial statements.
4
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998 (RESTATED) AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1999
------------ ------------
REVENUES ................................................ $ 33,947 $ 33,556
------------ ------------
COSTS AND EXPENSES:
Operating costs and other expenses ...................... 25,781 26,252
Depreciation and amortization ........................... 3,403 3,580
Interest ................................................ 866 1,259
Equipment lease expense - net ........................... 55 929
Other (income) expense - net ............................ 68 102
------------ ------------
Total costs and expenses ................................ 30,173 32,122
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND CHANGE IN ACCOUNTING PRINCIPLE .................... 3,774 1,434
PROVISION FOR INCOME TAXES ............................ 1,306 426
------------ ------------
INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE ............ 2,468 1,008
CHANGE IN ACCOUNTING PRINCIPLE,
NET OF INCOME TAXES OF $150 ........................... (293) --
------------ ------------
NET INCOME .............................................. 2,175 1,008
RETAINED EARNINGS BEGINNING OF PERIOD ................... 20,510 21,432
LESS: DIVIDENDS PAID ................................... (140) --
------------ ------------
RETAINED EARNINGS END OF PERIOD ......................... $ 22,545 $ 22,440
============ ============
NET INCOME PER COMMON SHARE:
Net income available to common stockholders ............. $ 2,175 $ 1,008
Effect of dilutive securities:
5% convertible debentures ............................ 67 62
------------ ------------
Net income available to common stockholders
plus assumed conversions ............................. $ 2,242 $ 1,070
------------ ------------
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC .................................. 9,535,765 9,882,827
Effect of dilutive securities:
Stock options ........................................ 331,538 683,097
5% convertible debentures ............................ 697,677 643,341
------------ ------------
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED ................................ 10,564,980 11,209,265
------------ ------------
NET INCOME PER COMMOM SHARE:
Income before change in accounting principle - Basic . $ 0.26 $ 0.10
Change in accounting principle ....................... (0.03) --
------------ ------------
Net income - Basic ................................... $ 0.23 $ 0.10
============ ============
Income before change in accounting principle - Diluted $ 0.24 $ 0.10
Change in accounting principle ....................... (0.03) --
------------ ------------
Net income - Diluted ................................. $ 0.21 $ 0.10
============ ============
See notes to consolidated financial statements.
5
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998 (RESTATED) AND 1999
(DOLLARS IN THOUSANDS)
1998 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 2,175 $ 1,008
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................................... 3,403 3,580
Deferred income taxes........................................... 876 -
Deferred compensation and other................................. (130) (30)
Foreign currency exchange rate loss............................. - 74
Amortization of deferred gain on
sale/leaseback transaction.................................. (616) (207)
(Gain) on sale of marketable securities
and investments............................................. - (413)
(Gain) loss on disposition of fixed assets...................... (39) 5
Changes in assets and liabilities (net of acquisitions):
Trade receivables, net....................................... (4,404) (4,171)
Inventories and other current assets......................... 169 122
Accounts payable and accrued liabilities..................... 172 (2,083)
Accrued equipment lease...................................... - 445
Income taxes payable, net.................................... 330 (259)
Provision for liabilities and other.......................... (346) (26)
Deferred income.............................................. (19) 90
-------- --------
Net cash provided by (used in) operating activities: ................ 1,571 (1,865)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities and investments.................. - 427
Proceeds from sale of marketable securities
and investments................................................. 161 1,056
Proceeds from disposition of fixed assets.......................... 101 23
Capital expenditures............................................... (4,601) (3,180)
Purchase of 50% investment in 103 Estudio, S.L..................... - (2,084)
Other assets....................................................... 152 171
-------- --------
Net cash flows used in investing activities: ........................ $ (4,187) $ (3,587)
-------- --------
6
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998 (RESTATED) AND 1999
(DOLLARS IN THOUSANDS)
(CONTINUED)
1998 1999
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt......................................... $ 8,060 $ 4,775
Payments on long-term debt........................................... (742) (475)
Payments on capital lease obligations................................ (26) -
Proceeds from issuance of common stock............................... - 268
Treasury stock purchases............................................. (2,767) -
Dividends paid....................................................... (141) -
-------- --------
Net cash flows provided by financing activities: ...................... 4,384 4,568
-------- --------
Effect of exchange rate changes on cash ............................ - -
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................................................... 1,768 (884)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................................................. 3,997 9,739
-------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD....................................................... $ 5,765 $ 8,855
======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................................. $ 653 $ 1,167
======== ========
Income taxes......................................................... $ 0 $ 0
======== ========
7
THE TODD-AO CORPORATION
- -----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1999
(Dollars in Thousands, except per share amounts)
- --------------------------------------------------------------------------------
If complete notes were to accompany these statements they would be substantially
in the same form as those to the Company's Financial Statements for the Year
Ended August 31, 1999. In addition the following notes are applicable:
1. In the opinion of management for the Company, all adjustments (which
comprise only normal recurring accruals) necessary for a fair
presentation of the results of operations have been included.
2. The consolidated financial statements include the Company and its wholly
owned subsidiaries.
3. During fiscal year 1999, the Company adopted the Statements of Position
(SOP) No. 98-5, "Reporting on the Costs of Start-Up Activities". The
effect of the adoption was to record an expense, net of tax, of $293 in
1999. The prior year quarter ended November 30, 1998 has been restated to
reflect this change. The restatement had no impact on previously reported
income before change in accounting principle.
4. The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share" ("EPS"), during the year ending August 31,
1998 and has restated its net income per common share disclosures for
prior periods to comply with SFAS No. 128. Under SFAS No. 128, primary
EPS is replaced by "Basic" EPS, which excludes dilution and is computed
by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. "Diluted"
EPS, which is computed similarly to fully diluted EPS, reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. When
dilutive, stock options are included as share equivalents in computing
diluted earnings per share using the treasury stock method.
5. In June 1999 all of the issued and outstanding shares of Sound One
Corporation ("Sound One"), a New York corporation, were acquired by the
Company through a Merger Agreement signed June 8, 1999. Todd-AO East,
Inc., an indirect wholly owned subsidiary of the Company, was merged into
Sound One extinguishing all of the issued and outstanding shares of
common stock of Sound One in exchange for a cash consideration of $11.50
per share. In consideration of the purchase, the Company paid $11,962 in
cash for the common stock and an additional $353 in cash for costs
incurred in connection with the acquisition. In addition, $800 is
represented by non-compete agreements. Sound One is the leading post
production sound facility in New York servicing the entertainment
industry.
The acquisition is being accounted for under the purchase method of
accounting. The following unaudited pro forma consolidated financial
information for the three months ended November 30, 1998 is presented as
if the acquisition had occurred on September 1, 1998. Pro forma
adjustments for Sound One are primarily for amortization of goodwill and
non-compete agreements, changes in executive compensation, depreciation
adjustments, interest expense on borrowings in connection with the
acquisition, and income taxes.
8
1998
----------
Revenues.......................................................... $ 37,085
Net income before change in accounting principle.................. $ 2,636
==========
Net income........................................................ $ 2,343
Net income per common share - before change in ==========
accounting principle - Basic................................... $ 0.28
==========
Net income per common share - Basic............................... $ 0.25
==========
Net income per common share - before change in
accounting principle - Diluted................................. $ 0.26
==========
Net income per common share - Diluted............................. $ 0.23
==========
6. In December 1998, November 1997 and December 1994 the Company signed
agreements with its bank to implement the sale/leaseback of certain
equipment. The agreements terminate on December 30, 2005, December 1,
2002 and December 30, 1999, respectively, and are being treated as
operating leases for financial statement purposes. The termination date
for the agreement terminating on December 30, 1999 has been extended to
June 30, 2000. On December 30, 1998, November 3, 1997 and December 30,
1994 an aggregate of $8,809, $8,500 and $11,218, respectively, of sound
studio and video equipment was sold and leased back. The total deferred
gain on the transactions to be amortized over five to seven years is
$12,525. The annual lease cost currently is approximately $3,350.
The net equipment lease expense is as follows for the three months ended
November 30:
1998 1999
-------- --------
Equipment lease costs........................................... $ 671 $ 1,136
Amortization of deferred gain on sale of equipment.............. (616) (207)
-------- --------
Equipment lease expense, net.................................... $ 55 $ 929
======== ========
In June 2000, one of the Company's sale/leaseback agreements is maturing.
In fiscal year 1999, the Company exercised its option to purchase for
$5,699 the equipment currently being leased under this agreement. The
purchase price exceeds the equipment's estimated fair value, as
determined by an independent valuation, by approximately $788. The
Company recorded a pre-tax loss on equipment lease commitments in this
amount during the fiscal year ended August 31, 1999.
7. The Company has a stock repurchase program under which 2,300,000 shares
may be purchased from time to time in the open market or in private
transactions. As of November 30, 1999, 1,621,756 shares had been
repurchased. 1,555,303 of these shares have been cancelled and returned
to authorized but unissued status. 60,453 of these shares were
transferred to the Company's 401(k) plan.
8. In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." The Company adopted SFAS No. 130
beginning in the first quarter of fiscal 1999. Comprehensive income is
defined as all changes in shareholders' equity, except those resulting
from investments by or distributions to shareholders. The Company's
comprehensive income is as follows for the three months ended:
9
NOVEMBER 30, NOVEMBER 30,
1998 1999
------------ ------------
Net income..................................... $ 2,175 $ 1,008
Unrealized gain (loss) on marketable
securities and long-term investments....... (221) (135)
Foreign currency translation adjustments....... 1 74
------------ -------------
Comprehensive income........................... $ 1,955 $ 947
============ =============
9. The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," for its fiscal year ended August 31,
1999, which changed the way the Company reports information about its
operating segments. The Company's business units have been aggregated
into two reportable operating segments: sound and video services. The
Other column includes corporate related items and income and expenses not
allocated to reportable segments. The Company's reportable operating
segments have been determined in accordance with the Company's internal
management structure, which is organized based on operating activities.
The Company evaluates performance based upon several factors, including
segment income (loss) before income taxes, interest, depreciation and
amortization of intangibles.
Summarized financial information concerning the Company's reportable
segments is shown in the following tables:
SOUND VIDEO
SERVICES SERVICES OTHER TOTAL
---------- ---------- ------- -------
THREE MONTHS ENDED
NOVEMBER 30, 1998:
Revenues............................. $ 12,546 $ 21,401 $ -- $ 33,947
Income (loss) before income taxes,
interest, depreciation and
amortization of intangibles....... 2,550 5,975 (482) 8,043
Identifiable assets.................. 37,613 74,264 1,219 113,096
Intangible assets, net............... -- 28,843 -- 28,843
Capital expenditures................. 280 4,321 - 4,601
Depreciation expense................. 615 2,438 - 3,053
THREE MONTHS ENDED
NOVEMBER 30, 1999:
Revenues............................. $ 11,903 $ 21,653 $ -- $ 33,556
Income (loss) before income taxes,
interest, depreciation and
amortization of intangibles....... (14) 6,464 (177) 6,273
Identifiable assets.................. 40,423 79,779 2,800 123,002
Intangible assets, net............... 7,062 26,471 - 33,533
Capital expenditures................. 538 2,642 - 3,180
Depreciation expense................. 672 2,566 - 3,238
10
The following table reconciles segment income (loss) before income taxes,
interest, depreciation and amortization of intangibles to the Company's
consolidated net income:
THREE MONTHS ENDED
NOVEMBER 30,
--------------------
1998 1999
-------- --------
Income before income taxes, interest,
depreciation and amortization of intangibles............... $8,043 $6,273
Amortization of intangibles................................... (350) (342)
Interest expense.............................................. (866) (1,259)
Depreciation.................................................. (3,053) (3,238)
Provision for income taxes.................................... (1,306) (426)
-------- --------
Net income before change in accounting principle.............. 2,468 1,008
Change in accounting principle, net........................... (293) -
-------- --------
Net income.................................................... $2,175 $1,008
-------- --------
-------- --------
10. On December 10, 1999, the Company entered into an Agreement and Plan of
Merger with Liberty Media Corporation (subject to shareholder approval)
in which Liberty Media shall acquire control of Todd-AO in a tax-free
transaction. The agreement provides for a reclassification of Todd-AO
existing common stock followed by a merger in which a portion of the
reclassified Todd-AO common stock is exchanged for Liberty Media common
stock. As a result of the reclassification and merger, Todd-AO
shareholders will receive, for each share of existing Todd-AO common
stock, one-quarter of a share of Liberty Media common stock and
four-tenths of a share of the new Todd-AO common stock. Liberty Media
will own 60% of the outstanding equity and more than 90% of the
outstanding voting power of Todd-AO.
In connection with the acquisition of Hollywood Digital, the Company
issued convertible subordinated notes. In November 1999, the Company
exercised its right to convert the existing Hollywood Digital notes and
in December 1999 converted the notes to 643,327 shares of Todd-AO Class
A common stock. These notes in the amount of $7,599 are classified as
long-term debt on the balance sheet at November 30, 1999.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(DOLLARS IN THOUSANDS, EXCEPT AMOUNTS PER SHARE)
1. Material Changes in Financial Condition
Under a new long-term credit agreement dated June 30, 1999 and expiring
on May 31, 2004, the Company may borrow up to $80,000 in revolving loans
until May 31, 2002. On that date and thereafter, the revolving loan
commitment will reduce incrementally to nil by the expiration of the
agreement. Prior to May 31, 2002 the Company may request an automatic
extension of the revolving period of the facility for one year that will
also extend the term period and the expiration date of the agreement.
Prior to December 31, 2000 the Company may make a one-time request to
increase the credit line by up to $20,000. Such increase is at the sole
discretion of the Banks; however, the Company has the option to bring a
new bank to the syndicate, thereby avoiding the Banks' discretion. The
Company also has the availability of Standby Letters of Credit up to
$20,000 under the facility. The credit facility provides for borrowings
based on the Bank's Reference, CD, and LIBOR rates. The facility includes
commitment fees on the unused balance of the credit facility. Other
material restrictions include: the Fixed Charge Coverage Ratio may not be
less than 1.25:1; Other Indebtedness (excluding up to $35,000 in Capital
or Off Balance Sheet Leases, the convertible subordinated notes issued in
the Hollywood Digital acquisition, non-recourse debt up to $50,000 of
less than 100% owned Joint Ventures, $5,000 in purchase money mortgage
financing and the existing TeleCine mortgage debt for the Charlotte
Street property) may not exceed $10,000; Leverage Ratio is not to exceed
4:1 through May 31, 2001 (decreasing thereafter); Net Worth is not to be
less than $54,000 plus net proceeds from issuance of equity plus 50% of
consolidated net income subsequent to May 31, 1998 (excluding the effect
of stock repurchases up to $3,000 from the closing date through the
fiscal year ending August 31, 2000).
In January 1998 the Company entered into a three-year interest rate swap
agreement for a notional amount of $10,000 to hedge the impact of
fluctuations in interest rates on its floating rate credit facility.
Under the agreement, the Company is obligated to pay 5.65% in exchange
for receiving three-month LIBOR on the notional amount. Settlements are
quarterly and the contract expires in March 2001.
Through August 31, 1999 the Company has signed three agreements with its
bank to implement the sale/leaseback of certain equipment. An aggregate
of $28,527 of sound studio and video equipment has been sold and leased
back. The agreements terminate on December 30, 1999, December 1, 2002 and
December 30, 2005. The termination date for the agreement terminating on
December 30, 1999 has been extended to June 30, 2000. All the agreements
provide for interest based on LIBOR rates.
The credit facilities are available for general corporate purposes,
capital expenditures and acquisitions. Management believes that funds
generated from operations, proceeds from the sale/leaseback agreements
and the borrowings available under the restated credit facility will be
sufficient to meet the needs of the Company at least through the end of
2000.
In June 1997, the Company used $15,760 under its credit facility to
acquire the assets of Hollywood Digital. In May 1998, the Company used
$14,000 to fund a substantial portion of the TeleCine acquisition. In
June 1999, $11,962 was used to fund the Sound One acquisition. In
September 1999, $2,084 was used to acquire a 50% interest in a
Barcelona-based sound facility named 103 Estudio, S.L. As of November 30,
1999, the Company had $56,174 outstanding under the credit facility,
which has been used principally to fund the acquisitions described and
for capital expenditures.
12
The Company has exercised its option to purchase for $5,699 the equipment
currently being leased under the sale/leaseback transaction maturing in
June 2000. The purchase will be funded by borrowings under credit
facilities.
The Company expects capital expenditures of approximately $14,000 for its
Los Angeles, Santa Monica, New York City, Atlanta and London facilities
in fiscal 2000. These capital expenditures will be financed by internally
generated funds and borrowings under credit facilities.
The Company does not believe that it is currently exposed to any material
foreign exchange rate risk and, at present, does not have a policy for
managing such risk beyond the utilization of local currency borrowings to
fund foreign acquisitions whenever possible.
2. Material Changes in Results of Operations
THREE MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
NOVEMBER 30, 1998
Revenues remained relatively flat, decreasing $391 from $33,947 to
$33,556. Increases in revenue due to the acquisition of Sound One in June
1999 ($3,456) were offset by lower utilization and activity in the
Company's other sound services divisions ($4,099) while the Company's
video services divisions remained flat, increasing revenues by $252.
Operating costs and other expenses also remained relatively flat,
increasing $471 from $25,781 to $26,252. Cost increases related to the
acquisition of Sound One ($2,860) were offset by cost decreases in the
Company's other sound and video divisions as a result of the revenue
decreases described above.
Depreciation and amortization increased $177 or 5.2% primarily due to the
equipment and goodwill acquired with the Sound One acquisition.
Interest expense increased $393 or 45.4% primarily due to the Sound One
acquisition financing.
Net equipment lease expense increased $874 primarily as a result of the
sale/leaseback to the Company's financial institution of certain
equipment in December 1998.
Net other expense increased $34 primarily due to costs incurred to date
in connection with the Liberty Media Corporation merger ($560) reduced by
gains from the sale of investments ($413) in the current period and
offset by other costs ($109) recorded in the prior period. The Company
expects to incur additional costs in connection with the Liberty merger.
As a result of the above, income before taxes and net change in
accounting principle decreased $2,340 from $3,774 to $1,434 and net
income before net change in accounting principle decreased $1,460 from
$2,468 to $1,008.
The Company elected early adoption of Statements of Position No. 98-5,
"Reporting on the Costs of Start-Up Activities" in the prior year and
reported the cumulative effect of a change in accounting principle, as
described in Accounting Principles Board Opinion No. 20, in the amount of
$293, net of income tax benefit in the amount of $150.
As a result of the above, net income after net change in accounting
principle decreased $1,167 from $2,175 to $1,008.
13
MATERIAL CHANGES IN CASH FLOWS
For the three months ended November 30, 1999, the Company used $1,865 in
cash from operating activities compared to generating $1,571 in 1998. Net
income of $1,008 adjusted for depreciation and net amortization of $3,373
provided cash of $4,381 in 1999 compared to $4,962 in 1998. Decreases in
accounts payable and other liabilities were $1,833 in 1999 compared to an
increase of $137 in 1998. Cash provided by operations supplemented by
borrowings from the Company's credit facility were used to pay down
accounts payable and other liabilities and to fund trade receivables in
1999 and cash provided by operations was utilized primarily to fund trade
receivables in 1998.
Borrowings from the Company's credit facility of $4,775 supplemented by
net cash generated from the sale of marketable securities and other
assets of $1,506 were also used to acquire a 50% interest in a
Barcelona-based sound facility named 103 Estudio, S.L. for $2,084 and to
reinvest in capital assets of the Company.
FORWARD LOOKING STATEMENTS
When used in this document, the words "believes", expects", anticipates",
"intends", and similar expressions are intended to identify forward
looking statements. Such statements are subject to a number of known
risks and uncertainties. Actual results in the future could differ
materially from those described in the forward looking statements. Such
risks and uncertainties include, but are not limited to, industry-wide
market factors such as the timing of, and spending on, feature film and
television programming production, foreign and domestic television
advertising, and foreign and domestic spending by broadcasters, cable
companies and syndicators on first run and existing content libraries. In
addition, the failure of the company to maintain relationships with key
customers and certain key personnel, more rapid than expected
technological obsolescence, and failure to integrate acquired operations
in expected time frames could also cause actual results to differ
materially from those described in forward looking statements.
YEAR 2000 COMPLIANCE ISSUE
The Company's program consisting of identifying, assessing and, where
necessary, upgrading and/or replacing its systems and equipment that may
be vulnerable to Year 2000 problems has been completed. Based upon the
assessment of operations through January 7, 2000, the Company has not
experienced any significant Year 2000 issues.
The Company assessed, inventoried and classified Year 2000 issues on all
of our information systems, infrastructure and technical operating
equipment. Information systems that were Year 2000 deficient were
modified, upgraded or replaced and tested for compliance. All technical
operating equipment was tested and upgraded where necessary. The costs
incurred for addressing internal system Year 2000 issues totaled
approximately $325 through the 15 months ended November 30, 1999 and did
not have a material adverse impact on the Company's financial position,
results of operation or cash flows. There have been no costs incurred
subsequent to November 30, 1999.
The Company has surveyed significant customers, suppliers and third
parties critical to business operations to determine their Year 2000
compliance. The Company has experienced no significant Year 2000 issues
arising from such third parties' systems. The Company shall continue to
monitor its internal information systems and material third party
relationships for ongoing Year 2000 issues that might arise at a later
date.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in litigation and similar claims incidental to
the conduct of its business. None of the pending actions is considered
material.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). (1) A report on Form 8-K was filed on December 22,
1999 disclosing an Agreement and Plan of Merger
entered into on December 10, 1999 by and among AT&T
Corp., B-Group Merger Corp., Liberty Media
Corporation and The Todd-AO Corporation.
(2) Exhibit 27 Financial Data Schedule.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TODD-AO CORPORATION
January 13, 2000 /s/ Silas R. Cross
- ------------------------ -------------------------------
Date Silas R. Cross
Chief Accounting Officer
15