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
For the quarterly period ended MAY 31, 1996
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)
172 GOLDEN GATE AVENUE, SAN FRANCISCO, CALIFORNIA 94102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 928-3200
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 July 8, 1996
was: 6,494,927 Class A Shares and 1,747,181 Class B Shares.
THE TODD-AO CORPORATION
QUARTERLY REPORT ON FORM 10-Q
MAY 31, 1996
INDEX
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following financial statements are filed herewith:
Consolidated Balance Sheets, May 31, 1996
and August 31, 1995. Page 3
Consolidated Statements of Income and Retained Earnings
for the Nine Months and Three Months Ended
May 31, 1996 and 1995. Page 5
Consolidated Statements of Cash Flows for the Nine Months
Ended May 31, 1996 and 1995. Page 6
Notes to Consolidated Financial Statements for the
Nine Months Ended May 31, 1996. Page 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 10
PART II - OTHER INFORMATION
ITEM 1.
Legal Proceedings Page 13
ITEM 4.
Submission of Matters to a Vote of Security Holders Page 13
ITEM 6.
Exhibits and Reports on Form 8-K Page 13
Signature Page 14
PART I - FINANCIAL INFORMATION
THE TODD-AO CORPORATION
CONSOLIDATED BALANCE SHEETS
MAY 31, 1996 and AUGUST 31, 1995
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
MAY 31, AUGUST 31,
1996 1995
----------- ----------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 3,263 $ 5,278
Marketable securities 2,685 3,484
Trade receivables
(net of allowance for doubtful
accounts of $663 at May 31, 1996
and $828 at August 31, 1995) 11,043 6,787
Inventories (first-in first-out basis) 661 484
Prepaid income taxes 727
Deferred income taxes 805 924
Other 552 565
-------- --------
Total current assets 19,009 18,249
-------- --------
INVESTMENTS 1,336 1,656
-------- --------
PROPERTY AND EQUIPMENT - at cost:
Land 4,270 4,270
Buildings 10,773 10,762
Leasehold improvements 6,802 6,802
Lease acquisition costs 2,187 2,187
Equipment 37,022 30,734
Equipment under capital leases 3,163 3,163
Construction in progress 122
-------- --------
Total 64,339 57,918
Accumulated depreciation and
amortization (29,113) (22,955)
-------- --------
Property and equipment - net 35,226 34,963
-------- --------
GOODWILL - net 1,738 1,832
-------- --------
OTHER ASSETS 375 498
-------- --------
TOTAL $ 57,684 $ 57,198
-------- --------
-------- --------
See notes to consolidated financial statements.
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3
THE TODD-AO CORPORATION
CONSOLIDATED BALANCE SHEETS
MAY 31, 1996 and AUGUST 31, 1995
(DOLLARS IN THOUSANDS)
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MAY 31, AUGUST 31,
1996 1995
----------- ----------
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,517 $ 1,784
Accrued liabilities:
Payroll and related taxes 1,918 1,975
Interest 129 179
Equipment lease 300 396
Other 382 515
Income taxes payable 654
Current maturities of long-term debt 615 759
Capitalized lease obligations - current 867 897
Deferred income 446 703
-------- --------
Total current liabilities 7,828 7,208
LONG-TERM DEBT 6,065 7,707
CAPITALIZED LEASE OBLIGATIONS 68 620
DEFERRED COMPENSATION 265 401
DEFERRED GAIN ON SALE OF EQUIPMENT 5,277 6,381
DEFERRED INCOME TAXES 3,587 3,683
-------- --------
Total liabilities 23,090 26,000
-------- --------
SHAREOWNERS' EQUITY:
Common Stock:
Class A authorized 30,000,000 shares
of $0.25 par value; issued 6,488,727
at May 31, 1996 and 6,403,021 at
August 31, 1995 1,622 1,600
Class B authorized 6,000,000
shares of $0.25 par value;
issued and outstanding 1,747,181 437 437
Additional capital 20,985 21,048
Retained earnings 11,605 7,904
Unrealized gains on marketable securities
and long-term investments 204 473
Cumulative foreign currency translation adjustment (259) (264)
-------- --------
Total shareowners' equity 34,594 31,198
-------- --------
TOTAL $ 57,684 $ 57,198
-------- --------
-------- --------
See notes to consolidated financial statements.
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4
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE NINE MONTHS AND THREE MONTHS ENDED MAY 31, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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NINE MONTHS THREE MONTHS
------------------------ ------------------------
1996 1995 1996 1995
---- ---- ---- ----
REVENUES $ 48,140 $ 37,125 $ 16,801 $ 18,290
-------- -------- -------- --------
COSTS AND EXPENSES:
Operating costs and other expenses 37,231 29,405 12,952 12,872
Depreciation and amortization 3,967 3,014 1,379 1,444
Interest 531 320 145 220
Equipment lease expense - net 415 371 71 222
Other expense (income) - net (554) (223) (179) (271)
-------- -------- -------- --------
Total 41,590 32,887 14,368 14,487
-------- -------- -------- --------
INCOME BEFORE JOINT VENTURE
AND INCOME TAXES 6,550 4,238 2,433 3,803
LOSS FROM JOINT VENTURE 117 167 0 58
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 6,433 4,071 2,433 3,745
INCOME TAXES 2,371 1,452 861 1,416
-------- -------- -------- --------
NET INCOME 4,062 2,619 $ 1,572 $ 2,329
-------- --------
-------- --------
RETAINED EARNINGS BEGINNING OF PERIOD 7,904 11,087
LESS: DIVIDENDS PAID (361) (326)
-------- --------
RETAINED EARNINGS END OF PERIOD $ 11,605 $ 13,380
-------- --------
-------- --------
NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENT $ .46 $ .31 $ .18 $ .28
-------- -------- -------- --------
-------- -------- -------- --------
AVERAGE SHARES OUTSTANDING 8,805,359 8,351,588 8,883,035 8,365,544
--------- --------- --------- ---------
--------- --------- --------- ---------
See notes to consolidated financial statements.
5
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MAY 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
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1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,062 $ 2,619
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities:
Depreciation and amortization 3,967 3,014
Deferred income taxes 23 845
Loss from joint venture 167
Deferred compensation and other (136) (107)
Amortization of deferred gain
on sale of equipment (1,104) (612)
Loss on sale of marketable
securities and investments 42 29
Changes in assets and liabilities:
Trade receivables (4,022) (4,459)
Inventory and other current assets (16) (222)
Accounts payable and accrued
liabilities 103 1,233
Accrued equipment lease (96) 394
Income taxes 1,212 433
Deferred income (257) 347
-------- --------
Net cash flows provided by
operating activities: 3,778 3,681
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities
and investments (73) (489)
Proceeds from sale of marketable
securities and investments 881 1,159
Capital expenditures (3,317) (2,638)
Contributions to joint venture (167)
Purchase of Skywalker Sound South (6,966)
Purchase of Chrysalis Television
Facilities Ltd. (8,002)
Other assets 128 1
-------- --------
Net cash flows (used in)
investing activities: (2,381) (17,102)
-------- --------
CONTINUED ON PAGE 7
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6
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MAY 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
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1996 1995
---- ----
CONTINUED FROM PAGE 6
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 2,175 7,714
Payments of long-term debt (4,516) (84)
Payments on capital lease obligation (669) (820)
Proceeds from sale/leaseback transaction 11,218
Proceeds from issuance of common stock 519 60
Treasury stock transactions (560)
Dividends paid (361) (326)
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Net cash flows provided by (used in)
financing activities: (3,412) 17,762
------- -------
Effect of exchange rate changes on cash (13)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,015) 4,328
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 5,278 606
------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,263 $ 4,934
------- -------
------- -------
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 581 $ 117
------- -------
------- -------
Income taxes $ 2,495 $ 675
------- -------
------- -------
See notes to consolidated financial statements.
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7
THE TODD-AO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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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, 1995. 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 Todd-AO Studios East, Inc. ("Todd-AO East"), Todd-AO
Productions, Inc., Todd-AO Digital Images, Inc. ("TDI"), Todd-AO Video
Services, Inc. ("TVS"), Todd-AO Studios West ("TSW"), Todd-AO Europe
Holding Ltd. ("TAO Europe"), Todd-AO Preservation Services and Todd-AO's
Land of the Future. All significant intercompany balances and transactions
have been eliminated.
3. Net income per common share is computed based on the weighted average
number of common and common equivalent shares outstanding for each of the
years presented including common share equivalents arising from the assumed
exercise of any outstanding dilutive stock options.
4. On February 15, 1995, TSW (a wholly owned subsidiary of the Company)
acquired substantially all of the property, equipment and inventory of
Kaytea Rose, Inc. (dba Skywalker Sound South) ("SSS"). TSW provides post
production sound services to the film and television industries. In
consideration of the purchase, TSW paid $6,966 in cash. TSW is included in
the Company's results of operations from February 1995.
On March 16, 1995 TAO Europe (formerly FCB 1120, Ltd.) (a wholly owned
subsidiary of the Company) acquired all of the outstanding shares of
Chrysalis/Todd-AO Europe Ltd. ("Chrysalis") (formerly Chrysalis Television
Facilities, Ltd.) from Chrysalis Holdings Ltd. ("CHL"). TAO Europe,
Chrysalis and CHL are all corporations organized under the laws of the
United Kingdom and headquartered in London. Chrysalis specializes in the
collation of television programming for satellite broadcast and also
provides post production video and other services to a variety of clients.
In consideration of the purchase, TAO Europe paid CHL $1,966 in cash at
closing and issued a note in the amount of $1,364. An additional cash
settlement of $220 was paid in June 1995. Concurrently with the
acquisition, TAO Europe advanced and paid on behalf of Chrysalis its
intercompany debt to CHL in the amount of $4,585. Subsequent to the
acquisition, TAO Europe advanced and paid on behalf of Chrysalis other debt
in the amount of $1,562. TAO Europe and Chrysalis consolidated are
included in the Company's results of operations from March 1995.
The acquisitions are being accounted for under the purchase method of
accounting. The following unaudited pro forma consolidated financial
information for the nine months ended May 31, 1995 is presented as if the
acquisitions of TSW and TAO Europe had occurred on September 1, 1994. Pro
forma adjustments for TSW are primarily to operating expenses related to
nonapplicable allocations made by the parent corporation of SSS,
depreciation expense relating to the acquisition of assets, interest
expense on borrowings in connection with the acquisition and income
8
taxes. Pro forma adjustments for TAO Europe are primarily to amortization
expense relating to allocation of the purchase price, interest expense on
borrowings in connection with the acquisition and income taxes.
1995
Revenues $ 46,224
---------
---------
Net income $ 2,761
---------
---------
Net income per common share $ 0.33
---------
---------
5. The Company has a stock repurchase program under which 1,300,000 shares may
be purchased from time to time in the open market or in private
transactions. As of May 31, 1996, 795,146 shares had been repurchased.
All of these shares have been cancelled and returned to authorized but
unissued status.
6. On August 11, 1995 a 10% stock dividend was declared for holders of Class A
and Class B stock, payable on September 29, 1995 to shareholders of record
on September 8, 1995.
The financial statements set forth herein, and applicable share and per
share data for periods and dates included in the accompanying financial
statements and notes, have been adjusted to retroactively reflect the stock
dividend.
7. The Company is in the process of organizing a limited liability company
("LLC") with United Artists Theatre Circuit, Inc., an operator of motion
picture theatres ("UATC") for the purpose of exploiting proprietary
technology to conserve film stock and reduce the length of wide screen film
release prints. The technology, known as "Compact Distribution Print" or
"CDP", is in the final stages of development. It is anticipated that the
Company and UATC will each have a 50% interest in any profits of the LLC,
which is known as "CDP Limited Liability Company".
In April 1996 TAO Europe (a wholly owned subsidiary of the Company)
acquired all the outstanding shares of Filmatic Laboratories, Ltd.
("Filmatic"), a London based film processing and video post production
company for the sum of $1. Concurrently with the acquisition, TAO Europe
advanced and paid on behalf of Filmatic bank debt in the amount of $555.
While the acquisition is integral to the Company's goals, it is not
material to the Company's consolidated financial statements.
The Company announced in June 1996 that it is in negotiations to acquire
Editworks, a limited liability company, based in Atlanta, Georgia and
engaged in the business of providing a full range of video tape editorial
post production services. Editworks is the DBA name for Edit Acquisition
LLC.
9
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
1. Material Changes in Financial Condition
In December 1994 the Company signed agreements with its bank to implement
the sale/leaseback of certain equipment and a long-term revolving to term
loan credit agreement. An aggregate of $11,218 was sold and leased back on
December 30, 1994. The sale/leaseback agreement terminates on December 30,
1999. Amendments to the credit agreement in March 1995, April 1996 and
June 1996 have increased the amount available from $10,000 to $28,000. In
addition, the June 1996 amendment converted the credit agreement from a
revolving to term facility to a reducing revolving facility. Under the
credit agreement, the Company may borrow up to $28,000 in revolving loans
until February 28, 2000. On that date and quarterly thereafter until the
expiration of the agreement on November 30, 2003, the revolving loan
commitment shall reduce by 5% of the original loan commitment. These
credit facilities are available for general corporate purposes, capital
expenditures and acquisitions. Management believes that the proceeds from
the sale/leaseback and the borrowings available under the credit facility
will be sufficient to meet the needs of the Company for the foreseeable
future.
In February 1995 the Company used $6,878 of the proceeds from the
sale/leaseback agreement to acquire substantially all of the property,
equipment and inventory of Skywalker Sound South.
In March 1995 the Company used $7,726 under the credit agreement in
connection with the acquisition of Chrysalis Television Facilities Ltd.
As of May 31, 1996 the Company has $5,327 outstanding under the credit
agreement.
The Company expects capital expenditures of approximately $7,000 for its
Los Angeles, New York City and London facilities in fiscal 1996. These
capital expenditures will be financed by bank leasing and credit facilities
and by internally generated funds.
2. Material Changes in Results of Operations
YEAR-TO-DATE
Total revenues increased 29.7% ($11,015) and operating costs and expenses
increased 26.6% ($7,826).
SOUND SERVICES:
Sound studio revenues in California and New York increased $4,367. Revenue
increases were due primarily to the inclusion of Todd-AO Studios West
("TSW") ($4,241) acquired in February 1995.
Sound studio operating costs and expenses increased $2,864 primarily due to
the inclusion of TSW acquired in February 1995.
VIDEO SERVICES:
Total video services revenues increased $6,648. Revenues increased $5,643
due to the acquisition of Chrysalis/Todd-AO Europe, Ltd.
10
("Chrysalis") in March 1995 and $338 due to the acquisition of Todd-AO
Filmatic ("Filmatic") in April 1996. Todd-AO Video Services ("TVS")
increased $872 and Todd-AO Digital Images ("TDI") revenues decreased $205
in the current year.
Increases in operating costs and expenses attributable to Chrysalis,
Filmatic and TVS were $4,882 and are related to the revenue increases
described above.
CORPORATE:
Depreciation and amortization increased 31.6% ($953) primarily due to the
inclusion of TSW and Chrysalis in the current year.
Equipment lease expense net of gain on sale of equipment in connection with
a sale/leaseback agreement entered into in December 1994 with the Company's
institutional lender is $415 and interest expense primarily due to
borrowings in connection with acquisitions is $531.
A net increase in other income of $331 is primarily due to the following:
non-recurring provision adjustments of $215 and $218 due to the favorable
settlement of a contested claim and prior year business taxes; other
provision adjustments and a prior year severance cost totalling $302;
current year research and development costs ($112) and a decrease of $254
due to stock appreciation rights provision adjustments in the current and
prior year.
As a result of the above, income before taxes increased $2,362 and net
income increased $1,443.
CURRENT QUARTER
Total revenues decreased 8.1% ($1,489) and operating costs and expenses
remained the same. In the prior year, the ratio of operating costs to
revenue were low due to certain favorable contracts and arrangements. In
the current year, the ratio of operating costs to revenue returned to a
more normal level. In addition, certain fixed costs increased by
approximately $300 in the current year.
SOUND SERVICES:
Sound studio revenues in California and New York decreased $2,166. Revenue
decreases at the Los Angeles studios were due primarily to decreases in
feature film editing, scoring and ancillary services. Revenues at TSW and
the New York studios decreased due to an exceptional quarter in the prior
year which included services performed on the feature films "Die Hard 3" at
TSW and "Apollo 13" (which won the Academy Award for sound this year) in
New York.
Sound studio operating costs and expenses decreased $812 due to the revenue
decreases described above.
VIDEO SERVICES:
Total video services revenues increased $677. Revenues increased $338 due
to the acquisition of Todd-AO Filmatic ("Filmatic") in April 1996.
Chrysalis increased $196 and TVS increased $360. Todd-AO Digital Images
("TDI") revenues decreased $217.
11
Increases in operating costs and expenses attributable to TVS, Filmatic and
Chrysalis were $904. These include corporate overhead costs of $192 in the
current year.
CORPORATE:
Depreciation and amortization decreased $65.
Equipment lease expense net of gain on sale of equipment in connection with
a sale/leaseback agreement entered into in December 1994 with the Company's
institutional lender is $71 and interest expense primarily due to
borrowings in connection with acquisitions is $145.
A net decrease in other income of $92 is primarily due to the following: a
non-recurring provision adjustment of $218 due to the favorable settlement
of prior years business taxes; $83 decrease in interest and dividend
income; other provision adjustments and a decrease of $183 due to stock
appreciation rights adjustments in the prior year.
As a result of the above, income before taxes decreased $1,312 and net
income decreased $757.
12
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 6, 1996 the Company filed a definitive Information Statement
relating to the adoption of a Restated Certificate of Incorporation (the
"Restated Certificate") by Majority Consent of Stockholders. The
Information Statement was sent to stockholders on or about May 13, 1996.
The purpose for the Restated Certificate was to modernize the previous
Certificate of Incorporation and to eliminate obsolete provisions. The
Restated Certificate increased the number of authorized Class A and Class B
shares to 30,000,000 and 6,000,000 respectively but did not make any other
material changes to the existing documents. Adoption of the Restated
Certificate required the written consent of a majority of the 6,442,877
Class A shares and a majority of the 1,747,178 Class B Shares outstanding
as of March 29, 1996, and the written consents of at least 3,257,666 Class
A Shares and 1,703,636 Class B shares were obtained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). (1) Agreement for the acquisition of the entire issued share capital
of Filmatic Laboratories Ltd. dated as of April 18, 1996 between
David L. Gibbs, Ian Magowan and Todd-AO Europe Holding Company
Ltd.
(2) Third amendment dated June 14, 1996 to Credit Agreement dated as
of December 2, 1994 between The Todd-AO Corporation and Bank of
America National Trust and Savings Association.
(3) Exhibit 27 Financial Data Schedule.
13
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
July 12, 1996 /s/ Silas R. Cross
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Date Silas R. Cross
Chief Accounting Officer