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 February 28, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________________
Commission file number 1-8654
Unitel Video, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-1713238
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 West 57th Street - New York, New York 10019
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(212) 265-3600
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
________________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
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 twelve months and (2) has been subject to such requirements
for the past 90 days.
Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
2,714,116 common shares outstanding as of April 20, 1999
(Number of shares) (Date)
UNITEL VIDEO, INC.
FORM 10-Q
QUARTER ENDED FEBRUARY 28, 1999
Page
INDEX Number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
February 28, 1999 (Unaudited) and
August 31, 1998 3-4
Consolidated Statements of Operations
February 28, 1999 (Unaudited) and
February 28, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows
February 28, 1999 (Unaudited)
and February 28, 1998 (Unaudited) 6-7
Notes to Consolidated Financial
Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9-15
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 16
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 18
2
UNITEL VIDEO, INC.
FORM 10-Q
QUARTER ENDED FEBRUARY 28, 1999
Part 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
February 28, 1999 August 31, 1998
----------------- ---------------
(Unaudited) (Note)
ASSETS
Current Assets:
Cash $ 84,000 $ 1,190,000
Accounts receivable, net 4,763,000 4,784,000
Other receivables 88,000 93,000
Prepaid income taxes 70,000 62,000
Prepaid expenses 614,000 498,000
Deferred tax asset 312,000 312,000
------------ ------------
Total current assets 5,931,000 6,939,000
Property and equipment - at cost
Land, buildings
and improvements 23,823,000 23,490,000
Video equipment 78,891,000 78,113,000
Furniture and fixtures 1,769,000 1,758,000
------------ ------------
104,483,000 103,361,000
Less accumulated depreciation
and amortization 56,833,000 52,420,000
------------ ------------
47,650,000 50,941,000
Deferred tax asset 2,157,000 2,157,000
Goodwill 1,514,000 1,583,000
Other assets 2,160,000 2,112,000
------------ ------------
$ 59,412,000 $ 63,732,000
============ ============
Note: The balance sheet at August 31, 1998 has been taken from the audited
consolidated financial statements at that date.
See notes to consolidated financial statements.
3
UNITEL VIDEO, INC.
FORM 10-Q
CONSOLIDATED BALANCE SHEETS
(Continued)
February 28, 1999 August 31, 1998
----------------- ---------------
(Unaudited) (Note)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,344,000 $ 5,282,000
Accrued expenses 869,000 2,056,000
Payroll and related taxes 1,098,000 1,434,000
Current maturities of long-term debt 14,503,000 4,203,000
Current maturities of subordinated debt 2,171,000 --
Current maturities of capital
lease obligations 2,432,000 2,077,000
------------ ------------
Total current liabilities 27,417,000 15,052,000
Deferred rent -- 112,000
Long-term debt, less current maturities 20,910,000 32,679,000
Subordinated debt, less current maturities -- 2,171,000
Long-term leases, less current maturities 3,855,000 4,468,000
Accrued retirement 982,000 1,047,000
Stockholders' equity:
Common stock, par value
$.01 per share:
Authorized 5,000,000 shares
Issued 3,544,854 and 3,541,754 shares,
respectively, and outstanding
2,714,116 and 2,711,016 shares,
respectively 27,000 27,000
Additional paid-in capital 27,284,000 27,275,000
Accumulated deficit (13,418,000) (11,454,000)
Common stock held in treasury,
at cost (830,738 shares) (7,645,000) (7,645,000)
------------ ------------
Total stockholders' equity 6,248,000 8,203,000
------------ ------------
$ 59,412,000 $ 63,732,000
============ ============
Note: The balance sheet at August 31, 1998 has been taken from the audited
consolidated financial statements at that date.
See notes to consolidated financial statements.
4
UNITEL VIDEO, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
February 28, February 28, February 28, February 28,
1999 1998 1999 1998
---- ---- ---- ----
Sales $ 10,414,000 $ 12,429,000 $ 22,736,000 $ 26,197,000
Cost of sales:
Production costs 7,295,000 8,784,000 15,307,000 18,063,000
Depreciation 2,216,000 2,190,000 4,313,000 4,341,000
------------ ------------ ------------ ------------
9,511,000 10,974,000 19,620,000 22,404,000
------------ ------------ ------------ ------------
Gross profit 903,000 1,455,000 3,116,000 3,793,000
Operating expenses:
Selling 238,000 406,000 506,000 769,000
General and administrative 1,297,000 1,484,000 2,498,000 3,104,000
Interest 1,042,000 946,000 2,085,000 1,845,000
------------ ------------ ------------ ------------
2,577,000 2,836,000 5,089,000 5,718,000
------------ ------------ ------------ ------------
Loss from operations (1,674,000) (1,381,000) (1,973,000) (1,925,000)
Other income -- 73,000 -- 163,000
------------ ------------ ------------ ------------
Loss before income taxes (1,674,000) (1,308,000) (1,973,000) (1,762,000)
Income taxes -- -- -- 2,000
------------ ------------ ------------ ------------
Net loss available to common
stockholders $ (1,674,000) $ (1,308,000) $ (1,973,000) $ (1,764,000)
============ ============ ============ ============
Loss Per Common Share
Basic and Diluted $ (.62) $ (.49) $ (.73) $ (.66)
============ ============ ============ ============
Weighted average of common and
common equivalent shares
outstanding 2,714,000 2,675,000 2,714,000 2,675,000
============ ============ ============ ============
See notes to consolidated financial statements.
5
UNITEL VIDEO, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended February 28,
-----------------------------
1999 1998
---- ----
Cash Flows From Operating Activities:
Net loss $(1,973,000) $(1,764,000)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation and amortization 4,678,000 4,374,000
Net gain on disposal of equipment (361,000) (33,000)
Amortization of deferred
financing costs 133,000 137,000
Deferred rent and other (102,000) 2,000
Accrued retirement expense (65,000) (65,000)
Deferred advisory and legal costs -- (326,000)
Changes in operating assets
and liabilities:
Accounts receivable, net 21,000 (810,000)
Other receivables 5,000 (188,000)
Prepaid expenses (116,000) (144,000)
Prepaid taxes (8,000) (32,000)
Other assets (58,000) (60,000)
Accounts payable 1,062,000 1,119,000
Accrued expenses (1,188,000) 101,000
Payroll and related taxes (336,000) (969,000)
----------- -----------
3,665,000 3,106,000
----------- -----------
Net cash provided by
operating activities 1,692,000 1,342,000
Cash Flows from Investing
Activities:
Capital expenditures (1,307,000) (4,670,000)
Proceeds from disposal
of equipment 355,000 33,000
----------- -----------
Net cash used in
investing activities (952,000) (4,637,000)
(Continued)
6
UNITEL VIDEO, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Six Months Ended February 28,
-----------------------------
1999 1998
---- ----
Cash Flows From Financing
Activities:
Proceeds from long-term
financing $ 1,333,000 $ 11,257,000
Proceeds from issuance of
common stock 9,000 --
Deferred financing costs (128,000) (395,000)
Principal repayments (3,060,000) (7,615,000)
------------ ------------
Net cash (used) provided
by financing activities (1,846,000) 3,247,000
------------ ------------
Net Decrease in Cash (1,106,000) (48,000)
Cash Beginning of Year 1,190,000 137,000
------------ ------------
Cash End of Six Months $ 84,000 $ 89,000
============ ============
Schedule of income taxes and
interest paid:
Income Taxes Paid $ 10,000 $ -0-
Interest Paid 1,919,000 1,639,000
------------ ------------
$ 1,929,000 $ 1,639,000
============ ============
See notes to consolidated financial statements.
7
UNITEL VIDEO, INC.
FORM 10-Q
SIX MONTHS ENDED FEBRUARY 28, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Consolidated Financial Statements
The condensed consolidated balance sheet as of February 28, 1999, the
consolidated statements of operations for the six months and quarters ended
February 28, 1999 and 1998 and the consolidated statements of cash flows for the
six months then ended have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations, and cash flows at February 28, 1999 and for all periods presented
have been made.
Certain information and footnote disclosure normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto in the Company's August 31, 1998 Form 10-K filed
with the Securities and Exchange Commission. The results of operations for the
quarter ended February 28, 1999 are not necessarily indicative of the operating
results for the full year.
2. Stockholders' Equity
During the six months ended February 28, 1999, stockholders' equity decreased
due to:
Net loss $(1,973,000)
Translation adjustment 9,000
Purchase of stock under the Unitel Video, Inc.
Employee Stock Purchase Plan 9,000
-----------
Total decrease in stockholders' equity $(1,955,000)
===========
3. Classification of Long-Term Obligations
During the six months ended February 28, 1999 $9,396,000 has been classified as
current maturities of long-term debt as a result of the advance of the maturity
of all of the obligations under the credit facility discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
The Company has taken several steps to increase its liquidity, which had been
significantly reduced by the losses incurred during the past several fiscal
years.
In August 1998, the Company refinanced its owned New York City real estate
generating funds of approximately $4,600,000 after repayment of the existing
first mortgages on such properties, closing costs and escrows. These funds were
used to repay Term Loan D of the credit facility described below in this item in
the amount of $1,600,000, with the balance used for working capital purposes.
Additionally, the holder of subordinated debt of the Company agreed to
restructure its note with the Company by postponing the maturity date from May
1999 to September 1999 and by eliminating principal payments that had been due
for the months of April 1998 through April 1999, totaling $450,000. The holder
also agreed to add $108,000 of accrued but unpaid interest to the principal
balance payable in September 1999. The new terms require that interest only be
paid on a current basis effective September 1, 1998 through the September 30,
1999 maturity date.
The Company has reduced its cash requirements through cost reductions.
Additionally, due to capital expenditures in fiscal years 1996 through 1998
totaling approximately $30,000,000, the Company currently anticipates that
capital expenditures in fiscal 1999 will be less than $2,500,000. Capital
expenditures were $952,000 (net of proceeds from dispositions of equipment)
during the six months ended February 28, 1999, and consisted of the purchase of
production, post production and graphics equipment for use throughout the
Company.
Net cash provided by operating activities during the six months ended February
28, 1999 and 1998 was $1,692,000 and $1,342,000, respectively. Net cash provided
by operating activities for the six months ended February 28, 1999 was offset by
net cash of $952,000 used in investing activities which consisted of capital
expenditures (net of proceeds from asset dispositions), and by net cash used in
financing activities of $1,846,000 for debt repayment, resulting in a net
decrease in cash available of $1,106,000.
In December 1995, the Company entered into a $26 million revolving credit and
term loan agreement (the "credit facility") with a financial institution,
consisting of an $11 million revolving credit facility and two $7.5 million term
loans (Term Loans A and B). In May 1997, Term Loan A was revised by the
inclusion of $2,500,000 of the original Term Loan B and the advance of $518,000
of new funds, resulting in a revised Term Loan A balance of $9,000,000. Term
Loan A was payable in equal monthly principal installments of $100,000 plus
interest, with the balance of $5,700,000 due at maturity. In November 1997 Term
Loan B was repaid, in part from the proceeds of a new Term Loan D in the amount
of $2,500,000. $3,742,000 of the original Term Loan B was repaid from sales of
equipment from the Company's Editel Chicago, Editel New York and Unitel
Hollywood divisions. The Company refinanced its New York owned real estate in
August 1998 and
9
used a portion of the proceeds of the refinancing to repay Term Loan D and other
indebtedness and the balance of the proceeds for working capital purposes.
In July 1997 the credit facility was further amended by the issuance of a
$5,080,000 letter of credit to secure payment of principal and interest on
$5,000,000 principal amount of Allegheny County (Pennsylvania) Industrial
Development Authority Variable Rate Demand Revenue Bonds (the "Bonds"). The
proceeds from the sale of the Bonds were loaned to the Company and were used by
the Company to build a new digital mobile teleproduction unit. The credit
facility requires quarterly principal payments of $179,000 commencing December
1998 in respect of the Bonds. The Bonds mature on July 1, 2009 and, to the
extent not previously redeemed in full, are required to be repaid by the Company
on that date.
In December 1997 a second series of Bonds was issued in an amount of $3,500,000.
The proceeds of the second series of Bonds were used to finance the construction
of a second digital mobile unit. The credit facility requires quarterly
principal payments of $125,000 commencing February 1999 in respect of this
second series of Bonds which also mature on July 1, 2009.
The terms of the credit facility with the financial institution provide that the
lender receive a first lien on all property and equipment and accounts
receivable that are not encumbered by another lender.
The Company has at times during the six months ended February 28, 1999 not been
in compliance with certain covenants contained in the credit facility. In
January 1999 the credit facility was amended to advance the maturity of all
outstanding loans to March 1999 and require that the letter of credit facility
supporting the Bonds, in the amount of $8,631,932, be replaced at that time. The
lender has agreed to forebear from exercising its rights and remedies until May
17, 1999 and is continuing to provide financing to the Company on a
discretionary basis. The Company is currently in discussions with various
lenders to refinance the credit facility and make available to the Company
additional working capital, but there are no assurances that the Company will
obtain such financing. The amounts owed under the credit facility, aggregating
$10,596,000 at February 28, 1999 have been classified as a current liability in
the February 28, 1999 consolidated balance sheet. Additionally, the Company has
at certain times during the six months ended February 28, 1999 been in arrears
on certain other indebtedness.
In addition to the refinancing of the Company's primary credit facility, the
Company is attempting to secure other sources of capital and financing as well
as the restructuring of certain other outstanding indebtedness. The Company
anticipates that these steps, together with funds generated from operations and
proceeds from the sale of certain fixed assets will be sufficient to meet the
Company's anticipated working capital and investment needs in fiscal 1999.
However, there is no assurance that these uncertainties will be settled or that
management's plan will be achieved.
10
Results of Operations
Sales were $10,414,000 and $12,429,000 for the quarters ended February 28, 1999
and 1998, respectively. Sales were $22,736,000 and $26,197,000 for the six
months ended February 28, 1999 and 1998, respectively. The decrease in sales of
$3,461,000 in the six months ended February 28, 1999 is primarily attributable
to the following areas of the Company's business. First, the consolidation of
the Company's two New York City based post-production facilities into a single
facility at Unitel Post 38 resulted in a decrease in sales of approximately
$1,400,000 from the closing of the Unitel Post 57 facility and the elimination
of the interactive segment of the Company's post-production business. Second,
sales of the Company's mobile division declined approximately $400,000 in the
first quarter as a result of pass-through costs being eliminated from mobile
division billing and absorbed directly by the Company's clients. Although mobile
division sales decreased in the first quarter of fiscal 1999 and remained flat
in the second quarter of fiscal 1999 compared to sales for that division in the
same period of the prior year, results of operations for that division were
improved. Third, studio revenues decreased approximately $400,000 primarily due
to holding one studio vacant in anticipation of obtaining a long term contract
which is expected to commence in June of 1999. Fourth, sales for the Company's
Editel Los Angeles division declined approximately $ 1,300,000 of which $800,000
was a result of the loss of the Company's business in connection with the Star
Trek television series in the fourth quarter of fiscal 1998.
The Company's net loss for the quarter and six months ended February 28, 1999
was ($1,674,000) and ($1,973,000) compared to a net loss of ($1,308,000) and
($1,764,000) for the quarter and six months ended February 28, 1998. The
comparative increase in the net loss of approximately ($366,000) and ($209,000)
for the quarter and six months ended February 28, 1999 compared to the quarter
and six months ended February 28, 1998 is principally due to a decrease in sales
at the Company's Editel Los Angeles division. The decrease in sales was
partially offset by improvements in the results of the New York post production
operation resulting from the closure of the Unitel Post 57 facility,
improvements in the results of the mobile division due to a change in the client
composition and cost reductions and improvements in the operations of the New
York studio division.
Production costs, the main component of cost of sales, consist primarily of
direct labor, equipment maintenance expenses and occupancy costs. The Company's
production costs, as a percentage of sales, were 70% and 70.7% for the quarters
ended February 28, 1999 and 1998, respectively, and 67.3% and 69% for the six
months ended February 28, 1999 and 1998, respectively. The decrease in
production costs for the quarter and six months ended February 28, 1999 compared
with the same period of the prior year is primarily due to the efficiencies
achieved from an increase in sales without a proportionate increase in costs at
the Company's Unitel Post 38 facility as a result of the closure of the
Company's Unitel Post 57 facility and the relocation of a significant portion of
that facility's customer base to the Unitel Post 38 facility.
11
Depreciation, as a percentage of sales, was 21.3% and 17.6% for the quarters
ended February 28, 1999 and 1998, respectively, and 19% and 16.6% for the six
months ended February 28, 1999 and 1998, respectively. Had gain on sale of
equipment of $361,000 and $33,000 been excluded from depreciation expense for
the six months ended February 28, 1999 and 1998, depreciation as a percentage of
sales would have been 20.6% compared with 16.7% for the same period in the prior
year. The increase in the quarter and six months ended February 28, 1999
compared to the same period in the prior year was primarily a result of the
introduction of a digital mobile teleproduction unit in the quarter ended
February 28, 1998. Additionally, the Company retained the majority of the
equipment previously used at the Company's Unitel Post 57 facility that was
closed in the third quarter of the Company's 1998 fiscal year. Also, since sales
were down and depreciation was constant with the comparative periods of the
prior year, depreciation as a percentage of sales increased for such period.
Selling expenses, as a percentage of sales, for the quarters ended February 28,
1999 and 1998 were 2.3% and 3.3%, respectively and 2.2% and 2.9% for the six
months ended February 28, 1999 and 1998, respectively. The decrease in the
quarter and six months ended February 28, 1999 as compared to the quarter and
six months ended February 28, 1998 is due to a decrease in the Company's overall
sales staff primarily as a result of the closure of the Unitel Post 57 facility
in May 1998. Also, promotional expenses were higher in the six months ended
February 28, 1998 due to the introduction of one of the Company's new digital
mobile teleproduction units.
General and administrative expenses, as a percentage of sales, for the quarters
ended February 28, 1999 and 1998 were 12.5% and 11.9%, respectively, and 11% and
11.8% for the six months ended February 28, 1999 and 1998, respectively. The
increase in general and administrative expenses as a percentage of sales in the
quarter ended February 28, 1999 as compared with February 28, 1998 is due to a
larger decrease in sales in relation to the decrease in expense. The decrease in
general and administrative expenses as a percentage of sales in the six months
ended February 28, 1999 as compared with the February 28, 1998 is primarily due
to the greater decrease in expense in relation to the decrease in sales. General
and administrative expenses decreased by approximately $600,000 primarily from
reductions in corporate expenses, bad debt allowances and professional fees.
Interest expense, as a percentage of sales, for the quarters ended February 28,
1999 and 1998 was 10% and 7.6%, respectively and 9.2% and 7% for the six months
ended February 28, 1999 and 1998, respectively. Interest expense for the six
months ended February 28, 1999 increased approximately $240,000 compared to the
six months ended February 28, 1998 primarily from new debt added as of August
31, 1998 and higher interest rates on the Company's credit facility which was
partially offset by normal principal reductions on older debt.
The Company's effective tax rate was 0% for the first six months of fiscal years
1999 and 1998. The effective tax rate for the first six months of fiscal 1999 is
less than the federal statutory rate of 34% due to the utilization of net
operating loss carryforwards generated by the losses incurred in fiscal 1998 and
prior years.
12
Year 2000 Update
General
The Company's company-wide Year 2000 Project (the "Project") is proceeding on
schedule. The purpose of the Project is to evaluate the ability of computer
programs (software) and embedded chips to distinguish between the year 1900 and
the year 2000. The Project has been underway since the middle of calendar year
1998, is proceeding on schedule and is expected to be completed by the middle of
calendar year 1999. While many different types of equipment and software
products may be prone to the Year 2000 problem, major emphasis is being placed
on those items considered to be material to the operation of the Company's
business.
The Company's primary business is to provide services to the video and film
communications industry for the recording, editing, creation of digital effects
and duplication of television programs, commercials, corporate communications
and feature films. Because the various operating divisions of the Company share
much of the software and hardware necessary to provide these services, Year 2000
research done at one division is largely applicable at the Company's other
divisions. This fact will greatly simplify the process of evaluating the impact
of Year 2000 issues on the Company's business and minimize the costs to the
Company involved in becoming Year 2000 compliant.
Project
The Company's Project is divided into four major sections:
1. Administrative Functions--accounts payable, accounts receivable, client
scheduling, purchasing and payroll.
2. Technical Services--equipment/systems, software packages, interconnectivity
issues.
3. Infrastructure--personal computers (PC's and MAC's), owned telephone system
equipment, networks (Novell, Microsoft), office equipment, etc.
4. External Services Vendors--401K/health care management, payroll services,
property/liability insurance providers, etc.
Administrative Functions:
The accounts payable, accounts receivable and client scheduling tasks at
most divisions of the Company are provided by industry standard software
applications, for example J.D. Edwards Accounting Package or Xytech Systems
13
(Xymox), or both, depending on the division. The Company has purchased the
Xytech Systems (Xymox) upgrade and is waiting for installation. The Company has
ordered The J.D. Edwards upgrade package and expects installation in early June,
1999. Standard PC based applications, used for these and other applications, are
currently compliant. Similarly, the payroll services vendor expects to have Year
2000 software to be available in mid calendar year 1999. These upgrades will be
purchased by the Company as soon as they become available.
Technical Services:
The Company utilizes technical hardware from various vendors to provide a wide
range of services to its clients. All divisions have been compiling lists of
equipment considered critical to their operations. Based on written responses
from various vendors, the Company has been advised that the majority of these
items are either Year 2000 compliant or not affected by Year 2000 issues. Some
software packages utilized on Silicon Graphics and Apple platforms are still
being evaluated with respect to Year 2000 issues, but since these items are
routinely upgraded by the Company as part of its ongoing operations to insure
that the Company is staying current with technology it is anticipated that the
Year 2000 issues in such cases should be minimal. Furthermore, the products
produced by the Company for its clients are delivered to the client at the
conclusion of a job and such products are not thereafter affected by Year 2000
issues. Therefore, Year 2000 compliance is not considered a material issue for
already completed client work. All critical equipment and software products
utilized in the production of client material will have been certified, either
through testing by the Company or vendor representation, to be Year 2000
compliant or not affected by Year 2000 issues by the middle of calendar year
1999.
Infrastructure:
It is expected that general purpose PC workstations purchased within the past 12
months should be able to recognize the date change to the Year 2000. A
comprehensive checklist is being prepared that will assist each division in
determining which PCs need to have some form of upgrade. Some older PCs may
require replacement, or may be upgraded through inexpensive after-market clock
upgrades. Also being evaluated are Company owned telephone systems which contain
embedded chips which may be date sensitive. To date, all telephone systems
checked have been found to be either Year 2000 compliant or not affected by the
Year 2000 issue. Novell or Microsoft computer network products have upgrades
available supplied and represented by the vendor to be Year 2000 compliant which
will be installed by the Company by the middle of calendar 1999. Other general
purpose office equipment such as copy machines and fax machines are being
evaluated but are not considered to be material.
External Services Vendors:
The Company utilizes numerous outside vendors for management of such services as
payroll, health care benefits, 401K administration and insurance
14
coverages. All of these vendors are being asked to supply a written statement
concerning Year 2000 compliance and a general scope of appropriate needed
actions, costs, and time-frames. This part of the Project is expected to be
completed by the middle of calendar 1999.
Costs
The total cost of the Year 2000 Project is not expected to be material to the
Company's financial position. Because some investigation is still ongoing, total
costs can only be estimated. Based on mission critical hardware and software
upgrade costs that are known, and reasonable expectations of results from
further testing, the total cost of the Project is not expected to exceed
$100,000 Company-wide and will be expensed as incurred.
Risks
The Company supplies a wide range of services to its clients. Once those
services are delivered, whether on videotape, CD Rom, computer disk, or other
media, Year 2000 compliance is no longer a concern. Since it has already been
determined that much of the hardware and software material to the internal
operation of the Company's business is or will be compliant, there appears to be
minimal risk to the internal operations of the Company due to the Year 2000
issue. This does not include any serious problems or outages caused by Year 2000
problems that could exist at local utilities that supply telephone, electrical,
natural gas and similar services or with external services vendors. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of outside vendors or clients, the
Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. However, the Company's internal
Project is expected to significantly reduce the level of uncertainty about the
Year 2000 problem particularly with respect to the effect on the Company of the
readiness of its vendors. It is the opinion of the Company that, with the
installation of new equipment which the Company is advised to be Year 2000
compliant and the completion of the Project as scheduled, the possibility of
significant interruptions of normal operations should be significantly reduced.
Contingency Plan
Based on the Company's expectation that Year 2000 issues will be adequately
addressed by the scheduled completion of the Project, no contingency plans have
been formulated. In the event an unexpected Year 2000 problem is discovered that
will affect either the completion or delivery of client material, the Company
expects that a sufficient number of alternative production methods exist in the
industry to mitigate any substantial problems.
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This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which are based upon current
expectations and involve certain risks and uncertainties. Under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, readers are
hereby cautioned that these statements may be impacted by several factors, and,
consequently, actual results may differ materially from those expressed herein.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
The Company is exposed to interest rate change market risk with respect to its
credit facility with a financial institution which is priced based on the prime
rate of interest. At February 28, 1999 $10,596,000 was outstanding under the
credit facility. Changes in the prime interest rate during fiscal 1999 will have
a positive or negative effect on the Company's interest expense. Each 1%
fluctuation in the prime interest rate will increase or decrease interest
expense for the Company by approximately $106,000 annually.
In addition, the Company is exposed to interest rate change market risk with
respect to the Bonds in the amount of $8,500,000. The Bonds bear interest at a
floating rate established weekly by the remarketing agent. During fiscal 1999
the interest rate on the Bonds approximated 3.5%. Each 1% fluctuation in the
interest rate on the Bonds will increase or decrease interest expense on the
Bonds by approximately $85,000 annually.
The impact of interest rate fluctuations on other floating rate debt of the
Company and foreign exchange fluctuation on the Company's Canadian subsidiary is
not material.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
The following two legal proceedings have been filed against the Company, both of
which have been settled:
On or about February 22, 1999 General Electric Capital Business Asset Funding
Corporation ("Plaintiff") filed a summons and complaint against the Company in
the Supreme Court of the State of New York, County of New York, alleging that
the Company breached the terms of two leases (including a capital lease) and a
promissory note (the "Contracts") with the Plaintiff by failing to make timely
payments thereunder. Plaintiff sought a judgment for the sum of approximately
$4,600,000 plus interest, late charges and expenses, the return of the equipment
subject to the Contracts and related relief.
On or about April 8, 1999 General Electric Capital Corporation (the "Second
Plaintiff") filed a summons and complaint against the Company and a company
subleasing certain equipment from the Company in the United States District
Court for the Southern District of New York alleging that the Company breached
the terms of a certain lease agreement (the "Lease") with the Second Plaintiff
by failing to make timely payments thereunder. The Second Plaintiff sought a
judgment against the Company for the sum of approximately $894,000 together with
interest, late charges and expenses, the return of the equipment subject to the
Lease and other related relief.
The Company is involved in other legal proceedings which are not of a material
nature.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K.
1. Exhibit 27. Financial Data Schedule.
(b) There were no reports filed on Form 8-K during the six months ended
February 28, 1999.
This Form 10-Q contains forward-looking statements which are based upon current
expectations and involve certain risks and uncertainties. Under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, readers are
hereby cautioned that these statements may be impacted by several factors, and,
consequently, actual results may differ materially from those expressed herein.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITEL VIDEO, INC.
By: /s/ Barry Knepper
---------------------
Barry Knepper
President and Chief Executive Officer
By: /s/ Neil Marcus
---------------------
Neil Marcus
Chief Financial Officer
Dated: April 20, 1999
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