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, 1997
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: (213) 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, 1998 was:
8,248,970 Class A Shares and 1,747,178 Class B Shares.
THE TODD-AO CORPORATION
QUARTERLY REPORT ON FORM 10-Q
NOVEMBER 30, 1997
INDEX
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PART I - FINANCIAL INFORMATION Page
Item 1- FINANCIAL STATEMENTS
The following financial statements are filed herewith:
Consolidated Balance Sheets, November 30, 1997 and August 31, 1997 3
Consolidated Statements of Income and Retained Earnings for the
Three Months Ended November 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for the Three Months Ended
November 30, 1997 and 1996 6
Notes to Consolidated Financial Statements for the Three Months
Ended November 30, 1997 8
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 13
Item 6 - Exhibits and Reports on Form 8-K 13
Signature 13
2
THE TODD-AO CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
AUGUST 31, NOVEMBER 30,
---------- ------------
1997 1997
---------- ------------
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . $ 5,127 $ 3,539
Marketable securities. . . . . . . . . . . . . . . 1,977 1,783
Trade receivables
(net of allowance for doubtful accounts of $633 at
November 30, 1997 and $562 at August 31, 1997) . 13,176 15,763
Inventories (first-in first-out basis) . . . . . . 625 588
Income tax receivable. . . . . . . . . . . . . . . 671 671
Deferred income taxes. . . . . . . . . . . . . . . 368 359
Other. . . . . . . . . . . . . . . . . . . . . . . 2,168 2,694
---------- ----------
Total current assets . . . . . . . . . . . . . . . 24,112 25,397
---------- ----------
INVESTMENTS. . . . . . . . . . . . . . . . . . . . 997 736
---------- ----------
PROPERTY AND EQUIPMENT - At Cost:
Land . . . . . . . . . . . . . . . . . . . . . . . 4,270 4,270
Buildings. . . . . . . . . . . . . . . . . . . . . 10,994 11,045
Leasehold improvements . . . . . . . . . . . . . . 10,203 10,239
Lease acquisition costs. . . . . . . . . . . . . . 2,187 2,187
Equipment. . . . . . . . . . . . . . . . . . . . . 54,707 51,298
Equipment under capital leases . . . . . . . . . . 1,540 1,540
Construction in progress . . . . . . . . . . . . . 920 5,697
---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . . 84,821 86,276
Accumulated depreciation and amortization. . . . . (27,697) (27,902)
---------- ----------
Property and equipment - net . . . . . . . . . . . 57,124 58,374
---------- ----------
GOODWILL
(net of accumulated amortization of $845 at
November 30, 1996 and $602 at August 31, 1997). . 19,162 18,967
---------- ----------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . 2,056 2,583
---------- ----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . $ 103,451 $ 106,057
---------- ----------
---------- ----------
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,
---------- ------------
1997 1997
---------- ------------
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . $ 5,302 $ 6,494
Accrued liabilities:
Payroll and related taxes. . . . . . . . . . . . 2,507 3,335
Interest . . . . . . . . . . . . . . . . . . . . 422 510
Equipment lease. . . . . . . . . . . . . . . . . 279 275
Other. . . . . . . . . . . . . . . . . . . . . . 1,533 1,419
Income taxes payable . . . . . . . . . . . . . . 105 1,007
Current maturities of long-term debt . . . . . . . 578 592
Capitalized lease obligations - current. . . . . . 35 7
Deferred income. . . . . . . . . . . . . . . . . . 1,459 1,498
---------- ----------
Total current liabilities. . . . . . . . . . . . . 12,220 15,137
---------- ----------
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . 25,430 18,007
DEFERRED COMPENSATION AND OTHER. . . . . . . . . . 326 199
DEFERRED GAIN ON SALE/LEASEBACK. . . . . . . . . . 3,437 7,921
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . 4,659 5,266
---------- ----------
Total liabilities. . . . . . . . . . . . . . . . . 46,072 46,530
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock:
Class A; authorized 30,000,000 shares of $0.01
par value; issued and outstanding 8,248,970 at
November 30, 1997 and 8,284,925 at August 31,
1997 . . . . . . . . . . . . . . . . . . . . . . 83 84
Class B; authorized 6,000,000 shares of $0.01
par value; issued and outstanding 1,747,178. . 17 17
Additional capital . . . . . . . . . . . . . . . . 39,996 40,422
Treasury stock . . . . . . . . . . . . . . . . . . (691) (1,016)
Retained earnings. . . . . . . . . . . . . . . . . 17,711 19,337
Unrealized gains on marketable securities and
long-term investments. . . . . . . . . . . . . . . 94 129
Cumulative foreign currency translation adjustment 169 554
---------- ----------
Total stockholders' equity . . . . . . . . . . . . 57,379 59,527
---------- ----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . $ 103,451 $ 106,057
---------- ----------
---------- ----------
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, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1997
---------- ----------
REVENUES . . . . . . . . . . . . . . . . . . . . . $ 20,340 $ 25,024
---------- ----------
COSTS AND EXPENSES:
Operating costs and other expenses . . . . . . . . 15,557 19,314
Depreciation and amortization. . . . . . . . . . . 1,622 2,421
Interest . . . . . . . . . . . . . . . . . . . . . 221 412
Equipment lease expense - net. . . . . . . . . . . 92 27
Other (income) expense - net . . . . . . . . . . . 39 98
---------- ----------
Total costs and expenses . . . . . . . . . . . . . 17,531 22,272
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES . . . . . 2,809 2,752
PROVISION FOR INCOME TAXES . . . . . . . . . . . . 1,038 979
---------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . . 1,771 1,773
RETAINED EARNINGS BEGINNING OF PERIOD. . . . . . . 12,267 17,711
LESS: DIVIDENDS PAID. . . . . . . . . . . . . . . (122) (147)
---------- ----------
RETAINED EARNINGS END OF PERIOD. . . . . . . . . . $ 13,916 $ 19,337
---------- ----------
---------- ----------
NET INCOME PER COMMON SHARE AND
COMMON SHARE EQUIVALENTS. . . . . . . . . . . . . 0.20 0.17
---------- ----------
---------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING. . . . . . . . 9,016,706 10,551,204
---------- ----------
---------- ----------
See notes to consolidated financial statements.
5
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1996 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . $ 1,771 $ 1,773
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . 1,622 2,421
Deferred income taxes, net . . . . . . . . . . . 2 623
Deferred compensation. . . . . . . . . . . . . . (15) (127)
Amortization of deferred gain on
sale/leaseback transactions . . . . . . . . . . (368) (453)
(Gain) on sale of marketable securities
and investments . . . . . . . . . . . . . . . . -- (27)
Loss on disposition of fixed assets. . . . . . . -- 22
Shares issued for stock award. . . . . . . . . . -- 66
Changes in assets and liabilities (net of
acquisitions):
Trade receivables . . . . . . . . . . . . . . . (4,123) (3,384)
Inventories and other current assets. . . . . . (185) (207)
Accounts payable and accrued liabilities. . . . 443 2,283
Income taxes payable, net . . . . . . . . . . . 1,116 794
Deferred income . . . . . . . . . . . . . . . . 167 230
---------- ----------
Net cash provided by operating activities: . . . . 430 4,014
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities
and investments . . . . . . . . . . . . . . . . 530 517
Capital expenditures. . . . . . . . . . . . . . . (3,654) (6,682)
Other assets. . . . . . . . . . . . . . . . . . . (153) (558)
---------- ----------
Net cash flows (used in) investing activities: . . $ (3,277) $ (6,723)
---------- ----------
6
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
(CONTINUED)
1996 1997
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt . . . . . . . . . . $ 6,900 $ 1,400
Payments on long-term debt . . . . . . . . . . . (4,838) (8,809)
Payments on capital lease obligations. . . . . . (155) (28)
Proceeds from sale/leaseback transaction . . . . -- 8,500
Net proceeds from issuance of common stock . . . 14,155 158
Treasury stock transactions. . . . . . . . . . . -- (325)
Dividends paid . . . . . . . . . . . . . . . . . (122) (147)
---------- ----------
Net cash flows provided by financing activities: . 15,940 749
Effect of exchange rate changes on cash. . . . . 55 372
---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS . . . . . . . . . . . . . . . . 13,148 (1,588)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD. . . . . . . . . . . . . . . 3,385 5,127
---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD. . . . . . . . . . . . . . . . . . $ 16,533 $ 3,539
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . $ 254 $ 327
---------- ----------
---------- ----------
Income taxes . . . . . . . . . . . . . . . . . . . $ 0 $ 0
---------- ----------
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7
THE TODD-AO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1997
(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, 1997. 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. 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. Fully diluted earnings
per share are not materially different from primary earnings per share.
4. On June 20, 1997, the Company and its newly formed, wholly owned subsidiary
Todd-AO Hollywood Digital ("THD") acquired the assets and certain
liabilities of Hollywood Digital Limited Partnership ("Hollywood Digital").
Hollywood Digital is a digital based post-production facility providing
sound and video services to the film, television and advertising
industries. In consideration of the purchase, the Company paid $17,761 in
cash to pay down existing debt of Hollywood Digital. The Company also
issued convertible subordinated notes in the amount of $8,399. The notes
are convertible into the Company's Class A Common Stock at the conversion
price of $11.875 per share at any time before the maturity date.
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, 1996 is presented as if
the acquisition had occurred on September 1, 1996. Pro forma adjustments
for Hollywood Digital are primarily to non-recurring legal and other
non-operating costs, amortization of goodwill, interest expense on
borrowings in connection with the acquisition, and income taxes.
1996
--------
Revenues . . . . . . . . . . . . . $ 25,315
--------
--------
Net income . . . . . . . . . . . . $ 2,128
--------
--------
Net income per common share. . . . . $ 0.24
--------
--------
5. In November 1997 and December 1994 the Company signed agreements with its
bank to implement the sale/leaseback of certain equipment. The five year
agreements terminate on December 1, 2002 and December 30, 1999,
respectively, and are being treated as operating leases for financial
statements purposes. On November 3, 1997 an aggregate of $8,500 of sound
studio equipment was sold and leased back (lease #2). The total deferred
gain on the transaction to be amortized over five years is $4,937. The
annual lease cost is expected to be approximately $1,400. On December 30,
1994 an aggregate of $11,218 was sold and leased back (lease #1). The
total deferred gain on the transaction to be amortized over five years is
$7,345. The annual lease cost currently is approximately $1,500.
8
The net equipment lease expense for the period ended November 30, 1997 is
as follows:
LEASE #1 LEASE #2 TOTAL
-------- -------- -------
Equipment lease costs. . . . . . . $ 424 $ 56 $ 480
Amortization of deferred gain
on sale of equipment. . . . . . . $ (367) $ (86) $ (453)
-------- -------- -------
Equipment lease expense, net . . . $ 57 $ (30) $ 27
-------
-------
6. 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 November 30, 1997, 939,156 shares had been
repurchased. 831,856 of these shares have been cancelled and returned to
authorized but unissued status.
7. On October 10, 1996, the Company filed a registration statement with the
Securities and Exchange Commission. Proceeds from the offering, net of
costs totaled $15,512. The funds received were used to pay down existing
debt in the amount of $9,102. The remaining funds were used in the
acquisition of Hollywood Digital and for other general corporate purposes.
9
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
In December 1994, the Company signed agreements with its bank to implement
the sale/leaseback of certain equipment and a long-term credit facility. An
aggregate of $11,218 of sound studio equipment was sold and leased back on
December 30, 1994. The sale/leaseback agreement, which consists of five
1-year terms amortizing to approximately 40% with interest at Libor rates
plus 1.5% which can increase to Libor plus 2% if the leverage ratio (Funded
Indebtedness/EBITDA) is greater than 2:1, terminates on December 30, 1999.
In October 1997, the Company signed a second agreement with its bank to
implement the sale/leaseback of certain equipment for up to $10,000 and
restated the long-term credit facility signed in December 1994. An
aggregate of $8,500 of sound studio equipment was sold and leased back on
November 3, 1997. The sale/leaseback agreement, which consists of five
1-year terms amortizing to approximately 42% with interest at Libor rates
plus .75% if the leverage ratio (Funded Indebtedness/EBITDA but excluding
convertible subordinated notes issued by Company in connection with the
Hollywood Digital acquisition) is under 1:1 and which increases .25% for
each .5 increase in the ratio up to Libor plus 2% if the leverage ratio is
greater than 2.5:1, terminates on December 1, 2002. Under the new First
Amended and Restated Credit Agreement, dated as of October 20, 1997, the
Company may borrow up to $50,000 (with a provision for an increase to
$60,000 requiring Bank consent and Company Board approval) in revolving
loans (including up to 50% in Multi-currency) until November 30, 2000. On
that date and quarterly thereafter until August 31, 2002, the revolving
loan commitment will reduce by 6.25% to 50% of the combined loan commitment
on the reduction date. The remaining 50% will reduce to nil by the
expiration of the agreement on December 31, 2002. Annually, the Company
may request an automatic extension of the revolving period of the facility
for one year which will also extend the term period and the expiration date
of the agreement. The Company also has the availability of Standby Letters
of Credit up to $2,500 under the facility. The credit facility provides
for borrowings at the Bank's Reference rates (plus .125%), CD rates (plus
0.875%) and Libor rates (plus .75%) which increase incrementally to plus
1%, 2.125% and 2%, respectively, based on the leverage ratio. The leverage
ratios which determine the rates range from less than 1:1 to greater than
2.5:1. Leverage ratios may not exceed 3:1. The facility includes
commitment fees at .2% to .5% (based on the leverage ratio) per annum on
the unused balances. Other material restrictions include: the coverage
ratio (cash flow/fixed charges) may not be less than 1.25:1; Other
Indebtedness or Contingent Liabilities (excluding up to $25,000 in Capital
or Off Balance Sheet Leases, the convertible subordinated notes issued in
the Hollywood Digital acquisition and non-recourse debt up to $50,000 of
less than 100% owned Joint Ventures) may not exceed $10,000 without the
Bank's approval. Minimum Tangible Net Worth is not to be less than $25,000
plus net proceeds from issuance of equity plus 50% of future consolidated
net income.
The credit facilities are available for general corporate purposes, capital
expenditures and acquisitions. Management believes that funds generated
from operations, proceeds from the new sale/leaseback 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 1998.
On October 10, 1996, the Company filed a registration statement with the
Securities and Exchange Commission. Proceeds from the offering, net of
costs totaled $15,512. The funds received were used to pay down existing
debt in the amount of $9,102. The remaining funds were used in the
acquisition of Hollywood Digital and for other general corporate purposes.
10
In June 1997, the Company used $15,760 under the credit facility and $3,000
from the proceeds of the offering described above to acquire the assets of
Hollywood Digital. In November 1997, the Company used $8,500 from the
sale/leaseback of equipment described above to pay down the credit facility
debt. As of November 30, 1997, the Company had $9,275 outstanding under
the credit facility.
The Company expects capital expenditures of approximately $18,000 for its
Los Angeles, Santa Monica, New York City, Atlanta and London facilities in
fiscal 1998. Included in this amount is $7,500 for a new facility in Santa
Monica, California to service primarily the advertising clients of THD.
These capital expenditures will be financed by credit facilities and
internally generated funds.
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, 1997 COMPARED TO THREE MONTHS ENDED
NOVEMBER 30, 1996
Revenues increased $4,684 or 23.0% from $20,340 to $25,024 primarily due to
the acquisition of Hollywood Digital ("THD") in June 1997. THD recorded
video services revenues of $5,734 for the quarter which were offset by the
Company's sound services which were down compared to a particularly strong
quarter in the prior year. This was partially due to the commencement of
construction projects on three sound stages which are being upgraded for
digital technology. The revenue increases for the Company's remaining
video divisions was $1,150.
Operating costs and other expenses increased $3,757 or 24.2% from $15,557
to $19,314. Cost increases related to the THD acquisition ($4,235) and the
revenue increases for the Company's other video services divisions ($289)
were offset by a reduction in costs for the sound services divisions
related to their revenue decreases described above.
Depreciation and amortization increased $799 or 49.3% primarily due to the
equipment ($12,117) and goodwill ($14,100) included with the THD
acquisition.
Interest expense increased $161 or 72.9% primarily due to the THD
acquisition financing.
As a result of the above, income before taxes and net income remained
relatively flat.
Earnings per share decreased 15% from $0.20 to $0.17 from a 17% dilution in
average shares outstanding primarily due to the November 1996 public
offering when 1,645,000 shares were issued. If the public offering had
occurred as of September 1, 1996 and the bank credit facility debt paid
down, the EPS as of November 30, 1996 would not have changed from $0.20.
MATERIAL CHANGES IN CASH FLOWS
For the three months ended November 30, 1997 the Company generated $4,014
in cash from operating activities compared to $430 in 1996. In addition to
net income of $1,773, adjusted for depreciation and net amortization of
$1,968, increases in accounts payable and other liabilities of $3,307 also
increased cash provided by operations. Cash was utilized primarily to fund
trade receivables and other current assets.
Net cash generated from operating activities supplemented by proceeds from
the sale/leaseback of certain equipment and borrowings from the Company's
credit facility totaling $9,900 were used to reinvest in capital assets of
the Company and to pay down long-term debt.
11
OTHER BUSINESS INFORMATION
Due to shortened post production schedules for motion picture features, it
has become the norm for clients to use two stages or more rather than one
for the pre-mixing phase of the total post production sound mixing process.
In view of this development, the Company is converting an ADR (Additional
Dialogue Replacement) Stage at the Hollywood facilities into a new sound
mixing stage primarily for dialogue pre-mixing services, but which can also
be used for various other mixing services. The newly converted stage will
begin operating in the second quarter of fiscal year 1998.
THD is expecting to open a separate facility in Santa Monica, California to
primarily service its advertising clients. The present Hollywood facility
will expand its current feature and television services. The new facility
will begin operations during fiscal year 1998.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). (1) 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, 1998 /s/ Silas R. Cross
- -------------------- ------------------------------------
Date Silas R. Cross
Chief Accounting Officer
13