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, 1998
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 11, 1999 was:
7,747,212 Class A Shares and 1,747,178 Class B Shares.
THE TODD-AO CORPORATION
QUARTERLY REPORT ON FORM 10-Q
NOVEMBER 30, 1998
INDEX
- -------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION Page
Item 1- FINANCIAL STATEMENTS
The following financial statements are filed herewith:
Consolidated Balance Sheets, November 30, 1998 and
August 31, 1998 3
Consolidated Statements of Income and Retained Earnings for the
Three Months Ended November 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the Three Months Ended
November 30, 1998 and 1997 6
Notes to Consolidated Financial Statements for the Three Months
Ended November 30, 1998 8
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 14
Item 6 - Exhibits and Reports on Form 8-K 14
Signature 14
2
THE TODD-AO CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
AUGUST 31, NOVEMBER 30,
---------- -------------
1998 1998
---------- -------------
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 3,997 $ 5,765
Marketable securities. . . . . . . . . . . . . . . . . . . . 1,490 1,329
Trade receivables
(net of allowance for doubtful accounts of $1,829 at
November 30, 1998 and $1,768 at August 31, 1998) . . . . . 18,164 22,568
Income tax receivable. . . . . . . . . . . . . . . . . . . . 1,397 1,384
Inventories (first-in first-out basis) . . . . . . . . . . . 783 661
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 301 301
Prepaid deposits and other . . . . . . . . . . . . . . . . . 3,629 3,579
--------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . 29,761 35,587
--------- ----------
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 956 738
--------- ----------
PROPERTY AND EQUIPMENT - At Cost:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,270 4,270
Buildings. . . . . . . . . . . . . . . . . . . . . . . . . . 11,293 10,251
Leasehold improvements . . . . . . . . . . . . . . . . . . . 15,054 16,055
Lease acquisition costs. . . . . . . . . . . . . . . . . . . 2,187 2,187
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . 76,172 79,315
Equipment under capital leases . . . . . . . . . . . . . . . 1,151 1,151
Construction in progress . . . . . . . . . . . . . . . . . . 1,466 2,903
--------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . 111,593 116,132
Accumulated depreciation and amortization. . . . . . . . . . (38,046) (41,099)
--------- ----------
Property and equipment - net . . . . . . . . . . . . . . . . 73,547 75,033
--------- ----------
GOODWILL
(net of accumulated amortization of $1,993 at
November 30, 1998 and $1,646 at August 31, 1998). . . . . . 29,193 28,843
--------- ----------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 1,909 2,181
--------- ----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 135,366 $ 142,382
--------- ----------
--------- ----------
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,
----------- ------------
1998 1998
----------- ------------
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 6,464 $ 5,358
Accrued liabilities:
Payroll and related taxes. . . . . . . . . . . . . . . . . . 3,520 5,900
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 369 537
Equipment lease. . . . . . . . . . . . . . . . . . . . . . . 569 563
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,201 1,945
Income taxes payable . . . . . . . . . . . . . . . . . . . . 1,090 1,557
Current maturities of long-term debt . . . . . . . . . . . . . 537 515
Capitalized lease obligations - current. . . . . . . . . . . . 422 396
Deferred income. . . . . . . . . . . . . . . . . . . . . . . . 897 878
---------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . . 17,069 17,649
---------- ----------
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . . 44,654 51,994
DEFERRED COMPENSATION AND OTHER. . . . . . . . . . . . . . . . 266 135
DEFERRED GAIN ON SALE/LEASEBACK TRANSACTIONS . . . . . . . . . 6,085 5,469
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . 4,911 5,787
OTHER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,061 1,715
---------- ----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . 75,046 82,749
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock:
Class A; authorized 30,000,000 shares of $0.01 par value;
issued 7,868,869 at November 30, 1998 and 8,438,700 at
August 31, 1998. . . . . . . . . . . . . . . . . . . . . . . 84 79
Class B; authorized 6,000,000 shares of $0.01 par value;
issued and outstanding 1,747,178 . . . . . . . . . . . . . . 17 17
Additional capital . . . . . . . . . . . . . . . . . . . . . . 40,805 36,823
Treasury stock (121,657 and 235,151 shares at cost
As of November 30, 1998 and August 31, 1998, respectively) . (2,338) (1,118)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 20,538 22,838
Accumulated comprehensive income:
Unrealized gains (losses) on marketable securities
and long-term investments . . . . . . . . . . . . . . . . . . 198 (23)
Cumulative foreign currency translation adjustment. . . . . . 1,016 1,017
---------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . 60,320 59,633
---------- ----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 135,366 $ 142,382
---------- ----------
---------- ----------
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 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1998
----------- -----------
REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,024 $ 33,947
----------- -----------
COSTS AND EXPENSES:
Operating costs and other expenses . . . . . . . . . . . . . . 19,314 25,705
Depreciation and amortization. . . . . . . . . . . . . . . . . 2,421 3,403
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 412 866
Equipment lease expense - net. . . . . . . . . . . . . . . . . 27 55
Other (income) expense - net . . . . . . . . . . . . . . . . . 98 144
----------- -----------
Total costs and expenses . . . . . . . . . . . . . . . . . . . 22,272 30,173
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES . . . . . . . . . . . 2,752 3,774
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . 979 1,306
----------- -----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . 1,773 2,468
RETAINED EARNINGS BEGINNING OF PERIOD. . . . . . . . . . . . . 17,711 20,510
LESS: DIVIDENDS PAID. . . . . . . . . . . . . . . . . . . . . (147) (140)
----------- -----------
RETAINED EARNINGS END OF PERIOD. . . . . . . . . . . . . . . . $ 19,337 $ 22,838
----------- -----------
----------- -----------
NET INCOME PER COMMON SHARE:
Net income available to common stockholders. . . . . . . . . . $ 1,773 $ 2,468
Effect of dilutive securities:
5% convertible debentures. . . . . . . . . . . . . . . . . . 70 67
----------- -----------
Net income available to common stockholders
plus assumed conversions . . . . . . . . . . . . . . . . . . $ 1,843 $ 2,535
----------- -----------
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC. . . . . . . . . . . . . . . . . . . . . 10,016,631 9,535,765
Effect of dilutive securities:
Stock options. . . . . . . . . . . . . . . . . . . . . . . . 534,573 331,538
5% convertible debentures. . . . . . . . . . . . . . . . . . 711,057 697,677
----------- -----------
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED. . . . . . . . . . . . . . . . . . . . 11,262,261 10,564,980
----------- -----------
NET INCOME PER COMMON SHARE - BASIC. . . . . . . . . . . . . . $ 0.18 $ 0.26
----------- -----------
----------- -----------
NET INCOME PER COMMON SHARE - DILUTED. . . . . . . . . . . . . $ 0.16 $ 0.24
----------- -----------
----------- -----------
See notes to consolidated financial statements.
5
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
1997 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,773 $ 2,468
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . 2,421 3,403
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 623 876
Deferred compensation and other. . . . . . . . . . . . . . . (127) (130)
Amortization of deferred gain on
sale/leaseback transaction. . . . . . . . . . . . . . . . . (453) (616)
(Gain) on sale of marketable securities
and investments . . . . . . . . . . . . . . . . . . . . . . (27) --
Loss (gain) on disposition of fixed assets. . . . . . . . . . 22 (39)
Shares issued for stock award . . . . . . . . . . . . . . . . 66 --
Changes in assets and liabilities (net of acquisitions):
Trade receivables, net. . . . . . . . . . . . . . . . . . . (3,384) (4,404)
Inventories and other current assets. . . . . . . . . . . . (207) 169
Accounts payable and accrued liabilities. . . . . . . . . . 2,283 172
Income taxes payable, net . . . . . . . . . . . . . . . . . 794 480
Provision for liabilities . . . . . . . . . . . . . . . . . -- (346)
Deferred income . . . . . . . . . . . . . . . . . . . . . . 230 (19)
---------- ----------
Net cash provided by operating activities: . . . . . . . . . . 4,014 2,014
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities
and investments. . . . . . . . . . . . . . . . . . . . . . . 517 161
Proceeds from disposition of fixed assets . . . . . . . . . . -- 101
Capital expenditures. . . . . . . . . . . . . . . . . . . . . (6,682) (4,601)
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . (558) (291)
---------- ----------
Net cash flows used in investing activities: . . . . . . . . . $ (6,723) $ (4,630)
---------- ----------
6
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(CONTINUED)
1997 1998
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt . . . . . . . . . . . . . . . . . $ 1,400 $ 8,060
Payments on long-term debt . . . . . . . . . . . . . . . . . . (8,809) (742)
Payments on capital lease obligations. . . . . . . . . . . . . (28) (26)
Proceeds from sale/leaseback transaction . . . . . . . . . . . 8,500 --
Proceeds from issuance of common stock . . . . . . . . . . . . 158 --
Treasury stock purchases . . . . . . . . . . . . . . . . . . . (325) (2,767)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . (147) (141)
---------- ----------
Net cash flows provided by financing activities: . . . . . . . . 749 4,384
Effect of exchange rate changes on cash. . . . . . . . . . . . 372 --
---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . . . . (1,588) 1,768
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . 5,127 3,997
---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,539 $ 5,765
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 327 $ 653
---------- ----------
---------- ----------
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 0 $ 0
---------- ----------
---------- ----------
7
THE TODD-AO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998
(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, 1998. 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. 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.
4. On May 8, 1998, Todd Europe, a wholly owned United Kingdom subsidiary of
the Company, purchased substantially all of the outstanding shares of
Tele-Cine Cell Group plc. ("TeleCine"), a U.K. Corporation. The purchase
price of the shares was $17,948 (L11,011) of which $15,741 was paid in cash
and $2,207 is represented by unsecured loan notes guaranteed as to
principal only and bearing interest at a fixed rate of 4.5% payable
annually in arrears. Included above is cash in the amount of $495 which
was paid by Todd Europe for costs incurred in connection with the
acquisition. TeleCine is a London based facility that specializes in video
post-production and special effects providing services to the film and
television industries.
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, 1997 is presented as if
the acquisition had occurred on September 1, 1997. Pro forma adjustments
for TeleCine are primarily to eliminate operations discontinued as part of
the acquisition plan, to adjust depreciation to estimated useful lives of
assets acquired, amortization of goodwill, interest expense on borrowings
in connection with the acquisition, and income taxes.
1997
---------
Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 30,410
---------
---------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 2,478
---------
---------
Net income per common share - Basic. . . . . . . . . . $ 0.25
---------
---------
Net income per common share - Diluted. . . . . . . . . $ 0.23
---------
---------
8
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
statement 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 currently is 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 $1,400.
The net equipment lease expense is as follows for the three months ended:
LEASE #1 LEASE #2 TOTAL
-------- -------- -------
NOVEMBER 30, 1998
Equipment lease costs. . . . . . . . . . . . . . . . $ 315 $ 354 $ 669
Amortization of deferred gain
on sale of equipment. . . . . . . . . . . . . . . (368) (246) (614)
-------- -------- -------
Equipment lease expense, net . . . . . . . . . . . . $ (53) $ 108 $ 55
-------- -------- -------
-------- -------- -------
NOVEMBER 30, 1997
Equipment lease costs. . . . . . . . . . . . . . . . $ 424 $ 56 $ 480
Amortization of deferred gain
on sale of equipment. . . . . . . . . . . . . . . (367) (86) (453)
-------- -------- -------
Equipment lease expense, net . . . . . . . . . . . . $ 57 $ (30) $ 27
-------- -------- -------
-------- -------- -------
In December 1998, the Company signed a third agreement with its bank to
implement the sale/leaseback of certain equipment for up to $10,000. An
aggregate of $8,809 of sound studio and video equipment was sold and leased
back on December 30, 1998. The agreement consists of a base 2-year term
plus five additional 1-year terms amortizing to approximately 41% and
terminates on December 30, 2005.
6. 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, 1998, 1,563,456 shares had been
repurchased. 1,432,705 of these shares have been cancelled and returned to
authorized but unissued status.
7. 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:
NOVEMBER 30, NOVEMBER 30,
------------ ------------
1997 1998
------------ ------------
Net income . . . . . . . . . . . . . . . $ 1,773 $ 2,468
Unrealized gain (loss) on marketable
securities and long-term investments . 35 (221)
Foreign currency translation
adjustments. . . . . . . . . . . . . . 385 1
------------ ------------
Comprehensive income . . . . . . . . . . $ 2,193 $ 2,248
------------ ------------
------------ ------------
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 terminates on
December 30, 1999, consists of five 1-year terms amortizing to
approximately 40%. The agreement, amended in December 1997, provides for
interest at the same LIBOR rates and terms as the second sale/leaseback
agreement (see below).
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 consists of five 1-year
terms amortizing to approximately 42% with interest at LIBOR rates ranging
from plus .75% to plus 2% based on the leverage ratio (Funded
Indebtedness/EBITDA excluding convertible subordinated notes issued by
Company in connection with the Hollywood Digital acquisition) and
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 $60,000 in revolving loans (including up to 50% in Multi-currency) until
November 30, 2001. On that date and quarterly thereafter until August 31,
2003, 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, 2003.
Annually, 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. 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, CD,
and LIBOR rates ranging from plus .75% to plus 2.125% based on the leverage
ratio. The leverage ratio that determines the rate ranges from less than
1:1 to greater than 2.5:1. The leverage ratio may not exceed 3.5:1 until
February 28, 2000. Thereafter, the leverage ratio may not exceed 3:1. The
facility includes commitment fees at .2% to .5% (based on the leverage
ratio) per annum on the unused balance of the credit facility. 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. 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 $8,000 during the fiscal
year ending August 31, 1999).
In December 1998, the Company signed a third agreement with its bank to
implement the sale/leaseback of certain equipment for up to $10,000. An
aggregate of $8,809 of sound studio and video equipment was sold and leased
back on December 30, 1998. The agreement consists of a base 2-year term
plus five additional 1-year terms amortizing to approximately 41% and
terminates on December 30, 2005. The agreement provides for interest at
the same LIBOR rates and terms as the second sale/leaseback agreement (see
above).
Management evaluated capital raising alternatives including capital and
operating leases, sale/leaseback and other sources of long-term debt
including bank and public financing. Based upon cost, structure and term
the sale/leaseback financing provided incremental funding with a favorable
impact on earnings per share as compared with available alternative debt
financings.
10
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.
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 fiscal year
1999.
In June 1997, the Company used $15,760 under the credit facility 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. In May 1998, the Company used $14,000 under the credit
facility to fund a substantial portion of the TeleCine acquisition. As of
November 30, 1998, the Company had $41,625 outstanding under the credit
facility.
The Company expects capital expenditures of approximately $21,000 for its
Los Angeles, Santa Monica, New York City, Atlanta and London facilities in
fiscal 1999. 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, 1998 COMPARED TO THREE MONTHS ENDED
NOVEMBER 30, 1997
Revenues increased $8,923 or 35.7% from $25,024 to $33,947 primarily due to
the acquisition of TeleCine in May 1998 and to an increase in all other
video and sound services of the Company. TeleCine recorded video services
revenues of $6,456 which was supplemented by an increase of $1,584 from the
Company's other video divisions. This increase includes revenues of $735
from Todd-AO Video Services DVD formed in May 1998 to provide DVD product
services to the major Hollywood studios and others. Higher utilization and
activity in the Company's sound services divisions was responsible for an
increase in sound services revenues of $1,073.
Operating costs and other expenses increased $6,391 or 33.1% from $19,314
to $25,705. Cost increases are related to the TeleCine acquisition
($4,809) and the other revenue increases described above.
Depreciation and amortization increased $982 or 40.1% primarily due to the
equipment and goodwill acquired in the TeleCine acquisition ($599) and to
the assets placed in service in March 1998 in connection with the new THD
Santa Monica facility ($294) as well as increased capital expenditures in
other divisions.
Interest expense increased $454 or 110.2% primarily due to the TeleCine
acquisition financing.
As a result of the above, income before taxes increased $1,022 or 37.1%
from $2,752 to $3,774 and net income increased $695 or 39.2% from $1,773 to
$2,468.
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MATERIAL CHANGES IN CASH FLOWS
For the three months ended November 30, 1998, the Company generated $2,025
in cash from operating activities compared to $4,014 in 1997. Net income
of $2,468 adjusted for depreciation and net amortization of $2,787 provided
cash of $5,255 in 1998 compared to $3,741 in 1997. Increases in accounts
payable and other liabilities were restricted to $298 in 1998 compared to
$3,307 in 1997. Cash provided by operations was utilized primarily to fund
trade receivables and other current assets in both years.
Net cash generated from operating activities supplemented by borrowings
from the Company's credit facility of $8,060 were used to purchase treasury
stock under the Company's stock repurchase program, reinvest in capital
assets of the Company and to pay down long-term debt.
OTHER BUSINESS INFORMATION
On September 8, 1997, the Company and Disney Character Voices
International, Inc. ("DCVI") committed to jointly establishing a dubbing
and audio post production studio in Germany. The Company and DCVI's German
subsidiaries, TODD-AO GERMANY GMBH and BUENA VISTA INTERNATIONAL FILM
PRODUCTION (GERMANY) GMBH have agreed to jointly build a state-of-the-art,
all-digital post production complex in Munich. The 36,000 square foot
facility will include feature and video mixing studios, film and video
dialogue recording rooms and editorial suites. The Company will manage all
technical and operational functions and DCVI will coordinate the creative
services of the studios. Additional joint ventures are contemplated for
France, Italy, Spain and Asia. The foreign language dubbing studios will
provide each of those territories with state-of-the-art theatrical and
television recording, mixing and editing facilities.
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 is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to
define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000, which could result in miscalculations or system
failure. The Company has conducted a review of its computer information
systems and its technological operating equipment to identify the systems
that could be affected by the year 2000 compliance issue.
The Company uses purchased software programs for a variety of functions,
including general ledger, accounts payable, and accounts receivable
accounting packages as well as comprehensive facility management packages.
These programs are generally Year 2000 compliant, and any software and/or
computer systems not currently compliant will be upgraded during fiscal
1999 under existing maintenance and other agreements and through normal
replacement programs currently in place. A review of the Company's
equipment containing embedded microprocessors or other technology has
revealed few systems that are not Year 2000 compliant and those that are
not compliant are expected to be upgraded through normal maintenance
replacements in fiscal 1999. Operation of these
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systems is generally not time-sensitive and, if necessary, equipment
settings can be adjusted without posing any significant operational
problems for the Company.
Based on these reviews, costs of addressing potential problems are not
currently expected to have a material adverse impact on the Company's
financial position, results of operations or cash flows in future periods.
To date, the Company has not identified any system which presents a
material risk of not being Year 2000 ready in a timely fashion or for which
a suitable alternative cannot be implemented. As the Company progresses
with its Year 2000 conversion, however, it may identify systems which do
present a material risk of Year 2000 disruption. Such disruption may
include, among other things, the inability to process transactions or
information, to record or access data, or engage in similar normal business
activities. If the Company, its customers or vendors are unable to resolve
such processing issues in a timely manner, it could result in a material
financial risk. Accordingly, the company will devote the necessary
resources to resolve all significant Year 2000 issues in a timely manner.
The discussion above contains certain forward looking statements. The
costs of the Year 2000 conversion, the date which the Company has set to
complete such conversion, and possible risks associated with the Year 2000
issue are based on the Company's current estimates and are subject to
various uncertainties that could cause the actual results to differ
materially from the Company's expectations. Such uncertainties include,
among others, the success of the Company in identifying systems that are
not Year 2000 compliant, the nature and amount of programming required to
upgrade or replace each of the affected systems, the availability of
qualified personnel, consultants and other resources, and the success of
the Year 2000 conversion efforts of others.
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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) Lease Intended as Security dated as of December 30,
1998 between BA Leasing and Capital Corporation and The
Todd-AO Corporation.
(1)(b) Appendix to Lease Intended as Security dated as of
December 30, 1998 between BA Leasing and Capital
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, 1999 /s/ Silas R. Cross
- ---------------------- ------------------------------
Date Silas R. Cross
Chief Accounting Officer
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