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 MAY 31, 1999
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 0-1461
THE TODD-AO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-1679856
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
900 N. SEWARD STREET, HOLLYWOOD, CALIFORNIA 90038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (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 July 7, 1999 was:
7,948,194 Class A Shares and 1,747,178 Class B Shares.
THE TODD-AO CORPORATION
QUARTERLY REPORT ON FORM 10-Q
MAY 31, 1999
INDEX
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PART I - FINANCIAL INFORMATION Page
Item 1- FINANCIAL STATEMENTS
The following financial statements are filed herewith:
Condensed Consolidated Balance Sheets, May 31, 1999
(Unaudited) and August 31, 1998 3
Condensed Consolidated Statements of Income and Retained Earnings
for the Nine and Three Months Ended May 31, 1999 and
1998 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended May 31, 1999 and 1998 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements for the Nine
Months Ended May 31, 1999 (Unaudited) 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
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
AUGUST 31, MAY 31,
------------- --------------
1998 1999
(AUDITED) (UNAUDITED)
------------- -------------
CURRENT ASSETS
Cash and cash equivalents.............................................. $ 3,997 $ 3,122
Marketable securities.................................................. 1,490 1,450
Trade receivables
(net of allowance for doubtful accounts of $1,768 at
August 31, 1998 and $1,379 at May 31, 1999) ........................ 18,164 19,727
Income tax receivable.................................................. 1,397 1,339
Inventories (first-in first-out basis)................................. 783 680
Deferred income taxes.................................................. 301 279
Prepaid deposits and other............................................. 3,629 2,635
------------- -------------
Total current assets................................................... 29,761 29,232
------------- -------------
INVESTMENTS............................................................ 956 1,128
------------- -------------
PROPERTY AND EQUIPMENT - At Cost:
Land................................................................... 4,270 4,270
Buildings.............................................................. 11,293 17,525
Leasehold improvements................................................. 15,054 14,935
Lease acquisition costs................................................ 2,187 2,187
Equipment.............................................................. 76,172 79,006
Equipment under capital leases......................................... 1,151 1,151
Construction in progress............................................... 1,466 3,250
------------- -------------
Total.................................................................. 111,593 122,324
Accumulated depreciation and amortization.............................. (38,046) (46,267)
------------- -------------
Property and equipment - net........................................... 73,547 76,057
------------- -------------
GOODWILL
(net of accumulated amortization of $1,646 at
August 31, 1998 and $2,558 at May 31, 1999)......................... 29,193 28,281
------------- -------------
OTHER ASSETS........................................................... 1,909 2,319
------------- -------------
TOTAL.................................................................. $ 135,366 $ 137,017
============= =============
See notes to condensed consolidated financial statements.
3
THE TODD-AO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
AUGUST 31, MAY 31,
------------- -------------
1998 1999
(AUDITED) (UNAUDITED)
------------- -------------
CURRENT LIABILITIES:
Accounts payable....................................................... $ 6,464 $ 5,253
Accrued liabilities:
Payroll and related taxes........................................... 3,520 3,944
Interest............................................................ 369 688
Equipment lease..................................................... 569 751
Other............................................................... 3,201 1,733
Income taxes payable................................................... 1,090 1,635
Current maturities of long-term debt................................... 537 158
Capitalized lease obligations - current................................ 422 341
Deferred income........................................................ 897 942
----------- ------------
Total current liabilities.............................................. 17,069 15,445
----------- ------------
LONG-TERM DEBT......................................................... 44,654 50,663
DEFERRED COMPENSATION AND OTHER........................................ 266 190
DEFERRED GAIN ON SALE/LEASEBACK TRANSACTIONS........................... 6,085 4,465
DEFERRED INCOME TAXES.................................................. 4,911 4,911
OTHER.................................................................. 2,061 1,225
----------- ------------
Total liabilities...................................................... 75,046 76,899
----------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock:
Class A; authorized 30,000,000 shares of $0.01 par value;
8,438,700 issued at August 31, 1998 and 7,778,888 issued
at May 31, 1999..................................................... 84 78
Class B; authorized 6,000,000 shares of $0.01 par value; issued and
outstanding 1,747,178............................................... 17 17
Additional paid-in capital............................................. 40,805 35,960
Treasury stock (235,151 and 72,859 shares at cost
as of August 31, 1998 and May 31, 1999, respectively).............. (2,338) (585)
Retained earnings...................................................... 20,538 23,546
Accumulated comprehensive income:
Unrealized gains on marketable securities
and long-term investments.......................................... 198 239
Cumulative foreign currency translation adjustment................. 1,016 863
----------- ------------
Total stockholders' equity............................................. 60,320 60,118
----------- ------------
TOTAL.................................................................. $ 135,366 $ 137,017
=========== ============
See notes to condensed consolidated financial statements.
4
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE NINE AND THREE MONTHS ENDED MAY 31, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NINE MONTHS THREE MONTHS
-------------------------- --------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
REVENUES..................................................... $ 74,858 $ 90,428 $ 27,252 $ 28,093
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Operating costs and other expenses........................... 59,163 73,050 21,635 23,457
Depreciation and amortization ............................... 7,418 9,735 2,704 3,364
Interest..................................................... 1,071 2,454 482 836
Equipment lease expense - net ............................... 164 908 53 488
Other expense (income) - net ................................ (220) (895) (97) (192)
------------ ------------ ------------ ------------
Total costs and expenses .................................... 67,596 85,252 24,777 27,953
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES..................... 7,262 5,176 2,475 140
PROVISION FOR INCOME TAXES................................... 2,546 1,749 848 78
------------ ------------ ------------ ------------
NET INCOME................................................... 4,716 3,427 $ 1,627 $ 62
============ ============
RETAINED EARNINGS BEGINNING OF PERIOD........................ 17,711 20,538
LESS: DIVIDENDS PAID....................................... (443) (419)
------------ ------------
RETAINED EARNINGS END OF PERIOD.............................. $ 21,984 $ 23,546
============ ============
NET INCOME PER COMMON SHARE:
Net income available to common stockholders.................. $ 4,716 $ 3,427 $ 1,627 $ 62
Effect of dilutive securities:
5% convertible debentures ................................ 209 191 50 62
------------ ------------ ------------ ------------
Net income available to common stockholders
plus assumed conversions ................................. $ 4,925 $ 3,618 $ 1,677 $ 124
------------ ------------ ------------ ------------
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC....................................... 10,004,781 9,489,372 9,954,606 9,455,280
Effect of dilutive securities:
Stock options............................................. 508,008 349,902 588,313 288,319
5% convertible debentures................................. 711,057 661,453 711,057 643,341
------------ ------------ ------------ ------------
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED..................................... 11,223,846 10,500,727 11,253,976 10,386,940
------------ ------------ ------------ ------------
NET INCOME PER COMMON SHARE - BASIC.......................... $ 0.47 $ 0.36 $ 0.16 $ 0.01
============ ============ ============ ============
NET INCOME PER COMMON SHARE - DILUTED........................ $ 0.44 $ 0.34 $ 0.15 $ 0.01
============ ============ ============ ============
See notes to consolidated financial statements.
5
THE TODD-AO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MAY 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1998 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 4,716 $ 3,427
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................... 7,418 9,735
Deferred income taxes, net...................................... (18) 22
Deferred compensation and other................................. (39) (229)
Amortization of deferred gain on
sale/leaseback transaction.................................. (1,673) (1,856)
(Gain) on sale of marketable securities
and investments............................................. (49) --
(Gain) loss on disposition of fixed assets...................... 8 (253)
Shares issued for stock award................................... 66 --
Changes in assets and liabilities (net of acquisitions):
Trade receivables, net....................................... 1,577 (1,563)
Inventories and other current assets......................... (1,298) 1,094
Accounts payable and accrued liabilities..................... 1,953 (1,936)
Accrued equipment lease...................................... 100 182
Income taxes payable, net.................................... 1,731 606
Provision for liabilities.................................... -- (836)
Deferred income.............................................. (760) 45
------------- -------------
Net cash flows provided by operating activities: .................... 13,732 8,438
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities and investments.................. (251) (91)
Proceeds from sale of marketable securities
and investments................................................. 979 --
Acquisition of Tele-Cine Cell Group plc............................ (16,145) --
Proceeds from disposition of fixed assets.......................... 17 370
Capital expenditures............................................... (17,216) (20,023)
Other assets....................................................... 9 (409)
------------- -------------
Net cash flows (used in) investing activities: ...................... $ (32,607) $ (20,153)
------------- -------------
6
THE TODD-AO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MAY 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(CONTINUED)
(UNAUDITED)
1998 1999
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt......................................... $ 22,206 $ 17,605
Payments of long-term debt........................................... (9,436) (11,976)
Payments on capital lease obligations................................ (80) (81)
Net proceeds from issuance of common stock........................... 206 5
Proceeds from sale/leaseback transaction............................. 8,500 8,809
Treasury stock transactions.......................................... (1,195) (3,103)
Dividends paid....................................................... (443) (419)
------------- ------------
Net cash flows provided by financing activities:....................... 19,758 10,840
Effect of exchange rate changes on cash ............................. -- --
------------- ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS............................................... 883 (875)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....................... 5,127 3,997
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................. $ 6,010 $ 3,122
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................................. $ 736 $ 2,013
============= ============
Income taxes......................................................... $ 860 $ 240
============= ============
SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING AND FINANCING ACTIVITIES:
1998:
On May 8, 1998 the Company acquired substantially all of the outstanding
shares of Tele-Cine Cell Group plc. (See Note 4). In connection with the
acquisition the Company paid cash as follows:
Assets acquired:
Property and equipment..................................................... $ 8,378
Trade and other receivables................................................ 7,279
Investments................................................................ 119
Inventory.................................................................. 200
Goodwill................................................................... 16,380
Liabilities assumed:
Accounts payable and accrued liabilities................................... (3,038)
Bank loan.................................................................. (2,489)
Equipment leases........................................................... (438)
Deferred tax liability..................................................... (4,800)
Provision for liabilities and charges...................................... (3,239)
Long-term debt issued to sellers............................................... (2,207)
-----------
Cash paid in acquisition....................................................... $ 16,145
===========
See notes to consolidated financial statements.
7
THE TODD-AO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1999 (UNAUDITED)
(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 condensed 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-AO Europe Holding Co., Ltd. ("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 nine months ended May 31, 1998 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.
1998
-----------
Revenues.......................................................... $ 88,755
===========
Net income........................................................ $ 6,103
===========
Net income per common share - Basic............................... $ 0.61
===========
Net income per common share - Diluted............................. $ 0.56
===========
8
5. In December 1998, November 1997 and December 1994 the Company signed
agreements with its bank to implement the sale/leaseback of certain
equipment. The agreements terminate on December 30, 2005, December 1,
2002 and December 30, 1999, respectively, and are being treated as
operating leases for financial statement purposes. On December 30, 1998,
November 3, 1997 and December 30, 1994 an aggregate of $8,809, $8,500 and
$11,218, respectively, of sound studio and video equipment was sold and
leased back. The total deferred gain on the transactions to be amortized
over five to seven years is $12,525. The annual lease cost currently is
approximately $3,350.
The net equipment lease expense is as follows for the nine months ended:
MAY 31, MAY 31,
------------- --------------
1998 1999
------------- --------------
Equipment lease costs............................ $ 1,837 $ 2,764
Amortization of deferred gain
on sale of equipment.......................... (1,673) (1,856)
------------- --------------
Equipment lease expense, net..................... $ 164 $ 908
============= ==============
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 May 31, 1999, 1,621,756 shares had been repurchased.
1,557,905 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 nine months ended:
MAY 31, MAY 31,
------------- --------------
1998 1999
------------- --------------
Net income..................................... $ 4,716 $ 3,427
Unrealized gain (loss) on marketable
securities and long-term investments....... 167 41
Foreign currency translation
Adjustments................................ (40) (153)
------------- --------------
Comprehensive income........................... $ 4,843 $ 3,315
============= ==============
8. On June 8, 1999 the Company and its indirect wholly owned subsidiary
Todd-AO East, Inc signed a merger agreement with Sound One Corporation
("Sound One"), a New York corporation. The Boards of Directors of each
company approved the acquisition of Sound One by the Company pursuant to
a merger of Todd-AO East, Inc. into Sound One in accordance with the
Internal Revenue Code of 1986 and the provisions of the merger agreement
with the result that all of the issued and outstanding shares of common
stock of Sound One shall be extinguished in exchange for cash
consideration of $11.50 per share. The merger was completed on June 22,
1999. The transaction is to be accounted for as a purchase and the
acquisition price is equal to the sum of: (1) $11,961 in cash for the
common stock (2) $800 in cash to be paid for non-compete agreements (3)
approximately $200 in acquisition costs. The funds to be paid for the
common stock were provided by the Company's institutional lender and the
other cash requirements by the Company's operational cash flows. Sound
One is the leading post production sound facility in New York servicing
the entertainment industry.
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
Through May 31, 1999 the Company has signed three agreements with its
bank to implement the sale/leaseback of certain equipment. An aggregate of
$28,527 of sound studio and video equipment has been sold and leased
back. The agreements terminate on December 30, 1999, December 1, 2002
and December 30, 2005. All the agreements provide for interest based on
LIBOR rates.
Under a new long-term credit agreement dated June 30, 1999 and expiring on
May 31, 2004, the Company may borrow up to $80,000 in revolving loans
until May 31, 2002. On that date and thereafter the revolving loan
commitment will reduce to nil by the expiration of the agreement. Prior
to May 31, 2002 the Company may request an automatic extension of the
revolving period of the facility for one year that will also extend the
term period and the expiration date of the agreement. Prior to December
31, 2000 the Company may make a one-time request to increase the credit
line by up to $20,000. Such increase to be at the sole discretion of
the Banks. The Company also has the availability of Standby Letters of
Credit up to $20,000 under the facility. The credit facility provides
for borrowings based on the Bank's Reference, CD, and LIBOR rates. The
facility includes commitment fees on the unused balance of the credit
facility. The agreement also contains various restrictive covenants
which must be met by the Company.
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.
As of May 31, 1999, the Company had $40,225 outstanding under the credit
facility which has been used principally to fund acquisitions of
companies and equipment.
The Company expects capital expenditures of approximately $25,000 for its
Los Angeles, Santa Monica, New York City, Atlanta and London facilities in
fiscal 1999. These capital expenditures will be financed by internally
generated funds and borrowings under credit facilities.
The Company does not believe that it is currently exposed to any material
foreign exchange rate risk and, at present, does not have a policy for
managing such risk beyond the utilization of local currency borrowings
to fund foreign acquisitions whenever possible.
10
2. Material Changes in Results of Operations
NINE MONTHS ENDED MAY 31, 1999 COMPARED TO NINE MONTHS ENDED MAY 31, 1998
Revenues increased $15,570 or 20.8% from $74,858 to $90,428 primarily due
to the acquisition of TeleCine in May 1998 ($15,834) and the formation of
Todd-AO Video Services DVD ("TAO DVD") formed in May 1998 to provide DVD
product services to the major Hollywood studios and others ($2,965).
These increases were offset by lower utilization and activity in the
Company's sound services divisions ($3,138) and the Company's other
video services divisions ($91).
Operating costs and other expenses increased $13,887 or 23.5% from $59,163
to $73,050. Cost increases are related to the TeleCine acquisition
($12,006) and the formation of TAO DVD ($1,771). Costs in connection
with the Company's other sound and video services divisions remained
flat.
Depreciation and amortization increased $2,317 or 31.2% primarily due to
the equipment and goodwill acquired in the TeleCine acquisition ($1,534)
and to assets placed in service in March 1998 in connection with the new
THD Santa Monica facility ($671).
Interest expense increased $1,383 or 129.1% primarily due to the TeleCine
acquisition financing.
Net equipment lease expense increased $744 as a result of the
sale/leaseback to the Company's financial institution of certain
equipment in December 1998.
Net other income increased $675 primarily from an insurance settlement
in the U.K. and a non-recurring executive stock bonus in the prior year.
As a result of the above, income before taxes decreased $2,086 or 28.7%
from $7,262 to $5,176 and net income decreased $1,289 or 27.3% from $4,716
to $3,427.
THREE MONTHS ENDED MAY 31, 1999 COMPARED TO THREE MONTHS ENDED MAY 31, 1998
Revenues increased $841 or 3.1% from $27,252 to $28,093 primarily due to
the acquisition of TeleCine in May 1998 ($3,950) and the formation of
TAO DVD formed in May 1998 to provide DVD product services to the major
Hollywood studios and others ($1,230). These increases were offset by
lower utilization and activity in the Company's sound services
divisions ($3,848) and the Company's other video services divisions
($491).
Operating costs and other expenses increased $1,822 or 8.4% from $21,635
to $23,457. Cost increases are related to the TeleCine acquisition
($2,889) and the formation of TAO DVD ($681). Costs in connection with
the Company's other sound and video services divisions decreased in
connection with the revenue decreases described above.
Depreciation and amortization increased $660 or 24.4% primarily due to
the equipment and goodwill acquired in the TeleCine acquisition ($517)
and to assets placed in service in March 1998 in connection with the new
THD Santa Monica facility ($135).
Interest expense increased $354 or 73.4% primarily due to the TeleCine
acquisition financing.
Net equipment lease expense increased $435 as a result of the
sale/leaseback to the Company's financial institution of certain
equipment in December 1998.
As a result of the above, income before taxes decreased $2,335 or 94.3%
from $2,475 to $140 and net income decreased $1,565 or 96.2% from $1,627
to $62.
11
MATERIAL CHANGES IN CASH FLOWS
For the nine months ended May 31, 1999, the Company generated $8,438 in
cash from operating activities compared to $13,732 in 1998. Net income
of $3,427 adjusted for depreciation and net amortization of $7,879
provided cash of $11,306 in 1999 compared to $10,461 in 1998. A
decrease in accounts payable and other liabilities of approximately
$2,000 in 1999 is compared to an increase of approximately $3,000 in
1998. Net cash provided by operations was utilized primarily to fund
capital expenditures in both years.
Net cash generated by proceeds from the sale/leaseback of certain
equipment and net borrowings from the Company's credit facility totaling
$14,438 were used to purchase treasury stock under the Company's stock
repurchase program and to reinvest in capital assets of the Company.
OTHER BUSINESS INFORMATION
In May 1999, the Company retained the investment banking firm of Lazard
Freres & Co. LLC, to advise the Company on possible strategic alliances,
including but not limited to a sale, merger or joint venture. Although
there has been no decision as to any specific alternative and there is
no assurance that a transaction will result from this process, the
Company is exploring all alternatives which would maximize stockholder
value and market valuation as well as strengthen its competitive
position and global efforts to become the premier post production
facility in the industry.
In January 1999, the Company, through its newly-formed subsidiary,
TODD-AO GERMANY GmbH, entered into a joint venture agreement with BUENA
VISTA INTERNATIONAL FILM PRODUCTION (GERMANY) GmbH ("BVI"), an affiliate
of Disney Enterprises, Inc. This agreement established a partnership,
which shall be known as Todd-AO [Germany] GmbH & Co. KG, which shall
develop and operate a German language dubbing facility in Germany.
Under the agreement, Disney Character Voices International, Inc.
("DCVI") shall give the Studio the first opportunity to dub all of its
products appropriate for the German market, including live action and
animated theatrical features, trailers, videos, television, and animated
interactive projects. To this venture, Todd-AO and BVI committed to a
capital equivalent of $1,025 and a financial accommodation or loans not
to exceed $2,975 each.
On March 4, 1999, the Company and DCVI announced an agreement in
principle to build the Studio in Munich, Germany. A non-binding letter
of intent, signed by the Company, DCVI and the Minister of the Free
State of Bavaria, provides that the Studio would be located at the
"Alte-Messe" in the heart of Munich, shall encompass 36,000 square feet
and would include feature and video mixing studios, film and video
dialogue recording rooms and editorial suites. The City of Munich and
the Free State of Bavaria have offered a subsidy of DM 27,000 for the
construction, development and equipment of the Studio at this site
location. A definitive agreement is expected to be negotiated and
signed by Todd-AO Germany and BVI, the joint venture partners.
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.
12
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 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 to the Company's financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). (1) Exhibit 27 Financial Data Schedule.
(b). (1) A report on Form 8-K was filed on June 21, 1999
disclosing as an "Other Event" item the acquisition
by merger of Sound One Corporation.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TODD-AO CORPORATION
July 13, 1999 /s/ Silas R. Cross
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Date Silas R. Cross
Chief Accounting Officer
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