SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1999
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8654
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UNITEL VIDEO, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 23-1713238
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 WEST 57TH STREET - NEW YORK, NEW YORK 10019
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(Address of principal executive offices)
(212) 265-3600
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months and (2) has been subject to such requirements
for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
2,714,866 Common shares outstanding as of July 15, 1999
(Number of shares) (Date)
UNITEL VIDEO, INC.
FORM 10-Q
QUARTER ENDED MAY 31, 1999
Page
INDEX Number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
May 31, 1999 (Unaudited) and
August 31, 1998 3-4
Consolidated Statements of Operations
May 31, 1999 (Unaudited) and
May 31, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows
May 31, 1999 (Unaudited)
and May 31, 1998 (Unaudited) 6-7
Notes to Consolidated Financial
Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9-16
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 19
2
UNITEL VIDEO, INC.
FORM 10-Q
QUARTER ENDED MAY 31, 1999
Part 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
May 31, 1999 August 31, 1998
------------ ---------------
(Unaudited) (Note)
ASSETS
Current Assets:
Cash $ 91,000 $ 1,190,000
Accounts receivable, net 4,217,000 4,784,000
Other receivables 70,000 93,000
Prepaid income taxes 199,000 62,000
Prepaid expenses 343,000 498,000
Deferred tax asset 312,000 312,000
------------ ------------
Total current assets 5,232,000 6,939,000
Property and equipment - at cost
Land, buildings
and improvements 24,114,000 23,490,000
Video equipment 78,452,000 78,113,000
Furniture and fixtures 1,614,000 1,758,000
------------ ------------
104,180,000 103,361,000
Less accumulated depreciation
and amortization 58,402,000 52,420,000
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45,778,000 50,941,000
Deferred tax asset 2,157,000 2,157,000
Goodwill 1,479,000 1,583,000
Other assets 2,111,000 2,112,000
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$ 56,757,000 $ 63,732,000
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------------ ------------
Note: The balance sheet at August 31, 1998 has been taken from the audited
consolidated financial statements at that date.
See notes to consolidated financial statements.
3
UNITEL VIDEO, INC.
FORM 10-Q
CONSOLIDATED BALANCE SHEETS
(Continued)
May 31, 1999 August 31, 1998
------------ ---------------
(Unaudited) (Note)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,769,000 $ 5,282,000
Accrued expenses 1,921,000 2,056,000
Payroll, benefits and related taxes 869,000 1,434,000
Current maturities of long-term debt 14,072,000 4,203,000
Current maturities of subordinated debt 2,171,000 --
Current maturities of capital lease obligations 3,411,000 2,077,000
------------ ------------
Total current liabilities 29,213,000 15,052,000
Deferred rent 3,000 112,000
Long-term debt, less current maturities 19,807,000 32,679,000
Subordinated debt, less current maturities -- 2,171,000
Long-term leases, less current maturities 2,448,000 4,468,000
Accrued retirement 949,000 1,047,000
Stockholders' equity:
Common stock, par value
$.01 per share
Authorized 5,000,000 shares
Issued 3,545,604 and 3,541,754 shares
respectively, and outstanding 2,714,866
and 2,711,016 shares respectively 27,000 27,000
Additional paid-in capital 27,285,000 27,275,000
Accumulated deficit (15,330,000) (11,454,000)
Common stock held in treasury,
at cost (830,738 shares) (7,645,000) (7,645,000)
------------ ------------
Total stockholders' equity 4,337,000 8,203,000
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$ 56,757,000 $ 63,732,000
------------ ------------
------------ ------------
Note: The balance sheet at August 31, 1998 has been taken from the audited
consolidated financial statements at that date.
See notes to consolidated financial statements.
4
UNITEL VIDEO, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended May 31, Nine Months Ended May 31,
-------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Sales $ 11,163,000 $ 13,957,000 $ 33,899,000 $ 40,154,000
Cost of sales:
Production costs 7,578,000 9,073,000 22,885,000 27,136,000
Depreciation 2,079,000 2,248,000 6,392,000 6,589,000
------------ ------------ ------------ ------------
9,657,000 11,321,000 29,277,000 33,725,000
------------ ------------ ------------ ------------
Gross profit 1,506,000 2,636,000 4,622,000 6,429,000
Operating expenses:
Selling 217,000 314,000 723,000 1,083,000
General and administrative 1,773,000 1,489,000 4,271,000 4,593,000
Interest 1,390,000 1,007,000 3,475,000 2,852,000
Merger Agreement Costs -- 685,000 -- 685,000
------------ ------------ ------------ ------------
3,380,000 3,495,000 8,469,000 9,213,000
------------ ------------ ------------ ------------
Loss from operations (1,874,000) (859,000) (3,847,000) (2,784,000)
Other income -- 182,000 -- 345,000
------------ ------------ ------------ ------------
Loss before income taxes (1,874,000) (677,000) (3,847,000) (2,439,000)
Income taxes 38,000 -- 38,000 2,000
------------ ------------ ------------ ------------
Net loss available to
common stockholders $ (1,912,000) $ (677,000) $ (3,885,000) $ (2,441,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Loss per Common Share-Basic
and Diluted $ (.70) $ (.25) $ (1.43) $ (.91)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average of common and
common equivalent shares
outstanding 2,714,000 2,687,000 2,714,000 2,679,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See notes to consolidated financial statements.
5
UNITEL VIDEO, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
-----------------
May 31, 1999 May 31, 1998
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Cash Flows From Operating Activities:
Net loss $(3,885,000) $(2,441,000)
Adjustments to reconcile
net loss to net cash
provided by operating activities:
Depreciation and amortization 6,756,000 6,675,000
Net gain on disposal of equipment (363,000) (86,000)
Amortization of deferred financing costs 192,000 231,000
Deferred rent and other (100,000) (12,000)
Accrued retirement expense (98,000) (97,000)
Changes in operating assets and liabilities:
Accounts receivable, net 567,000 (1,549,000)
Other receivables 23,000 (80,000)
Prepaid expenses 155,000 21,000
Prepaid taxes (137,000) (37,000)
Other assets (74,000) (38,000)
Accounts payable 1,487,000 358,000
Accrued expenses (135,000) 557,000
Payroll and related taxes (565,000) (1,707,000)
----------- -----------
7,708,000 4,236,000
----------- -----------
Net cash provided by operating
activities 3,823,000 1,795,000
Cash Flows From Investing Activities:
Capital expenditures (1,566,000) (5,346,000)
Proceeds from disposal of equipment 441,000 219,000
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Net cash used in investing activities (1,125,000) (5,127,000)
(Continued)
6
UNITEL VIDEO, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Nine Months Ended
-----------------
May 31, 1999 May 31, 1998
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Cash Flows From Financing Activities:
Proceeds from long-term financing 1,333,000 12,757,000
Proceeds from issuance of common stock 10,000 --
Deferred financing costs (118,000) (475,000)
Principal repayments (5,022,000) (9,148,000)
Reissue of treasury stock -- 235,000
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Net cash (used) provided by financing activities (3,797,000) 3,369,000
----------- -----------
Net Increase (Decrease) in Cash (1,099,000) 37,000
Cash Beginning of Year 1,190,000 137,000
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Cash End of Nine Months $ 91,000 $ 174,000
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----------- -----------
Schedule of income taxes and
interest paid:
Income Taxes Paid $ 20,000 $ 21,000
Interest Paid 3,048,000 2,523,000
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$ 3,068,000 $ 2,544,000
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----------- -----------
See notes to consolidated financial statements.
7
UNITEL VIDEO, INC.
FORM 10-Q
NINE MONTHS ENDED MAY 31, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of May 31, 1999, the consolidated
statements of operations for the nine months and quarters ended May 31, 1999 and
1998, and the consolidated statements of cash flows for the nine months then
ended have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations, and
cash flows at May 31, 1999 and for all periods presented have been made.
Certain information and footnote disclosure normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto in the Company's August 31, 1998 Form 10-K filed
with the Securities and Exchange Commission. The results of operations for the
nine months ended May 31, 1999 are not necessarily indicative of the operating
results for the full year.
2. STOCKHOLDERS' EQUITY
During the nine months ended May 31, 1999, stockholders' equity decreased due
to:
Net loss $(3,885,000)
Translation adjustment 9,000
Purchase of stock under the Unitel Video, Inc.
Employee Stock Purchase Plan 10,000
-----------
Total decrease in stockholders' equity $(3,866,000)
-----------
-----------
3. CLASSIFICATION OF LONG-TERM OBLIGATIONS
During the nine months ended May 31, 1999 $9,589,000 has been classified as
current maturities of long-term debt as a result of the advance of the maturity
of all of the obligations under the credit facility discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company has taken several steps to increase its liquidity, which has been
significantly reduced by the losses incurred during the current and past several
fiscal years.
In August 1998, the Company refinanced its owned New York City real estate
generating funds of approximately $4,600,000 after repayment of the existing
first mortgages on such properties, closing costs and escrows. These funds were
used to repay Term Loan D of the credit facility described below in this item in
the amount of $1,600,000, with the balance used for working capital purposes.
In May 1999, the Company closed its Editel Los Angeles division. This division
incurred losses of approximately $2,400,000 during the first nine months of
fiscal 1999 that were partially due to a loss of revenues related to the
announcement of the closing of this division. The Company has sold a portion of
the equipment from this division, will transfer a small portion of the equipment
to its New York facilities and has scheduled an auction in late July to dispose
of the balance with the proceeds from all equipment sales being used to repay a
portion of the Company's outstanding indebtedness. Additionally, the Company
owned real estate previously occupied by the Editel Los Angeles facility (the
"Los Angeles Real Estate") is for sale.
Also in May 1999, the Company announced that it had reached an agreement in
principle to sell the mobile television production assets of the Company's
Mobile division to National Mobile Television, Inc. ("NMT"). The Company is in
the process of negotiating a definitive sale agreement. Contingent on the
successful conclusion of these negotiations and the satisfaction of all
conditions, the Company expects the transaction to close in July 1999. The
proceeds generated from the sale will be used, together with the proceeds
from other asset sales, to repay a significant portion of the Company's
outstanding debt, but there is no assurance that the transaction will close.
The Company has reduced its cash requirements through cost reductions
principally related to the elimination and consolidation of businesses.
Additionally, due to capital expenditures in fiscal years 1996 through 1998
totaling approximately $30,000,000, the Company currently anticipates that
capital expenditures in fiscal 1999 will be approximately $1,500,000. Capital
expenditures were $1,125,000 (net of proceeds from dispositions of equipment)
during the nine months ended May 31, 1999, and consisted of the purchase of
production, post production and graphics equipment for use throughout the
Company.
Net cash provided by operating activities during the nine months ended May 31,
1999 and 1998 was $3,823,000 and $1,795,000, respectively. Net cash provided by
operating activities for the nine months ended May 31, 1999 was offset by net
cash of $1,125,000 used in investing activities which consisted of capital
expenditures (net of proceeds from asset dispositions), and by net cash used in
financing activities of $3,797,000 for debt repayment, resulting in a net
decrease in cash available of $1,099,000.
In December 1995, the Company entered into a $26 million revolving credit and
term loan agreement (the "credit facility") with a financial institution,
consisting of an $11 million
9
revolving credit facility and two $7.5 million term loans (Term Loans A and B).
In May 1997, Term Loan A was revised by the inclusion of $2,500,000 of the
original Term Loan B and the advance of $518,000 of new funds, resulting in a
revised Term Loan A balance of $9,000,000. Term Loan A was payable in equal
monthly principal installments of $100,000 plus interest, with the balance of
$5,700,000 due at maturity. In November 1997 Term Loan B was repaid, in part
from the proceeds of a new Term Loan D in the amount of $2,500,000. $3,742,000
of the original Term Loan B was repaid from sales of equipment from the
Company's Editel Chicago, Editel New York and Unitel Hollywood divisions. The
Company refinanced its New York owned real estate in August 1998 and used a
portion of the proceeds of the refinancing to repay Term Loan D and other
indebtedness and the balance of the proceeds for working capital purposes.
In July 1997 the credit facility was further amended by the issuance of a
$5,080,000 letter of credit to secure payment of principal and interest on
$5,000,000 principal amount of Allegheny County (Pennsylvania) Industrial
Development Authority Variable Rate Demand Revenue Bonds (the "Bonds"). The
proceeds from the sale of the Bonds were loaned to the Company and were used by
the Company to build a new digital mobile teleproduction unit. The credit
facility requires quarterly principal payments of $179,000 commencing December
1998 in respect of the Bonds. The Bonds mature on July 1, 2009 and, to the
extent not previously redeemed in full, are required to be repaid by the Company
on that date.
In December 1997 a second series of Bonds was issued in the amount of
$3,500,000. The proceeds of the second series of Bonds were used to finance the
construction of a second digital mobile teleproduction unit. The credit facility
requires quarterly principal payments of $125,000 commencing February 1999 in
respect of this second series of Bonds which also mature on July 1, 2009.
The terms of the credit facility with the financial institution provide that the
lender receive a first lien on all property and equipment and accounts
receivable that are not encumbered by another lender.
The Company has at times during the nine months ended May 31, 1999 not been in
compliance with certain covenants contained in the credit facility. In January
1999 the credit facility was amended to advance the maturity of all outstanding
loans to March 1999 and require that the letter of credit facility supporting
the Bonds, in the amount of $8,631,932, be replaced at that time. However, in
June 1999 the lender extended the maturity of the letter of credit through July
2000 and the lender is continuing to provide financing to the Company on a
discretionary basis, but there is no assurance that the lender will continue to
provide such financing. Although no commitment has been reached in this regard,
the Company is in discussions with various lenders to refinance the credit
facility and make available to the Company additional working capital. The
amounts owed under the credit facility, aggregating $9,589,000 at May 31, 1999,
have been classified as a current liability in the May 31, 1999 consolidated
balance sheet and the Company anticipates that a significant portion of such
indebtedness will be repaid from proceeds generated by the sale of the Company's
mobile teleproduction and Editel Los Angeles assets. Additionally, the Company
has during the nine months ended May 31, 1999 been in arrears on certain other
indebtedness that the Company also anticipates will be repaid from the sale of
its mobile teleproduction and Editel Los Angeles assets.
10
In addition to the refinancing of the Company's primary credit facility the
Company is attempting to secure other sources of capital and financing. The
Company anticipates that these steps, together with funds generated from
operations and proceeds from the sale of certain fixed assets will be sufficient
to meet the Company's anticipated working capital and investment needs for the
remainder of fiscal 1999. However, there is no assurance that these
uncertainties will be settled or that management's plan will be achieved.
11
RESULTS OF OPERATIONS
Sales were $11,163,000 and $13,957,000 for the quarters ended May 31, 1999 and
1998, respectively. Sales were $33,899,000 and $40,154,000 for the nine months
ended May 31, 1999 and 1998, respectively. The decrease in sales of $6,255,000
in the nine months ended May 31, 1999 is primarily attributable to the following
areas of the Company's business. First, the consolidation of the Company's two
New York City based post-production facilities into a single facility at Unitel
Post 38 resulted in a decrease in sales of approximately $1,700,000 from the
closing of the Unitel Post 57 facility and the elimination of the interactive
segment of the Company's post-production business. Second, sales of the
Company's Mobile division declined approximately $400,000 in the first quarter
as a result of pass-through costs being eliminated from Mobile division billing
and absorbed directly by the Company's clients. Although Mobile division sales
decreased in the nine months ended May 31, 1999 compared to sales for that
division in the same period of the prior year, results of operations for that
division were improved. Third, studio revenues decreased approximately $700,000
primarily due to holding one studio vacant in anticipation of obtaining a long
term contract that the Company was successful in obtaining and commenced in June
of 1999. Fourth, sales for the Company's Editel Los Angeles division declined
approximately $3,100,000 of which a substantial portion was a result of the loss
of the Company's business in connection with the Star Trek television series in
the fourth quarter of fiscal 1998. The Editel Los Angeles division was closed in
May 1999.
The Company's net loss for the quarter and nine months ended May 31, 1999 was
($1,912,000) and ($3,885,000) compared to a net loss of ($677,000) and
($2,441,000) for the quarter and nine months ended May 31, 1998. The comparative
increase in the net loss of ($1,235,000) and ($1,444,000) for the quarter and
nine months ended May 31, 1999 compared to the quarter and nine months ended May
31, 1998 is due to a substantial decrease in sales at the Company's Editel Los
Angeles division. The decrease in sales was partially offset by improvements in
the results of the New York post production operation resulting from the closure
of the Unitel Post 57 facility, improvements in the results of the Mobile
division due to a change in the client composition and cost reductions and
improvements in the operations of the New York studio division.
Production costs, the main component of cost of sales, consist primarily of
direct labor, equipment maintenance expenses and occupancy costs. The Company's
production costs, as a percentage of sales, were 67.9% and 65% for the quarters
ended May 31, 1999 and 1998, respectively, and 67.5% and 67.6% for the nine
months ended May 31, 1999 and 1998, respectively. Consolidated production costs
for the nine months ended May 31, 1999 remained consistent when compared with
the same period of the prior year, despite a significant decrease in sales at
the Editel Los Angeles division without a corresponding decrease in expenses due
to substantial fixed costs. The efficiencies achieved from an increase in sales
without a proportionate increase in costs at the Company's Unitel Post 38
facility as a result of the closure of the Company's Unitel Post 57 facility and
the relocation of a significant portion of that facility's customer base to the
Unitel Post 38 facility offset the increase in production costs at Editel Los
Angeles.
12
Depreciation, as a percentage of sales, was 18.6% and 16.1% for the quarters
ended May 31, 1999 and 1998, respectively, and 18.9% and 16.4% for the nine
months ended May 31, 1999 and 1998, respectively. Had gain on sale of equipment
of $363,000 and $86,000 been excluded from depreciation expense for the nine
months ended May 31, 1999 and 1998, depreciation as a percentage of sales would
have been 19.9% compared with 16.6% for the same period in the prior year. The
increase in the quarter and nine months ended May 31, 1999 compared to the same
period in the prior year was primarily a result of the introduction of a digital
mobile teleproduction unit in the quarter ended February 28, 1998. Additionally,
the Company retained the majority of the equipment previously used at the
Company's Unitel Post 57 facility that was closed in the third quarter of the
Company's 1998 fiscal year. Also, since sales were down and depreciation was
constant with the comparative periods of the prior year, depreciation as a
percentage of sales increased for such period.
Selling expenses, as a percentage of sales, for the quarters ended May 31, 1999
and 1998 were 1.9% and 2.2%, respectively and 2.1% and 2.7% for the nine months
ended May 31, 1999 and 1998, respectively. The decrease in the quarter and nine
months ended May 31, 1999 as compared to the quarter and nine months ended May
31, 1998 is due to a decrease in the Company's overall sales staff primarily as
a result of the closure of the Unitel Post 57 facility in May 1998. Also,
promotional expenses were higher in the nine months ended May 31, 1998 due to
the introduction of one of the Company's new digital mobile teleproduction
units.
General and administrative expenses, as a percentage of sales, for the quarters
ended May 31, 1999 and 1998 were 15.9% and 10.7%, respectively, and 12.6% and
11.4% for the nine months ended May 31, 1999 and 1998, respectively. The
increase in general and administrative expenses as a percentage of sales in the
nine months ended May 31, 1999 as compared with May 31, 1998 is due to a larger
decrease in sales than a decrease in expense. During such period, general and
administrative expenses decreased by approximately $300,000 primarily from
reductions in corporate expenses, bad debt allowances and professional fees.
General and administrative expenses increased in the third quarter of fiscal
1999 as compared to fiscal 1998 substantially due to the settlement of a use tax
audit and an increase in professional fees incurred in the process of
restructuring certain of the Company's indebtedness.
Interest expense, as a percentage of sales, for the quarters ended May 31, 1999
and 1998 was 12.5% and 7.2%, respectively and 10.3% and 7.1% for the nine months
ended May 31, 1999 and 1998, respectively. Interest expense for the nine months
ended May 31, 1999 increased approximately $600,000 compared to the nine months
ended May 31, 1998 primarily from new debt added as of August 31, 1998 and
higher interest rates on the Company's credit facility which was partially
offset by normal principal reductions on older indebtedness.
The Company's effective tax rate was 0% for the first nine months of fiscal
years 1999 and 1998. The effective tax rate for the first nine months of fiscal
1999 is less than the federal statutory rate of 34% due to the utilization of
net operating loss carryforwards generated by the losses incurred in fiscal 1998
and prior years.
13
YEAR 2000 UPDATE
General
The Company's company-wide Year 2000 Project (the "Project") is proceeding on
schedule. The purpose of the Project is to evaluate the ability of computer
programs (software) and embedded chips to distinguish between the year 1900 and
the year 2000. The Project has been underway since the middle of calendar year
1998, is proceeding on schedule and is expected to be completed by the middle of
calendar year 1999. While many different types of equipment and software
products may be prone to the Year 2000 problem, major emphasis is being placed
on those items considered to be material to the operation of the Company's
business.
The Company's primary business is to provide services to the video and film
communications industry for the recording, editing, creation of digital effects
and duplication of television programs, commercials, corporate communications
and feature films. Because the various operating divisions of the Company share
much of the software and hardware necessary to provide these services, Year 2000
research done at one division is largely applicable at the Company's other
divisions. This fact will greatly simplify the process of evaluating the impact
of Year 2000 issues on the Company's business and minimize the costs to the
Company involved in becoming Year 2000 compliant.
PROJECT
The Company's Project is divided into four major sections:
1. Administrative Functions--accounts payable, accounts receivable, client
scheduling, purchasing and payroll.
2. Technical Services--equipment/systems, software packages, interconnectivity
issues.
3. Infrastructure--personal computers (PC's and MAC's), owned telephone system
equipment, networks (Novell, Microsoft), office equipment, etc.
4. External Services Vendors--401K/health care management, payroll services,
property/liability insurance providers, etc.
Administrative Functions:
The accounts payable, accounts receivable and client scheduling tasks at most
divisions of the Company are provided by industry standard software
applications, for example J.D. Edwards Accounting Package or Xytech Systems, or
both, depending on the division. The Company has purchased the Xytech Systems
upgrade and is waiting for installation. The Company is in the process of
upgrading its J.D. Edwards Accounting Package and expects installation to be
completed in September, 1999. Standard PC based applications, used for these and
other applications, are currently compliant. Similarly, the payroll services
vendor expects to have Year 2000 software to be available in mid calendar year
14
1999. These upgrades will be purchased by the Company as soon as they become
available.
Technical Services:
The Company utilizes technical hardware from various vendors to provide a wide
range of services to its clients. All divisions have been compiling lists of
equipment considered critical to their operations. Based on written responses
from various vendors, the Company has been advised that the majority of these
items are either Year 2000 compliant or not affected by Year 2000 issues. Some
software packages utilized on Silicon Graphics and Apple platforms are still
being evaluated with respect to Year 2000 issues, but since these items are
routinely upgraded by the Company as part of its ongoing operations to insure
that the Company is staying current with technology it is anticipated that the
Year 2000 issues in such cases should be minimal. Furthermore, the products
produced by the Company for its clients are delivered to the client at the
conclusion of a job and such products are not thereafter affected by Year 2000
issues. Therefore, Year 2000 compliance is not considered a material issue for
already completed client work. All critical equipment and software products
utilized in the production of client material will have been certified, either
through testing by the Company or vendor representation, to be Year 2000
compliant or not affected by Year 2000 issues by the middle of calendar year
1999.
Infrastructure:
It is expected that general purpose PC workstations purchased within the past 12
months should be able to recognize the date change to the Year 2000. A
comprehensive checklist is being prepared that will assist each division in
determining which PCs need to have some form of upgrade. Some older PCs may
require replacement, or may be upgraded through inexpensive after-market clock
upgrades. Also being evaluated are Company owned telephone systems which contain
embedded chips which may be date sensitive. To date, all telephone systems
checked have been found to be either Year 2000 compliant or not affected by the
Year 2000 issue. Novell or Microsoft computer network products have upgrades
available supplied and represented by the vendor to be Year 2000 compliant which
will be installed by the Company by the middle of calendar 1999. Other general
purpose office equipment such as copy machines and fax machines are being
evaluated but are not considered to be material.
External Services Vendors:
The Company utilizes numerous outside vendors for management of such services as
payroll, health care benefits, 401K administration and insurance coverages. All
of these vendors are being asked to supply a written statement concerning Year
2000 compliance and a general scope of appropriate needed actions, costs, and
time-frames. This part of the Project is expected to be completed by the middle
of calendar 1999.
15
Costs
The total cost of the Year 2000 Project is not expected to be material to the
Company's financial position. Because some investigation is still ongoing, total
costs can only be estimated. Based on mission critical hardware and software
upgrade costs that are known, and reasonable expectations of results from
further testing, the total cost of the Project is not expected to exceed
$100,000 Company-wide and will be expensed as incurred.
Risks
The Company supplies a wide range of services to its clients. Once those
services are delivered, whether on videotape, CD Rom, computer disk, or other
media, Year 2000 compliance is no longer a concern. Since it has already been
determined that much of the hardware and software material to the internal
operation of the Company's business is or will be compliant, there appears to be
minimal risk to the internal operations of the company due to the Year 2000
issue. This does not include any serious problems or outages caused by Year 2000
problems that could exist at local utilities that supply telephone, electrical,
natural gas and similar services or with external services vendors. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of outside vendors or clients, the
Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. However, the Company's internal
Project is expected to significantly reduce the level of uncertainty about the
Year 2000 problem particularly with respect to the effect on the Company of the
readiness of its vendors. It is the opinion of the Company that, with the
installation of new equipment which the Company is advised to be Year 2000
compliant and the completion of the Project as scheduled, the possibility of
significant interruptions of normal operations should be significantly reduced.
Contingency Plan
Based on the Company's expectation that Year 2000 issues will be adequately
addressed by the scheduled completion of the Project, no contingency plans have
been formulated. In the event an unexpected Year 2000 problem is discovered that
will affect either the completion or delivery of client material, the Company
expects that a sufficient number of alternative production methods exist in the
industry to mitigate any substantial problems.
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WHICH ARE BASED UPON CURRENT
EXPECTATIONS AND INVOLVE CERTAIN RISKS AND UNCERTAINTIES. UNDER THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, READERS ARE
HEREBY CAUTIONED THAT THESE STATEMENTS MAY BE IMPACTED BY SEVERAL FACTORS, AND,
CONSEQUENTLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED HEREIN.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk.
The Company is exposed to interest rate change market risk with respect to its
credit facility with a financial institution which is priced based on the prime
rate of interest. At May 31, 1999 $9,589,000 was outstanding under the credit
facility. Changes in the prime interest rate during fiscal 1999 will have a
positive or negative effect on the Company's interest expense. Each 1%
fluctuation in the prime interest rate will increase or decrease interest
expense for the Company by approximately $96,000 annually.
In addition, the Company is exposed to interest rate change market risk with
respect to the Bonds in the amount of $8,500,000. The Bonds bear interest at a
floating rate established weekly by the remarketing agent. During fiscal 1999
the interest rate on the Bonds approximated 3.5%. Each 1% fluctuation in the
interest rate on the Bonds will increase or decrease interest expense on the
Bonds by approximately $85,000 annually.
The impact of interest rate fluctuations on other floating rate debt of the
Company is not material.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
The following legal proceedings have been filed against the Company:
On or about February 22, 1999 General Electric Capital Business Asset Funding
Corporation ("Plaintiff") filed a summons and complaint against the Company in
the Supreme Court of the State of New York, County of New York, alleging that
the Company breached the terms of two leases (including a capital lease) and a
promissory note (the "Contracts") with the Plaintiff by failing to make timely
payments thereunder. Plaintiff seeks a judgment for the sum of approximately
$4,600,000 plus interest, late charges and expenses, the return of the equipment
subject to the Contracts and related relief.
On or about April 8, 1999 General Electric Capital Corporation (the "Second
Plaintiff") filed a summons and complaint against the Company and a company
subleasing certain equipment from the Company in the United States District
Court for the Southern District of New York alleging that the Company breached
the terms of a certain lease agreement (the "Lease") with the Second Plaintiff
by failing to make timely payments thereunder. The Second Plaintiff seeks a
judgment against the Company for the sum of approximately $894,000 together with
interest, late charges and expenses, the return of the equipment subject to the
Lease and other related relief.
Although the Company previously reported that it had reached a settlement of the
above matters, the Company was not able to successfully conclude such
settlement. However, the Company has informed the claimants that the obligations
comprising these matters will be repaid in full at the closing of the sale of
the Company's mobile teleproduction assets discussed in Management's Discussion
and Analysis of Financial Condition and Results of Operations. However, there
is no assurance that the closing of the sale will occur and the obligations
owed to the claimants will be repaid.
On April 15, 1999 a Notice of Default and Election to Sell Under Deed of Trust
was recorded in the office of the County Recorder of Los Angeles County
providing for the sale of the Los Angeles Real Estate in the event that arrears
in mortgage payments are not paid in full. The Company subsequently made all
payments due under the mortgage on the Los Angeles Real Estate.
The Company is involved in other legal proceedings which are not of a material
nature.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K.
1. Exhibit 27. Financial Data Schedule.
(b) On May 12, 1999 the Company filed a Current Report on Form 8-K
dated May 12, 1999 (File No. 1-8654).
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH ARE BASED UPON CURRENT
EXPECTATIONS AND INVOLVE CERTAIN RISKS AND UNCERTAINTIES. UNDER THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, READERS ARE
HEREBY CAUTIONED THAT THESE STATEMENTS MAY BE IMPACTED BY SEVERAL FACTORS, AND,
CONSEQUENTLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED HEREIN.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITEL VIDEO, INC.
By: /s/ Barry Knepper
-------------------------------------
Barry Knepper
President and Chief Executive Officer
By: /s/ Neil Marcus
-------------------------------------
Neil Marcus
Chief Financial Officer
Dated: July 15, 1999
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