SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File Number 1-11976
UNAPIX ENTERTAINMENT, INC.
(Exact name of small business issuer as
specified in charter)
DELAWARE 95-4404537
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification number)
200 MADISON AVENUE
NEW YORK, NY 10016
(Address of principal executive offices)
212-252-7600
(Issuer's Telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 __
As of August 12,1999 there were 7,671,598 shares of the Company's common stock
outstanding.
Page 1
UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
JUNE 30, DECEMBER 31,
1999 1998
------- -------------
ASSETS
Cash and cash equivalents $ 1,812 $ 1,707
Accounts receivable-trade, net 19,553 18,968
Film costs, net 40,397 36,525
Product inventory 3,163 2,978
Property and equipment, net 1,088 1,037
Other assets 1,722 1,389
Excess of cost over fair value of
net assets acquired 3,192 3,279
-------- --------
Total Assets $ 70,927 $ 65,883
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 9,488 $ 8,845
Deferred income taxes 1,505 1,104
Royalty payable 3,232 5,234
Bank line of credit 14,701 9,978
Variable rate senior subordinated notes 2,629 2,608
10% convertible subordinated notes 13,380 13,343
-------- --------
Total Liabilities $ 44,935 $ 41,112
-------- --------
Stockholders' Equity:
Preferred stock; $.01 par value; 3,000,000 authorized
Cumulative convertible Series A 8% preferred stock;
501,000 issued and outstanding (aggregate liquidation
preference of $1,503) 5 5
Non-voting convertible Series B 6% preferred stock;
300 shares issued and outstanding, (aggregate
liquidation preference of $3,000) -- --
Cumulative Convertible Series C 8% preferred stock;
1,175 and 675 shares issued and outstanding (aggregate
liquidation preference of $1,175) -- --
Common stock $.01 par value per share; 40,000,000 authorized;
7,646,000 and 7,515,000 shares issued and outstanding 77 76
Additional paid-in capital 27,425 26,695
Notes receivable from equity sales (2,715) (2,715)
Retained Earnings 1,200 710
-------- --------
Total Stockholders' Equity $ 25,992 $ 24,771
-------- --------
Total Liabilities and Stockholders' Equity $ 70,927 $ 65,883
-------- --------
-------- --------
See accompanying notes to consolidated financial statements
Page 2
UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Three Months Ended June 30,
1999 1998
---- ----
Revenues:
Licensing and distribution $ 5,494 $ 2,737
Home video 5,106 6,031
------------ ------------
10,600 8,768
------------ ------------
Operating costs:
Licensing and distribution 2,460 1,829
Home video 3,507 3,426
General and administrative expenses 3,385 2,869
------------ ------------
9,352 8,124
------------ ------------
Income from operations 1,248 644
Interest and debt expense, net 758 532
------------ ------------
Income before taxes 490 112
Provision for income taxes 202 45
------------ ------------
Net income $ 288 $ 67
------------ ------------
------------ ------------
Net income per share, basic $ .03 $ .01
------------ ------------
------------ ------------
Net income per share, diluted $ .03 $ -
------------ ------------
------------ ------------
Average number of shares, basic 7,590 6,143
------------ ------------
------------ ------------
Average number of shares, diluted 7,701 6,765
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements
Page 3
UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Six Months Ended June 30,
1999 1998
---- ----
Revenues:
Licensing and distribution $ 8,849 $ 5,799
Home video 11,585 10,932
------------ ------------
20,434 16,731
------------ ------------
Operating costs:
Licensing and distribution 4,082 3,797
Home video 7,995 5,969
General and administrative expenses 5,893 5,415
------------ ------------
17,970 15,181
------------ ------------
Income from operations 2,464 1,551
Interest and debt expense, net 1,310 874
------------ ------------
Income before taxes 1,154 677
Provision for income taxes 484 269
------------ ------------
Net income $ 670 $ 408
------------ ------------
------------ ------------
Net income per share, basic $ .06 $ .06
------------ ------------
------------ ------------
Net income per share, diluted $ .06 $ .06
------------ ------------
------------ ------------
Average number of shares, basic 7,562 6,085
------------ ------------
------------ ------------
Average number of shares, diluted 7,638 6,708
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements
Page 4
UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Six Months Ended June 30,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 670 $ 408
Adjustments to reconcile net income to net cash used by operating
activities:
Amortization and depreciation 5,652 5,900
Deferred income taxes 406 193
Accretion of debentures discount 86 54
Film rights received - (368)
Decrease (increase) in accounts receivable, net (585) (1,095)
(Increase) decrease in product inventory (185) (753)
Increase in other assets (333) (940)
Increase in accounts payable and accrued expenses (63) (114)
Increase (decrease) in royalties payable (2,002) 895
--------- ---------
Total cash flows provided by operating activities 3,646 4,180
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Film cost expenditures (9,288) (12,437)
Purchase of property and equipment (199) (204)
--------- ---------
Total cash flows used by investing activities (9,487) (12,641)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from 10% convertible notes private placement - 4,063
Net borrowings under bank line of credit 4,709 2,224
Proceeds from employee notes receivable 1
Proceeds from warrant and option exercises 83 5,046
Private Placement expenditures (3)
Preferred stock dividends (21) (21)
Advances from affiliates 675 700
Payments to affiliates - (1,000)
Proceeds from issuance of preferred - Series C 500 -
--------- ---------
Total cash flows from financing activities $ 5,946 $ 3,665
--------- ---------
See accompanying notes to consolidated financial statements
Page 5
UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
For the Six Months Ended June 30,
1999 1998
---- ----
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS $ 105 $ 2,549
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,707 425
--------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD $ 1,812 $ 2,794
--------- ---------
--------- ---------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Preferred stock dividends paid in common stock $ 159 $ 39
Exchange of acquisition fund for 10% convertible subordinated debentures $ - $ 900
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,316 $ 1,198
--------- ---------
--------- ---------
Cash paid for taxes $ 61 $ 41
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements
Page 6
UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Unapix
Entertainment, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six-month period
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Form 10-KSB for the year ended December 31, 1998.
2. FINANCING
The Company has a Revolving Credit Loan and Security Agreement (the
"Agreement") with Imperial Bank (the "Bank") which was amended in June 1999
to provide for a revolving credit secured by accounts receivable of up to
$14,000,000 (increased from $10,000,000, the "Revolving Credit Facility") and
an additional $4,000,000 for qualifying productions (the "Production
Facility"). Interest on the outstanding loan balance accrues at a rate of 1%
per annum in excess of the Bank's publicly announced benchmark rate (8% at
July 1, 1999). The Company is also required to pay an unused credit line fee
on the Revolving Loan Facility at a rate equal to .5% per annum of the amount
by which the collateral base exceeds the average daily loan balance during
any calendar quarter. Each production loan under the Production Facility is
subject to a closing fee of 1%. The term of the facility expires on June 14,
1999. Outstanding amounts under the facility are collateralized by a security
interest in substantially all of the Company's assets. A closing fee of
$270,000 was paid to the Bank on closing the Agreement.
The facility contains restrictive covenants that require minimum tangible net
worth. The covenants also, among other things, prohibit the payment of cash
dividends on the Company's common stock, require minimum amounts of tangible net
worth and limit (a) the Company's ratio of debt to net worth on a consolidated
basis, (b) the amount of cost that the Company can incur in producing, financing
or acquiring entertainment properties, (c) the amount of cost and expenses that
the Company may incur with respect to theatrical releases of films, and (d) the
Company incurring losses for two consecutive quarters.
3. FILM COSTS
June 30,
1999
--------------
(In thousands)
Films released $ 91,748
Accumulated amortization (59,082)
--------
32,666
Films in process 7,731
--------
$ 40,397
--------
--------
Page 7
UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
4. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per basic common share ("EPS") is computed by dividing the net
income available to common shareholders by the weighted average number of common
shares outstanding.
Net income per diluted share is computed by dividing the net income available to
common shareholders, adjusted on an as if converted basis, by the weighted
average number of common shares outstanding plus potential dilutive securities.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
Weighted average basic shares outstanding 7,590 6,143 7,562 6,085
Effect of dilutive securities:
Options 111 529 76 528
Warrants - 93 - 95
----- ----- ----- -----
Weighted average dilutive shares outstanding 7,701 6,765 7,638 6,708
----- ----- ----- -----
----- ----- ----- -----
Net income as reported Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net income as reported $288 $ 67 $670 $ 408
Preferred stock dividends 94 30 183 60
---- ---- ---- -----
$194 $ 37 $487 $ 348
---- ---- ---- -----
---- ---- ---- -----
Total income used for earnings per share
Page 8
UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998
Revenues for the three months ended June 30, 1999 increased by 21% to
$10,600,000 from $8,768,000 in the same three month period in 1998. This
increase in revenues is largely the result of the increase in licensing and
distribution revenues of 100% to $5,494,000, as compared to $2,737,000 in
1998. Home video revenue decreased 15% in 1999 to $5,106,000 from $6,031,000
in 1998 due to the release of one less film and none of the higher volume and
margin genre films in the three months ended June 30, 1999. Management
expects that the improvement over the prior year will continue throughout
1999 as higher volume and margin genre films are released. This growth should
be generated by continued market penetration, as well as by the Company's
emphasis on licensing and distributing higher quality films to the rental
marketplace and non-fiction titles to the sell-through marketplace.
Licensing and distributing costs for the three months ended June 30, 1999
increased by 34% to $2,460,000 from $1,829,000 as compared to the corresponding
period in 1998. This increase reflects increased film expenses associated with
the higher levels of revenues described above.
General and administrative costs were $3,385,000 for the three months ended June
30, 1999, as compared to $2,869,000 in the same period in 1998, an increase of
$516,000. This increase is chiefly consisting of increased staffing and office
costs to support new business activities, and includes $103,000 in salaries
for personnel no longer with the Company.
The Company had income from operations of $1,248,000 for the three months ended
June 30, 1999, as compared to $644,000 in the same period in 1998. This
improvement in margins reflects the result of the Company's releasing higher
quality releases into the Licensing and Distribution markets.
Interest expense and financing expense, net, increased to $758,000 in 1999 from
$532,000 in 1998. This increase primarily reflects the interest and related
expenses on the 10% Convertible Notes, as well as increased bank borrowings.
The Company had income before taxes of $490,000 for the three months ended June
30, 1999 as compared to income before taxes of $112,000 for the corresponding
three month period in 1998. The increase is primarily attributable to higher
revenues from Licensing and Distribution.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
Revenues for the six months ended June 30, 1999 increased by 22% to $20,434,000
from $16,731,000 in the same six month period in 1998. This increase in revenues
is largely the result of the increase in licensing and distribution revenues of
52% to 8,849,000, as compared to $5,799,000 in 1998. Management expects that the
improvement over the prior year will continue throughout 1999. The growth should
be generated by continued market penetration, as well as by the Company's
emphasis on licensing and distributing higher quality films.
General and administrative costs were $5,893,000 for the six months ended
June 30, 1999, as compared to $5,415,000 in the same period 1998, an increase
of $478,000. This increase includes $357,000 in costs for new business
activities.
The Company has income from operations of $2,464,000 for the six months ended
June 30, 1999, as compared to $1,551,000 in the same period in 1998. The
improvement in margins reflects the result of the Company's releasing higher
quality releases into the Licensing and Distribution and video rental and
sell-through markets.
Interest expense and financing expense, net, increased to $1,310,000 in 1999
from $874,000 in 1998. This increase primarily reflects the interest and related
expenses on the 10% Convertible Notes, as well as increased bank borrowings.
The Company had income before taxes of $1,154,000 for the six months ended June
30, 1999 as compared to income before taxes of $677,000 for the corresponding
six month period in 1998.
Page 9
UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1999, operating activities provuided cash of
$3,646,000. The Company used $9,487,000 in investing activities which consisted
primarily of $9,288,000 incurred in acquiring and producing new properties for
the home video rental and the licensing and distribution markets. The additional
cash requirements were primarily met by proceeds of $5,946,000 from financing
activities which included $4,709,000 borrowed under the bank line of credit,
$675,000 in advances from affiliates and $500,000 proceeds from the private
placement of preferred stock.
In the normal course of business the Company makes certain guarantees to
producers and other third parties as to the minimum amount such parties will
receive from the Company's distribution of their products. The Company has
committed to pay film acquisition advances and guarantees of approximately
$5,200,000 as of June 30, 1999, which amounts are payable upon delivery of the
films. The Company also expects to incur significant additional cash flow needs
relating to its continued expansion. In order to meet its future funding needs
the Company will utilize cash on-hand (including cash from the financing
described below), operating cash flows, its line of credit and other potential
financing.
The Company's borrowing facility provides for borrowings of up to
$18,000,000. $14,000,000 secured by accounts receivable and $4,000,000 for
production loans (see footnote 2 for further details). The proceeds from loans
under the Facility have been, and will be, used for working capital purposes,
including enabling the Borrowers to acquire distribution rights with respect
to entertainment programming. As of June 30, 1999, the Company was fully
borrowed under the facilities.
The feature film and television licensing and distribution industries require
signigicant expenditures of funds to establish and expand a library of films and
programs from which revenues may be generated. The Company could be dependent
upon future financings to continue its long term plans of expansion and growth.
The Company anticipates that as its asset base grows it will secure an increased
working capital line of credit as well as explore other film acquisition
financing arrangements. The Company may also have additional debt or equity
financings.
The Company has received a commitment from GE Capital for a $40,000,000
revolving line of credit at a LIBOR-based interest rate which would replace
the existing borrowing facility. The closing is subject to the completion of
satisfactory legal documents.
Year 2000
The Company has undertaken a study of its technological systems to determine
their year 2000 compliance and to the extent of noncompliance, the required
remediation. The Company has generally completed this process of review. All
software in use is vendor supplied and will be upgraded to a current version and
is expected to be fully certified as year 2000 compliant prior to the end of the
third quarter of 1999. The Company believes it has identified all non-compliant
hardware and has scheduled replacements also by the end of the third quarter of
1999. The Company does not believe that the cost to complete such remediation
will be material.
An assessment of the readiness of year 2000 compliance of third party entities
such as suppliers, banking institutions, customers and others is ongoing. As
with other companies in its industry, the Company is dependent on a number of
third parties for the supply of products and services that are themselves
dependent on computers. The Company's initial assessment of compliance by third
party entities is not yet completed, and therefore, the Company has not yet
developed any related contingency plans. Currently, the Company is unable to
predict the cause of the worst case year 2000 scenario nor the likelihood of any
third party not being year 2000 compliant or the direct or indirect costs to the
Company of non-compliance by third parties.
Except for the historical information contained herein, the matters discussed
are forward-looking statements that are subject to risks and uncertainties,
including the inherent unpredictability of the entertainment industry in which a
success of a product depends upon factors such as competition and audience
acceptance, which may bear little or no correlation to the Company's production
or other costs, as well as the other factors described in "FACTORS WHICH MAY
AFFECT RESULTS" contained in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1998 (which has been filed with the Securities and
Exchange Commission). The highlighted risks should not be assumed to be the only
things to affect the Company's future performance.
Page 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has a borrowing facility on which it incurs interest equal to 1% per
annum above the bank's benchmark rate which was 8% at July 1, 1999. A 1%
change in the benchmark rate applied to the outstanding borrowings at June 30,
1999 would result in an increase or decrease in interest expense of $147,000 per
year.
The Company also has $2,722,000 principal amount of variable rate senior
subordinated notes outstanding at June 30, 1999. The notes bear interest at 3%
above the prime rate provided that the rate does not fall below 8% or exceed 12%
per annum. The rate is set at the beginning of each year and is 10.75% for 1999.
A 1% change in the prime rate would result in an increase or decrease in
interest expense of $27,220 per year.
Receivables from sales to foreign customers are generally denominated in U.S.
dollars. The Company has no significant foreign exchange gains or losses.
PART II - OTHER INFORMATION
ITEMS 1 AND 3 ARE NOT APPLICABLE.
ITEM 2. CHANGES IN SECURITIES
(A) and (B) are not applicable
In April 1999 the Company granted a total of 525,000 common stock
purchase options to two officers of the Company, all of which have an exercise
price of $1.875 per share. All such options expire in March 2009. The options
were issued pursuant to the exemption contained in Section 4(2) of the
Securities Act of 1933, as amended (the "Act"). An aggregate of 150,000 options
will become exercisable upon such officers' entering into new employment
agreements with the Company. Subject to such execution and the grantee's
continuing to provide services to the Company, the remaining options become
exercisable at various dates between January 2000 and January 2003.
In May 1999 the Company sold a total of 500 shares of its Series C 8%
Cumulative Convertible Preferred Stock, $.01 par value per share ("Preferred
Stock C"). Each share of Preferred Stock C has a stated value of $1,000 and is
convertible into shares of Common Stock at a conversion price of $2.50 per share
(i.e. each share of Preferred Stock C is convertible into 400 shares of the
Company's Common Stock). The sale was made pursuant to the exemption contained
in Section 4(2) of the Act. The purchaser was an "accredited" (as such term is
defined in Rule 501 of Regulation D promulgated under the Act).
In May 1999 the Company issued 686 shares of common stock to a public
relations firm as partial consideration for services previously rendered. The
shares were issued pursuant to the exemption contained in Section 4(2) of the
Securities Act of 1933.
In July 1999 the Company granted an aggregate of 685,000 common stock
purchase options to employees of the Company. All such options have an exercise
price of $2.6875 per share and expire in July 2009. 240,000 of the options were
immediately exercisable. The remaining options become exercisable solely on the
grantee's continuing to provide service to the Company. The options were issued
pursuant to the exemption contained in Section 4(2) of the Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 29, 1999, the Company held its 1999 Annual Meeting of
Stockholders at which stockholders elected Herbert M. Pearlman and David S. Lawi
as directors of the Company to serve until the Company's Annual Meeting of
Stockholders in the year 2002, or until their successors are duly elected.
6,561,811 shares were voted in favor of the election of such individuals and
votes were withheld with respect to 77,538 shares. In addition to the
individuals elected as directors at the 1999 Annual Meeting, Messrs. Robert
Baruc, Scott Hanock, David A. Dreilinger, Lawrence Bishop and Walter M. Craig,
Jr. , who were directors of the Company at the time of the 1999 Annual Meeting
of Stockholders, continue to serve as directors of the Company. At the 1999
Annual Meeting, stockholders also approved an amendment to the Company's 1993
Stock Option Plan (the "Amendment"), increasing the number of shares authorized
for issuance from 1,225,000 shares to 1,600,000 shares. 6,039,315 shares voted
in favor of the Amendment, 545,559 shares voted against the Amendment and 54,475
shares abstained from voting on the Amendment.
Page 11
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Financial Data Schedule
b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
UNAPIX ENTERTAINMENT, INC.
/s/ CHERYL FREEMAN August 13, 1999
- -------------------
Cheryl Freeman, Chief Financial Officer
Page 12
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
27 Financial Data
Page 13