<PAGE>
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 FEBRUARY 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 0-1461
THE TODD-AO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-1679856
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
900 N. SEWARD STREET, HOLLYWOOD, CALIFORNIA 90038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 962-5304
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares of common stock outstanding at April 8, 1997 was:
8,223,654 Class A Shares and 1,747,178 Class B Shares.
<PAGE>
THE TODD-AO CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FEBRUARY 28, 1997
<TABLE>
<CAPTION>
INDEX
- -----------------------------------------------------------------------------------------------
<S> <C>
PART I - FINANCIAL INFORMATION Page
Item 1- FINANCIAL STATEMENTS
The following financial statements are filed herewith:
Consolidated Balance Sheets, February 28, 1997 and August 31, 1996 3
Consolidated Statements of Income and Retained Earnings for the
Six and Three Months Ended February 28, 1997 and 1996 5
Consolidated Statements of Cash Flows for the Six Months Ended
February 28, 1997 and 1996 6
Notes to Consolidated Financial Statements for the Six Months
Ended February 28, 1997 8
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 13
Item 6 - Exhibits and Reports on Form 8-K 13
Signature 13
</TABLE>
2
<PAGE>
THE TODD-AO CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
------------ --------------
1996 1997
------------ --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . $ 3,385 $ 1,791
Marketable securities. . . . . . . . . . . . . . . . . 2,616 7,945
Trade receivables
(net of allowance for doubtful accounts of $707 at
February 28, 1997 and $696 at August 31, 1996) . . . 9,132 13,547
Inventories (first-in first-out basis) . . . . . . . . 635 552
Income tax receivable. . . . . . . . . . . . . . . . . -- 390
Deferred income taxes. . . . . . . . . . . . . . . . . 1,152 1,115
Prepaids and other . . . . . . . . . . . . . . . . . . 988 1,073
------------ -------------
Total current assets . . . . . . . . . . . . . . . . . 17,908 26,413
------------ -------------
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . 994 981
------------ -------------
PROPERTY AND EQUIPMENT - At Cost:
Land . . . . . . . . . . . . . . . . . . . . . . . . . 4,270 4,270
Buildings. . . . . . . . . . . . . . . . . . . . . . . 10,559 10,878
Leasehold improvements . . . . . . . . . . . . . . . . 6,286 6,930
Lease acquisition costs. . . . . . . . . . . . . . . . 2,187 2,187
Equipment. . . . . . . . . . . . . . . . . . . . . . . 31,271 38,399
Equipment under capital leases . . . . . . . . . . . . 3,360 3,360
Construction in progress . . . . . . . . . . . . . . . 1,402 270
------------ -------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . 59,335 66,294
Accumulated depreciation and amortization. . . . . . . (20,858) (23,800)
------------ -------------
Property and equipment - net . . . . . . . . . . . . . 38,477 42,494
------------ -------------
GOODWILL
(net of accumulated amortization of $406 at
February 28, 1997 and $190 at August 31, 1996) . . . 5,761 5,782
------------ -------------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . 1,046 1,037
------------ -------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . $ 64,186 $ 76,707
------------ -------------
------------ -------------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
THE TODD-AO CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
------------ --------------
1996 1997
------------ --------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . $ 2,812 $ 3,475
Accrued liabilities:
Payroll and related taxes. . . . . . . . . . . . . . 2,023 2,229
Interest . . . . . . . . . . . . . . . . . . . . . . 173 31
Equipment lease. . . . . . . . . . . . . . . . . . . 300 280
Other. . . . . . . . . . . . . . . . . . . . . . . . 1,198 1,027
Income taxes payable . . . . . . . . . . . . . . . . 368 1,469
Current maturities of long-term debt . . . . . . . . . 615 639
Capitalized lease obligations - current. . . . . . . . 616 237
Deferred income. . . . . . . . . . . . . . . . . . . . 634 1,559
------------ --------------
Total current liabilities. . . . . . . . . . . . . . . 8,739 10,946
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . 9,332 1,421
CAPITALIZED LEASE OBLIGATIONS. . . . . . . . . . . . . 22 --
DEFERRED COMPENSATION. . . . . . . . . . . . . . . . . 273 233
DEFERRED GAIN ON SALE/LEASEBACK. . . . . . . . . . . . 4,909 4,173
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 4,488 4,460
------------ --------------
Total liabilities. . . . . . . . . . . . . . . . . . . 27,763 21,233
------------ --------------
STOCKHOLDERS' EQUITY:
Common Stock:
Class A; authorized 30,000,000 shares of $0.01
par value; issued and outstanding 8,202,570 at
February 28, 1997 and 6,555,640 at
August 31, 1996. . . . . . . . . . . . . . . . . . . 65 82
Class B; authorized 6,000,000 shares of $0.01 par
value; issued and outstanding 1,747,178. . . . . . . 17 17
Additional capital . . . . . . . . . . . . . . . . . . 24,291 39,877
Retained earnings. . . . . . . . . . . . . . . . . . . 12,267 15,288
Unrealized gains on marketable securities and
long-term investments. . . . . . . . . . . . . . . . 42 3
Cumulative foreign currency translation adjustment . . (259) 207
------------ --------------
Total stockholders' equity . . . . . . . . . . . . . . 36,423 55,474
------------ --------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . $ 64,186 $ 76,707
------------ --------------
------------ --------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE SIX AND THREE MONTHS ENDED FEBRUARY 28, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
------------------------ ------------------------
1996 1997 1996 1997
--------- ---------- --------- ----------
<S> <C> <C>
REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,339 $ 39,681 $ 13,199 $ 19,341
--------- ---------- --------- ----------
COSTS AND EXPENSES:
Operating costs and other expenses . . . . . . . . . . . . . . . 24,279 30,659 11,256 15,102
Depreciation and amortization. . . . . . . . . . . . . . . . . . 2,588 3,187 1,322 1,565
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386 327 184 106
Equipment lease expense - net. . . . . . . . . . . . . . . . . . 344 155 132 63
Other expense (income) - net . . . . . . . . . . . . . . . . . . (258) 99 (511) 60
--------- ---------- --------- ----------
Total costs and expenses . . . . . . . . . . . . . . . . . . . . 27,339 34,427 12,383 16,896
--------- ---------- --------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES . . . . . . . . . . . . 4,000 5,254 816 2,445
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . . 1,510 1,965 309 927
--------- ---------- --------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,490 3,289 $ 507 $ 1,518
--------- ----------
--------- ----------
RETAINED EARNINGS BEGINNING OF PERIOD. . . . . . . . . . . . . . 7,904 12,267
LESS: DIVIDENDS PAID . . . . . . . . . . . . . . . . . . . . . (241) (268)
--------- ----------
RETAINED EARNINGS END OF PERIOD. . . . . . . . . . . . . . . . . $ 10,153 $ 15,288
--------- ----------
--------- ----------
NET INCOME PER COMMON SHARE AND
COMMON SHARE EQUIVALENTS . . . . . . . . . . . . . . . . . . . $ 0.28 $ 0.34 $ 0.06 $ 0.14
--------- ---------- --------- ----------
--------- ---------- --------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING. . . . . . . . . . . . . . . 8,748,018 9,770,336 8,746,989 10,523,799
--------- ---------- --------- ----------
--------- ---------- --------- ----------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,490 $ 3,289
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 2,588 3,187
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . -- 2
Deferred compensation. . . . . . . . . . . . . . . . . . . . . (98) (40)
Amortization of deferred gain on
sale/leaseback transaction . . . . . . . . . . . . . . . . . (736) (736)
(Gain) loss on sale of marketable securities
and investments. . . . . . . . . . . . . . . . . . . . . . . 41 --
(Gain) loss on disposition of fixed assets . . . . . . . . . . -- (23)
Changes in assets and liabilities (net of acquisitions):
Trade receivables . . . . . . . . . . . . . . . . . . . . . . (2,335) (4,246)
Inventories and other current assets. . . . . . . . . . . . . (56) 20
Accounts payable and accrued liabilities. . . . . . . . . . . 878 380
Accrued equipment lease . . . . . . . . . . . . . . . . . . . (80) (20)
Income taxes payable. . . . . . . . . . . . . . . . . . . . . 607 672
Deferred income . . . . . . . . . . . . . . . . . . . . . . . (298) 876
---------- ----------
Net cash flows provided by operating activities: . . . . . . . . . 3,001 3,361
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities and investments. . . . . . . . . 57 (5,901)
Proceeds from sale of marketable securities
and investments . . . . . . . . . . . . . . . . . . . . . . . . . 630 527
Proceeds from disposition of fixed assets. . . . . . . . . . . . . -- 26
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (2,511) (6,511)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 (118)
---------- ----------
Net cash flows (used in) investing activities: . . . . . . . . . . $ (1,694) $ (11,977)
---------- ----------
</TABLE>
6
<PAGE>
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1996
(DOLLARS IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt . . . . . . . . . . . . . . . . . . $ 1,400 $ 6,900
Payments of long-term debt . . . . . . . . . . . . . . . . . . . (3,359) (14,831)
Payments on capital lease obligations. . . . . . . . . . . . . . (508) (406)
Net proceeds from issuance of common stock . . . . . . . . . . . 238 15,603
Treasury stock transactions. . . . . . . . . . . . . . . . . . . (560) --
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . (241) (268)
-------------- --------------
Net cash flows provided by (used in) financing activities: . . . (3,030) 6,998
Effect of exchange rate changes on cash . . . . . . . . . . . . -- 24
-------------- --------------
NET (DECREASE) IN CASH AND
CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . (1,723) (1,594)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . 5,278 3,385
-------------- --------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,555 $ 1,791
-------------- --------------
-------------- --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 414 $ 475
-------------- --------------
-------------- --------------
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . $ 905 $ 1,080
-------------- --------------
-------------- --------------
</TABLE>
7
<PAGE>
THE TODD-AO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997
(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, 1996. In addition the following notes are applicable:
1. In the opinion of management for the Company, all adjustments (which
comprise only normal recurring accruals) necessary for a fair presentation
of the results of operations have been included.
2. The consolidated financial statements include the Company and its wholly
owned subsidiaries Todd-AO Studios, Todd-AO Studios East, Inc. ("Todd-AO
East"), Todd-AO Productions, Inc., Todd-AO Digital Images, Inc. ("TDI"),
Todd-AO Video Services, Inc. ("TVS"), Todd-AO Studios West ("TSW"), Todd-AO
Europe Holding Ltd. ("TAO Europe"), Todd-AO Preservation Services,
Hollywood Supply Company and Todd-AO's Land of the Future. All significant
intercompany balances and transactions have been eliminated.
3. Net income per common share is computed based on the weighted average
number of common and common equivalent shares outstanding for each of the
years presented including common share equivalents arising from the assumed
conversion of any outstanding dilutive stock options.
4. On August 15, 1996, the Company purchased substantially all of the assets
and certain liabilities of Edit Acquisition LLC ("Editworks"). Editworks
provides video post production services to broadcasters, advertising
agencies and other businesses. The Company paid Editworks $3,680 in cash
and $970 in common stock.
The acquisition is being accounted for under the purchase method of
accounting. The following unaudited pro forma consolidated financial
information for the six months ended February 29, 1996 is presented as if
the acquisition had occurred on September 1, 1995. Pro forma adjustments
for Editworks are primarily to amortization of goodwill, interest expense
on borrowings in connection with the acquisition, and income taxes.
1996
------------
Revenues . . . . . . . . . . . . . . . . . . $ 33,529
------------
------------
Net income . . . . . . . . . . . . . . . . . $ 2,721
------------
------------
Net income per common share. . . . . . . . . $ 0.31
------------
------------
5. The Company has a stock repurchase program under which 1,300,000 shares may
be purchased from time to time in the open market or in private
transactions. As of February 28, 1997, 795,146 shares had been
repurchased. All of these shares have been cancelled and returned to
authorized but unissued status.
6. On October 10, 1996, the Company filed a registration statement with the
Securities and Exchange Commission and on November 20, 1996 the
registration statement, as amended, was declared effective for a public
offering of 1,500,000 primary Class A shares at $10.50 per share. On
November 26, 1996 the offering was completed and all the shares were sold
and issued. In December 1996 an additional 145,000 shares were sold and
issued in connection with the exercise of a portion of the underwriters'
over-allotment option. Proceeds from the offering, net of costs as of
February 28, 1997 totaled $15,594.
8
<PAGE>
7. In January 1997 the Company announced that it was in negotiations to
acquire all of the stock of International Video Conversions, Inc.
("IVC"), a California corporation based in Burbank. IVC is engaged
in the business of providing a full range of video tape services
specializing in duplication, telecine and conversions including HDTV.
This acquisition has not materialized.
The Company is in the process of organizing a limited liability company
("LLC") with United Artists Theatre Circuit, Inc., an operator of motion
picture theatres ("UATC") for the purpose of exploiting proprietary
technology to conserve film stock and reduce the length of wide screen film
release prints. The technology, known as "Compact Distribution Print" or
"CDP", has been successfully demonstrated, but its implementation will
require a broad level of film industry acceptance which has not yet been
obtained. Pending such acceptance, further development and marketing
expenditures will be minimal. It is anticipated that the Company and UATC
will each have a 50% interest in any profits of the LLC, which is known as
"CDP Limited Liability Company".
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(DOLLARS IN THOUSANDS, EXCEPT AMOUNTS PER SHARE)
1. Material Changes in Financial Condition
In December 1994, the Company signed agreements with its bank to implement
the sale/leaseback of certain equipment and a long-term credit facility. An
aggregate of $11,218 of sound studio equipment was sold and leased back on
December 30, 1994. The sale/leaseback agreement, which consists of five 1-
year terms amortizing to approximately 40% with interest at Libor rates
plus 1.5% which can increase to Libor plus 2% if the leverage ratio (Funded
Indebtedness/EBITDA) is greater than 2:1, terminates on December 30, 1999.
Under the credit facility, including amendments in 1995 and 1996, the
Company may borrow up to $20,000 and L5,000 in revolving loans until
February 28, 2000. On that date and quarterly thereafter until the
expiration of the agreement on November 30, 2003, the revolving loan
commitment will reduce by 5% of the original loan commitment. The credit
facility provides for borrowings at the Bank's Reference rates (plus .5%),
CD rates (plus 1.625%) and Libor rates (plus 1.5%) which can increase to
plus 1%, 2.125% and 2%, respectively, if the leverage ratio (described
above) is greater than 2:1. Leverage ratios may not exceed 3:1. The
facility includes commitment fees at .5% per annum on the unused balance.
Other material restrictions include: the coverage ratio (cash flow/fixed
charges) may not be less than 1.75:1 through 1998 and 1.5:1 thereafter; the
Company is limited to $10,000 per annum for capital expenditures (except
for fiscal year 1997 which is limited to $12,500); Other Indebtedness or
Contingent Liabilities (outside the credit and sale/leaseback agreements)
may not exceed $8,000 and Minimum Net Worth is not to be less than $23,400
plus net proceeds from issuance of equity plus 50% of future consolidated
net income. These credit facilities are available for general corporate
purposes, capital expenditures and acquisitions. Management believes that
funds generated from operations, proceeds from the public offering
described below, proceeds from the sale/leaseback and the borrowings
available under the credit facility will be sufficient to meet the needs of
the Company at least through the end of 1997.
In February 1995, the Company used $6,878 of the proceeds from the
sale/leaseback agreement to acquire substantially all of the property,
equipment and inventory of Skywalker Sound South, renamed Todd-AO Studio
West. In March 1995, the Company used $7,726 under the credit facility in
connection with the acquisition of Chrysalis. In August 1996, the Company
used $4,280 under the credit facility in connection with the acquisition of
Editworks. As of February 28, 1997, the Company had $775 outstanding under
the credit facility.
The Company expects capital expenditures of approximately $11,500 for its
Los Angeles, New York City, Atlanta and London facilities in fiscal 1997.
These capital expenditures will be financed by credit facilities and
internally generated funds. As of February 28, 1997 the Company has
incurred $6,511 for fiscal 1997 capital expenditures.
On October 10, 1996, the Company filed a registration statement with the
Securities and Exchange Commission and on November 20, 1996 the
registration statement, as amended, was declared effective for a public
offering of 1,500,000 primary Class A shares at $10.50 per share. All of
the shares plus an additional 145,000, exercised as a portion of the
underwriters' over-allotment option, were sold and issued. Proceeds from
the offering, net of costs as of February 28, 1997 totaled $15,594. The
funds received were used to temporarily pay down existing debt in the
amount of $9,102. The remaining funds are currently invested in short-term
federal agency securities. These funds will be used for possible future
acquisitions, working capital requirements and other general corporate
purposes.
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.
10
<PAGE>
2. Material Changes in Results of Operations
General
Since fiscal 1995, the Company has pursued a strategy of diversifying its
operations by acquiring or establishing complementary service companies in
the production and post production markets. This diversification is not
only functional but geographical, as represented by the Company's
acquisitions in Santa Monica, California, London, UK and Atlanta, Georgia.
The Company has not yet utilized the funds provided by the public offering
in November, 1996 for its primary long-term objective of accretive
acquisitions. The previously announced acquisition of International Video
Conversions in Burbank, California has not materialized.
SIX MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO SIX MONTHS ENDED
FEBRUARY 29, 1996
Revenues increased $8,342 or 26.6% from $31,339 to $39,681 primarily due to
significant increases from the Company's sound services divisions ($4,257)
as well as its video services divisions which include Todd-AO Editworks
("Editworks") acquired in August 1996 and Todd-AO Filmatic ("Filmatic")
acquired in April 1996 which contributed revenue increases of $2,165 and
$522, respectively. There is also a non-recurring settlement of $434
included in the prior year revenue of Todd-AO UK, Ltd. (formerly
Chrysalis/Todd-AO Europe, Ltd. before name change on March 1, 1997).
Operating costs and other expenses increased $6,380 or 26.3% from $24,279
to $30,659. Cost increases related to the acquisitions described above
were higher than usual due to transitional changes at Editworks and the
relocation of Filmatic. These acquisitions are now fully integrated into
operations and should impact favorably on future results. The remaining
cost increases are related to the revenue increases described above.
Depreciation and amortization increased $599 or 23.1% primarily due to the
acquisitions and current year capital expenditures.
Net equipment lease expense decreased $189 or 54.9% due to decreases in the
interest rate and a declining principal balance while the straight line
amortization of the deferred gain remains the same.
Other (income) expense, net decreased $357 primarily due to a non-recurring
provision adjustment of $215 from a favorable settlement of a contested
claim and other provision adjustments of $202 in the prior year.
As a result of the above, income before taxes increased $1,254 from $4,000
to $5,254 and net income increased $799 from $2,490 to $3,289.
Earnings per share increased 21% from $0.28 to $0.34 in spite of a 12%
dilution in average shares outstanding primarily due to the November 1996
public offering when 1,645,000 shares were issued. If the public offering
had occurred as of September 1, 1996 and the bank credit facility debt paid
down, the EPS as of February 28, 1997 would not have changed from $0.34.
THREE MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO THREE MONTHS ENDED
FEBRUARY 29, 1996.
Revenues increased $6,142 or 46.5% from $13,199 to $19,341 primarily due to
significant increases from the Company's sound services divisions ($3,820)
as well as its video services divisions which include Editworks and
Filmatic acquired in August and April 1996 which contributed revenue
increases of $1,181 and $243, respectively. There is also a non-recurring
settlement of $109 included in the prior year revenue of Todd-AO UK, Ltd.
11
<PAGE>
Operating costs and other expenses increased $3,837 or $34.1% from $11,265
to $15,102. Cost increases related to the acquisitions described above
were higher than usual due to transitional changes at Editworks and the
relocation of Filmatic. The remaining cost increases are related to the
revenue increases described above.
Depreciation and amortization increased $243 or 18.4% primarily due to the
acquisitions and current year capital expenditures.
Net equipment lease expense decreased $69 or 52.3% due to a declining
principal balance while the straight line amortization of the deferred gain
remains the same.
Other (income) expense, net decreased $580 primarily due to a non-recurring
provision adjustment of $215 from a favorable settlement of a contested
claim and other provision adjustments of $199 in the prior year.
As a result of the above, income before taxes increased $1,629 from $816 to
$2,445 and net income increased $1,011 from $507 to $1,518.
Earnings per share increased 133% from $0.06 to $0.14 in spite of a 20%
dilution arising from the November 1996 public offering.
3. Material Changes in Cash Flows
For the six months ended February 28, 1997 the Company generated $3,361 in
cash from operating activities compared to $3,001 in 1996. In addition to
net income of $3,289, adjusted for depreciation and net amortization of
$2,451, increases in accounts payable and other liabilities of $1,928 also
increased cash provided by operations. Cash was utilized primarily to fund
trade receivables. The revenue increase in the second quarter of the
fiscal year represented 74% of the total increase for the six month period.
This, in addition to an overall increase in 1997 revenues, caused a
significant increase in trade receivables of $4,246 at February 28, 1997.
This is the opposite of the prior year when revenues in the second quarter
represented 25% of the total six month increase and caused a less severe
increase in trade receivables of $2,335.
Net cash generated from operating activities supplemented by proceeds from
the sale of certain marketable securities and investments and borrowings
from the Company's credit facility were used to reinvest in capital assets
of the Company and to pay down long-term debt. Cash generated from the net
proceeds received in connection with the Company's public offering of
$15,594 were used to pay down long-term debt, to purchase short-term
federal agency securities and to reinvest in capital assets of the Company.
4. Other Business Information
The Editworks division is currently constructing two audio rooms in order
to provide its clients with additional services. The rooms are expected to
begin operations in the fourth quarter of this fiscal year and thereafter
should contribute to the revenue and earnings of the Company.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. LEGAL PROCEEDINGS
The Company is involved in litigation and similar claims incidental to the
conduct of its business. None of the pending actions is considered
material.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). (1) Fourth amendment dated October 1, 1996 to Credit Agreement
dated as of December 2, 1994 between The Todd-AO
Corporation and Bank of America National Trust and Savings
Association.
(2) Employment agreement dated as of November 8, 1996 between
The Todd-AO Corporation and Christopher D. Jenkins.
(3) Exhibit 27 Financial Data Schedule.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TODD-AO CORPORATION
April 10, 1997 /s/ Silas R. Cross
------------------ ------------------------------
Date Silas R. Cross
Chief Accounting Officer
13
<PAGE>
Exhibit (a)(1)
FOURTH AMENDMENT
TO CREDIT AGREEMENT
This FOURTH AMENDMENT TO CREDIT AGREEMENT ("Fourth Amendment") is
entered into as of October 1, 1996 by and between THE TODD-AO CORPORATION, a
Delaware corporation (the "Borrower") and BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, (the "Bank") and amends that certain Credit Agreement
dated as of December 2, 1994 between Borrower and the Bank, as amended by a
First Amendment to Credit Agreement dated as of March 13, 1995, a Second
Amendment to Credit Agreement dated as of April 5, 1996 and a Third Amendment
to Credit Agreement dated as of June 14, 1996 (as so amended, the
"Agreement").
RECITAL
The Borrower desires to assume and incur up to $12,500,000 in
capital expenditures in fiscal year 1997, and the Bank is willing to allow
this, on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the Borrower and
the Bank hereby agree as follows:
1. Terms. All terms used herein shall have the same meaning as
in the Agreement unless otherwise defined herein. All references to the
Agreement shall mean the Agreement as hereby amended.
2. Amendatory Provisions to Agreement. The Borrower and the Bank
hereby agree that the Agreement is amended as follows:
2.1 Section 8.9 of the Agreement is amended by inserting the
following at the end thereof before the period:
<PAGE>
"provided, however, that the Borrower and its
Subsidiaries may assume and incur up to $12,500,000 in
capital expenditures in the aggregate in fiscal year
1997."
3. Representations and Warranties. The Borrower hereby
represents and warrants to the Bank that:
3.1 Authority. The Borrower has all the necessary corporate power
to make, execute and deliver this Fourth Amendment, and this Fourth Amendment
is the legal, valid and enforceable obligation of the Borrower it purports to
be.
3.2 No Legal Obstacle to Agreement. Neither the execution of this
Fourth Amendment, the making by the Borrower of any borrowings under the
Agreement, nor the performance of the Agreement has constituted or resulted
in or will constitute or result in a breach of the provisions of any contract
to which the Borrower is a party, or the violation of any law, judgment,
decree or governmental order, rule or regulation applicable to Borrower, or
result in the creation under any agreement or instrument of any security
interest, lien, charge, or encumbrance upon any of the assets of the Borrower
other than pursuant to the Pledge Agreement. No approval or authorization of
any governmental authority is required to permit the execution, delivery or
performance by the Borrower of this Fourth Amendment, the Agreement, or the
transactions contemplated hereby or thereby, or the making of any Borrowings
by the Borrower under the Agreement.
3.3 Incorporation of Certain Representations. The representations
and warranties set forth in Section 4 of the Agreement are true and correct
in all respects on and as of the date hereof as though made on and as of the
date hereof.
3.4 Default. No Event of Default under the Agreement has occurred
and is continuing.
4. Conditions, Effectiveness. The effectiveness of this Fourth
Amendment shall be subject to the compliance by the Borrower with its
agreements herein contained, and to the delivery of such evidence with
respect to the Borrower or any other person as the Bank may reasonably
request to establish the consummation of the transactions contemplated
hereby, the taking of all corporate action in connection with this Fourth
Amendment
<PAGE>
and the Agreement and the compliance with the conditions set forth herein.
5. Miscellaneous.
5.1 Effectiveness of the Agreement. Except as provided in this
Amendment, all of the terms and conditions of the Agreement shall remain in
full force and effect.
5.2 Waiver. This Fourth Amendment is specific in time and in
intent and does not constitute, nor should it be construed as, a waiver of
any right, power or privilege under the Agreement, or any agreement,
contract, indenture, document or instrument mentioned in the Agreement; nor
does it preclude other or further exercise of any right, power, privilege or
default hereunder, under the Agreement or under any agreement, contract,
indenture, document or instrument mentioned in the Agreement. The Bank
expressly reserves its right to exercise any remedy available to it under the
Agreement, or any agreement, contract, indenture, document or instrument
mentioned in the Agreement.
5.3 Counterparts. This Fourth Amendment may be executed in any
number of counterparts and all of such counterparts taken together shall be
deemed to constitute one and the same instrument. This Fourth Amendment
shall not become effective until the Borrower and the Bank shall have signed
a copy hereof, whether the same or counterparts, and the same shall have been
delivered to the Bank.
5.4 Jurisdiction. This Fourth Amendment, and any instrument or
agreement required hereunder, shall be governed by and construed under the
laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this Fourth
Amendment as of the day and year first above written.
THE TODD-AO CORPORATION,
a Delaware corporation
By:
<PAGE>
Title:
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:
Fred L. Thorne
Vice President
<PAGE>
CONSENT OF GUARANTORS
Each of the undersigned, as a Guarantor under its Continuing
Guaranty dated as of December 2, 1994, hereby consents to the foregoing
Fourth Amendment to Credit Agreement dated as of October 1, 1996 and confirms
that its Continuing Guaranty remains in full force and effect after giving
effect thereto.
Dated as of October 1, 1996
TODD-AO PRODUCTIONS INC.
TODD-AO STUDIOS EAST INC.
TODD-AO DIGITAL IMAGES
TODD-AO VIDEO SERVICES
TODD-AO STUDIOS WEST
By:
J.R. DeLang
Vice President
<PAGE>
Exhibit (a)(2)
November 8, 1996
Mr. Christopher D. Jenkins
390 South Grand Avenue
Pasadena, California 91105
Dear Mr. Jenkins:
This letter will constitute the Employment Agreement ("Agreement") between
The Todd-AO Corporation, ("the Company"), and Christopher D. Jenkins, "you".
In consideration of the mutual covenants and agreements contained herein, and
other good and valuable conditions, the Company and you agree as follows:
1. EMPLOYMENT AND SERVICES: The Company hereby agrees to employ you as
President and a rerecording sound mixer of Todd-AO Studios (a
subsidiary of the Company), and as Senior Vice President of the
Company, and you agree, commencing January 1, 1997 ("the commencement
date"), to perform your exclusive and full-time services in those
capacities for the Company upon the terms and conditions herein set
forth. In addition and/or alternatively, you shall perform such
services as requested from time to time by the President of The Todd-
AO Corporation which are attendant to the position of President and
Rerecording Sound Mixer of Todd-AO Studios, and Senior Vice President
of the Company.
2. TERM: The term of this Agreement shall be for a period of four (4)
years, commencing January 1, 1997 and terminating on December 31, 2000
subject to Section 6.
3. COMPENSATION: As full compensation for all your services rendered
under this Agreement, you will receive the applicable union rate (Y-1
daily supervisor's rate) plus 300%. For mixing services in excess of
9 hours per day or 45 hours per week or on weekends, you will receive
overtime premiums at the applicable Y-1 daily overtime rate plus 300%.
The compensation shall be paid on the Company's regular paydays during
the Term subject to the usual and required employee payroll deductions
and withholding for federal, state and local taxes, social security
and similar payments.
a. ADDITIONAL COMPENSATION: See Schedule A attached.
4. SPECIAL CONDITIONS: Special Conditions under this contract, which are
not specifically included herein, are covered in Schedule A attached,
which Schedule shall be considered a part of this Agreement.
<PAGE>
Mr. Christopher D. Jenkins
Employment Agreement
November 8, 1996
Page Two
5. BENEFITS: During the Term of this Agreement, you shall be entitled to
such fringe benefits as are made available to all eligible employees
including the following:
a. BUSINESS EXPENSES: The Company shall reimburse you for your
reasonable and necessary business expenses in accordance with its
then prevailing policy (which shall include appropriate
itemization and substantiation of expenses incurred).
b. VACATION: Vacation time shall accrue and you shall be entitled
to three (3) weeks paid vacation each year which can be taken at
mutually agreed upon times.
c. GROUP INSURANCE & PENSION: If eligible, you shall be entitled to
participate in any prevailing Motion Picture Health & Welfare and
Pension plans under the same terms and conditions as all eligible
employees (except that solely for purposes of determining pension
contributions your mixing compensation will be calculated on the
basis of 56 hours per week, excluding vacation periods); and
d. OTHER BENEFITS: If eligible, you shall be entitled to
participate in any other fringe benefits which the Company may
provide from time to time for all eligible employees.
6. TERMINATION: The Company may terminate your services in the event of:
a. DEATH: In the event of your death.
b. DISABILITY: Your having suffered a disability, total or partial,
mental or physical, by reason of which you have not performed
your obligations hereunder for six (6) consecutive months or
shorter periods aggregating more than six (6) months in any
twelve (12) month period; or
c. FOR CAUSE: (1) If you engage in a wilful act which constitutes a
fraud or a felony, and which results in an injury to the Company
or its reputation, (2) If you are convicted of or plead guilty to
a felony, (3) Your breach of any of the terms or provisions of
this Agreement, and/or (4) Your failure to perform your duties
and obligations under this Agreement in a satisfactory manner and
you have received prior notification that your performance is not
satisfactory.
7. COMPENSATION UPON TERMINATION: If your employment is terminated by
the Company pursuant to Section 6 above, you shall be entitled to
receive compensation through the date of such termination and shall
receive any incurred but not reimbursed business expenses and accrued
and unused vacation time as of the date of termination.
<PAGE>
Mr. Christopher D. Jenkins
Employment Agreement
November 8, 1996
Page Three
8. INTELLECTUAL PROPERTY: For purposes of this Agreement, "Included
Inventions" shall mean all patents, developments, designs, creations,
improvements, original works of authorship, copyrights, formulas,
processes, know how, techniques and/or inventions made or conceived or
reduced to practice during the Term of this Agreement or reduced to
practice within 12 months after termination of this Agreement, that
relate in any way to computer graphics, visual effects, audio and
visual production and post production, film, television, cable, CD
ROM, multi-media, or any other business now or hereafter conducted by
the Company or its affiliates. Excluded from the foregoing
definitions of "Included Inventions" are any inventions developed
entirely on your own time without using the Company's equipment,
supplies, facilities or Proprietary Information (as hereafter
defined).
a. DISCLOSURE AND OWNERSHIP: You agree to promptly disclose all
"Included Inventions" to the Company. All "Included Inventions"
shall be the sole and exclusive property of the Company and you
hereby assign to the Company all of your right, title and
interest in such "Included Inventions".
b. FURTHER ASSURANCES: You will assist the Company in applying for
and obtaining patents, copyrights and/or other protection for the
"Included Inventions" (during the Term of this Agreement and
thereafter) provided that you will be reasonably compensated if
the Company requests your assistance after termination of this
Agreement. You will sign such additional documents as the
Company may request in order to confirm the Company's rights to
"Included Inventions". In the event the Company is unable to
obtain your signature on any document needed to apply for, obtain
or enforce any intellectual property rights relating to any
"Included Inventions" for any reason whatsoever (including
without limitation your refusal, unavailability or incapacity),
you hereby irrevocably appoint Salah M. Hassanein or Silas R.
Cross, or either of them acting alone, with full power of
substitution, as your agent and attorney in fact to act for and
on your behalf in connection with the execution and filing of any
such document with the same legal force and effect as if such
acts were performed by you.
9. BUSINESS CODE OF CONDUCT: Attached hereto and made a part of this
Agreement is the Company's Business Code of Conduct. You confirm that
you have read, understand and will comply with the terms of such and
any reasonable amendments which you receive thereto.
10. PROPRIETARY INFORMATION: In the course of your service to the Company
you may have access to confidential specifications, know-how,
strategic or technical data, programs, computer software, processes,
business documents or information, marketing data, confidential
customer lists and sources of supply and trade secrets all of which
are
<PAGE>
Mr. Christopher D. Jenkins
Employment Agreement
November 8, 1996
Page Four
confidential and may be proprietary. For purposes of this Agreement,
"Proprietary Information" shall include all items enumerated in the
preceding sentence to which you have access, whether conceived or
developed by third parties, by you alone and/or with others, during
normal working hours or thereafter. Proprietary Information shall not
include information which is in the public domain unless as a
consequence of unauthorized disclosure.
a. NONDISCLOSURE: During the Term of your employment and for a
period of three (3) years thereafter, you will not use
Proprietary Information in a manner adverse to the Company's
interests nor disclose Proprietary Information, directly or
indirectly, to any person other than the Company or authorized
employees thereof at the time of such disclosure, or as otherwise
specifically instructed by the Company, and in each case only to
the extent reasonably required.
b. AGREEMENTS WITH THIRD PARTIES: You will individually observe the
confidentiality provisions of any Nondisclosure or similar
agreement entered into by the Company and known to you with
respect to information received by the Company which may be
proprietary to third parties.
c. RETURN OF INFORMATION: Upon termination of your employment, you
shall deliver to the Company all embodiments of Proprietary
Information (including without limitation notes, letters,
documents, computer files and other records) which are then in
your possession or control and shall not retain any copies of
summaries thereof.
11. PROTECTIVE COVENANTS: You acknowledge that you are a key employee
whose specialized skills, abilities and contacts are important to the
success of the Company, and agree that you will faithfully and
strictly adhere to the following covenants:
a. NONSOLICITATION OF EMPLOYEES: In the event you voluntarily
terminate your employment during the Term, or your employment is
terminated by the Company for cause, as that term is defined in
Section 6, subsection c, of this Agreement, you covenant and
agree that you shall not, within one (1) year after the date of
such termination of employment, divert, solicit, recruit or hire,
or attempt to divert, solicit, recruit or hire, directly or by
assisting others, any other employee of the Company or any person
who is an employee of the Company, whether or not such employee
is a full-time employee or a temporary employee of the Company
and regardless of whether such employment is pursuant to written
agreement, for a determined period, or at will.
<PAGE>
Mr. Christopher D. Jenkins
Employment Agreement
November 8, 1996
Page Five
12. REMEDIES: It is specifically understood and agreed that any breach of
the provisions of Section 10 of this Agreement is likely to result in
irreparable injury to the Company and that the remedy at law alone
will be an inadequate remedy for such breach, and that in addition to
any other remedy it may have, the Company shall be entitled to enforce
the specific performance of this Agreement by you and seek both
temporary and permanent injunctive relief (to the extent permitted by
law) without the necessity of proving actual damages.
13. ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement or breach hereof, other than matters pertaining to
injunctive relief including, without limitation, temporary restraining
orders, preliminary injunctions, and permanent injunctions, shall be
settled in the following manner:
a. NONBINDING MEDIATION: Upon written request of either party, a
retired judge of the California Superior Court, Court of Appeals
or Supreme Court shall be mutually agreed upon by the parties to
engage in nonbinding mediation of the dispute. In the event said
nonbinding mediation does not result in a resolution of the
dispute, the parties will proceed to final and binding
arbitration as set forth in subsection b below.
b. BINDING ARBITRATION: In the event the parties have been unable
to resolve the dispute after nonbinding mediation, they shall
select a retired judge of the California Superior Court, Court of
Appeals or Supreme Court to decide the matter. Any judgment
issued by the arbitrator shall be final and binding.
The parties hereby agree that the arbitrator shall not have
jurisdiction to award other than monetary damages. In the event
the arbitration issue involves a dispute under Section 6
Termination, the arbitrator's authority to award damages is
limited to the provisions of Section 7 Compensation Upon
Termination.
The parties wish to preserve all discovery rights and
specifically incorporate the provisions of California Code of
Civil Procedure, Sec. 1283.05 into this Agreement by reference.
Each party shall bear its own costs and attorney's fees. The
arbitrator's fee shall be divided equally between the parties.
Such arbitration shall take place in Los Angeles, California
unless otherwise agreed to, in writing, by the parties.
<PAGE>
Mr. Christopher D. Jenkins
Employment Agreement
November 8, 1996
Page Six
14. ATTORNEYS' FEES: Except as provided in Section 13 (Arbitration), if a
party to this Agreement (or any successor in interest to either party)
based on the performance, breach or interpretation of this Agreement,
each of the parties shall pay for their own respective costs and
attorney's fees regardless of the outcome of any litigation or
proceeding.
15. NOTICES: All notices, requests, consents and other communications
required or permitted to be given hereunder shall be written and shall
be deemed to have been duly given if delivered personally or sent by
prepaid telegram, or mailed first-class, postage prepaid as follows:
You Christopher D. Jenkins
390 S. Grand Avenue
Pasadena, California 91105
The Company The Todd-AO Corporation
Attn: Kate Reck
900 N. Seward Street
Los Angeles, California 90038
or at such other addresses as either party may specify by written
notice to the other.
16. GENERAL:
a. ENTIRE AGREEMENT AND MODIFICATION: This Agreement sets forth the
entire agreement and understanding of the parties hereto, and,
effective on the commencement date hereof, supersedes all prior
agreements, arrangements, and understandings. No representation,
promise or inducement has been made by either party that is not
embodied in this Agreement. This Agreement may only be modified
by an agreement in writing executed by both parties hereto.
b. SUCCESSORS: This Agreement shall be binding upon, and shall
inure to the benefit of the successors and assigns of the
Company.
c. GOVERNING LAW: This Agreement shall be construed under and
governed by the laws of the State of California.
d. SECTION HEADINGS: The section headings contained herein are for
reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement.
<PAGE>
Mr. Christopher D. Jenkins
Employment Agreement
November 8, 1996
Page Seven
e. SEVERABILITY: In the event that any provisions, or portions
thereof, of this Agreement are held to be unenforceable or
invalid by any court of competent jurisdiction, the validity and
enforceability of the remaining provisions or portions thereof
shall not be affected thereby.
If this sets forth our agreement, please sign and return a copy of this letter
Very truly yours,
THE TODD-AO CORPORATION
By /s/ Salah M. Hassanein
------------------------------------
Salah M. Hassanein
President & CEO
AGREED:
/s/ Christopher D. Jenkins Date 2-15-97
------------------------------- -------------------
Christopher D. Jenkins
Attachment: Schedule A
Business Code of Conduct
<PAGE>
SCHEDULE A
SPECIAL CONDITIONS
Section 3a of Employment Agreement dated November 8, 1996:
ADDITIONAL COMPENSATION
MANAGEMENT SERVICES: For Management and administrative services, you will
receive the sum of One Hundred Thousand Dollars ($100,000.00) per annum,
which you may elect to receive in cash, weekly or biannually at your option,
as deferred compensation or in Todd-AO Class A Common Stock, or in any
combination of the foregoing as determined by you on or prior to January 1 of
each year by written notice to the Company. In the event no notice is given,
you will be deemed to have elected to receive cash.
AUTOMOBILE ALLOWANCE: You will receive an annual Automobile Allowance of
Five Thousand Dollars, ($5,000.00), payable weekly on the Company's regular
paydays during the Term subject to the usual and required employee payroll
deductions and withholding for federal, state and local taxes, social
security and similar payments.
AGREED: Date 2-15-97
--------------
By: /s/ Christopher D. Jenkins By: /s/ Salah M. Hassanein
-------------------------------- ----------------------------
Christopher D. Jenkins Salah M. Hassanein
President & CEO
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 1,791
<SECURITIES> 7,945
<RECEIVABLES> 14,254
<ALLOWANCES> 707
<INVENTORY> 552
<CURRENT-ASSETS> 26,413
<PP&E> 66,294
<DEPRECIATION> 23,800
<TOTAL-ASSETS> 76,707
<CURRENT-LIABILITIES> 10,946
<BONDS> 1,421
0
0
<COMMON> 99
<OTHER-SE> 55,375
<TOTAL-LIABILITY-AND-EQUITY> 76,707
<SALES> 0
<TOTAL-REVENUES> 39,681
<CGS> 0
<TOTAL-COSTS> 34,001
<OTHER-EXPENSES> 99
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 327
<INCOME-PRETAX> 5,254
<INCOME-TAX> 1,965
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,289
<EPS-PRIMARY> 0
<EPS-DILUTED> .34
</TABLE>
