<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 MAY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 0-1461
THE TODD-AO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-1679856
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
900 N. SEWARD STREET, HOLLYWOOD, CALIFORNIA 90038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 962-5304
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares of common stock outstanding at July 9, 1998 was: 8,179,400
Class A Shares and 1,747,178 Class B Shares.
<PAGE>
THE TODD-AO CORPORATION
QUARTERLY REPORT ON FORM 10-Q
MAY 31, 1998
<TABLE>
<CAPTION>
INDEX
- ---------------------------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
Item 1- FINANCIAL STATEMENTS
The following financial statements are filed herewith:
Consolidated Balance Sheets, May 31, 1998 and August 31, 1997 3
Consolidated Statements of Income and Retained Earnings for the
Nine and Three Months Ended May 31, 1998 and 1997 5
Consolidated Statements of Cash Flows for the Nine Months Ended
May 31, 1998 and 1997 6
Notes to Consolidated Financial Statements for the Nine Months
Ended May 31, 1998 8
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 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>
(UNAUDITED)
AUGUST 31, MAY 31,
1997 1998
-------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................................... $ 5,127 $ 6,010
Marketable securities............................................... 1,977 1,558
Trade receivables
(net of allowance for doubtful accounts of $1,877 at
May 31, 1998 and $562 at August 31, 1997) ....................... 13,176 18,878
Inventories (first-in first-out basis).............................. 625 821
Income tax receivable............................................... 671 671
Deferred income taxes............................................... 368 359
Other............................................................... 2,168 3,673
-------------- --------------
Total current assets................................................ 24,112 31,970
-------------- --------------
INVESTMENTS......................................................... 997 904
-------------- --------------
PROPERTY AND EQUIPMENT - At Cost:
Land................................................................ 4,270 4,270
Buildings........................................................... 10,994 10,189
Leasehold improvements.............................................. 10,203 12,815
Lease acquisition costs............................................. 2,187 2,187
Equipment........................................................... 54,707 72,914
Equipment under capital leases...................................... 1,540 1,417
Construction in progress............................................ 920 940
-------------- --------------
Total............................................................... 84,821 104,732
Accumulated depreciation and amortization........................... (27,697) (32,185)
-------------- --------------
Property and equipment - net........................................ 57,124 72,547
-------------- --------------
GOODWILL
(net of accumulated amortization of $1,332 at
May 31, 1998 and $602 at August 31, 1997)........................ 19,162 34,813
-------------- --------------
OTHER ASSETS........................................................ 2,056 2,020
-------------- --------------
TOTAL............................................................... $ 103,451 $ 142,254
-------------- --------------
-------------- --------------
</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>
(UNAUDITED)
AUGUST 31, MAY 31,
1997 1998
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................................................... $ 5,302 $ 6,189
Accrued liabilities:
Payroll and related taxes....................................................... 2,507 3,627
Interest........................................................................ 422 634
Equipment lease................................................................. 279 379
Other........................................................................... 1,533 4,306
Income taxes payable............................................................ 105 1,836
Current maturities of long-term debt............................................... 578 170
Capitalized lease obligations - current............................................ 35 13
Deferred income.................................................................... 1,459 699
------------- -------------
Total current liabilities.......................................................... 12,220 17,853
------------- -------------
LONG-TERM DEBT..................................................................... 25,430 43,684
PROVISION FOR CONTINGENT LIABILITIES AND OTHER..................................... 326 3,526
DEFERRED GAIN ON SALE/LEASEBACK.................................................... 3,437 6,700
DEFERRED INCOME TAXES.............................................................. 4,659 9,432
------------- -------------
Total liabilities.................................................................. 46,072 81,195
------------- -------------
STOCKHOLDERS' EQUITY:
Common Stock:
Class A; authorized 30,000,000 shares of $0.01 par value; issued and
outstanding 8,178,550 at May 31, 1998
and 8,284,925 at August 31, 1997................................................ 83 84
Class B; authorized 6,000,000 shares of $0.01 par value;
issued and outstanding 1,747,178 at May 31, 1998
and August 31, 1997............................................................. 17 17
Additional capital................................................................. 39,996 40,470
Treasury stock..................................................................... (691) (1,886)
Retained earnings.................................................................. 17,711 21,984
Unrealized gains on marketable securities and long-term investments................ 94 261
Cumulative foreign currency translation adjustment................................. 169 129
------------- -------------
Total stockholders' equity......................................................... 57,379 61,059
------------- -------------
TOTAL.............................................................................. $ 103,451 $ 142,254
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE NINE AND THREE MONTHS ENDED MAY 31, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS THREE MONTHS
------------------------------ -----------------------------
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES.................................................... $ 59,338 $ 74,858 $ 19,657 $ 27,252
------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Operating costs and other expenses.......................... 45,856 59,163 15,197 21,635
Depreciation and amortization............................... 4,905 7,418 1,718 2,704
Interest.................................................... 483 1,071 156 482
Equipment lease expense - net............................... 209 164 54 53
Other expense (income) - net................................ (117) (220) (216) (97)
------------- ------------- ------------- -------------
Total costs and expenses.................................... 51,336 67,596 16,909 24,777
------------- ------------- ------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 8,002 7,262 2,748 2,475
PROVISION FOR INCOME TAXES.................................. 2,813 2,546 848 848
------------- ------------- ------------- -------------
NET INCOME.................................................. 5,189 4,716 $ 1,900 $ 1,627
------------- -------------
------------- -------------
RETAINED EARNINGS BEGINNING OF PERIOD....................... 12,267 17,711
LESS: DIVIDENDS PAID...................................... (415) (443)
------------- -------------
RETAINED EARNINGS END OF PERIOD............................. $ 17,041 $ 21,984
------------- -------------
------------- -------------
NET INCOME PER COMMON SHARE:
Net income available to common stockholders................. $ 5,189 $ 4,716 $ 1,900 $ 1,627
Effect of dilutive securities:
5% convertible debentures................................ -- 209 -- 50
------------- ------------- ------------- -------------
Net income available to common stockholders
plus assumed conversions................................. $ 5,189 $ 4,925 $ 1,900 $ 1,677
------------- ------------- ------------- -------------
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC...................................... 9,415,573 10,004,781 9,945,484 9,954,606
Effect of dilutive securities:
Stock options............................................ 585,370 508,008 526,588 588,313
5% convertible debentures................................ -- 711,057 -- 711,057
------------- ------------- ------------- -------------
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED.................................... 10,000,943 11,223,846 10,472,072 11,253,976
------------- ------------- ------------- -------------
NET INCOME PER COMMON SHARE - BASIC......................... $ 0.55 $ 0.47 $ 0.19 $ 0.16
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
NET INCOME PER COMMON SHARE - DILUTED....................... $ 0.52 $ 0.44 $ 0.18 $ 0.15
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MAY 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
1997 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 5,189 $ 4,716
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.............................................. 4,905 7,418
Deferred income taxes, net................................................. -- (18)
Deferred compensation and other............................................ (56) (39)
Amortization of deferred gain on
sale/leaseback transaction............................................. (1,105) (1,673)
(Gain) on sale of marketable securities
and investments........................................................ (27) (49)
(Gain) loss on disposition of fixed assets................................. (23) 8
Shares issued for stock award.............................................. -- 66
Changes in assets and liabilities (net of acquisitions):
Trade receivables....................................................... (3,294) 1,577
Inventories and other current assets.................................... (159) (1,298)
Accounts payable and accrued liabilities................................ (60) 1,953
Accrued equipment lease................................................. (18) 100
Income taxes payable, net............................................... 1,008 1,731
Deferred income......................................................... 690 (760)
-------------- --------------
Net cash flows provided by operating activities: ................................ 7,050 13,732
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities and investments............................. (6,208) (251)
Proceeds from sale of marketable securities
and investments............................................................ 864 979
Acquisition of Tele-Cine Cell Group plc....................................... -- (16,145)
Proceeds from disposition of fixed assets..................................... 26 17
Capital expenditures.......................................................... (8,948) (17,216)
Other assets.................................................................. (195) 9
-------------- --------------
Net cash flows (used in) investing activities: .................................. $ (14,461) $ (32,607)
-------------- --------------
</TABLE>
6
<PAGE>
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MAY 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
(UNAUDITED)
1997 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.................................................... $ 6,900 $ 22,206
Payments of long-term debt...................................................... (15,344) (9,436)
Payments on capital lease obligations........................................... (568) (80)
Net proceeds from issuance of common stock...................................... 15,654 206
Proceeds from sale/leaseback transaction........................................ -- 8,500
Treasury stock transactions..................................................... (740) (1,195)
Dividends paid.................................................................. (415) (443)
-------------- --------------
Net cash flows provided by financing activities: .................................. 5,487 19,758
Effect of exchange rate changes on cash ........................................ 2 --
-------------- --------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS........................................................... (1,922) 883
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................... 3,385 5,127
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................................... $ 1,463 $ 6,010
-------------- --------------
-------------- --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest........................................................................ $ 503 $ 736
-------------- --------------
-------------- --------------
Income taxes.................................................................... $ 1,600 $ 860
-------------- --------------
-------------- --------------
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING AND FINANCING ACTIVITIES:
1998:
On May 8, 1998 the Company acquired substantially all of the outstanding
shares of Tele-Cine Cell Group plc. (See Note 4). In connection with the
acquisition the Company paid cash as follows:
<TABLE>
<S> <C>
Assets acquired:
Property and equipment................................................................... $ 8,378
Trade and other receivables.............................................................. 7,279
Investments.............................................................................. 119
Inventory................................................................................ 200
Goodwill................................................................................. 16,380
Liabilities assumed:
Accounts payable and accrued liabilities................................................. (3,038)
Bank loan................................................................................ (2,489)
Equipment leases......................................................................... (438)
Deferred tax liability................................................................... (4,800)
Provision for liabilities and charges.................................................... (3,239)
Long-term debt issued to sellers........................................................... (2,207)
-----------
Cash paid in acquisition................................................................... $ 16,145
-----------
-----------
</TABLE>
See notes to consolidated financial statements
7
<PAGE>
THE TODD-AO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1998
(Dollars in Thousands, except per share amounts)
- --------------------------------------------------------------------------------
If complete notes were to accompany these statements they would be
substantially in the same form as those to the Company's Financial Statements
for the Year Ended August 31, 1997. In addition the following notes are
applicable:
1. In the opinion of management for the Company, all adjustments (which
comprise only normal recurring accruals) necessary for a fair presentation
of the results of operations have been included.
2. The consolidated financial statements include the Company and its wholly
owned subsidiaries.
3. The Company has adopted Statement of Financial Accounting Standards No. 128
("SFAS No. 128"), "Earnings Per Share", beginning in its second quarter
ending February 28, 1998 and has restated all prior periods presented to
comply with the provisions of SFAS No. 128. Under SFAS No. 128, net income
per common share is replaced by "Basic" net income per common share, which
excludes dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding
for the period. "Diluted" net income per common share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. When
dilutive, stock options are included as share equivalents in computing
diluted net income per common share using the treasury stock method.
Certain dilutive securities with an impact of 447,833 shares and 0 shares
for the nine and three months ended May 31, 1998, respectively, and 468,667
shares and 703,000 shares for the nine and three months ended May 31, 1997,
respectively, are not included in the calculation of diluted net income per
common share because the option's exercise price was greater than the
average market price of the common shares.
4. On May 8, 1998, Todd-AO Europe Holding Ltd. ("Todd Europe"), a wholly owned
United Kingdom subsidiary of the Company, purchased substantially all of
the outstanding shares of Tele-Cine Cell Group plc. ("TeleCine"), a U.K.
Corporation. The purchase price of the shares was $17,857 (L10,955)
of which $15,650 is being paid in cash and $2,207 is represented by
unsecured loan notes guaranteed as to principal only and bearing interest
at a fixed rate of 4.5% payable annually in arrears. In addition, cash in
the amount of $495 was paid by Todd Europe for costs incurred in connection
with the acquisition. TeleCine is a London based facility that specializes
in video post-production and special effects providing services to the film
and television industries.
On June 20, 1997, the Company and its newly formed, wholly owned subsidiary
Todd-AO Hollywood Digital ("THD") acquired the assets and certain
liabilities of Hollywood Digital Limited Partnership ("Hollywood Digital").
Hollywood Digital is a digital based post-production facility providing
sound and video services to the film, television and advertising
industries. In consideration of the purchase, the Company paid $17,761 in
cash to pay down existing debt of Hollywood Digital. The Company also
issued convertible subordinated notes in the amount of $8,399. The notes
are convertible into the Company's Class A Common Stock at the conversion
price of $11.812 per share at any time before the maturity date.
The acquisitions are being accounted for under the purchase method of
accounting. The following unaudited pro forma consolidated financial
information for the nine months ended May 31, 1997 and 1998 are presented
as if the acquisitions had occurred on September 1, 1996. Pro forma
adjustments for Hollywood Digital are primarily to non-recurring legal and
other non-operating costs, amortization of goodwill, interest expense on
borrowings in connection with the acquisition, and income taxes. Pro forma
adjustments for TeleCine are primarily to eliminate operations discontinued
as part of the acquisition plan, to adjust depreciation to estimated useful
lives of assets acquired, amortization of goodwill, interest expense on
borrowings in connection with the acquisition, and income taxes.
8
<PAGE>
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Revenues................................................. $ 86,931 $ 88,342
----------- -----------
----------- -----------
Net income............................................... $ 6,585 $ 5,610
----------- -----------
----------- -----------
Net income per common share - Basic...................... $ 0.70 $ 0.56
----------- -----------
----------- -----------
Net income per common share - Diluted.................... $ 0.63 $ 0.52
----------- -----------
----------- -----------
</TABLE>
5. In November 1997 and December 1994 the Company signed agreements with its
bank to implement the sale/leaseback of certain equipment. The five year
agreements terminate on December 1, 2002 and December 30, 1999,
respectively, and are being treated as operating leases for financial
statement purposes. On November 3, 1997 an aggregate of $8,500 of sound
studio equipment was sold and leased back (lease #2). The total deferred
gain on the transaction to be amortized over five years is $4,937. The
annual lease cost is expected to be approximately $1,400. On December 30,
1994 an aggregate of $11,218 was sold and leased back (lease #1). The total
deferred gain on the transaction to be amortized over five years is $7,345.
The annual lease cost currently is approximately $1,500.
The net equipment lease expense for the nine months ended May 31, 1998 is
as follows:
<TABLE>
<CAPTION>
LEASE #1 LEASE #2 TOTAL
----------- ---------- -----------
<S> <C> <C> <C>
Equipment lease costs........................... $ 1,089 $ 749 $ 1,838
Amortization of deferred gain
on sale of equipment......................... (1,105) (569) (1,674)
----------- ---------- -----------
Equipment lease expense, net.................... $ (16) $ 180 $ 164
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
6. 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 May 31, 1998, 1,037,156 shares had been repurchased.
831,856 of these shares have been cancelled and returned to authorized but
unissued status.
7. On October 10, 1996, the Company filed a registration statement with the
Securities and Exchange Commission. Proceeds from the offering, net of
costs totaled $15,512. The funds received were used to pay down existing
debt in the amount of $9,102. The remaining funds were used in the
acquisition of Hollywood Digital and for other general corporate purposes.
8. The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to
define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00"; as the year 1900
rather than the year 2000, which could result in miscalculations or system
failures. Based on preliminary information, costs of addressing potential
problems are not currently expected to have a material adverse impact on
the Company's financial position, results of operations or cash flows in
future periods. However, if the Company, its customers or vendors are
unable to resolve such processing issues in a timely manner, it could
result in a material financial risk. Accordingly, the Company plans to
devote the necessary resources to resolve all significant year 2000 issues
in a timely manner.
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 terminates on
December 30, 1999, consists of five 1-year terms amortizing to
approximately 40%. The agreement, amended in December 1997, provides for
interest at the same LIBOR rates and terms as the second sale/leaseback
agreement (see below).
In October 1997, the Company signed a second agreement with its bank to
implement the sale/leaseback of certain equipment for up to $10,000 and
restated the long-term credit facility signed in December 1994. An
aggregate of $8,500 of sound studio equipment was sold and leased back on
November 3, 1997. The sale/leaseback agreement, which consists of five
1-year terms amortizing to approximately 42% with interest at LIBOR rates
plus .75% if the leverage ratio (Funded Indebtedness/EBITDA but excluding
convertible subordinated notes issued by Company in connection with the
Hollywood Digital acquisition) is under 1:1 and which increases .25% for
each .5 increase in the ratio up to Libor plus 2% if the leverage ratio is
greater than 2.5:1, terminates on December 1, 2002. Under the new First
Amended and Restated Credit Agreement, dated as of October 20, 1997, the
Company may borrow up to $50,000 (increased to $60,000 with Bank consent
and Company Board approval in May 1998) in revolving loans (including up to
50% in Multi-currency) until November 30, 2000. On that date and quarterly
thereafter until August 31, 2002, the revolving loan commitment will reduce
by 6.25% to 50% of the combined loan commitment on the reduction date. The
remaining 50% will reduce to nil by the expiration of the agreement on
December 31, 2002. Annually, the Company may request an automatic extension
of the revolving period of the credit facility for one year which will also
extend the term period and the expiration date of the agreement. The
Company also has the availability of Standby Letters of Credit up to $2,500
under the facility. The credit facility provides for borrowings at the
Bank's Reference rates (plus .125%), CD rates (plus 0.875%) and Libor rates
(plus .75%) which increase incrementally to plus 1%, 2.125% and 2%,
respectively, based on the leverage ratio. The leverage ratios which
determine the rates range from less than 1:1 to greater than 2.5:1.
Leverage ratios may not exceed 3:1. The facility includes commitment fees
at .2% to .5% (based on the leverage ratio) per annum on the unused balance
of the credit facility. Other material restrictions include: the coverage
ratio (cash flow/fixed charges) may not be less than 1.25:1; Other
Indebtedness or Contingent Liabilities (excluding up to $25,000 in Capital
or Off Balance Sheet Leases, the convertible subordinated notes issued in
the Hollywood Digital acquisition and non-recourse debt up to $50,000 of
less than 100% owned Joint Ventures) may not exceed $10,000 without the
Bank's approval. Minimum Tangible Net Worth is not to be less than $25,000
plus net proceeds from issuance of equity plus 50% of consolidated net
income subsequent to May 31, 1997.
In January 1998, the Company entered into an interest rate swap agreement
with its bank on a notional amount of $10,000 under which the Company
contracted to pay a fixed rate of 5.65% for three years in exchange for
three month LIBOR. Settlements are made quarterly.
The credit facilities are available for general corporate purposes, capital
expenditures and acquisitions. Management believes that funds generated
from operations, proceeds from the new sale/leaseback and the borrowings
available under the restated credit facility will be sufficient to meet the
needs of the Company at least through the end of 1998.
On October 10, 1996, the Company filed a registration statement with the
Securities and Exchange Commission. Proceeds from the offering, net of
costs totaled $15,512. The funds received were used to pay down existing
debt in the amount of $9,102. The remaining funds were used in the
acquisition of Hollywood Digital and for other general corporate purposes.
10
<PAGE>
In June 1997, the Company used $15,760 under the credit facility and $3,000
from the proceeds of the offering described above to acquire the assets of
Hollywood Digital. In November 1997, the Company used $8,500 from the
sale/leaseback of equipment described above to pay down the credit facility
debt. In May 1998, the Company used $14,000 under the credit facility to
fund a substantial portion of the TeleCine stock acquisition. As of May 31,
1998, the Company had $29,825 outstanding under the credit facility.
The Company expects capital expenditures of approximately $23,000 for its
Los Angeles, Santa Monica, New York City, Atlanta and London facilities in
fiscal 1998. Included in this amount is $7,500 for a new facility in Santa
Monica, California to service primarily the advertising clients of THD.
These capital expenditures have been or will be financed by credit
facilities and internally generated funds.
The Company does not believe that it is currently exposed to any material
foreign exchange rate risk and, at present, does not have a policy for
managing such risk beyond the utilization of local currency borrowings to
fund foreign acquisitions whenever possible.
2. Material Changes in Results of Operations
NINE MONTHS ENDED MAY 31, 1998 COMPARED TO NINE MONTHS ENDED MAY 31, 1997
Revenues increased $15,520 or 26.2% from $59,338 to $74,858 primarily due
to the acquisition by THD in June 1997, the acquisition of TeleCine on May
8, 1998, and the opening of the new THD Santa Monica facility in late March
1998. Video services revenues from THD (including Santa Monica), TeleCine,
and the Company's other video divisions of $20,420 were offset by the
Company's sound services, which were down compared to a particularly strong
nine months in the prior year. This was primarily due to downtime on three
sound stages closed during part of the period for renovation and conversion
to digital technology and to the negative impact of a threatened Screen
Actors Guild strike that caused major delays in motion picture production
industrywide.
Operating costs and other expenses increased $13,307 or 29% from $45,856 to
$59,163. Cost increases related to the THD and TeleCine acquisitions and
the new THD Santa Monica facility ($13,521) and the Company's other video
services divisions ($1,204) were offset by a reduction in costs for the
sound services divisions related to their revenue decreases described
above. The profit margins of the Los Angeles video divisions were also
adversely affected by the threatened strike referred to above.
Depreciation and amortization increased $2,513 or 51.2% primarily due to
the equipment and goodwill acquired with the THD acquisition and increased
capital expenditures.
Interest expense increased $588 or 121.7% primarily due to the THD
acquisition financing.
As a result of the above, income before taxes decreased $740 from $8,002 to
$7,262 and net income decreased $473 from $5,189 to $4,716.
THREE MONTHS ENDED MAY 31, 1998 COMPARED TO THREE MONTHS ENDED MAY 31, 1997
Revenues increased $7,595 or 38.6% from $19,657 to $27,252 primarily due to
the acquisition by THD in June 1997, the acquisition of TeleCine on May 8,
1998, and the opening of the new THD Santa Monica facility in April 1998.
Video services revenues from THD (including Santa Monica), TeleCine, and
the Company's other video divisions of $7,895 were slightly offset by the
Company's sound services, which were flat compared to the prior year.
Operating costs and other expenses increased $6,438 or 42.4% from $15,197
to $21,635.
11
<PAGE>
Cost increases related to the THD and TeleCine acquisitions and the new THD
Santa Monica facility ($5,510) and the Company's other video services
divisions ($693) are related to the revenue increases described above. The
costs related to the sound services divisions remained flat.
Depreciation and amortization increased $986 or 57.4% primarily due to the
equipment and goodwill acquired with the THD and TeleCine acquisitions and
to increased capital expenditures.
Interest expense increased $326 or 209% primarily due to the THD
acquisition financing.
As a result of the above, income before taxes decreased $273 from $2,748 to
$2,475 and net income decreased $273 from $1,900 to $1,627
MATERIAL CHANGES IN CASH FLOWS
For the nine months ended May 31, 1998, the Company generated $13,732 in
cash from operating activities compared to $7,050 in 1997. Cash provided by
operating activities from net income of $4,716, adjusted for depreciation
and amortization of $5,745, and augmented by a net increase in receivables
and a decrease in payables and accrued liabilities of approximately $3,000
was utilized primarily to fund capital expenditures.
Net cash generated by proceeds from the sale/leaseback of certain equipment
and net borrowings from the Company's credit facility totaling $21,270 were
used to fund capital expenditures of the Company and the acquisition of
TeleCine.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in litigation and similar claims incidental to the
conduct of its business. None of the pending actions is considered
material.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). (1) Exhibit 27 Financial Data Schedule.
(b). (1) A report on Form 8-K and an Amendment to the report on Form
8-K/A were filed on May 18, 1998 and July 13, 1998,
respectively, disclosing the acquisition of the entire
issued share capital of Tele-Cine Cell Group plc.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TODD-AO CORPORATION
July 14, 1998 /s/ Silas R. Cross
----------------------- ---------------------------------------
Date Silas R. Cross
Chief Accounting Officer
13
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 6,010
<SECURITIES> 1,558
<RECEIVABLES> 20,755
<ALLOWANCES> 1,877
<INVENTORY> 821
<CURRENT-ASSETS> 31,970
<PP&E> 104,732
<DEPRECIATION> 32,185
<TOTAL-ASSETS> 142,254
<CURRENT-LIABILITIES> 17,853
<BONDS> 43,684
0
0
<COMMON> 101
<OTHER-SE> 60,958
<TOTAL-LIABILITY-AND-EQUITY> 142,254
<SALES> 0
<TOTAL-REVENUES> 74,858
<CGS> 0
<TOTAL-COSTS> 66,745
<OTHER-EXPENSES> (220)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,071
<INCOME-PRETAX> 7,262
<INCOME-TAX> 2,546
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,716
<EPS-PRIMARY> .47
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