SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Under Section 13
of
The Securities Exchange Act of 1934
For the fiscal year Commission File
ended March 31, 1996 Number: 0-8505
NORTHWEST TELEPRODUCTIONS, INC.
(Name of Small Business Issuer in its Charter)
Minnesota 41-0641789
(State of incorporation) (I.R.S. Employer
Identification Number)
4455 West 77th Street
Minneapolis, Minnesota 55435
(Address of principal executive offices) (Zip code)
Telephone Number: 612-835-4455
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01
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 .
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended March 31, 1996 were $12,509,041.
The aggregate market value of the Common Stock held by shareholders
other than officers, directors or holders of more than 5% of the outstanding
stock of the registrant as of June 26, 1996 was approximately $1,504,000 (based
upon the closing sale price of the registrant's Common Stock on such date).
Shares of $.01 par value Common Stock outstanding at June 26, 1996: 1,356,425.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended March 31, 1996 are incorporated by reference into Part II.
2. Portions of the Registrant's definitive Proxy Statement for the Registrant's
1996 Annual Meeting of Shareholders are incorporated by reference into Part III.
Transitional Small Business Disclosure Format (check one): Yes No X
<PAGE>
Introduction
Northwest Teleproductions, Inc. and its subsidiaries, Southwest
Teleproductions, Inc. and Northwest Teleproductions/Chicago, Inc., are referred
to herein as the "Registrant" unless the context indicates otherwise.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General Development of Business.
Northwest Teleproductions, Inc. (the "Registrant"), a Minnesota
corporation, was incorporated in 1945 and began its current business operations
in 1970. Since it began operations the Registrant has been in the videotape
production business and, in fiscal 1981, added film production as an alternative
to videotape recording.
Each year since fiscal 1986, the Registrant has derived a significant
portion of its revenue from government twelve-month requirement contracts and
renewals. In August 1993 the Registrant was awarded a new contract by the
Government for the same requirements with four consecutive one-year renewal
options on the part of the Government, the second of which has been exercised by
the Government. See "Narrative Description of Business -- Dependence on One or a
Few Customers."
Narrative Description of Business.
Principal Products and Services. The Registrant is engaged in the videotape
and film production business. The Registrant produces advertising commercials,
industrial, governmental and educational programs, programming for cable
broadcast, proprietary programming and electronic retailing (infomercials). The
Registrant offers services in all phases of production including production
planning (pre-production phase), recording (production phase), editing
(post-production phase) and duplication. The Registrant has six studios with a
total stage area of approximately 14,000 square feet and operates eleven
post-production facilities to provide editing services. In addition to studio
recording facilities, the Registrant has portable recording units used for
location production.
Markets and Distribution. The Registrant sells its services as a
producer of commercials to advertising agencies and advertisers, and to other
users of production services for various kinds of educational and broadcast
programs. Such advertising agencies, advertisers and other users are located
throughout the United States although a majority of those purchasing the
Registrant's services are located in the north central and south central
portions of the United States. The Registrant presently uses six salespersons in
its marketing efforts.
Status of New Products or Services. None.
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<PAGE>
Competition. Numerous videotape and film production companies located
throughout the United States compete directly with the Registrant in the area of
both commercial and industrial production. Many of these companies are larger
than the Registrant in terms of sales, assets and resources.
Competition in the videotape and film production industry is based
primarily on quality and timeliness of service at competitive prices. Location
of a company's production facilities and location of the client involved are
also factors in competition since the cost of transporting equipment and crews
can often affect a company's ability to compete. The Registrant has production
facilities in Minneapolis, Minnesota; Dallas, Texas; and Chicago, Illinois.
Although there are many production companies in the geographical areas in which
the Registrant is located, the major and much larger production companies
generally are located on either the west or east coasts of the United States.
Sources and Availability of Raw Materials. There are many available
sources of supply for raw materials needed for the Registrant's operations.
Dependence on One or a Few Customers. Since fiscal 1986 a significant
portion of the Registrant's revenue has been derived from twelve-month
requirement contracts and renewals awarded to the Registrant by the U.S.
Department of Defense for the production of radio and television spot
announcements meeting the requirements of the Armed Forces Information
Service/Armed Forces Radio and Television Service. The original contract,
awarded in October 1984, provided for four consecutive one-year renewal options
by the Department of Defense, all of which were exercised by the Government. The
subsequent contract, awarded to the Registrant in January, 1990, covered the
Department's same requirements and provided for three one-year renewal options
by the Department of Defense, all of which were exercised by the Government. In
August, 1993, the Registrant was awarded a new contract by the Department of
Defense for the Department's same requirements. The contract provides for four
consecutive one-year renewal options by the Department of Defense after the
initial year of the contract. The initial year and the first renewal year of the
contract each amounted to revenues of $2,600,000. The second one year renewal
option has been exercised by the Government. This second renewal year is
estimated to amount to approximately $2,200,000 in revenue to the Registrant.
In fiscal 1996, 1995 and 1994, government contract revenue accounted
for 22%, 27% and 25%, respectively, of total revenue. The loss, therefore, of
business from the Government could have a material adverse effect on the
Registrant.
Patents, Trademarks, Etc. The Registrant claims common law trademark
rights in its name, Northwest Teleproductions, and its subsidiaries' names. The
Registrant has no other patents, trademarks, copyrights, licenses, franchises or
concessions that it considers material.
Government Approvals. Other than approval by the U.S. Department of
Defense of the television spot announcements produced for it, the Registrant is
not required to obtain government approval of its products or services.
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<PAGE>
Effect of Governmental Regulations. The Registrant does not believe
that any existing or proposed governmental regulations will have a material
effect upon its business.
Research and Development. During each of the last two fiscal years the
Registrant expended an insignificant amount of funds on research activities
relating to the development of new products or services, or the improvement of
existing products or services, and had no employees who devoted full time to
research and development activities.
Effect of Environmental Regulation. To the extent management can
determine at this time, there are no federal, state or local provisions
regulating the discharge of materials into the environment or otherwise relating
to the protection of the environment, compliance with which by the Registrant
has had or is expected to have a material effect upon the capital expenditures,
earnings and competitive position of the Registrant.
Employees. At June 1, 1996 the Registrant employed approximately 120
persons, all of which were employed full time.
ITEM 2. DESCRIPTION OF PROPERTY
The Registrant's principal properties are as follows:
<TABLE>
<S> <C> <C>
Location General Description Manner of Ownership
- -------- ------------------- -------------------
4455 West 77th Street 20,000 square feet; Direct fee ownership subject to
Minneapolis, Minnesota office and production mortgage. See Note C of Notes to
facility. Consolidated Financial Statements.
4000 West 76th Street 13,000 square feet; Direct ownership.
Minneapolis, Minnesota office and production
facility.
2649 Tarna Drive 14,000 square feet; Direct fee ownership subject to
Dallas, Texas office and production mortgage. See Note C of Notes to
facility. Consolidated Financial Statements.
142 E. Ontario Street 15,000 square feet; Leased with lease expiring April,
Chicago, Illinois office and production 2002. Option to renew for one
facility. additional five-year term.
865-875 West North 15,000 square feet; Leased with lease expiring
Ave. office and production February 28, 1997.
Chicago, Illinois facility.
81 South Ninth Street 5,000 square feet; Leased with lease expiring
Minneapolis, Minnesota office and production September 30, 2001.
facility.
</TABLE>
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<PAGE>
The Registrant believes its properties to be in good condition and
adequate for its present and foreseeable operations.
ITEM 3. LEGAL PROCEEDINGS
On January 30, 1995, an action (the "McCone Litigation") was filed
against the Registrant and its wholly-owned subsidiary, Northwest
Teleproductions/Kansas City, Inc. (the "Kansas City Subsidiary"), in the Circuit
Court of Jackson County, Missouri, at Kansas City by Plaintiffs Mark D. McCone,
Daniel L. Nussbeck and Midwest Teleproductions, Inc. (the "Buyers"). In April
1993 the Buyers purchased the assets of the Registrant's Kansas City Subsidiary.
A plaintiff in the McCone Litigation was also named as defendant, along with the
Registrant, in an action (the "Shaw Litigation") filed against the Kansas City
Subsidiary on September 17, 1993 and settled on December 31, 1994, and
previously reported by the Registrant. The plaintiffs in the McCone Litigation
alleged breach of contract and misrepresentation by the Registrant in connection
with the April 1993 sale and sought recovery of damages alleged to be $141,629.
The plaintiffs in the McCone Litigation also sought punitive damages, attorneys'
fees, costs and interest. This action was settled on November 24, 1995. The
Company, without admitting liability, paid the plaintiffs $10,000 in settlement
of the litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Registrant's shareholders
during the fourth quarter of the Registrant's 1996 fiscal year.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
The information required by Item 5 is incorporated herein by reference
to the section labeled "Financial Review -- Market Prices" which appears in the
Registrant's 1996 Annual Report to Shareholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
The information required by Item 6 is incorporated by reference to the
section labeled "Management's Discussion and Analysis" which appears in the
Registrant's 1996 Annual Report to Shareholders.
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<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The information required by Item 7 is incorporated by reference to the
Consolidated Financial Statements, Notes thereto and Independent Auditors'
Report thereon which appear in the Registrant's 1996 Annual Report to
Shareholders.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names and ages of the executive officers of the Registrant and
their positions and offices presently held are as follows:
<TABLE>
<CAPTION>
Present
Name of Position(s) with
Executive Officer Age Registrant Business Experience
- ----------------- --- ---------------- -------------------
<S> <C> <C> <C>
John G. Lindell 63 Chairman of the Chairman of the Board of Registrant
Board; President; since February 5, 1996, President since
Director April 1, 1996, and a director since 1970.
Prior to retirement in December 1985, he
served as President (from January 1981)
and Chief Operating Officer (from
November 1979) of RayGo, Inc., a heavy
equipment manufacturer.
James N. Steffen 54 Vice President, Secretary and Treasurer of Registrant
Secretary, since July, 1974 and Vice President since
Treasurer February, 1982.
Smith L. McClure 49 Vice President Vice President of the Registrant since
April, 1994. Creative Director of the
Registrant from October, 1984 to March,
1994.
</TABLE>
There are no family relationships among any of the Registrant's directors or
executive officers.
- 5 -
<PAGE>
The information required by Item 9 relating to directors is
incorporated herein by reference to the section labeled "Election of Directors"
which appears in the Registrant's definitive Proxy Statement filed pursuant to
Regulation 14A not later than 120 days after the close of the Registrant's 1996
fiscal year end in connection with the Registrant's 1996 annual meeting of
shareholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated herein by reference
to the Section labeled "Executive Compensation" which appears in the
Registrant's definitive Proxy Statement for its 1996 annual meeting of
shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 11 is incorporated herein by reference
to the sections labeled "Principal Shareholders" and "Management Shareholdings"
which appear in the Registrant's definitive Proxy Statement for its 1996 annual
meeting of shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated herein by reference
to the section labeled "Election of Directors" which appears in the Registrant's
definitive Proxy Statement for its 1996 annual meeting of shareholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See "Exhibit Index" on page following signatures.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last fiscal quarter of the
Registrant's 1996 fiscal year.
- 6 -
<PAGE>
SIGNATURES
In accordance with Section 13 of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NORTHWEST TELEPRODUCTIONS, INC.
(the "Registrant")
By /s/ John G. Lindell
Date: July 15, 1996 John G. Lindell, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints JOHN
G. LINDELL and JAMES N. STEFFEN his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report on Form 10-KSB and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
Signature Title Date
/s/ John G. Lindell Chairman, President and July 15, 1996
John G. Lindell Director (principal executive
officer)
/s/ James N. Steffen Vice President, Secretary and July 15, 1996
James N. Steffen Treasurer (principal financial
and accounting officer)
Director July __, 1996
James S. Fish
/s/ C. Dale Haworth Director July 15, 1996
C. Dale Haworth
Director July __, 1996
Ronald V. Kelly
/s/ Gerald W. Simonson Director July 15, 1996
Gerald W. Simonson
-7-
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
NORTHWEST TELEPRODUCTIONS, INC.
(Commission File Number: 0-8505)
E X H I B I T I N D E X
for
Form 10-KSB for 1996 fiscal year
Exhibit
3 Registrant's Articles of Incorporation and Bylaws
3.1 Registrant's Restated Articles of Incorporation, as amended to
date--incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1987*
3.2 Registrant's Restated Bylaws, as amended to date--incorporated
by reference to Exhibit 6(b) to the Registrant's Registration
Statement on Form S-14, Reg. No. 2-55647*
10 Registrant's Material Contracts
10.1(a)** Employment Agreement, dated May 4, 1983, between the
Registrant and R. Mitchell--incorporated by reference to
Exhibit 10.3 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1983*
10.1(b)** Amendment, dated March 21, 1994, to Employment Agreement
between the Registrant and R. Mitchell--incorporated by
reference to Exhibit 10.1(c) to the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended March 31, 1994*
10.1(c)** Amendment, dated May 20, 1995, to Employment
Agreement between the Registrant and R. Mitchell--incorporated
by reference to Exhibit 10.1(c) to the Registrant's Annual
Report on Form 10-KSB for the fiscal year March 31, 1995*
10.2** Description of Officers' Incentive Compensation Arrangement
for Fiscal 1997
<PAGE>
10.3 Lease, dated January 31, 1994, covering facility at 142 East
Ontario Street, Chicago, Illinois--incorporated by reference
to Exhibit 10.3 to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1994*
10.4 Lease, dated January 1, 1990, covering facilities at 865-875
West North Avenue, Chicago, Illinois--incorporated by
reference to Exhibit 10.6 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended March 31, 1990*
10.5 Lease, dated June 17, 1991, covering facilities at 81 South
Ninth Street, Minneapolis, Minnesota--incorporated by
reference to Exhibit 10.7 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended March 31, 1991*
10.6 Requirements Contract, dated August 27, 1993, between the
Registrant and the Department of Defense--incorporated by
reference to Exhibit 10.6 to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1994*
10.7** 1993 Stock Option Plan and form of option
agreements--incorporated by reference to Exhibit 10.7 to the
Registrant's Annual Report on Form 10- KSB for the fiscal year
ended March 31, 1993*
10.8(a) Credit Agreement, dated January 18, 1990, between the
Registrant and Norwest Bank Minnesota, National Association
(the "Bank") --incorporated by reference to Exhibit 28.1 to
the Registrant's Current Report on Form 8-K, dated January 18,
1990*
10.8(b) First Amendment, dated March 31, 1990, to Credit Agreement
between the Registrant and the Bank--incorporated by reference
to Exhibit 10.10(c) to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1991*
10.8(c) Second Amendment, dated October 5, 1990, to Credit Agreement
between the Registrant and the Bank--incorporated by reference
to Exhibit 10.10(c) to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1991*
10.8(d) Replacement First Term Note, dated September 28, 1992,
executed by the Registrant in favor of the Bank--incorporated
by reference to Exhibit 10.8(d) to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended March 31,
1993*
<PAGE>
10.8(e) Replacement Second Term Note, dated September 28, 1992,
executed by the Registrant in favor of the Bank--incorporated
by reference to Exhibit 10.8(e) to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended March 31,
1993*
10.8(f) Third Amendment, dated July 9, 1991, to Credit Agreement
between the Registrant and the Bank--incorporated by reference
to Exhibit 10.9(f) to the Registrant's Form 10-K for the
fiscal year ended March 31, 1992*
10.8(g) Fourth Amendment, dated June 15, 1992, to Credit Agreement
between the Registrant and the Bank--incorporated by reference
to Exhibit 10.9(g) to the Registrant's Form 10-K for the
fiscal year ended March 31, 1993*
10.8(h) Fifth Amendment, dated September 28, 1992, to Credit Agreement
between the Registrant and the Bank--incorporated by reference
to Exhibit 10.8(h) to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1993*
10.8(i) Sixth Amendment, dated June 14, 1993, to Credit Agreement and
Waiver between the Registrant and the Bank--incorporated by
reference to Exhibit 10.8(i) to the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended March 31, 1993*
10.8(j) Seventh Amendment, dated September 14, 1993, to Credit
Agreement between the Registrant and the Bank--incorporated by
reference to Exhibit 10.8(j) to the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended March 31, 1994*
10.8(k) Eighth Amendment, dated November 2, 1993, to Credit Agreement
between the Registrant and the Bank--incorporated by reference
to Exhibit 10.8(k) to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1994*
10.8(l) Ninth Amendment, dated March 24, 1994, to Credit Agreement
between the Registrant and the Bank--incorporated by reference
to Exhibit 10.8(l) to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1994*
10.8(m) Tenth Amendment to Credit Agreement and Second Amendment to
Replacement First Term Note, dated July 29, 1994, between the
Registrant and the Bank--incorporated by reference to Exhibit
10.8(m) to the Registrant's Annual Report on Form 10-KSB for
the fiscal year ended March 31,1995*
<PAGE>
10.8(n) Eleventh Amendment, dated March 28, 1995, to Credit Agreement
between the Registrant and the Bank--incorporated by reference
to Exhibit 10.8(n) to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1995*
10.8(o) Twelfth Amendment to Credit Agreement and Second Amendment to
Replacement First Term Note, dated August 25, 1995, between
the Registrant and the Bank--incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-QSB for the fiscal quarter ended September 30, 1995*
10.9** Agreement and Release dated April 10, 1996, between the
Registrant and Robert C. Mitchell.
11 Statement Regarding Computation of Per Share Earnings. The
required information is included in Note B of Notes to
Consolidated Financial Statements
13 Annual Report to Shareholders. The portions of the
Registrant's 1996 Annual Report to Shareholders that are
incorporated in this Form 10-KSB by reference
21 Subsidiaries of the Registrant
Name State of Incorporation
Southwest Teleproductions, Inc. Texas
Northwest Teleproductions/Kansas City, Inc. Minnesota
Northwest Teleproductions/Chicago, Inc. Minnesota
23 Consent. Consent of Deloitte & Touche LLP
24 Power of Attorney. Powers of Attorney from directors of the
Registrant are included as part of the "Signatures" page of
this Form 10-KSB
27 Financial Data Schedule (filed in electronic format only)
* Incorporated by reference to a previously filed report or document, SEC File
No. 0-8505, unless otherwise indicated.
**Indicates a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-KSB.
EXHIBIT 10.2
FISCAL 1997 OFFICER'S INCENTIVE COMPENSATION
The corporate officers, Robert Mitchell, James Steffen and Smith McClure shall
receive additional compensation as participants in the "1997 Officers Incentive
Compensation Plan" which plan is defined as follows:
*Incentive compensation in the form of a cash bonus shall be paid based on
consolidated audited pre-tax earnings, which for the purpose of this plan, will
be pre-tax earnings as determined in accordance with generally accepted
accounting principles and shall be net of a deduction for a provision for
officers incentive compensation to be paid under this plan.
*Total incentive compensation shall be calculated as follows:
Total incentive compensation shall equal ten percent (10%) of
consolidated pre-tax earnings in excess of eight percent (8%) of
consolidated stockholders' equity at March 31, 1996.
*Total incentive compensation shall be allocated and paid to the individual
officers as follows:
Robert Mitchell 50%
James Steffen 25%
Smith McClure 25%
EXHIBIT 10.9
AGREEMENT AND RELEASE
This Agreement and Release ("Agreement") is entered into by and between
Northwest Teleproductions, Inc. ("Company") and Robert C. Mitchell
("Executive").
RECITALS
A. Company and Executive are parties to a certain Employment Agreement,
dated May 4, 1983 and attached to this Agreement as Exhibit A (the "Employment
Agreement").
B. Company and Executive have agreed to sever their employment
relationship;
C. Company and Executive have engaged in negotiations to reach a
mutually beneficial separation arrangement;
D. Company and Executive desire to provide Executive with certain
separation payments and to fully resolve any and all actual or potential
disputes between them, as described fully herein;
In consideration of the above recitals and the mutual promises made
below, the parties agree as follows:
AGREEMENT
1. Company. Company, as used herein, means Northwest Teleproductions,
Inc. and its subsidiaries, successors and assigns, affiliated and predecessor
companies, and insurers, and its and their present or former owners, directors,
officers, shareholders, employees, and agents, whether in their individual or
official capacities, and the current and former trustees or administrators of
any pension or other benefit plan applicable to the employees or former
employees of above-described entities, in their official and individual
capacities. Any successor or assignee of the Company will assume any and all of
the Company's obligations under this Agreement.
2. Executive. Executive, as used herein, means Robert C. Mitchell and
anyone who has or obtains legal rights or claims through him.
3. Resignation. Executive hereby resigns as an employee and officer of
Northwest Teleproductions, Inc., and as an employee, officer, and director of
Northwest Teleproductions, Inc.'s subsidiaries, effective April 1, 1996.
4. Salary Continuation. Specifically in consideration for Executive's
resignation and Executive's agreement to the terms of this Agreement, Company
agrees to pay Executive at his base salary rate (in the gross amount of
$14,333.33 per month), less required withholding, on Company's normal payroll
dates, for the period from and beginning April 2, 1996 until and ending May 3,
1998 ("Salary Continuation Period"). Executive shall not be entitled to any
other payments or benefits of any type whatsoever, including but not limited to
salary, bonus, severance, deferred compensation, insurance (except any rights
Executive may have pursuant to federal or state law), 401(k) Company
contributions, and perquisites.
<PAGE>
5. Consulting. Executive shall, at Company's request, provide
consulting services to Company during the Salary Continuation Period for no
additional cost, compensation, or benefit whatsoever. If Executive provides
services under this paragraph, he shall at all times be an independent
contractor, rather than a co-venturer, agent, employee, or representative of
Company. If Executive provides any services under this paragraph, Executive
shall control the means and manner of performance of such services, including
the amount of time required, nature of services requested, and geographical
location required for performance of requested services.
6. Release of Claims. Executive hereby releases and forever discharges
Company of and from any and all actions or causes of action, suits, debts,
claims, complaints, contracts (expressed or implied), controversies, agreements,
promises, damages, claims for attorneys' fees, judgments, costs, disbursements,
severance benefits, compensation, commissions, vacation pay, and demands
whatsoever, known or unknown, in law or equity, he ever had, now has, or shall
have as of the date of this Agreement, including, but not limited to, any
alleged violation of any federal, state, or local law, regulation or ordinance
prohibiting discrimination or other unlawful activity on the basis of race,
color, creed, marital status, sex, age, religion, sexual orientation, national
origin, disability, or any other basis, sexual harassment, or any alleged
obligation created by statute or by common law contract or tort theory.
Executive affirms that he has not caused or permitted, and will not cause or
permit, to be filed any charge, complaint, or action against Company. Executive
agrees that the payments provided to him under this Agreement fully compensate
him for and extinguish any and all claims arising out of his employment, or
termination of employment, with Company. The Company will indemnify Executive
consistent with its Articles of Incorporation, Bylaws, and Minnesota law.
7.(a) Notification of Rights Pursuant to the Minnesota Human Rights Act
(Minnesota Statutes ss.ss. 363.01-.15) and the Federal Age Discrimination in
Employment Act (29 U.S.C. ss.ss. 621-634). Executive understands that he may not
sign this Agreement until 21 days after he receives it. Executive agrees that he
will use this 21-day period to consider whether the terms of this Agreement are
acceptable to him. Executive is hereby notified that he may rescind his release
of claims arising under the Minnesota Human Rights Act, Minnesota Chapter 363,
within 15 calendar days of his signing of this Agreement. Executive is further
notified that he may rescind his release of claims arising under the Federal Age
Discrimination in Employment Act, 29 U.S.C. ss.ss. 621-634, within seven
calendar days of his signing of this Agreement. In order to be effective,
Executive's rescission must be in writing and delivered by hand or mail to John
G. Lindell, Chairman of the Board, Northwest Teleproductions, Inc., 4455 West
77th Street, Minneapolis, MN 55435. If delivered by mail, the rescission must be
postmarked within the required period, properly addressed to John G. Lindell as
set forth above, and sent by certified mail, return receipt requested. Executive
understands that if he rescinds his release of claims as provided for in this
paragraph, he will not receive the payments provided for in this Agreement and
will have to return immediately any payments already received under this
Agreement.
<PAGE>
(b) Acknowledgment of Reading and Understanding; Consultation with
Counsel; Period to Consider Agreement. Executive, by signing this Agreement,
acknowledges and agrees that he has carefully read and understood all provisions
of this Agreement and that he has entered into this Agreement knowingly and
voluntarily. Executive further acknowledges that Company has advised him to
consult with counsel before signing this Agreement. Executive also acknowledges
that Company informed him that he has 21 days from the receipt of this Agreement
to consider whether its terms are acceptable to him and that he has had the
benefit of the 21-day period. Executive acknowledges and agrees that, in
executing this Agreement, he has not relied on any representations or statements
by Company, whether oral or written, other than the express statements of this
Agreement.
8. Claims Involving Company. Executive agrees to make himself available
to Company, and any attorneys or agents acting on behalf of Company, and to
cooperate in good faith with Company concerning any litigation or administrative
claims or investigations involving Company and arising out of any incidents that
occurred during Executive's employment with Company.
9. Restrictive Covenant. During the term of the Salary Continuation
Period Executive agrees that he will not directly or indirectly engage in the
business of, or own or control any interest in, or act as a director, officer,
or employee of or consultant to, any person, partnership, corporation, or other
business entity, that is directly or indirectly engaged, anywhere in the
metropolitan markets of Minneapolis, Dallas, or Chicago, in any business
competitive with the business being carried on by Company at the time of his
resignation or during the Salary Continuation Period. Executive acknowledges
that the provisions of this paragraph 9 are reasonable, but in the event this
covenant is more restrictive than permitted by the law of the jurisdiction in
which Company seeks enforcement thereof, this covenant shall be limited to the
extent permitted by law. Company will continue to pay Executive pursuant to
paragraph 4 of this Agreement until the earlier of (i) May 3, 1998 or (ii) the
date on which Executive breaches the restrictive covenant contained in this
paragraph 9. In the event litigation is commenced by either Company or Executive
against the other party related to alleged violations of the Restrictive
Covenant or the stopping of payment during the Salary Continuation Period, the
prevailing party shall recover from the other party the prevailing party's
attorney's fees and related costs.
10. Remedies and Injunctive Relief. Executive acknowledges and agrees
that the provisions of paragraph 9 of this Agreement are of a special, unique,
and extraordinary character and that any such damages to Company as the result
of any violation of such provisions of this Agreement could not be adequately
compensated for by monetary damages. Executive acknowledges that in the event of
any violations of any provisions of this Agreement, Company, in addition to any
other rights and remedies available to it, shall be entitled to obtain specific
performance and injunctive relief restraining Executive from committing or
continuing any such violation of this Agreement and to discontinue payments to
Executive under paragraph 4.
11. Non-Admission. This Agreement is intended to resolve disputed
claims. Nothing in this Agreement shall be construed as an admission by Company
or Executive of any liability or unlawful conduct whatsoever. Company and
Executive individually specifically denies any liability or unlawful conduct.
<PAGE>
12. Governing Law. Any disputes arising under this Agreement shall be
governed by the laws of the State of Minnesota.
13. Full Agreement. This Agreement contains the full agreement of the
parties and may not be modified, altered, or changed in any way except by
written agreement signed by both parties. The parties agree that, except for the
Company 401(k) profit sharing plan and certain written stock option agreements
between Company and Executive, this Agreement supersedes and terminates any and
all oral and written prior agreements and understandings between the parties,
including but not limited to the Employment Agreement. Executive, by signing
this Agreement, acknowledges and agrees that he has carefully read and
understood all provisions of this Agreement and that he has entered into this
Agreement knowingly and voluntarily.
ROBERT C. MITCHELL
Dated: April 10, 1996
Robert C. Mitchell
NORTHWEST TELEPRODUCTIONS, INC.
Dated: April 10, 1996 By
John G. Lindell
Its Chairman of the Board
EXHIBIT 13
MANAGEMENTS DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Sales for the year ended March 31, 1996 of $12,509,041 compare to sales of
$13,203,986 in fiscal 1995, and $13,773,411 in fiscal 1994. The 5% decrease in
sales from fiscal 1995 to fiscal 1996 reflects a decrease in Department of
Defense contract production and customary noncontract sales which were favorably
offset by significantly increased production of television programs for
broadcast. The 4% decline in sales from fiscal 1994 to fiscal 1995 resulted from
a decline in noncontract sales while Department Of Defense contract sales were
substantially the same as in fiscal 1994.
Pricing pressure and excess capacity continue to characterize the Company's
traditional full service production and postproduction markets. While the
Company continues to vigorously pursue these traditional markets, resources have
been added to accelerate the creation, sale and production of programming for
the broadcast market. In addition, the Company has become involved in the
production of programming for electronic retailing (infomercials).
For the years ended March 31, 1996, 1995 and 1994, Department of Defense
contract sales equaled 22%, 27% and 25% respectively, of total sales.
Department of Defense production in fiscal 1996 consisted of completion of the
balance of the contract requirements for the first year of the present potential
five year agreement, approximately 80% completion of the second year's
requirements and commencement of creative development and scripting for the
third year requirements.
Costs of products and services sold, as a percentage of sales, equaled 86%, 75%
and 72% for the years ended March 31, 1996, 1995 and 1994, respectively. The
dramatic increase in the cost of sales rate in fiscal 1996 results from
decreased sales and a shift in the sales mix toward a greater percentage of
consolidated sales resulting from full service production which is characterized
by higher direct job costs.
Selling, general and administrative expenses for the years ended March 31, 1996,
1995 and 1994 totaled $2,707,709, $2,542,140 and $2,533,800 respectively.
Expense for the fiscal years of 1995 and 1994 are approximately equal with
fiscal 1996 expenses being only 6% greater than the prior year. Increased
compensation and related expenses along with general overall expense increases
account for this change.
Operating results for fiscal 1996 include a goodwill impairment charge of
$1,060,330, litigation and settlement costs of $100,000 and severance and other
charges of $443,000, all of which are explained in detail in the footnotes to
the financial statements.
Interest expense of $487,770, $379,736 and $339,647 for the fiscal years ended
March 31,1996, 1995 and 1994, respectively, reflect increases as the result of
increased borrowing along with rate increases on the variable rate debt over the
past two years.
The increase in the effective tax rate from 39% in fiscal 1994 to 67% in fiscal
1995 reflect the greater impact of permanent book/tax differences at the
decreased income level. The 19% tax benefit rate in fiscal 1996 reflects the
substantial amount of nondeductible costs and expenses included in current years
operations. (see footnote E for detail).
Cost increases over the three years have negatively impacted operating
performance as severe price competition has precluded price increases, and in
some service segments necessitated price reductions.
<PAGE>
LIQUIDITY AND CAPITAL REQUIREMENTS
The impact of the net loss of $2,415,977 in fiscal 1996, which included a
goodwill impairment charge of $1,060,330, $100,000 of litigation and settlement
costs and $443,000 of severance and other charges, reduced stockholders equity
from $6,832,712 at March 31, 1995 to $4,016,788 at March 31, 1996. Anticipated
losses in the first quarter of fiscal 1997 will further reduce stockholders
equity.
As a result of the losses incurred, the Company was not in compliance with the
covenants of its debt agreements and, therefore, $2,748,562 of term debt that
would otherwise have been classified as long term had to be reclassified as
currently due. Being in default entitles the holder of the term notes to
accelerate the indebtedness owed by the Company. The Board of Directors has
authorized the issuance of $412,500 of 10 1/2% subordinated debt with warrants
to purchase common stock at $2.50 per share. On July 15, 1996 the Company plans
to enter into a new debt agreement. This new agreement requires full payment by
October 31, 1996. The Company is actively negotiating with several other lending
institutions in pursuit of alternative financing that would provide greater
borrowing flexibility, allow for increased borrowing against available
collateral and extend the payback period.
See footnote A "Basis of Presentation On Going Concern" for further information
regarding the Company's overall financial condition and management's comments
regarding near term anticipated operating performance.
<PAGE>
FINANCIAL REVIEW
MARKET PRICES Year Ended March 31,
1996 1995
High Low High Low
Quarter Ended:
June 30 $ 3.00 $ 1.88 $ 5.00 $ 4.00
September 30 3.63 2.50 4.75 3.50
December 31 4.25 2.75 4.00 2.25
March 31 3.88 2.50 2.88 2.13
The Company's common stock is traded on the Nasdaq National Market under the
symbol NWTL. The quotes in the above table set forth the high and low closing
sales prices as reported by Nasdaq.
At July 2, 1996 there were 491 shareholders of record.
The Company has not paid dividends since fiscal 1991.
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, March 31,
ASSETS 1996 1995
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 19,188 $ 271,258
Trade accounts receivable, less doubtful accounts
of $153,000 and $101,000 respectively (Note B and C) 2,155,365 2,663,586
Inventory (Note B) 214,105 212,886
Refundable income taxes (Note E) 328,482 199,565
Deferred income taxes (Note E) 216,000 75,000
Current portion of note receivable 99,831 99,831
Other assets 168,584 107,992
TOTAL CURRENT ASSETS 3,201,555 3,630,118
PROPERTY, PLANT AND EQUIPMENT (Note B):
Land 447,500 447,500
Buildings and improvements 2,837,902 2,743,844
Leasehold improvements 359,641 316,333
Machinery and equipment 21,625,491 20,554,284
25,270,534 24,061,961
Less accumulated depreciation 17,813,000 15,671,779
7,457,534 8,390,182
GOODWILL (Note B) 1,116,225
PROPRIETARY PROGRAMMING (Note B) 187,911
NOTE RECEIVABLE, less payments due within one year 76,133 200,475
OTHER ASSETS 142,216 175,782
406,260 1,492,482
$11,065,349 $13,512,782
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 1,030,000 $ 800,000
Accounts payable 412,610 281,131
Commissions,salaries and withholding 455,320 429,319
Miscellaneous accounts payable and accrued expenses 185,408 208,731
Other liabilities 268,708 138,539
Payments due within one year on long term debt and
capital leases (Notes D and F) 3,844,659 1,806,914
TOTAL CURRENT LIABILITIES 6,196,705 3,664,634
DEFERRED INCOME TAXES (NOTE E) 556,000 813,000
LONG TERM DEBT AND CAPITAL LEASES,less payments due
within one year (Notes D and F) 107,751 2,202,436
OTHER LONG TERM LIABILITIES (Note F) 188,105
COMMITMENTS AND CONTINGENCIES (Note F)
STOCKHOLDERS' EQUITY (Notes D and G):
Preferred stock, 2,500,000 shares authorized, none issued
Common stock, par value $.01 per share; authorized
10,000,000 shares, issued and outstanding 1,356,425
and 1,554,525 respectively 13,564 15,545
Additional paid-in capital 577,123 680,596
Retained earnings 3,426,101 6,136,571
4,016,788 6,832,712
$11,065,349 $13,512,782
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 12,509,041 $ 13,203,986 $ 13,773,311
COSTS AND EXPENSES
Costs of products and services sold 10,733,791 9,888,482 9,882,291
Selling, general and administrative (Note F) 2,707,709 2,542,140 2,533,800
Goodwill impairment charge (Note B) 1,060,330
Cost of litigation and settlement 100,000 281,852
Severance and other charges (Note F ) 443,000
Interest 487,770 379,736 339,647
15,532,600 13,092,210 12,755,738
(3,023,559) 111,776 1,017,573
OTHER INCOME 58,582 44,567 53,935
(LOSS) EARNINGS BEFORE INCOME TAXES (TAX BENEFIT) (2,964,977) 156,343 1,071,508
INCOME TAXES (TAX BENEFIT) (549,000) 105,000 418,000
NET (LOSS) EARNINGS ($ 2,415,977) $ 51,343 $ 653,508
============ ============ ============
NET (LOSS) EARNINGS PER SHARE (Note A) ($ 1.73) $ .03 $ .40
============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 1,394,155 1,571,963 1,618,253
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
COMMON STOCK
---------------------------------
Additional
Number of Paid-In Retained
Shares Issued Amount Capital Earnings
------------- ------- --------- ----------
BALANCES AT MARCH 31,1993 1,632,830 $16,328 $714,880 $5,680,397
Stock repurchased (58,305) (583) (25,527) (207,110)
Net earnings 653,508
BALANCES AT MARCH 31,1994 1,574,525 $15,745 $689,353 $6,126,795
Stock repurchased (20,000) (200) (8,757) (41,557)
Net earnings 51,333
BALANCES AT MARCH 31,1995 1,554,525 $15,545 $680,596 $6,136,571
Stock repurchased (198,100) (1,981) (103,473) (294,493)
Net loss (2,415,977)
BALANCES AT MARCH 31,1996 1,356,425 $13,564 $577,123 $3,426,101
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED
STATEMENTS
OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31,
1996 1995 1994
----------- ----------- -----------
CASH FLOWS - OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net (loss) earnings ($2,415,977) $ 51,333 $ 653,508
Adjustments to reconcile net (loss) earnings
to net cash provided by operating activities:
Depreciation 2,141,221 2,006,253 2,049,732
Goodwill impairment charge 1,060,330
Severance and other charges 443,000
Amortization of goodwill, organizational costs, and
non-competition agreements 55,895 184,328 227,112
(Decrease) increase in deferred income taxes (398,000) (27,000) 235,000
Changes in assets and liabilities:
Decrease (increase) in trade accounts receivable 508,221 89,255 (155,272)
(Increase) decrease in inventory (1,219) 9,955 (22,608)
(Increase) decrease in other assets (155,942) 52,878 (195,770)
Increase (decrease) in accounts payable and other liabilities 9,434 (464,840) (103,389)
Net cash provided by operating activities 1,246,963 1,902,162 2,688,313
CASH FLOWS -- INVESTING ACTIVITIES:
Property, plant and equipment additions (1,208,573) (2,450,143) (2,141,672)
Investment in proprietary programming (187,911)
Payments received on note receivable 124,342 122,968 201,549
Net cash used in investing activities (1,272,142) (2,327,175) (1,940,123)
CASH FLOWS - FINANCING ACTIVITIES:
Net increase in line of credit 230,000 800,000
Long term borrowing 1,890,000 1,620,000 2,000,000
Payments on long term borrowing (1,946,944) (1,899,441) (2,421,402)
Stock repurchases (399,947) (50,514) (233,220)
Net cash (used in) provided by financing activities (226,891) 470,045 (654,622)
INCREASE (DECREASE) IN CASH (252,070) 45,032 93,568
CASH AT BEGINNING OF YEAR 271,258 226,226 132,658
----------- ----------- -----------
CASH AT END OF YEAR $ 19,188 $ 271,258 $ 226,226
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash payments made for:
Income taxes $ 85,000 $ 90,000 $ 530,000
=========== =========== ===========
Interest $ 480,000 $ 390,000 $ 340,000
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1996, 1995 and 1994.
A. Basis of Presentation on Going Concern:
The consolidated financial statements have been prepared on a going-concern
basis,which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As reflected in the Company's
financial statements for the year ended March 31, 1996, the Company incurred a
net loss of $2,415,977, stockholder equity decreased by 41% from $6,832,712 at
March 31, 1995 to $4,016,788 at March 31, 1996. Gross margins decreased from 25%
in fiscal 1995 to 14% of sales in fiscal 1996 as the result of decreased sales
and an increase in both variable and fixed production costs resulting from a
change in the overall sales mix showing increased full service production which
is characterized by greater direct job costs. The loss before a provision for
tax benefit also includes $1,060,330 of goodwill impairment, $443,000 of
severance and other charges and $100,000 of legal and settlement costs. As
discussed in Note D, the Company was not in technical compliance with certain
covenants of its debt agreements at March 31, 1996.
These conditions raise substantial doubt as to the Company's ability to continue
as a going concern. The accompanying financial statements do not include any
adjustments that might result from the outcome of these uncertainities.
Effective April 1, 1996 the Company began implementation of dramatic management
changes, including naming an interim President, hiring a Business Development
Vice President and initiating a significant realignment of personnel in other
key management positions to better serve the Company's clientele and institute
operating efficiencies. Plans also include expanding the Company's presence in
the electronic retailing market (infomercials) and increased proprietary program
production.
Although the Company will incur significant losses in its first quarter ended
June 30, 1996, management is anticipating improved operating performance in the
balance of the fiscal year. Their anticipation of improved operating performance
is based on a significant backlog of Department of Defense production of
approximately $2,200,000, along with program production for cable broadcast
which could total in excess of $3,500,000 over the current and following fiscal
year.
Fiscal 1996 operations along with the current year's first quarter loss has
produced what management views as a short term liquidity crisis. Management
anticipates improved net cash flow beginning in the second quarter. The Board of
Directors has authorized the issuance of $412,500 of 10 1/2% subordinated debt
with warrants to purchase common stock at $2.50 per share. On July 15, 1996 the
Company plans to enter into a new debt agreement. This new agreement requires
full payment by October 31, 1996. The Company is actively negotiating with
several other lending institutions in pursuit of alternative financing that
would provide greater borrowing flexibility, allow for increased borrowing
against available collateral and extend the payback period.
B. Summary of Significant Accounting Policies:
Description of business - The Company is a full service videotape and film
production company providing a full range of creative, production and
postproduction service to clientele throughout the United States.
Principles of consolidation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, after elimination of
intercompany balances and transactions.
Inventory - Inventory consists of videotapes, tape reels, tape cassettes,
electronic components and other supplies used in recording of film and videotape
production and equipment maintenance and is stated at the lower of cost
(first-in, first-out) or market.
Depreciation - Depreciation on buildings and improvements and machinery and
equipment is computed using the straight line basis over their estimated useful
lives. Assets under capital leases and leasehold improvements are amortized on a
straight line basis over their estimated useful lives.
Buildings and improvements 15-30 years
Leasehold improvements 2-15 years
Machinery and equipment 5-10 years
The Company is depreciating machinery and equipment using accelerated methods
for income tax purposes.
<PAGE>
Goodwill - Goodwill was being amortized over a 25-year life using the straight
line method. At March 31, 1996 the Company recognized a goodwill impairment
charge of $1,060,330. The amount of the impairment charge was based on analysis
of future cash flows attributed to the Company's Chicago subsidiary compared to
the carrying value of the goodwill. This analysis has resulted in full
impairment of the recorded goodwill.
Net (loss) earnings per share - Net (loss) earnings per share are computed based
on the weighted average number of common shares outstanding during the year.
There were no common share equivalents outstanding during the years ended March
31, 1996, 1995 and 1994.
Revenue recognition and trade accounts receivable - Beginning in 1986 the
Company commmenced performance on major government contracts which are performed
over extended periods of time and are based on fixed prices. Revenue and profits
on these contracts are recorded under the percentage of completion method of
accounting. During the years ended March 31, 1996, 1995 and 1994 revenue under
these contracts accounted for 22%, 27% and 25%, respectively, of total revenue.
Included in accounts receivable at March 31, 1996 and 1995 are $659,000 and
$319,000 of billed revenue from government contracts and $197,000 and $584,000,
respectively, of unbilled revenue from government contracts.
Proprietary programming - During fiscal 1996 the Company began producing
proprietary programming for future sale to the broadcast industry. Costs and
expenses relative to such programs are capitalized to be amortized over their
useful life based on the estimated revenue from the direct sale or the sale of
broadcast rights. Capitalized costs are reviewed quarterly. If it is determined
that they are impaired, based on current estimated future cash flows the
capitalized value is adjusted accordingly.
Non-competition agreements - The non-competition agreements were amortized over
the five year term of the agreements.
Estimated fair value - The estimated fair value of cash and cash equivalents,
trade accounts receivable, accounts payable, notes payable, and long-term debt
approximates their carrying value due to the relatively short-term nature of the
instruments and/or due to the short-term floating interest rates on the
borrowing. The estimated fair value of notes receivable approximates the net
carrying value, as management believes the respective interest rates are
commensurate with the credit, interest rates, and prepayment risks involved.
Management estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expense during
the reporting period. Actual results could differ from those amounts.
New Accounting Pronouncement - In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards no. 123 (SFAS
123), "Accounting for Stock Based Compensation." The Company has elected to
continue following the guidance of Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" for measurement and recognition of
stock-based transactions with employees. The Company will adopt the disclosure
provisions of SFAS 123 in fiscal year 1997.
<PAGE>
C. Line of Credit:
The Company has a line of credit with a bank which is secured by the Company's
accounts receivable. Maximum borrowing under the credit agreement was determined
by an accounts receivable borrowing base calculation or $1,750,000 whichever was
less. Outstanding amounts bear interest at prime plus 3/4% (9.00% at March 31,
1996). At March 31, 1996 there was a balance outstanding of $1,030,000 on the
line of credit and the borrowing limit was $1,122,000. Currently the Company is
not in compliance with its term note provisions and, therefore, the holder of
the line of credit is entitled to accelerate the indebtedness owed by the
Company. See Note D for discussion of the noncompliance.
D. Long Term Debt:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Term note payable in monthly installments of $145,000 plus
interest at prime plus 3/4% (9.00% at March 31,1996) (See Below) $3,695,000 $3,295,000
First mortgage note payable in monthly installments of $2,098
including interest at 9% through May 2002. 122,373 135,868
First mortgage note payable in monthly installments of $3,740
including interest at 8 7/8% through January 1997. 34,331 74,210
Capital lease obligations (Note F) 100,706 504,272
3,952,410 4,009,350
Less payments due within one year 3,844,659 1,806,914
---------- ----------
$107,751 $2,202,436
========== ==========
</TABLE>
Aggregate amounts of long-term maturities, exclusive of capital lease
obligations, for the years ending March 31, are as follows:
1997 $3,743,950
1998 16,146
1999 19,317
2000 21,130
2001 24,226
Thereafter 26,929
----------
$3,851,698
Under the term note provisions that became effective March 31, 1996 the Company
is required to maintain a mininum tangible net worth of $4,200,000. The
agreement also restricted additional indebtedness, limited capital expenditures
and required the Company to maintain a ratio of debt to tangible net worth of
not greater than 1.7 to 1.0 and a ratio of current assets to current liabilities
of 0.80 to 1.0. Substantially all of the Company's assets are pledged as
collateral under the line of credit debt agreements.
The Company was not in compliance with these covenants at March 31, 1996.
Consequently, $2,748,562 of term debt that would otherwise have been classified
as long term has been classified as current in the March 31, 1996 consolidated
balance sheet. This failure to be in compliance with the covenant provisions, or
to receive appropriate relief, has resulted in default under the credit
agreement and the holders of the term notes are entitled to accelerate the
indebtedness owed by the Company. See Note A for discussion of management's
plan.
<PAGE>
E. Income Taxes:
The provision (benefit) for income taxes consists of:
Year Ended March 31,
1996 1995 1994
Currently payable(refundable):
Federal ($140,000) $108,000 $148,000
State (11,000) 24,000 35,000
(151,000) 132,000 183,000
Deferred (398,000) (27,000) 235,000
-------- -------- --------
($549,000) $105,000 $418,000
A reconciliation between the income tax provision computed at the federal
statutory rate and the income tax provision recorded is as follows:
Year Ended March 31,
1996 1995 1994
Income tax (benefit) expense at
statutory rates(35%) ($1,038,000) $55,000 $375,000
State income tax expense less
applicable federal benefit (80,000) 13,000 57,000
Valuation allowance 72,000
Nondeductible expenses 494,000 40,000 35,000
Other 3,000 (3,000) (49,000)
-------- ------- --------
($549,000) $59,000 $467,000
During the year ended March 31, 1996 the Company established a valuation
allowance of $72,000 on the deferred tax assets reducing the total to an amount
that management believes will ultimately be realized.
Temporary differences that give rise to the net deferred tax assets and
liabilities at March 31, 1996, 1995 and 1994 are as follows:
Net current deferred tax assets:
1996 1995 1994
Severance and other $133,000
Allowance for doubtful accounts 40,000 $45,000 $41,000
Vacation accrual 81,000 84,000 112,000
Real estate tax accrual (24,000) (22,000) (16,000)
Profit on unbilled government contracts (10,000) (28,000) (11,000)
Prepaid Items (4,000) (4,000)
-------- ------- --------
$216,000 $75,000 $126,000
Net noncurrent deferred tax liability:
Depreciation $926,000 $1,015,000 $1,057,000
Severance and other (123,000)
Alternate minimum tax credit
carryforwards (167,000) (189,000) (146,000)
Deferred rent restructure charge (8,000) (13,000) (20,000)
------- ------- -------
628,000 813,000 891,000
Less valuation allowance (72,000)
------- ------- -------
$556,000 $813,000 $891,000
<PAGE>
F. Commitments:
Capital Leases:
Included in machinery and equipment at March 31,1996 and 1995 is $1,701,340 net
of accumulated amortization of $1,121,115 and $878,067, respectively, of
equipment leased under capital leases.
Amortization of capital leases for the years ended March 31, 1996, 1995 and 1994
included in the Consolidated Statements of Operations was $243,048, $212,985 and
$243,048 respectively.
Minimum future obligations on these leases in effect at March 31, 1996 total
$102,589 of which $1,888 represents interest.
Operating Leases:
The Company leases facilities in Minneapolis, Kansas City and Chicago under
operating leases.
The downtown Minneapolis facility is leased under the terms of a ten year lease
which commenced in October 1991 and provides for monthly rental of $4,133. The
lease has a five year renewal option.
The Kansas City facility lease, which provides for monthly lease payments of
$2,625 through June 1997, is being subleased under the terms of the sale of the
business and assets of the subsidiary effective March 31, 1993.
The Chicago facility has two operating leases:
Under the terms of a non-cancellable lease commencing September 1993 and
expiring in April 2002 monthly rental of $15,010 is required during the initial
forty four months of the lease decreasing to $3,129 per month for the balance of
the lease. Terms of the lease call for partial rent abatement during the first
forty four months of the lease. The Company has recorded rent expense on a
straight line basis recognizing deferred rent for the difference between cash
payments and recorded expense. The lease has a five year renewal option.
Under the terms of a lease dated January 1,990 and running through February
1997, minimum monthly rental of $6,897 is required.
All leases provide for additional rental based on shared operating expenses.
Minimum future payments for operating leases and related sublease payments to be
received at March 31, 1996 are as follows:
Year Ending Operating
March 31, Leases Subleases
1997 308,847 (31,500)
1998 106,903 (7,875)
1999 87,147
2000 87,147
2001 87,147
Thereafter 65,475
------- ------
$742,666 ($39,375)
The Company also rents as needed various types of production equipment. Total
rental expenses for facilities and equipment were $621,000, $647,000 and
$596,000 for each of the years ended March 31, 1996, 1995 and 1994,
respectively.
<PAGE>
Employment Agreement and Severance Charges: The Company had an employment
agreement with its former President through May 1998. The agreement provided for
annual base salary plus increases as determined by the Board of Directors. The
agreement also contained non-compete provisions which required the continued
payment, under certain circumstances, of the annual base salary. The former
President resigned effective April 1, 1996. As part of a severance agreement, he
will be compensated as per the agreement receiving his annual base salary of
$172,000 through May 8, 1998. The present value of these future payments,
$323,000, has been expensed as severance charges in fiscal 1996.
In addition to the $323,000 severance settlement, the Company booked an
additional $120,000 of expense applicable to actual and estimated consulting
services, legal services and other severance compensation.
Legal Proceedings: The Company was a defendent in an action relating to the sale
of the business and certain assets of its Kansas City subsidiary. This action
was settled on November 20, 1995. The Company, without admitting liability, paid
the plaintiffs $10,000 in settlement of the litigation.
G. Common Stock and Stock Options:
In June 1993 the Company adopted an Incentive Stock Option Plan providing for
the issuance of 80,000 shares of the Company's common stock at not less than
fair market value at the date of grant. Options to to purchase 6,000 shares at a
price of $3.00 per share were granted during fiscal 1996 and became exercisable
on the date of grant.
H. Employee Benefit Plan:
The Company maintains an employee benefit plan as set forth under Section 401(K)
of the Internal Revenue Code covering substantially all of its employees. Under
this plan, the Company contributes to the plan an amount equal to fifty percent
of an employee's contribution up to a maximum Company contribution of 2 1/2% of
an employee's covered compensation. The cost of these contributions was
approximately $83,000, $80,000 and $89,000 for the years ended March 31, 1996,
1995, and 1994, respectively.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Northwest Teleproductions, Inc.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Northwest
Teleproductions, Inc. and subsidiaries (the Company) as of March 31, 1996 and
1995 and the related consolidated statements of operations, cash flows, and
stockholders' equity for each of the three years in the period ended March 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
March 31, 1996 and 1995 and the consolidated results of operations and cash
flows for each of the three years in the period ended March 31, 1996, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going-concern. The Company incurred significant net
loss for the year ended March 31, 1996, and as discussed in Notes C and D, it
was not in compliance with certain provisions of its debt agreements at March
31, 1996. As a result, the holders of such debt may declare the entire amount of
such indebtedness due and payable immediately and these obligations have been
classified as current liabilities in the accompanying financial statements.
These conditions raise substantial doubt about the Company's ability to continue
as a going-concern. Management's plans regarding these matters are discussed in
Note A. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/s/ Deloitte & Touche, LLP
Minneapolis, Minnesota
July 11, 1996
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
Northwest Teleproductions, Inc. on Form S-8 (File No. 33-69036) of our report
dated July 11, 1996, which contains an explanatory paragraph concerning the
Company's ability to continue as a going concern, appearing in this Annual
Report on Form 10-KSB of Northwest Teleproductions, Inc. and subsidiaries for
the year ended March 31, 1996.
/s/ Deloitte & Touche, LLP
Minneapolis, Minnesota
July 11, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S.Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 19,188
<SECURITIES> 0
<RECEIVABLES> 2,308,163
<ALLOWANCES> 153,000
<INVENTORY> 214,105
<CURRENT-ASSETS> 3,201,555
<PP&E> 25,270,534
<DEPRECIATION> (17,813,000)
<TOTAL-ASSETS> 11,065,349
<CURRENT-LIABILITIES> 6,196,705
<BONDS> 0
0
0
<COMMON> 13,564
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,065,349
<SALES> 12,509,045
<TOTAL-REVENUES> 0
<CGS> 10,733,791
<TOTAL-COSTS> 15,532,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 487,770
<INCOME-PRETAX> (2,964,977)
<INCOME-TAX> 549,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,415,977)
<EPS-PRIMARY> (1.73)
<EPS-DILUTED> (1.73)
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