<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
For the quarterly period ended NOVEMBER 30, 1998
-----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________________
Commission file number 1-8654
UNITEL VIDEO, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-1713238
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 WEST 57TH STREET - NEW YORK, NEW YORK 10019
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(Address of principal executive offices)
(212) 265-3600
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months and (2) has been subject to such requirements
for the past 90 days.
Yes /X/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
2,714,116 common shares outstanding as of January 19, 1999
(Number of shares) (Date)
<PAGE>
UNITEL VIDEO, INC.
FORM 10-Q
QUARTER ENDED NOVEMBER 30, 1998
Page
INDEX Number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
November 30, 1998 (Unaudited) and 3-4
August 31, 1998
Consolidated Statements of Operations
November 30, 1998 (Unaudited) and 5
November 30, 1997 (Unaudited)
Consolidated Statements of Cash Flows
November 30, 1998 (Unaudited) 6-7
and November 30, 1997 (Unaudited)
Notes to Consolidated Financial 8
Statements (Unaudited)
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of 9-15
Operations
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 15
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
2
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UNITEL VIDEO, INC.
FORM 10-Q
QUARTER ENDED NOVEMBER 30, 1998
Part 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, 1998 August 31, 1998
----------------- ---------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 349,000 $ 1,190,000
Accounts receivable, net 4,825,000 4,784,000
Other receivables 149,000 93,000
Prepaid income taxes 55,000 62,000
Prepaid expenses 397,000 498,000
Deferred tax asset 312,000 312,000
----------- -----------
Total current assets 6,087,000 6,939,000
Property and equipment - at cost
Land, buildings
and improvements 23,644,000 23,490,000
Video equipment 78,590,000 78,113,000
Furniture and fixtures 1,773,000 1,758,000
----------- -----------
104,007,000 103,361,000
Less accumulated depreciation
and amortization 54,593,000 52,420,000
----------- -----------
49,414,000 50,941,000
Deferred tax asset 2,157,000 2,157,000
Goodwill 1,549,000 1,583,000
Other assets 2,191,000 2,112,000
----------- -----------
$61,398,000 $63,732,000
=========== ===========
</TABLE>
Note: The balance sheet at August 31, 1998 has been taken from the audited
consolidated financial statements at that date.
See notes to consolidated financial statements.
3
<PAGE>
UNITEL VIDEO, INC.
FORM 10-Q
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
November 30, 1998 August 31, 1998
----------------- ---------------
(Unaudited) (Note)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,602,000 $ 5,282,000
Accrued expenses 1,007,000 2,056,000
Payroll and related taxes 1,406,000 1,434,000
Current maturities of long-term debt 3,729,000 3,563,000
Current maturities of subordinated debt 2,438,000 640,000
Current maturities of capital lease
obligations 2,016,000 2,077,000
----------- -----------
Total current liabilities 16,198,000 15,052,000
Deferred rent 111,000 112,000
Long-term debt, less current maturities 32,206,000 32,679,000
Subordinated debt, less current maturities -- 2,171,000
Long-term leases, less current maturities 3,948,000 4,468,000
Accrued retirement 1,013,000 1,047,000
Stockholders' equity:
Common stock, par value
$.01 per share:
Authorized 5,000,000 shares
Issued 3,544,854 and 3,541,754 shares,
respectively, and outstanding 2,714,116
and 2,711,016 shares, respectively 27,000 27,000
Additional paid-in capital 27,284,000 27,275,000
Accumulated deficit (11,744,000) (11,454,000)
Common stock held in treasury,
at cost (830,738 shares) (7,645,000) (7,645,000)
----------- -----------
Total stockholders' equity 7,922,000 8,203,000
----------- -----------
$61,398,000 $63,732,000
=========== ===========
</TABLE>
Note: The balance sheet at August 31, 1998 has been taken from the audited
consolidated financial statements at that date.
See notes to consolidated financial statements.
4
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UNITEL VIDEO, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended November 30,
---------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Sales $12,322,000 $13,768,000
Cost of sales:
Production costs 8,012,000 9,279,000
Depreciation and amortization 2,097,000 2,151,000
----------- -----------
10,109,000 11,430,000
----------- -----------
Gross profit 2,213,000 2,338,000
Operating expenses:
Selling 268,000 363,000
General and administrative 1,201,000 1,620,000
Interest 1,043,000 899,000
----------- -----------
2,512,000 2,882,000
----------- -----------
Loss from operations (299,000) (544,000)
Other income -- 90,000
Loss before income taxes (299,000) (454,000)
Income taxes -- 2,000
Net loss applicable for common stock-
basic and diluted $ (299,000) $ (456,000)
=========== ===========
Net loss per common share $ (.11) $ (.17)
=========== ===========
Weighted average number of common
shares outstanding 2,714,000 2,675,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
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UNITEL VIDEO, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended November 30,
---------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (299,000) $ (456,000)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation and amortization 2,337,000 2,151,000
Net gain on disposal of equipment (240,000) --
Amortization of deferred financing costs 56,000 47,000
Deferred rent and other 8,000 2,000
Accrued retirement expense (34,000) (33,000)
Changes in operating assets
and liabilities:
Accounts receivable, net (41,000) (1,625,000)
Other receivables (339,000) (82,000)
Prepaid expenses 101,000 (181,000)
Prepaid taxes 7,000 (26,000)
Other assets (106,000) (229,000)
Accounts payable 603,000 1,410,000
Accrued expenses (1,049,000) 294,000
Payroll and related taxes (28,000) (452,000)
----------- -----------
1,275,000 1,276,000
----------- -----------
Net cash provided by operating
activities 976,000 820,000
Cash Flows from Investing
Activities:
Capital expenditures (851,000) (947,000)
Proceeds from disposal of equipment 316,000 --
----------- -----------
Net cash used in
investing activities (535,000) (947,000)
</TABLE>
(Continued)
6
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UNITEL VIDEO, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
Three Months Ended November 30,
---------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows From Financing
Activities:
Proceeds from long term financing $ -- $ 6,832,000
Proceeds from issuance of common stock 9,000 --
Deferred financing costs (30,000) --
Principal repayments (1,261,000) (6,274,000)
----------- -----------
Net cash (used) provided in financing
Activities (1,282,000) 558,000
----------- -----------
Net (Decrease) Increase in Cash (841,000) 431,000
Cash Beginning of Year 1,190,000 137,000
----------- -----------
Cash End of Quarter $ 349,000 $ 568,000
=========== ===========
Schedule of income taxes and interest paid:
Income Taxes Paid $ 2,000 $ 2,000
Interest Paid 982,000 854,000
----------- -----------
$ 984,000 $ 856,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
7
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UNITEL VIDEO, INC.
FORM 10-Q
THREE MONTHS ENDED NOVEMBER 30, 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of November 30, 1998, the
consolidated statements of operations for the quarters ended November 30,
1998 and 1997, and the consolidated statements of cash flows for the three
months then ended have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations, and cash flows at November 30, 1998 and for all periods presented
have been made.
Certain information and footnote disclosure normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
these condensed consolidated financial statements be read in conjunction with
the financial statements and notes thereto in the Company's August 31, 1998
Form 10-K filed with the Securities and Exchange Commission. The results of
operations for the quarter ended November 30, 1998 are not necessarily
indicative of the operating results for the full year.
2. STOCKHOLDERS' EQUITY
During the three months ended November 30, 1998, stockholders' equity
decreased due to:
Net loss $ (299,000)
Translation adjustment 9,000
Purchase of stock under the Unitel Video, Inc.
Employee Stock Purchase Plan 9,000
-----------
Total decrease in stockholders' equity $ (281,000)
===========
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
The Company has taken several steps to increase its liquidity, which had been
significantly reduced by the losses incurred during the past several fiscal
years.
In August 1998, the Company refinanced its owned New York City real estate
generating funds of approximately $4,600,000 after repayment of the existing
first mortgages on such properties, closing costs and escrows. These funds
were used to repay Term Loan D of the credit facility described below in this
item in the amount of $1,600,000, with the balance used for working capital
purposes.
Additionally, the holders of subordinated debt of the Company related to the
acquisition of the mobile facilities company GC& Co. by the Company in 1995,
which had been due in August 1998, agreed to a new payment schedule providing
for payments of fifty percent of the $650,000 in October 1998 and the balance
in six equal installments beginning November 1998.
In a third step, another holder of subordinated debt of the Company agreed to
restructure its note with the Company by postponing the maturity date from
May 1999 to September 1999 and by eliminating principal payments that had
been due for the months of April 1998 through April 1999, totaling $450,000.
The holder also agreed to add $108,000 of accrued but unpaid interest to the
principal balance payable in September 1999. The new terms require that
interest only be paid on a current basis effective September 1, 1998 through
the September 30, 1999 maturity date.
The Company has reduced its cash requirements through cost reductions.
Additionally, due to capital expenditures in fiscal years 1996 through 1998
totaling approximately $30,000,000, the Company currently anticipates that
capital expenditures in fiscal 1999 will be less than $2,500,000. Capital
expenditures were $535,000 (net of proceeds from dispositions of equipment)
during the quarter ended November 30, 1998, and consisted of the purchase of
production, post production and graphics equipment for use throughout the
Company.
Net cash provided by operating activities during the quarter ended November
30, 1998 and 1997 was $976,000 and $820,000, respectively. Net cash provided
by operating activities for the quarter ended November 30, 1998 was offset by
net cash of $535,000 used in investing activities which consisted of capital
expenditures (net of proceeds from asset dispositions), and by net cash used
in financing activities of $1,282,000 for debt repayment, resulting in a net
decrease in cash available of $841,000. Net cash provided by operating
activities for the quarter ended November 30, 1997 was increased by net cash
provided from financing activities of $558,000 from additional long term debt
and was offset by net cash of $947,000 used in investing activities which
consisted of capital expenditures resulting in a net increase in cash
available of $431,000
9
<PAGE>
In December 1995, the Company entered into a $26 million revolving credit and
term loan agreement (the "credit facility") with a financial institution,
consisting of an $11 million revolving credit facility and two $7.5 million
term loans (Term Loans A and B). In May 1997, Term Loan A was revised by the
inclusion of $2,500,000 of the original Term Loan B and the advance of
$518,000 of new funds, resulting in a revised Term Loan A balance of
$9,000,000. Term Loan A is payable in equal monthly principal installments of
$100,000 plus interest, with the balance of $6,000,000 due March 2000. In
November 1997 Term Loan B was repaid, in part from the proceeds of a new Term
Loan D in the amount of $2,500,000. $3,742,000 of the original Term Loan B
was repaid from sales of equipment from the Company's Editel Chicago, Editel
New York and Unitel Hollywood divisions. The Company refinanced its New York
owned real estate in August 1998 and used a portion of the proceeds of the
refinancing to repay Term Loan D and other indebtedness and the balance of
the proceeds for working capital purposes.
In July 1997 the credit facility was further amended by the issuance of a
$5,080,000 letter of credit to secure payment of principal and interest on
$5,000,000 principal amount of Allegheny County (Pennsylvania) Industrial
Development Authority Variable Rate Demand Revenue Bonds (the "Bonds"). The
proceeds from the sale of the Bonds were loaned to the Company and were used
by the Company to build a new digital mobile teleproduction unit. The credit
facility requires quarterly principal payments of $179,000 commencing
December 1998 in respect of the Bonds. The Bonds mature on July 1, 2009 and,
to the extent not previously redeemed in full, are required to be repaid by
the Company on that date.
In December 1997 a second series of Bonds were issued in an amount of
$3,500,000. The proceeds of the second series of Bonds were used to finance
the construction of a second digital mobile unit. The credit facility
requires quarterly principal payments of $125,000 commencing February 1999 in
respect of this second series of Bonds which also mature on July 1, 2009.
The terms of the credit facility with the financial institution provide that
the lender receive a first lien on all property and equipment and accounts
receivable that are not encumbered by another lender. The Company has at
certain times during the quarter ended November 30, 1998 not been in
compliance with certain of the financial covenants contained in the credit
facility and the lender has waived such non-compliance. In addition, the
Company has at certain times during the quarter ended November 30, 1998 been
in arrears on certain other indebtedness. The Company is currently in
discussions with various lenders to refinance the credit facility and make
available to the Company additional working capital. The Company is also in
negotiations to restructure the repayment terms of certain of its other
long-term debt. The Company anticipates that the steps enumerated above in this
item together with funds generated from operations and proceeds from the sale
of selected fixed assets no longer useful in the Company's business will be
sufficient to meet the Company's anticipated working capital and investment
needs in fiscal 1999.
10
<PAGE>
RESULTS OF OPERATIONS
Sales were $12,322,000 and $13,768,000 for the quarters ended November 30,
1998 and 1997, respectively, resulting in a decrease from the same period of
the prior year. The decrease in sales of $1,446,000 in the quarter ended
November 30, 1998 is primarily attributable to the following three areas of
the Company's business. First, the consolidation of the Company's two New
York City based post-production facilities into a single facility at Unitel
Post 38 resulted in a decrease in sales of approximately $600,000 from the
closing of the Unitel Post 57 facility and the elimination of the interactive
segment of the Company's post-production business. Second, sales of the
Company's mobile division declined approximately $400,000 as a result of
pass-through costs being eliminated from mobile division billing and absorbed
directly by the Company's clients. Although mobile division sales were lower
in the quarter ended November 30, 1998 compared to sales for that division in
the quarter ended November 30, 1997, results of operations for that division
were the same in both the quarters ended November 30, 1998 and November 30,
1997. Third, sales for the Company's Editel Los Angeles division declined
approximately $400,000 as a result of the loss of the Company's business in
connection with the Star Trek television series in the fourth quarter of
fiscal 1998.
The Company's net loss for the quarter ended November 30, 1998 was
($299,000) compared to a net loss of ($456,000) for the quarter ended
November 30, 1997. The comparative decrease in the net loss of approximately
$157,000 for the quarter ended November 30, 1998 compared to the quarter
ended November 30, 1997 is principally due to the improvement in the results
of the New York post production operation resulting from the closure of the
Unitel Post 57 facility and improvements in the New York studio division.
These improvements were offset by a loss in the Editel Los Angeles division
caused by a decrease in sales.
Production costs, the main component of cost of sales, consist primarily of
direct labor, equipment maintenance expenses and occupancy costs. The
Company's production costs, as a percentage of sales, were 65% for the
quarter ended November 30, 1998, as compared to 67% for the quarter ended
November 30, 1997. The decrease in production costs for the quarter ended
November 30, 1998 compared with the same period of the prior year is
primarily due to the efficiencies achieved from an increase in sales without
a proportionate increase in costs at the Company's Unitel Post 38 facility as
a result of the closure of the Company's Unitel Post 57 facility and the
relocation of a significant portion of that facility's customer base to the
Unitel Post 38 facility.
Depreciation, as a percentage of sales, was 17.0% and 15.6% for the quarters
ended November 30, 1998 and 1997, respectively. Had gain on sale of equipment
of $240,000 been excluded from depreciation expense for the quarter ended
November 30, 1998, depreciation as a percentage of sales would have been
19.0% compared with 15.6% for the same period in the prior year. The increase
in the quarter ended November 30, 1998 compared to the same period in the
prior year was primarily a result of the introduction of a digital mobile
teleproduction unit in the quarter ended February 28, 1998. Additionally, the
Company retained the majority of the equipment previously used at the
Company's Post 57 facility that was closed in the third quarter of the
Company's 1998 fiscal year.
Selling expenses, as a percentage of sales, for the quarters ended November
30, 1998 and 1997 were 2.2% and 2.6%, respectively. The decrease in the
quarter ended November 30, 1998 as compared to the quarter ended November 30,
1997 is due to a decrease in the Company's overall sales staff primarily as a
result of the closure of the Unitel Post 57 facility in May 1998. Also,
promotional expenses were higher in the quarter ended
11
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November 30, 1997 due to the introduction of one of the Company's new digital
mobile teleproduction units.
General and administrative expenses, as a percentage of sales, for the
quarters ended November 30, 1998 and 1997 were 9.7% and 11.8%, respectively.
The decrease in general and administrative expenses as a percentage of sales
is primarily due to the greater decrease in expense in relation to the
decrease in sales. General and administrative expenses decreased by
approximately $400,000 primarily from reductions in corporate expenses, bad
debt allowances and professional fees.
Interest expense, as a percentage of sales, for the quarters ended November
30, 1998 and 1997 was 8.5% and 6.5%, respectively. Interest expense for the
quarter ended November 30, 1998 increased approximately $140,000 compared to
the quarter ended November 30, 1997 primarily from new debt added as of
August 31, 1998, partially offset by normal principal reductions on older
debt.
The Company's effective tax rate was 0% for the first quarter of fiscal years
1999 and 1998. The effective tax rate for the first quarter of fiscal 1999 is
less than the federal statutory rate of 34% due to the utilization of net
operating loss carryforwards generated by the losses incurred in fiscal 1998
and prior years.
YEAR 2000 UPDATE
General
The Company's company-wide Year 2000 Project (the "Project") is proceeding on
schedule. The purpose of the Project is to evaluate the ability of computer
programs (software) and embedded chips to distinguish between the year 1900
and the year 2000. The Project has been underway since the middle of calendar
year 1998, is proceeding on schedule and is expected to be completed by the
middle of calendar year 1999. While many different types of equipment and
software products may be prone to the Year 2000 problem, major emphasis is
being placed on those items considered to be material to the operation of the
Company's business.
The Company's primary business is to provide services to the video and film
communications industry for the recording, editing, creation of digital
effects and duplication of television programs, commercials, corporate
communications and feature films. Because the various operating divisions of
the Company share much of the software and hardware necessary to provide
these services, Year 2000 research done at one division is largely applicable
at the Company's other divisions. This fact will greatly simplify the process
of evaluating the impact of Year 2000 issues on the Company's business and
minimize the costs to the Company involved in becoming Year 2000 compliant.
12
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Project
The Company's Project is divided into four major sections:
1. Administrative Functions - accounts payable, accounts receivable, client
scheduling, purchasing and payroll.
2. Technical Services - equipment/systems, software packages,
interconnectivity issues.
3. Infrastructure - personal computers (PC's and MAC's), owned telephone
system equipment, networks (Novell, Microsoft), office equipment, etc.
4. External Services Vendors - 401K/health care management, payroll services,
property/liability insurance providers, etc.
Administrative Functions:
The accounts payable, accounts receivable and client scheduling tasks at most
divisions of the Company are provided by industry standard software
applications, for example J.D. Edwards Accounting Package or Xytech Systems
(Xymox), or both, depending on the division. Both J.D. Edwards and Xytech
Systems have available Year 2000 upgrade programs and the Company anticipates
these will be installed in early calendar year 1999. Standard PC based
applications, used for these and other applications, are either currently
compliant or are expected to have suitable upgrades available in early
calendar year 1999. Similarly, the payroll services vendor expects to have
Year 2000 software available early in calendar year 1999. These will be
purchased by the Company as soon as they become available.
Technical Services:
The Company utilizes technical hardware from various vendors to provide a
wide range of services to its clients. All divisions have been compiling
lists of equipment considered critical to their operations. Based on written
responses from various vendors, the Company has been advised that the
majority of these items are either Year 2000 compliant or not affected by
Year 2000 issues. Some software packages utilized on Silicon Graphics and
Apple platforms are still being evaluated with respect to Year 2000 issues,
but since these items are routinely upgraded by the Company as part of its
ongoing operations to insure that the Company is staying current with
technology it is anticipated that the Year 2000 issues in such cases should
be minimal. Furthermore, the products produced by the Company for its clients
are delivered to the client at the conclusion of a job and such products are
not thereafter affected by Year 2000 issues. Therefore, Year 2000 compliance
is not considered a material issue for already completed client work. All
critical equipment and software products utilized in the production of client
material will have been certified, either through testing by the Company or
vendor representation, to be Year 2000 compliant or not affected by Year 2000
issues by the middle of calendar year 1999.
13
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Infrastructure:
It is expected that general purpose PC workstations purchased within the past
12 months should be able to recognize the date change to the Year 2000. A
comprehensive checklist is being prepared that will assist each division in
determining which PCs need to have some form of upgrade. Some older PCs may
require replacement, or may be upgraded through inexpensive after-market
clock upgrades. Also being evaluated are Company owned telephone systems
which contain embedded chips which may be date sensitive. To date, all
telephone systems checked have been found to be either Year 2000 compliant or
not affected by the Year 2000 issue. Novell or Microsoft computer network
products have upgrades available supplied and represented by the vendor to be
Year 2000 compliant which will be installed by the Company by the middle of
calendar 1999. Other general purpose office equipment such as copy machines
and fax machines are being evaluated but are not considered to be material.
External Services Vendors:
The Company utilizes numerous outside vendors for management of such services
as payroll, health care benefits, 401K administration and insurance
coverages. All of these vendors are being asked to supply a written statement
concerning Year 2000 compliance and a general scope of appropriate needed
actions, costs, and time-frames. This part of the Project is expected to be
completed by the middle of calendar 1999.
Costs
The total cost of the Year 2000 Project is not expected to be material to the
Company's financial position. Because some investigation is still ongoing,
total costs can only be estimated. Based on mission critical hardware and
software upgrade costs that are known, and reasonable expectations of results
from further testing, the total cost of the Project is not expected to exceed
$100,000 Company-wide and will be expensed as incurred.
Risks
The Company supplies a wide range of services to its clients. Once those
services are delivered, whether on videotape, CD Rom, computer disk, or other
media, Year 2000 compliance is no longer a concern. Since it has already been
determined that much of the hardware and software material to the internal
operation of the Company's business is or will be compliant, there appears to
be minimal risk to the internal operations of the Company due to the Year
2000 issue. This does not include any serious problems or outages caused by
Year 2000 problems that could exist at local utilities that supply telephone,
electrical, natural gas and similar services or with external services
vendors. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of outside
vendors or clients, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on the
Company's results of operations, liquidity or financial condition. However,
the Company's internal Project is expected to significantly reduce the level
of uncertainty about the Year 2000 problem particularly with respect to the
effect on the Company of the readiness of its vendors. It is the opinion of
the Company that, with the installation of new equipment which the Company is
advised to be Year 2000 compliant
14
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and the completion of the Project as scheduled, the possibility of
significant interruptions of normal operations should be significantly
reduced.
Contingency Plan
Based on the Company's expectation that Year 2000 issues will be adequately
addressed by the scheduled completion of the Project, no contingency plans
have been formulated. In the event an unexpected Year 2000 problem is
discovered that will affect either the completion or delivery of client
material, the Company expects that a sufficient number of alternative
production methods exist in the industry to mitigate any substantial problems.
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WHICH ARE BASED UPON
CURRENT EXPECTATIONS AND INVOLVE CERTAIN RISKS AND UNCERTAINTIES. UNDER THE
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995, READERS ARE HEREBY CAUTIONED THAT THESE STATEMENTS MAY BE IMPACTED BY
SEVERAL FACTORS, AND, CONSEQUENTLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE EXPRESSED HEREIN.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to interest rate change market risk with respect to
its credit facility with a financial institution which is priced based on the
prime rate of interest. At November 30, 1998 $12,172,000 was outstanding
under the credit facility. Changes in the prime interest rate during fiscal
1998 will have a positive or negative effect on the Company's interest
expense. Each 1% fluctuation in the prime interest rate will increase or
decrease interest expense for the Company by approximately $122,000 annually.
In addition, the Company is exposed to interest rate change market risk with
respect to the Bonds in the amount of $8,500,000. The Bonds bear interest at
a floating rate established weekly by the remarketing agent. During fiscal
1999 the interest rate on the Bonds approximated 3.5%. Each 1% fluctuation in
the interest rate on the Bonds will increase or decrease interest expense on
the Bonds by approximately $85,000 annually.
The impact of interest rate fluctuations on other floating rate debt of the
Company and foreign exchange fluctuation on the Company's Canadian subsidiary
is not material.
15
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PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K.
1. Exhibit 10(A). Agreement, dated as of September 1, 1998,
between Unitel Video, Inc. and Albert Walton.
2. Exhibit 27. Financial Data Schedule.
(b) There were no reports filed on Form 8-K during the quarter ended
November 30, 1998.
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH ARE BASED UPON
CURRENT EXPECTATIONS AND INVOLVE CERTAIN RISKS AND UNCERTAINTIES. UNDER THE
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995, READERS ARE HEREBY CAUTIONED THAT THESE STATEMENTS MAY BE IMPACTED BY
SEVERAL FACTORS, AND, CONSEQUENTLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE EXPRESSED HEREIN.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITEL VIDEO, INC.
By: /s/ Barry Knepper
---------------------------------------
Barry Knepper
President and Chief Executive Officer
By: /s/ Neil Marcus
---------------------------------------
Neil Marcus
Chief Financial Officer
Dated: January 19, 1999
17
<PAGE>
Exhibit 10(a)
EXECUTION COPY
AGREEMENT
THIS AGREEMENT, dated as of September 1, 1998, by and between UNITEL VIDEO,
INC., a Delaware corporation (herein "Employer") and ALBERT WALTON, an
individual residing at 1040 S. Longwood Ave., Los Angeles, CA 90019
(hereinafter "Employee").
Section 1. EMPLOYMENT.
A. Employee shall perform such duties and exercise such powers on behalf
of Employer and have such responsibilities as are consistent with the position
of "President - Editel Los Angeles", together with any other function as might
reasonably be deemed required and necessary for the advancement of the interests
of Employer.
B. Employee shall devote his best efforts and his time, knowledge, skill,
attention and energy exclusively to the business of Employer in the advancement
of the interests of Employer. Employee will not engage in any activities that
would interfere with his ability to discharge his responsibilities as an
employee of Employer.
C. Employer shall have the right at any time, and from time to time, to
modify the duties to be performed by Employee, or the powers exercised by him,
consistent with the discharge of his responsibilities as President of Editel Los
Angeles; provided, however, that Employer may not modify the duties of Employee
such that the modification(s) creates a substantial change or alteration in
Employee's duties without first obtaining Employee's written consent.
Section 2. TERM OF EMPLOYMENT.
A. Employee's employment under this Agreement shall be for an initial
period of 12 months commencing on September 1, 1998 and ending on August 31,
1999 (the "Initial Term"). The Initial Term shall automatically renew for an
additional twelve month period expiring on August 31, 2000 (such period being,
the "Renewal Year" and the Initial Term and the Renewal Year being the
"Employment Period"), unless either party shall have given the other written
notice, at least ninety (90) days prior to the end of the Initial Term, that the
Employment Period shall expire at the end of the Initial Term.
B. Notwithstanding the terms of paragraph A of this section, Employee's
employment is subject to termination by Employer in accordance with the
provisions of Section 5 of this Agreement.
<PAGE>
Section 3. COMPENSATION.
A. In consideration for the services to be rendered by Employee hereunder
and in consideration of the covenants herein given by Employee, Employer shall
pay to Employee an annual base salary (i) during the Initial Term equal to Two
Hundred Thousand Dollars ($200,000.00) and (ii) during the Renewal Year equal to
the greater of (a) $200,000.00 (the "Base Amount") or (b) the Base Amount plus
an amount equal to the percentage increase in the Bureau of Labor Statistics
Consumer Price Index, All Urban Consumers, for the Los Angeles Metropolitan Area
(the "Index") (or its successor index, or, failing such successor, the most
nearly comparable index published by a governmental authority) at August 31,
1999 over the index at August 31, 1998 multiplied by the Base Amount (by way of
example, at September 1, 1999 the Index increase shall be measured by comparing
the Index at August 31, 1999 over the Index at August 31, 1998 and in the event
that the Index increase during that period is 5%, Employee's annual base salary
shall increase in the Renewal Year to $210,000.00).
B. Employee shall be paid bonus compensation in respect of each fiscal
year of Employer during the Employment Period equal to five (5%) percent of the
increase in pre-tax net income of Editel Los Angeles for such fiscal year over
the pre-tax net income of Editel Los Angeles in the prior fiscal year
(calculated in accordance with Employer's accounting practices currently in
force; provided that the corporate charge used in calculating such amount shall
be whatever was agreed to in the budget for Editel Los Angeles for such fiscal
year (whether the actual number for such charge in such fiscal year increases or
decreases from such budgeted amount) and the depreciation expense used in such
calculation shall be the lesser of the budgeted amount or the actual amount for
Editel Los Angeles for such fiscal year unless actual exceeds budgeted due to an
increase in Editel Los Angeles' capital budget for such fiscal year in which
case the actual amount will be used in such calculation). Bonus compensation
payable pursuant to this Section 3B shall be paid within 90 days after the end
of the applicable fiscal year. Bonus compensation shall be pro rated in respect
of any period during the Employment Period which is shorter than a full fiscal
year of Employer.
C. All compensation provided for in this paragraph 3, shall be subject to
withholding as required by law or by the terms of any applicable benefit plan(s)
and shall be paid in accordance with Employer's customary practices.
Section 4. BENEFITS.
A. During the Employment Period, Employee shall be eligible to
participate in such pension, insurance, medical, disability and other employee
benefit plans of Employer which may be in effect from time to time, to the
extent he is eligible under the terms of those plans on the same basis as other
similarly situated employees of Employer.
B. Employee shall receive vacation during each annual period during the
Employment Period calculated in accordance with Employer policy.
2
<PAGE>
C. Employer will pay for (i) lease payments on one automobile leased and
utilized for business purposes not to exceed a maximum of $600 per month
(including sales taxes) and (ii) the cost of insurance and maintenance for such
automobile.
Section 5. TERMINATION.
A. Employee's employment and his rights hereunder shall terminate on the
first to occur of the following dates:
(i) the expiration of the Employment Period;
(ii) the date on which Employer gives Employee written notice of
termination for cause pursuant to subsection (b) hereof;
(iii) upon Employee's death; or
(iv) at the option of Employer, at the expiration of the maximum
period or leave pursuant to the federal Family Medical Leave
Act (if applicable to Employee) or 60 days after the onset of
Employee's disability, whichever is later.
B. Should Employee (in the reasonable opinion of Employer) (i) fail,
neglect or refuse (other than by reason of mental or physical disability) to
perform or observe any or all of his obligations hereunder at the time and in
the manner herein provided; (ii) commit an act of dishonesty, gross negligence
or willful misconduct, including, without limitation, fraud or embezzlement;
(iii) make or be found to have made any false representation or warranty herein;
(iv) be in breach of any material covenant or other obligation contained in this
Agreement; (v) be convicted of a felony or any crime involving moral turpitude;
or (vi) be found to be in possession or under the influence of illegal drugs,
Employer may upon written notice, at its option, terminate this Agreement, and
thereupon be released and discharged from the obligation to pay salary accruing
after the date of Employee's discharge, and from all other obligations provided
for herein, but such termination shall not affect any liability of Employee to
Employer for any loss or damages to Employer caused by, or arising out of, the
conduct of Employee resulting in his termination under this subsection (B).
Section 6. NON-DISCLOSURE COVENANT; OWNERSHIP OF PROCEEDS EMPLOYMENT.
A. Employee shall not, at any time during the term of this Agreement or
thereafter, except in the performance of his duties hereunder, communicate or
disclose to any person, or use for his own account, without the prior written
consent of Employer, any knowledge or information concerning any patents,
inventions or equipment used in, or any secret or confidential information
(including, without limitation, any customer lists or trade secrets) acquired by
Employee by reason of his employment hereunder concerning
3
<PAGE>
the business and affairs of Employer or any of its affiliates. Employee shall
retain all such proprietary and confidential information in trust for the sole
benefit of Employer and its successors and assigns.
B. Employer shall be the sole owner of all the fruits and proceeds of
Employee's services hereunder all of which Employee will promptly disclose to
Employer, including, but not limited to, all formats, suggestions, developments,
arrangements, designs, packages, programs, promotions and other intellectual
properties which Employee may create in connection with and during the
Employment Period, free and clear of any claims by Employee (or anyone claiming
through or under him) of any kind or character (other than his right to
compensation hereunder). All copyrightable works created by Employee and
covered by this paragraph shall be deemed to be Works for Hire. Employee shall,
at the request of Employer, execute such assignments, certificates or other
instruments as Employer may from time to time deem necessary or desirable to
evidence, establish, maintain, perfect, protect, enforce or defend its rights,
title or interest in or to any such properties. If Employee is unable or
unwilling to perform such acts, Employee hereby appoints Employer his
attorney-in-fact with full power and authority to execute any and all documents
and take such other action as is necessary to accomplish the foregoing.
C. All memoranda, notes, records, and other documents made or compiled by
Employee, or made available to him during his employment by Employer, concerning
the business of Employer, shall be Employer's property and shall be delivered to
Employer on the termination of this Agreement or at any other time on request.
Section 7. COVENANTS NOT TO COMPETE; NON-INTERFERENCE.
A. Except in the course of his employment or upon the prior written
consent of Employer, Employee shall not at any time during the Employment Period
(i) render services or advice, for compensation or otherwise, to any other
person or entity as an employee, consultant or independent contractor or
otherwise; or (iii) enter into any other business affiliation, including,
without limitation, the establishment of a proprietorship or the participation
in a partnership or joint venture.
B. Employee shall not, at any time during the Employment Period and for
six (6) months after termination pursuant to Section 5, for compensation or
otherwise, acting alone or in conjunction with others, directly or indirectly,
as a stockholder, investor, officer or director of a corporation in which he
possesses, directly or indirectly, the power to direct or cause the direction of
management or policies (including without limitation a 5% or more holder of the
voting securities of a corporation), or as sole proprietor or member of a
partnership in all cases.
(i) for his own account or for the account of any other person,
engage, hire, employ or solicit the employment of any person who is then or has
been, within three (3) months prior thereto, an officer, manager or employee of
Employer, whether or not
4
<PAGE>
such person would commit a breach of his or her contract of employment by reason
of leaving the services of Employer or
(ii) take advantage of any corporate opportunity of Employer.
C. The restrictions contained in this section are considered reasonable
by the parties and it is the intent of the parties that such restrictions and
the other provisions of this Section be enforced to the fullest extent
permissible under the laws and the public policies applied in each jurisdiction
in which enforcement is ought.
Section 8. COMPLIANCE WITH OTHER AGREEMENTS.
Employee represents and warrants to Employer that (i) he is legally
free to make and perform this Agreement; and (ii) he has no obligation to any
other person or entity that would or will affect or conflict with any of his
obligations hereunder.
Section 9. FULL AND COMPLETE AGREEMENT; AMENDMENT.
This Agreement constitutes the full and complete understanding and
agreement of the parties and supersedes all prior understandings and agreements
regarding Employee's employment by Employer. This Agreement may be modified
only by a written instrument executed by both parties.
Section 10. WAIVER.
No waiver by either party of any failure or refusal to comply with its
or his obligation shall be deemed a waiver of any other or subsequent failure or
refusal to so comply.
Section 11. PARTIAL INVALIDITY.
If any term or provision of this Agreement or the application thereof
to any person or circumstances shall, to any extent, be invalid or
unenforceable, the remainder of this Agreement, or the application of such term
or provision to persons or circumstances other than those as to which it is held
invalid or unenforceable shall not be affected thereby, and each term and
provision of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
Section 12. SUCCESSORS AND ASSIGNS.
This Agreement shall inure to the benefit of, and shall be binding
upon the parties hereto and their respective successors, assigns, heirs, and
legal representatives, including any person or entity with which Employer may
merge or consolidate or to which it may transfer all or substantially all of its
assets. With respect to Employee, this Agreement, being personal, cannot be
assigned.
5
<PAGE>
Section 13. AUTHORIZATION.
Employer warrants and represents that the person executing this
Agreement on behalf of Employer has full right and authority to bind Employer
corporation, and was and is authorized in every manner and respect to enter into
this Agreement.
Section 14. NOTICES.
All notices and other communications which are required or may be
given under this agreement shall be in writing and shall be deemed to have been
duly given when delivered in person or transmitted by facsimile, or five (5)
days after being mailed by registered or certified first class mail, postage
prepaid, return receipt requested, in the case of Employer, to its Chief
Executive Officer at 555 West 57th Street, New York, NY 10019, and, in the case
of Employee, to 1040 S. Longwood Ave., Los Angeles, CA 90019, or to such other
address as such party shall have specified by notice to the other party hereto.
Section 15. JURISDICTION.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York (without regard to the principles of conflicts of
laws), the principal place of business of Employer. The parties agree that the
courts of the State of California shall have exclusive jurisdiction over all
matters of this Agreement and either party may bring suit in such jurisdiction.
The venue of such action shall be in Los Angeles County.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first set forth above.
UNITEL VIDEO, INC. ALBERT WALTON
By: /s/ Barry Knepper /s/ Albert Walton
------------------------------- ------------------------------
Name: Bary Knepper
Title:Chief Executive Officer
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNITEL
VIDEO, INC. FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 349
<SECURITIES> 0
<RECEIVABLES> 5,191
<ALLOWANCES> 366
<INVENTORY> 0
<CURRENT-ASSETS> 6,087
<PP&E> 104,007
<DEPRECIATION> 54,593
<TOTAL-ASSETS> 61,398
<CURRENT-LIABILITIES> 16,198
<BONDS> 44,337
0
0
<COMMON> 27
<OTHER-SE> 7,895
<TOTAL-LIABILITY-AND-EQUITY> 61,398
<SALES> 12,322
<TOTAL-REVENUES> 12,322
<CGS> 10,109
<TOTAL-COSTS> 10,019
<OTHER-EXPENSES> 2,512
<LOSS-PROVISION> (41)
<INTEREST-EXPENSE> 1,043
<INCOME-PRETAX> (299)
<INCOME-TAX> 0
<INCOME-CONTINUING> (299)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (299)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
