SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission File Number 1-11976
UNAPIX ENTERTAINMENT, INC.
--------------------------
(Exact name of small business issuer as
specified in charter)
Delaware 95-4404537
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification number)
200 Madison Avenue
New York, NY 10016
------------------
(Address of principal executive offices)
212-252-7600
------------
(Issuer's Telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No |_|
As of March 14, 1998 there were 6,050,587 shares of the Company's common stock
outstanding.
No Exhibits
<PAGE>
UNAPIX ENTERTAINMENT, INC.
Consolidated Balance Sheet
(In thousands, except per share amounts)
March 31,
1998
---------
ASSETS
Cash and cash equivalents $ 712
Accounts receivable- trade, net of allowances
of $1,554 14,127
Film costs, net 27,332
Product inventory 1,950
Property and equipment, net 687
Other assets 3,991
Excess of cost over fair value of net assets
acquired 2,959
--------
Total Assets $ 51,758
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities :
Accounts payable and accrued expenses $ 7,335
Deferred income taxes 1,175
Royalty payable 3,869
Bank line of credit 6,477
Affiliate payable 200
Variable rate senior subordinated notes 2,875
10% convertible subordinated notes 12,580
--------
Total Liabilities $ 34,511
--------
Stockholders' Equity :
Common stock $.01 par value per share; 40,000
authorized; 6,042 shares issued and
outstanding 60
Cumulative convertible series A 8% preferred
stock, $.01 par value per share; 3,000
authorized; 505 issued and outstanding
(aggregate liquidation preference of $1,547) 5
Additional paid-in capital 18,054
Notes receivable from equity sales (2,016)
Retained earnings 1,144
--------
Total Stockholders' Equity $ 17,247
--------
Total Liabilities and Stockholders' Equity $ 51,758
========
See accompanying notes to consolidated financial statements
Page 2
<PAGE>
UNAPIX ENTERTAINMENT, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
For the Three
Months Ended March 31
1998 1997
---- ----
Revenues:
Licensing and distribution $ 3,062 $ 2,809
Home video 4,901 3,628
------- -------
7,963 6,437
------- -------
Operating costs:
Licensing and distribution 1,968 1,932
Home video 2,543 2,417
General and administrative expenses 2,546 1,535
------- -------
7,057 5,884
------- -------
Income from operations 906 553
Interest expense and financing expense, net (341) (152)
------- -------
Income before taxes 565 401
Provision for income taxes 224 165
------- -------
Net income $ 341 $ 236
======= =======
Net income per basic common share $ .05 $ .04
======= =======
Net income per diluted common share $ .05 $ .03
======= =======
Average number of basic common shares outstanding 6,029 5,382
======= =======
Average number of diluted common shares
outstanding 6,807 6,053
======= =======
See accompanying notes to consolidated financial statements
Page 3
<PAGE>
UNAPIX ENTERTAINMENT, INC.
Consolidated Statements of Cash Flows
(In thousands)
For the Three
Months Ended March 31,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 341 $ 236
Adjustments to reconcile net income to net cash
used by operating activities:
Amortization and depreciation 3,078 2,425
Deferred income taxes 178 182
Accretion of debentures discount 27 16
Film rights received (368) --
Decrease (increase) in accounts receivable, net 228 (1,498)
(Increase) decrease in product inventory (297) 16
Increase in other assets (594) (625)
Increase in accounts payable and
accrued expenses 597 1,705
Increase in royalties payable 124 878
------- -------
Total cash flows provided by operating activities 3,314 3,335
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Film cost expenditures (6,642) (4,818)
Purchase of property and equipment (50) (136)
Acquisition of subsidiary -- (707)
------- -------
Total cash flows used by investing activities (6,692) (5,661)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from 10% convertible notes private
placement 4,063 500
Net borrowings (repayment) under bank line of
credit (316) 1,387
Advances from affiliates 700 --
Repayments to affiliates (900) --
Proceeds from warrant and option exercises 120 103
Proceeds from employee notes receivable 1 3
Private placement expenditures (3) (42)
------- -------
Total cash flows from financing activities $ 3,665 $ 1,951
------- -------
See accompanying notes to consolidated financial statements
Page 4
<PAGE>
UNAPIX ENTERTAINMENT, INC.
Consolidated Statements of Cash Flows (continued)
(In thousands)
For the Three
Months Ended March 31,
1998 1997
---- ----
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS $ 287 $ (375)
CASH AND EQUIVALENTS AT BEGINNING OF
PERIOD 425 659
------- -------
CASH AND EQUIVALENTS AT END OF PERIOD $ 712 $ 284
======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Warrants issued 758 33
Film cost additions (decreases) (568) (210)
Acquisition of subsidiary -- 1,400
Conversion of accrued liability to acquisition
fund payable -- 71
------- -------
$ 190 $ 1,294
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 140 $ 25
======= =======
Cash paid for taxes $ 48 $ 18
======= =======
See accompanying notes to consolidated financial statements
Page 5
<PAGE>
UNAPIX ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
March 31, 1998
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Unapix
Entertainment, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Form 10-KSB for the year ended December 31, 1997.
2. Financing
On May 2, 1997, the Company entered into a revolving credit facility (the
"Facility") with Imperial Bank (the "Bank") providing for borrowings of up to
$7,000,000. The Facility was amended on March 25, 1998 to provide for borrowings
of up to $10,000,000. Loans are extended and required to be repaid based upon
the Company's outstanding accounts receivable and other contractual rights to
payment. Interest on the outstanding loan balance accrues at a rate of 1.25% per
annum in excess of the Bank's publicly announced benchmark rate (9.75% at March
31, 1998). The Company paid facility fees of $112,500 and is also required to
pay an unused credit line fee at a rate equal to .5% per annum of the amount by
which the collateral base exceeds the average daily loan balance during any
calendar quarter. The term of the facility expires on September 30, 1998.
Outstanding amounts under the facility are secured by a security interest in
substantially all of the Company's assets.
The facility contains restrictive covenants that require minimum tangible net
worth. The covenants also, among other things, prohibit the payment of cash
dividends on the Company's common stock, require minimum amounts of tangible net
worth and limit (a) the Company's ratio of debt to net worth on a consolidated
basis, (b) the amount of cost that the Company can incur in producing, financing
or acquiring entertainment properties, (c) the amount of cost and expenses that
the Company may incur with respect to theatrical releases of films, and (d) the
Company incurring losses for two consecutive quarters.
In February 1998, the Company issued, in a private placement, $5,250,000
principal amount of 10% convertible subordinated notes due June 30, 2003
("Notes") convertible initially into common stock at $4.75 per share. The
conversion price is subject to adjustment in certain circumstances, including
resets at September 1, 1998 and March 1, 1999 to 110% of the then current market
price of the common stock but not less than $4.00 and $3.50 respectively.
For every $1,000 principal amount converted, the holder will receive warrants to
purchase 125 shares of common stock (an aggregate of 656,250) at $6.00 per share
expiring June 30, 2003. If a holder converts the Note prior to September 1,
1999, the holder will receive an amount equal to 75% of the interest which would
have accrued from the date of conversion through September 1, 1999. The Company
also issued warrants expiring June 30, 2003 to purchase 42,500 shares of common
stock at $6.00 per share as a placement fee. Notes in the principal amount of
$900,000 were issued to certain investors in a film acquisition fund in exchange
for their interests therein.
Short term loans of $1,000,000 were obtained, of which $300,000 was received in
December 1997 and $700,000 in January 1998 from Mezzanine Financial Corp.
($750,000), the Chairman ($150,000) and the Secretary ($100,000) in order to
enable the Company to fund program acquisitions in accordance with its expansion
plans pending the completion of the private offering of 10% convertible notes.
The Chairman and Secretary are also officers and directors of Mezzanine
Financial Corp. Upon completion of the offering of Notes, proceeds of $250,000
were used to repay the loans from the Chairman and the Secretary, and proceeds
of $650,000 were used to repay Mezzanine Financial Corp. The remaining $100,000
of the Mezzanine loan was exchanged for an equivalent amount of Notes.
Page 6
<PAGE>
UNAPIX ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
March 31, 1998
3. Film costs
The Company's film costs include:
March 31,
1998
--------------
(In thousands)
Films released $ 63,178
Accumulated amortization (44,617)
18,561
Films completed but not released 3,972
Films in process 4,799
--------
$ 27,332
========
4. Net income (loss) per common share
Net income (loss) per basic common share ("EPS") is computed by dividing the net
income available to common shareholders by the weighted average number of common
shares outstanding.
Net income per diluted share is computed by dividing the net income available to
common shareholders, adjusted on an as if converted basis, by the weighted
average number of common shares outstanding plus potential dilutive securities.
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Weighted average basic shares outstanding 6,029 5,382
Effect of dilutive securities:
Options 597 561
Warrants 181 110
--- ---
Weighted average dilutive shares outstanding 6,807 6,053
===== =====
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Net income as reported $ 341 $ 236
Preferred stock dividends (30) (32)
----- -----
Total income used for earnings per share $ 311 $ 204
===== =====
Page 7
<PAGE>
UNAPIX ENTERTAINMENT, INC.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Three Months Ended March 31, 1998 Compared with Three Months Ended March 31,
1997
Revenues for the three months ended March 31, 1998 increased by 24% to
$7,963,000 from $6,437,000 in the same three month period in 1997. This increase
in revenues is largely the result of the increase in home video revenues of 35%
to $4,901,000, as compared to $3,628,000 in 1997. The increase is due to
aggressive video sell-through market penetration as well as a full quarter's
contribution from the acquisition of Miramar Images, Inc., which occurred late
in the first quarter of 1997. Home video revenues would have been higher had the
Company not deferred a release until later in the year to give it the
opportunity to be a premiere on HBO. The increase also reflects an increase in
licensing and distribution revenues by 9% to $3,062,000 as compared to
$2,809,000 in 1997. This increase reflects the Company's continued growth in
higher quality non-fiction product acquisition and production. Management
expects that the improvement over the prior year will continue throughout 1998.
The Company expects to recognize continued growth in the Home Video market
through the remainder of 1998. This growth should be generated by Miramar
Images, Inc. continuing to phase into aggressive market penetration, as well as
by the Company's emphasis on distributing higher quality films to the rental
marketplace and non-fiction titles to the sell-through marketplace.
Licensing and distribution costs have increased by 2% to $1,968,000 from
$1,932,000 in 1997. This increase reflects increased royalty, amortization and
other film expenses associated with the higher levels of revenues described
above. Home video costs for the three months ended March 31, 1998 increased by
5% to $2,543,000 from $2,417,000 as compared to the corresponding period in
1997. This increase reflects increased royalty, amortization and other film
expenses associated with the higher levels of revenues described above.
General and administrative costs were $2,546,000 for the three months ended
March 31, 1998, as compared to $1,535,000 in the same period in 1997, an
increase of $1,013,000. This increase is chiefly attributable to costs related
to the infrastructure required to support the Company's expansion and
diversification. These costs mainly consisted of increased staffing and office
costs to support the increased sales activity described above.
The Company had income from operations of $906,000 for the three months ended
March 31, 1998, as compared to $553,000 in the same period in 1997. This
improvement in margins reflects the result of the Company's releasing higher
quality releases into the licensing and distribution and video rental and
sell-through markets.
Interest expense and financing expense net increased to $341,000 in 1998 from
$152,000 in 1997. This increase primarily reflects the interest and related
expenses on the 10% Convertible Notes issued in the second half of 1997 and in
1998, as well as increased bank borrowings.
The Company had income before taxes of $565,000 for the three months ended March
31, 1998 as compared to income before taxes of $401,000 for the corresponding
three month period in 1997. This improvement reflects the higher quality
releases into the Company's various markets. Management anticipates that as the
number of higher quality releases to the video rental and sell through markets
and the licensing and distribution markets increase in 1998, the impact on
operations should continue to be favorable.
Page 8
<PAGE>
UNAPIX ENTERTAINMENT, INC.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
For the three months ended March 31, 1998, operating activities provided cash of
$3,314,000. The Company used $6,692,000 in investing activities which consisted
primarily of $6,642,000 incurred in acquiring, producing and promoting new
properties for the home video rental and the licensing and distribution markets.
The additional cash requirements were primarily met by cash on hand, and the
proceeds of the private offerings of 10% Convertible Subordinated Notes,
described below.
In the normal course of business the Company makes certain guarantees to
producers and other third parties as to the minimum amount such parties will
receive from the Company's distribution of their products. The Company has
committed to pay film acquisition advances and guarantees of approximately
$4,000,000 as of March 31, 1998, which amounts are payable upon delivery of the
films. The Company also expects to incur significant additional cash flow needs
relating to its continued expansion. In order to meet its future funding needs
the Company will utilize cash on-hand (including cash from the financing
described below), operating cash flows, its line of credit and other potential
financing.
The Company's revolving credit facility (the "Facility") with Imperial Bank (the
"Bank") was amended on March 25, 1998 to provide for borrowings of up to
$10,000,000. Loans are extended and required to be repaid based upon the
Company's outstanding accounts receivable and other contractual rights to
payment (see footnote 2 for further details). The proceeds from loans under the
Facility have been, and will be, used for working capital purposes, including
enabling the Borrowers to acquire distribution rights with respect to
entertainment programming. As of March 31, 1998, under the Imperial Facility,
the Company had borrowed $6,477,000 and had remaining availability of
$2,900,000.
In February 1998, the Company issued, in a private placement, $5,250,000
principal amount of 10% convertible subordinated debentures due June 30, 2003
convertible initially into common stock at $4.75 per share. The conversion price
is subject to adjustment in certain circumstances, including resets at September
1, 1998 and March 1, 1999 to 110% of the then current market price of the common
stock but not less than $4.00 and $3.50 respectively. Notes in the principal
amount of $900,000 were issued to certain investors in a film acquisition fund
in exchange for their interests therein. Upon completion of the offering,
proceeds of $250,000 were used to repay the loans from the Chairman and the
Secretary, and proceeds of $650,000 were used to repay Mezzanine Financial Corp.
The remaining $100,000 of the Mezzanine loan was exchanged for an equivalent
amount of 10% convertible notes (see note 2).
The feature film and television licensing and distribution industries require
significant expenditures of funds to establish and expand a library of films and
programs from which revenues may be generated. The Company could be dependent
upon future financings to continue its long term plans of expansion and growth.
The Company anticipates that as its asset base grows it will secure an increased
working capital line of credit as well as explore other film acquisition
financing arrangements. The Company may also have additional debt or equity
financings.
Except for the historical information contained herein, the matters discussed
are forward-looking statements that are subject to risks and uncertainties,
including the inherent unpredictability of the entertainment industry in which a
success of a product depends upon factors such as competition and audience
acceptance, which may bear little or no correlation to the Company's production
or other costs, as well as the other factors described in "FACTORS WHICH MAY
AFFECT RESULTS" contained in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1997 (which has been filed with the Securities and
Exchange Commission). The highlighted risks should not be assumed to be the only
things to affect the Company's future performance.
Page 9
<PAGE>
UNAPIX ENTERTAINMENT, INC.
PART II - OTHER INFORMATION
Items 1 and 3 are not applicable.
Item 2. Changes in Securities
(a) and (b) are not applicable
In February 1998, the Company issued, in a private placement, $5,250,000
principal amount of 10% convertible subordinated notes due June 30, 2003
("Notes"), convertible initially into common stock at $4.75 per share. The
conversion price is subject to adjustment in certain circumstances, including
resets at September 1, 1998 and March 1, 1999 to 110% of the then current market
price of the common stock but not less than $4.00 and $3.50, respectively. For
every $1,000 principal amount converted, the holder will receive warrants to
purchase 125 shares of common stock (an aggregate of 656,250) at $6.00 per share
expiring June 30, 2003. If a holder converts the Note prior to September 1,
1999, (the first date that the Notes can be redeemed at the Company's option),
the holder will receive an amount equal to 75% of the interest which would have
accrued from date of conversion through September 1, 1999.
Forum Capital Markets LLC ("Forum") acted as placement agent with respect
to $4,250,000 aggregate principal amount of such Notes, which were sold to
accredited investors for an aggregate gross purchase price equal to the face
amount thereof. A fee equal to 5% of the gross proceeds (i.e. a fee of $212,500)
was paid in cash to Forum and Forum also received warrants to purchase 42,500
shares of common stock at $6.00 per share expiring June 30, 2003 as part of its
placement fee.
The remaining $1,000,000 principal amount of Notes was issued as follows:
an aggregate of $900,000 principal amount of Notes was issued to three investors
in exchange for their existing investments in the Company, which investments had
values equivalent to the principal amount of the Notes for which they were
exchanged (of such $900,000 of Notes: $400,000 was issued to Herbert M.
Pearlman, the Company's Chairman of the Board; and an aggregate of $500,000 was
issued to a partnership (the "Bishop Partnership") of which Lawrence Bishop, a
director of the Company, is a general partner and to a customer of Gray Seifert
& Co., Inc. ("Gray Seifert"), an investment advisory firm of which Lawrence
Bishop is an executive officer); and $100,000 principal amount of Notes was
issued to Mezzanine Financial Corp. ("Mezzanine") in exchange for an equivalent
amount of indebtedness. The Notes that were issued to Mr. Pearlman, the Bishop
Partnership , the Gray Seifert customer and Mezzanine did not provide for a
reset of the conversion price on September 1, 1998 or March 1, 1999, instead the
exercise price of the warrants issuable upon conversion of the Notes may be
reset on such dates if the "market price" (as defined) of the Company's common
stock is less than $4.75 on either such date, but the exercise price will not,
in any event, be adjusted to a price less than $5.25 with respect to the
September 1, 1998 reset or not less than $4.75 with respect to the March 1, 1999
reset.
All of the Notes were issued pursuant to the exemption contained in
Section 4(2) of the Act.
In February 1998 the Company issued 12,500 common stock purchase warrants
to Mezzanine (the "Mezzanine Warrant"). Each Mezzanine Warrant has a term
expiring on June 30, 2003 and entitles the holder to purchase one share of
Common Stock at an exercise price of $6.00 per share. The Mezzanine Warrants
were issued as part of the consideration for an aggregate of $750,000 short term
loans extended to the Company by Mezzanine in December 1997 and January 1998,
which were repaid in February 1998. The Mezzanine Warrants were issued pursuant
to the exemption contained in Section 4(2) of the Act.
In the first quarter of 1998 the Company granted a total of 198,500 common
stock purchase options to employees, 165,000 of which have an exercise price of
$4.56 per share (which was the closing sales price, as reported by the American
Stock Exchange (the "AMEX"), of the Company's common stock on the date of grant)
and expire January 8, 2008 and 33,500 of which have an exercise price of $4.44
per share (which was also the closing sales price, as reported by the AMEX, of
the Company's common stock on the date of grant) and expire in March 2003. All
of the options are subject to the grantee's continuing to provide services to
the Company and were issued pursuant to the exemption contained in Section 4(2)
of the Act.
A total of 973 shares of common stock are issuable to a public relations
firm as partial consideration for services rendered during the first quarter of
1998. The shares were issued pursuant to the exemption contained in Section 4(2)
of the Act.
Page 10
<PAGE>
Item 4. Submissions of matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Financial Data Schedule
b) Reports on Form 8-K
None
Page 11
<PAGE>
UNAPIX ENTERTAINMENT, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Unapix Entertainment, Inc.
/s/ Daniel T. Murphy Chief Financial Officer March 14, 1998
- ----------------------
Daniel T. Murphy
Page 12
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 Financial Data
Page 13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 712
<SECURITIES> 0
<RECEIVABLES> 14,127
<ALLOWANCES> 1,554
<INVENTORY> 1,950
<CURRENT-ASSETS> 0
<PP&E> 687
<DEPRECIATION> 391
<TOTAL-ASSETS> 51,758
<CURRENT-LIABILITIES> 0
<BONDS> 15,655
0
5
<COMMON> 60
<OTHER-SE> 17,182
<TOTAL-LIABILITY-AND-EQUITY> 51,758
<SALES> 0
<TOTAL-REVENUES> 7,963
<CGS> 0
<TOTAL-COSTS> 4,511
<OTHER-EXPENSES> 2,546
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 341
<INCOME-PRETAX> 565
<INCOME-TAX> 224
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 341
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
