SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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 14,1999 there were 7,596,408 shares of the Company's common stock
outstanding.
Page 1
<PAGE>
UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 357 $ 1,707
Accounts receivable, net 20,774 18,968
Film costs, net 38,295 36,525
Product inventory 3,532 2,978
Property and equipment, net 977 1,037
Other assets 2,012 1,389
Excess of cost over fair value of
net assets acquired, net 3,220 3,279
-------- --------
Total Assets $ 69,167 $ 65,883
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 11,632 $ 8,845
Deferred income taxes 1,366 1,104
Royalty payable 4,414 5,234
Bank line of credit 10,588 9,978
Variable rate senior subordinated notes 2,629 2,608
10% convertible subordinated notes 13,361 13,343
-------- --------
Total Liabilities $ 43,990 $ 41,112
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock; $.01 par value; 3,000,000
authorized Cumulative convertible Series A 8% preferred stock;
501,000 issued and outstanding (aggregate liquidation
preference of $1,503) 5 5
Non-voting convertible Series B 6% preferred stock;
300 shares issued and outstanding, (aggregate
liquidation preference of $3,000) -- --
Cumulative Convertible Series C 8% preferred stock;
675 shares issued and outstanding (aggregate
liquidation preference of $675) -- --
Common stock $.01 par value per share;
40,000,000 authorized; 7,533,000 and 7,515,000
shares issued and outstanding 76 76
Additional paid-in capital 26,745 26,695
Notes receivable from equity sales (2,695) (2,715)
Retained Earnings 1,046 710
-------- --------
Total Stockholders' Equity $ 25,177 $ 24,771
-------- --------
Total Liabilities and Stockholders' Equity $ 69,167 $ 65,883
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
Page 2
<PAGE>
UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months Ended March 31
1999 1998
---- ----
<S> <C> <C>
Revenues:
Licensing and distribution $ 3,355 $ 3,062
Home video 6,479 4,901
------- -------
9,834 7,963
------- -------
Operating costs:
Licensing and distribution 1,623 1,968
Home video 4,309 2,543
General and administrative expenses 2,687 2,546
8,619 7,057
------- -------
Income from operations 1,215 906
Interest expense and financing expense, net (552) (341)
------- -------
Income before taxes 663 565
Provision for income taxes 282 224
------- -------
Net income $ 381 $ 341
======= =======
Net income per basic common share $ .04 $ .05
======= =======
Net income per diluted common share $ .04 $ .05
======= =======
Average number of basic common shares outstanding 7,533 6,029
======= =======
Average number of diluted common shares outstanding 7,574 6,807
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
Page 3
<PAGE>
UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 381 $ 341
Adjustments to reconcile net income to net cash used by operating
activities:
Amortization and depreciation 2,718 3,078
Deferred income taxes 268 178
Accretion of debentures discount 39 27
Film rights received -- (368)
Decrease (increase) in accounts receivable, net (1,806) 228
(Increase) decrease in product inventory (554) (297)
Increase in other assets (622) (594)
Increase in accounts payable and
accrued expenses 2,239 597
Increase (decrease) in royalties payable (820) 124
------- -------
Total cash flows provided by operating activities 1,843 3,314
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Film cost expenditures (4,291) (6,642)
Purchase of property and equipment (24) (50)
------- -------
Total cash flows used by investing activities (4,315) (6,692)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from 10% convertible notes private placement -- 4,063
Net borrowings (repayment) under bank line of credit 610 (316)
Advances from affiliates 525 700
Repayments to affiliates -- (900)
Proceeds from warrant and option exercises -- 120
Other (13) (2)
------- -------
Total cash flows from financing activities $ 1,122 $ 3,665
------- -------
</TABLE>
See accompanying notes to consolidated financial statements
Page 4
<PAGE>
UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In thousands)
<TABLE>
<CAPTION>
For the Three Months Ended March 31
1999 1998
------- -------
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS $(1,350) $ 287
CASH AND EQUIVALENTS AT BEGINNING OF
PERIOD 1,707 425
------- -------
CASH AND EQUIVALENTS AT END OF PERIOD $ 357 $ 712
======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Preferred dividend paid in common stock $ 45 $ --
Warrants issued -- 758
Film cost additions (decreases) -- (568)
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 222 $ 140
======= =======
Cash paid for taxes $ 35 $ 48
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
Page 5
<PAGE>
UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
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-Q. 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, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. 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, 1998.
2. Financing
The Company has a $10,000,000 revolving credit facility (increased from
$7,000,000 on March 25, 1998) with Imperial Bank dated April 17, 1997. The
parties expect to amend the agreement to provide for total borrowings of up to
$20,000,000 which includes a revolving credit of up to $15,000,000 based on the
Company's qualifying accounts receivable and other contractual rights to payment
and up to $5,000,000 for qualifying film productions in the near future. The
amendment will extend the facility to March 2001 and is contingent upon the bank
obtaining a participant for the credit facility, which management expects to
occur in the very near future. Pending obtaining a participant, the present
facility was amended April 12, 1999 to provide for borrowings of up to
$13,000,000 based on qualifying accounts receivable and other contractual rights
to payment and the agreement was extended to March 2, 2000. Beginning May 3,
1999 and each month thereafter, the maximum amount available decreases by
$500,000 but not below $10,000,000. 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 (7.75% at March 31, 1999). The Company 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. Outstanding amounts under the facility are collateralized 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)
limits the Company to incurring losses for two consecutive quarters.
3. Film costs
The Company's film costs include:
March 31,
1999
--------------
(In thousands)
Films released $ 87,867
Accumulated amortization (56,072)
--------
31,795
Films completed but not released
Films in process 6,500
--------
$ 38,295
========
Page 6
<PAGE>
UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999
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,
1999 1998
---- ----
Weighted average basic shares outstanding 7,533 6,029
Effect of dilutive securities:
Options 41 597
Warrants -- 181
------- -------
Weighted average dilutive shares outstanding 7,574 6,807
======= =======
Three Months Ended March 31,
1999 1998
---- ----
Net income as reported $ 381 $ 341
Preferred stock dividends (90) (30)
------- -------
Total income used for earnings per share $ 291 $ 311
======= =======
Page 7
<PAGE>
UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Three Months Ended March 31, 1999 Compared with Three Months Ended March 31,
1998
Revenues for the three months ended March 31, 1999 increased by 24% to
$9,834,000 from $7,963,000 in the same three month period in 1999. This increase
in revenues is largely the result of the increase in film revenues of 32% to
$6,479,000, as compared to $4,901,000 in 1998. The increase is due to video
sell-through. The increase also reflects an increase in licensing and
distribution revenues by 9% to $3,356,000 as compared to $3,062,000 in 1998.
This increase reflects the Company's continued growth in higher quality reality
product acquisition and production. Management expects that the improvement over
the prior year will continue throughout 1999. The Company expects to recognize
continued growth in the home video market through the remainder of 1999. This
growth should be generated by the Unapix/Miramar division continuing to phase
into market penetration, as well as by the Company's emphasis on distributing
higher quality films to the rental marketplace and the sell-through marketplace.
Licensing and distribution costs have decreased by 17% to $1,623,000 from
$1,968,000 in 1998. Home video costs for the three months ended March 31, 1999
increased by 69% to $4,309,000 from $2,543,000 as compared to the corresponding
period in 1998. This increase reflects increased royalty, amortization and other
film expenses associated with the higher levels of revenue described above.
General and administrative costs were $2,687,000 for the three months ended
March 31, 1999, as compared to $2,546,000 in the same period 1998, an increase
of $141,000. 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 has income from operations of $1,215,000 for the three months ended
March 31, 1999, as compared to $906,000 in the same period in 1998. The
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 $552,000 in 1999 from
$341,000 in 1998. This increase primarily reflects the interest and related
expenses on the 10% convertible notes, as well as increased bank borrowings.
The Company had income before taxes of $663,000 for the three months ended March
31, 1999 as compared to income before taxes of $565,000 for the corresponding
three month period in 1998. 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-though markets
and the licensing and distribution markets increase in 1999, the impact on
operations should continue to be favorable.
Liquidity and Capital Resources
For the three months ended March 31, 1999, operating activities provuided cash
of $1,843,000. The Company used $4,315,000 in investing activities which
consisted primarily of $4,291,000 incurred in acquiring and producing new
properties for the home video rental and the licensing and distribution markets.
The additional cash requirements were met by cash on hand, borrowings and
advances from affiliates.
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
$5,700,000 as of March 31, 1999, 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, operating cash flows, its line of credit
and other potential financing.
The Company has a bank line of credit which it is presently seeking to increase
to $20,000,000. See note 2 to the consolidated financial statements.
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.
Page 8
<PAGE>
UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Year 2000
The Company has undertaken a study of its technological systems to determine
their year 2000 compliance and to the extent of noncompliance, the required
remediation. The Company has generally completed this process of review. All
software in use is vendor supplied and will be upgraded to a current version and
is expected to be fully certified as year 2000 compliant prior to the end of the
third quarter of 1999. The Company believes it has identified all non-compliant
hardware and has scheduled replacements also by the end of the third quarter of
1999. The Company does not believe that the cost to complete such remediation
will be material.
An assessment of the readiness of year 2000 compliance of third party entities
such as suppliers, banking institutions, customers and others is ongoing. As
with other companies in its industry, the Company is dependent on a number of
third parties for the supply of products and services that are themselves
dependent on computers. The Company's initial assessment of compliance by third
party entities is not yet completed, and therefore, the Company has not yet
developed any related contingency plans. Currently, the Company is unable to
predict the cause of the worst case year 2000 scenario nor the likelihood of any
third party not being year 2000 compliant or the direct or indirect costs to the
Company of non-compliance by third parties.
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, 1998 (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.
Item 3. Quantitative and Qualitative Disclosure
About Market Risk
The Company has a revolving line of credit facility on which it incurs interest
equal to 1.25% per annum above the bank's benchmark rate which was 7.75% at
March 31, 1999. A 1% change in the benchmark rate applied to the outstanding
borrowings at March 31, 1999 ($10,588,000) would result in an increase or
decrease in interest expense of $105,880 per year.
The Company also has $2,722,000 principal amount of variable rate senior
subordinated notes outstanding at March 31, 1999. The notes bear interest at 3%
above the prime rate provided that the rate does not fall below 8% or exceed 12%
per annum. The rate is set at the beginning of each year and is 10.75% for 1999.
A 1% change in the prime rate would result in an increase or decrease in
interest expense of $27,220 per year.
Receivables from sales to foreign customers are generally denominated in U.S.
dollars. The Company has no significant foreign exchange gains or losses.
PART II - OTHER INFORMATION
Items 1, 3 and 4 are not applicable.
Item 2. Changes in Securities
(A) and (B) are not applicable
(C) All sales of unregistered securities for the first quarter of 1999
were previously reported in the Company's Annual Report on Form 10-KSB for 1998.
Page 9
<PAGE>
UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
Item 5. Other Information
The Company plans to hold its 1999 Annual Meeting of Stockholders on July
29, 1999. Proposals that stockholders wish to include in the Company's proxy
statement and form of proxy for presentation at the next Annual Meeting of
Shareholders must be received by the Company at 200 Madison Avenue, New York,
New York 10015, Attention Michael R. Epps, Esq. prior to May 21, 1999, the
deadline that was stated in the Company's proxy statement for its 1998 Annual
Meeting of Stockholders. The Company will be allowed to have discretionary
voting authority on any proposal that is to be presented at next year's annual
meeting, unless it receives notice of such proposal by no later than June 10,
1999.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Financial Data Schedule
b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, for an event dated January
15, 1999, describing that, effective February 1, 1999, David Fox, who at the
time was the Company's Vice Chairman of the Board of Directors and Chief
Executive Officer, would be resigning all of his offices with the Company and
that Herbert M. Pearlman would be assuming the role of Chief Executive Officer
in addition to his role of Chairman of the Board of Directors, which he held at
the time.
The Company also filed a Current Report on Form 8-K, for an event dated
February 24, 1999, describing that effective February 24, 1999, Paul Sullivan,
President of Unapix/Miramar and a member of the Company's Office of the
President, had stepped down from his positions to pursue other business
interests.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
UNAPIX ENTERTAINMENT, INC.
/s/ Cheryl Freeman May 14, 1999
- ---------------------------------------
Cheryl Freeman, Chief Financial Officer
Page 10
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 Financial Data
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 357
<SECURITIES> 0
<RECEIVABLES> 20,774
<ALLOWANCES> 0
<INVENTORY> 3,532
<CURRENT-ASSETS> 0
<PP&E> 977
<DEPRECIATION> 0
<TOTAL-ASSETS> 69,167
<CURRENT-LIABILITIES> 0
<BONDS> 13,361
0
5
<COMMON> 76
<OTHER-SE> 26,745
<TOTAL-LIABILITY-AND-EQUITY> 69,167
<SALES> 0
<TOTAL-REVENUES> 9,834
<CGS> 0
<TOTAL-COSTS> 8,619
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 552
<INCOME-PRETAX> 663
<INCOME-TAX> 282
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 381
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
