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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended AUGUST 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 0-1461
THE TODD-AO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-1679856
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
900 N. SEWARD STREET, HOLLYWOOD, CALIFORNIA 90038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 962-5304
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
COMMON STOCK, CLASS A, NASDAQ
$ .01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates at November
18, 1997 was approximately $45,800,000
The number of shares of common stock outstanding at November 18, 1998 was:
7,732,549 Class A Shares and 1,747,178 Class B Shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
The Todd-AO Corporation
- --------------------------------------------------------------------------------
Annual Report on Form 10-K
August 31, 1998
Table of Contents
- --------------------------------------------------------------------------------
Part I Page
Item 1 - Business 1
Item 2 - Properties 6
Item 3 - Legal Proceedings 7
Item 4 - Submission of Matters to a Vote
of Security Holders 7
Part II
Item 5 - Market for the Registrant's Common
Stock and Related Stockholder Matters 8
Item 6 - Selected Financial Data 9
Item 7 - Management's Discussion and Analysis
of Financial Condition and
Results of Operations 9
Item 8 - Financial Statements and
Supplementary Data 15
Item 9 - Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 15
Part III
Item 10 - Directors and Executive Officers
of the Registrant 16
Item 11 - Executive Compensation 19
Item 12 - Security Ownership of Certain
Beneficial Owners and Management 21
Item 13 - Certain Relationships and Related
Transactions 22
Part IV
Item 14 - Exhibits, Financial Statement Schedule
and Reports on Form 8-K 23
Signatures 24
Exhibit Index 25
Index to Financial Statements
and Schedule 29
PART I
ITEM 1. BUSINESS.
(DOLLARS IN THOUSANDS, EXCEPT AMOUNTS PER SHARE)
The Todd-AO Corporation and its subsidiaries (collectively
"Todd-AO" or the "Company") provide sound, video and ancillary post
production and distribution services to the motion picture and television
industries in the United States and Europe. The Company believes that it is
one of the largest independent providers of combined sound studio and video
services in the world, with facilities located in Los Angeles, New York,
London and Atlanta. Sound services include music recording, sound editing and
enhancement and the mixing of dialogue, music and sound effects. Todd-AO's
principal video services include film-to-video transfer (telecine), mastering
and duplication of professional videotape formats, transmission for satellite
broadcast, videotape editing, audio post production, and visual effects and
graphics. The Company believes that its principal strengths include the
depth and continuity of its creative and artistic talent, the quality and
scope of its facilities, a tradition of providing quality services to its
clients, and a history of technological innovation. Since its inception in
1952, the Company and its employees have been nominated for 34 Academy
Awards-Registered Trademark- and have won 19.
Todd-AO provides its sound and video services to over 1,500
clients, including the major motion picture studios and television production
companies. The Company's ten largest customers account for approximately 56%
and 63% of revenues for the fiscal years ended August 31, 1998 and 1997,
respectively. The Walt Disney Company and its affiliated companies, the only
customer to account for more than 10% of revenues, accounted for 15% and 17%
of revenues for 1998 and 1997, respectively.
Demand for the Company's services and facilities is principally
derived from the production of new motion pictures, television programs and
television commercials, as well as the distribution of previously released
motion picture and television programming through distribution channels such
as television syndication, home video, cable and satellite. Historically, its
clients have outsourced, and are expected by the Company to continue to
outsource, many services required for production, post production, and
distribution of film and television programming. The Company believes that
trends toward digitalization and globalization in the entertainment and media
industries are increasing the quality, variety and number of post production
services required by customers. The Company believes that the worldwide
market penetration of distribution channels such as home video and digital
satellite broadcast is contributing to a growing demand for original and
reissued programming, American product in particular, which in turn should
increase demand for the Company's services.
The Company's objective is to be the leading worldwide independent
provider of sound and video post production services. Since 1994, the Company
has implemented a strategy to achieve this objective and to capitalize on the
movement towards digitalization and globalization in the motion picture and
television industries by expanding its range of services through strategic
acquisitions, internal growth and strategic alliances. The Company believes
that in the future, U.S. and international entertainment and media companies
will demand a broader range of sound and video post production services and
are likely to prefer a single-source provider. To implement its strategy, the
Company has assembled a senior management team experienced in the industry.
The Company entered the video services business in 1994 through its
acquisition of the assets and certain liabilities of Film Video Masters by
Todd-AO Video Services for the purchase price of $1,900. In February 1995,
the Company expanded its sound studio business through the acquisition of the
assets of Skywalker Sound South, renamed Todd-AO Studios West, with sound
studios and facilities located in the West Los Angeles area for $6,966. Also,
in March 1995, the Company expanded its operations into Europe through the
acquisition of the stock and inter-company debt ($8,135) of Chrysalis
Television Facilities, Ltd. ("Todd-AO UK") in London, which also augmented
the Company's video services capabilities to include the collation of
television programming for satellite broadcast. The purchase of Filmatic
Laboratories ("Filmatic") for a nominal sum in 1996 enlarged Todd-AO's video
services capabilities in London and added film processing to its services. In
August 1996, the Company acquired for the total sum of $4,650 the assets and
certain liabilities of Edit Acquisition LLC ("Editworks") located in Atlanta,
Georgia, which specializes in providing video services to the advertising
industry. Expanding its sound and video services still further, the Company
acquired the assets and certain liabilities of Hollywood Digital Limited
1
Partnership ("Hollywood Digital") in June 1997. In consideration, the
Company paid down existing debt of $17,761 and issued convertible
subordinated notes in the amount of $8,399. Hollywood Digital is a digital
based post-production facility providing sound and video services to the
film, television and advertising industries. In March 1998, the Company
opened a new facility in Santa Monica, California primarily to service
Hollywood Digital's advertising customers. In May 1998, the Company further
expanded its operations in Europe by acquiring the stock of Tele-Cine Cell
Group plc. ("TeleCine") in London for a total purchase price of $17,948 which
it anticipates will double its video post-production and special effects
services capabilities in the U.K. as well as adding graphics based clientele
to its customer base. As a result of these transactions, the Company has
expanded its client base, increased its range of services and broadened its
global market coverage. In May 1998, the Company also announced the
formation of Todd-AO Video Services DVD, Inc. ("TVS DVD") in Hollywood which
will provide Digital Versatile Disc ("DVD") services including encoding,
authoring, and proofing to the major Hollywood studios and others.
SOUND STUDIO OPERATIONS
GENERAL
Todd-AO performs post production sound services primarily for
theatrical feature films, television series, television specials,
movies-of-the-week, trailers and commercials. Sound services include music
recording, sound editing and enhancement, mixing of music, sound effects, and
dialogue and narration. After picture editing, the soundtrack becomes the
primary focus of the production process. Feature film and television
producers utilize the Company's studio facilities and highly skilled sound
engineers to mix (re-record) the basic elements of a soundtrack: dialogue (or
narration), music ("score") and all other recorded sounds referred to
collectively as "sound effects." A number of ancillary services derive from
this core activity, including sound effects editing, film-to-tape and
tape-to-tape transfers and duplication, automated dialogue replacement
("ADR"), live recorded sound effects ("Foley"), equipment rental, edit room
rental and sale of film and tape stock ("rawstock").
The demand for the Company's core motion picture services has
historically been seasonal, with higher demand in the fall (first fiscal
quarter) and spring (third fiscal quarter) preceding the Christmas holiday
season and summer theatrical releases, respectively. Demand has been lower in
the winter and summer, corresponding to the Company's second and fourth
fiscal quarters, respectively. Accordingly, the Company has historically
experienced, and expects to continue to experience, quarterly fluctuations in
revenue and net income.
QUARTERLY FINANCIAL DATA SCHEDULE (UNAUDITED)
BASIC DILUTED
EARNINGS PER EARNINGS PER
TOTAL GROSS NET COMMON SHARE COMMON SHARE
1997 REVENUES PROFIT INCOME OUTSTANDING OUTSTANDING
- ---- -------- ------ ------ ------------ ------------
First Quarter ........................ $ 20,340 $ 3,069 $ 1,771 $ .21 $ .20
Second Quarter ....................... 19,341 2,611 1,518 .15 .14
Third Quarter ........................ 19,657 2,688 1,900 .19 .18
Fourth Quarter ....................... 19,633 1,455 816 .08 .08
--------- -------- ------- ---------- ------------
TOTAL ................................ $ 78,971 $ 9,823 $ 6,005 $ .63(a) $ .59(a)
--------- -------- ------- ---------- ------------
--------- -------- ------- ---------- ------------
BASIC DILUTED
NET EARNINGS PER EARNINGS PER
TOTAL GROSS INCOME COMMON SHARE COMMON SHARE
1998 REVENUES PROFIT (LOSS) OUTSTANDING OUTSTANDING
- ---- -------- ------ ------ ------------ ------------
First Quarter ........................ $ 25,024 $ 3,262 $ 1,773 $ .18 $ .16
Second Quarter ....................... 22,582 1,991 1,316 .13 .12
Third Quarter ........................ 27,252 2,860 1,627 .16 .15
Fourth Quarter ....................... 27,756 537 (1,297 (.13) (.11)
--------- -------- ------- ---------- ------------
TOTAL ................................ $ 102,614 $ 8,650 $ 3,419 $ .34(a) $ .33(a)
--------- -------- ------- ---------- ------------
--------- -------- ------- ---------- ------------
- ------------------------
(a) Aggregate per share amounts for each quarter may differ from annual
totals as each is independently calculated.
2
FACILITIES
Currently, the Company offers 26 acoustically designed sound stages
equipped with modern sound recording equipment, providing a broad range of
sound services for both film and video tape. Todd-AO's scoring stage can
accommodate up to 150 musicians for live sound recording. The mixing
(re-recording) stages provide premium services including stereo sound in both
35mm and 70mm formats. Each of the Company's major feature stages has the
capability to create soundtracks utilizing any of the current digital release
formats. In order to emulate the movie theater environment, the Company's
film recording stages are of significant size. The Company believes that its
scoring stage is one of the largest in the world. In total, the Company has
over 69,000 square feet of stage space.
Todd-AO's facilities are conveniently located and readily
accessible to the film making and television community, with locations in
Hollywood, the San Fernando Valley, Los Angeles' westside and New York.
ACADEMY AWARDS-Registered Trademark-
Todd-AO has a long history and tradition of providing quality sound
services, starting with the theatrical release of OKLAHOMA! in 1955. Equally
important as the Company's technical facilities is the talented staff of
associated recording mixers. The Company's mixing teams have won numerous
Academy Awards-Registered Trademark- and Emmys, including a Lifetime
Achievement Award for Fred Hynes, who was a sound mixer of the Company for
over 30 years. This long tradition of sound recording excellence continues
today. The Company's employees have received nine Academy Award-Registered
Trademark-nominations for Best Sound in the last ten years and two Academy
Awards-Registered Trademark- for Best Sound. A list of some of Todd-AO's 1998
credits include: SAVING PRIVATE RYAN, THERE'S SOMETHING ABOUT MARY, DEEP
IMPACT, PLEASANTVILLE, DR. DOOLITTLE, AND LOST IN SPACE.
The Academy Awards-Registered Trademark- and nominations for Best
Sound received by the Company or its creative personnel are described below
(with Academy Award-Registered Trademark- winners shown in bold):
YEAR MOVIE(s) YEAR MOVIE(s)
- ---- -------- ---- --------
1997 L.A. Confidential 1978 Hooper
1996 Evita 1977 Close Encounters of the Third Kind, Sorcerer
1995 APOLLO 13, Braveheart 1976 A Star Is Born
1994 Legends of the Fall 1973 THE EXORCIST
1993 Schindler's List 1972 CABARET
1992 LAST OF THE MOHICANS 1965 THE SOUND OF MUSIC
1990 Dick Tracy 1963 Cleopatra
1988 Who Framed Roger Rabbit 1961 WEST SIDE STORY
1987 Empire of the Sun 1960 THE ALAMO
1985 OUT OF AFRICA 1959 Porgy and Bess
1982 E.T. - THE EXTRA-TERRESTRIAL 1958 SOUTH PACIFIC
1979 1941 1955 OKLAHOMA!
Other Academy Awards-Registered Trademark- received:
YEAR ACCOMPLISHMENT
- ---- --------------
1997 Scientific/Technical Achievement Award
1995 Scientific/Technical Achievement Award
1994 Scientific/Technical Achievement Award
1987 Gordon E. Sawyer Lifetime Achievement Award (Fred Hynes)
1980 Honorary Award (Fred Hynes)
1973 Scientific/Technical Achievement Award
1968 Scientific/Technical Achievement Award
1957 Scientific/Technical Achievement Award
3
VIDEO SERVICES
Todd-AO, through its various subsidiaries and divisions in Los
Angeles, New York, London and Atlanta, provides video services (electronic
post production services) principally to the worldwide motion picture,
television, home video and advertising industries. Video post production is
provided by skilled technicians using sophisticated electronic equipment and
computers to process images and sound from film, videotape and computers onto
a master element from which distribution and broadcast materials are created
for worldwide markets. These markets include theatrical releases, home video,
cable, pay television, syndication, network, satellite, multimedia and
advertising. Todd-AO provides its video services to over 1,000 customers
including the major motion picture and television studios, independent
producers, advertising agencies, television networks, cable program suppliers
and television program syndicators.
Todd-AO's principal video and related services are as follows:
-FILM-TO-VIDEO TRANSFER (TELECINE). All feature films and most
television programming and advertising are produced on film but viewed
(except in movie theaters) on an electronic medium such as a television
screen. Todd-AO transfers the film to a video master in a frame-by-frame
process in which skilled personnel use specialized equipment to accurately
render the proper tone, color and lighting from the film original to the
video master.
-MASTERING AND DUPLICATION OF PROFESSIONAL FORMAT VIDEOTAPE.
Todd-AO receives original master elements from a program provider such as a
motion picture, television, commercial production, or home video company and
duplicates the master for broadcast use in a variety of professional formats.
Duplicates are used by television stations, home video duplicators, cable
systems operators, cable program suppliers, TV networks, pay-per-view and
satellite distribution companies to exhibit programs and commercials.
Airlines use duplicates to exhibit in-flight movies.
-TRANSMISSION. Todd-AO UK transmits television channels for
satellite and cable broadcasters by providing services to generate video and
audio signals which are passed on to the uplink provider for distribution by
satellite. Clients provide details of each program and its exact duration.
Each day, the client supplies a computerized playlist detailing the next 24
hours of network programming. This playlist is input into dedicated
technology which consecutively plays each program at the correct time,
thereby creating the continuous network output. To provide such transmission
services (often on a 24 hours a day, 7 days a week basis), Todd-AO UK
provides the technology, operational staff, physical library, database
services, engineering support and emergency power (in case of electrical
failure).
-VIDEOTAPE EDITING. Editing entails the electronic transfer of
video or audio information from one or more sources to a new master element.
Editing is a highly creative service with individual editors often attaining
star status and receiving screen credits.
-AUDIO POST PRODUCTION. The Company provides services referred to
as audio layback and audio augmentation. Layback is the process by which the
sound and picture are synchronized and is frequently provided with telecine.
The final soundtracks for feature films often include foreign languages for
international release and are usually prepared separately for synchronization
to match the various versions of the picture. Audio augmentation or
"sweetening" is the process used to restore or modify existing sound or
create new sound. Sweetening allows for the addition of music or sound
effects, and eliminates unwanted portions of previously recorded sound.
-VISUAL EFFECTS AND GRAPHICS. The Company provides visual effects
and graphics services using modern computer imaging systems such as Silicon
Graphics workstations. Visual effects for motion pictures and television
include anything from a simple "fade to black" to the intricate "special
effects" common in today's feature films. Graphic services entail the
creating and melding of computer-generated images, video and audio, into
programming, including commercial advertising, television music videos, and
corporate video.
-BROADCAST STANDARDS CONVERSION. Several technically incompatible
video standards for broadcasting are in use throughout the world. The Company
converts feature films and television programs to or from any global
standard, depending on the intended market.
4
-CLOSED CAPTIONING/SUBTITLING. The vast majority of programming is
closed captioned (for the hearing impaired) or subtitled for foreign
languages. The Company electronically applies captions and subtitles onto the
program.
-PRODUCT EVALUATION/QUALITY ASSURANCE. The Company provides
comprehensive evaluation and quality control for video and audio products.
Todd-AO has consulted with several of the major entertainment and equipment
manufacturing companies to develop post production specifications, equipment
and processes.
-VAULTING/STORAGE. Todd-AO provides storage for up to 100,000
units in its environmentally controlled and secured vaults. The Company also
offers database and tracking services, 24-hour shipping and delivery services
and element disposal.
OTHER SERVICES
-DVD SERVICES. TVS DVD provides video and audio compression
(encoding), menu/interactive design, formatting (authoring), specification
verification and player compatibility testing (proofing) of DVD product. TVS
DVD is in its start-up stage and expects to produce about 25 complete
projects per month during this time for the major Hollywood studios and
others.
-FILM PROCESSING. Filmatic provides film laboratory services
including film developing, printing, cleaning and negative film cutting.
Established in 1935, Filmatic is widely considered to be one of England's
premier specialty film laboratories, providing its services to over 500
customers, including colleges, universities, corporate and training
companies, film and video libraries, independent production companies and
broadcast television.
-COMPACT DISTRIBUTION PRINT. CDP Limited Liability Company, a
joint venture of Todd-AO and United Artists Theatre Circuit, Inc., has
created a new print process, known as Compact Distribution Print or CDP. The
CDP process reduces the length of feature release prints without affecting
picture or sound quality by eliminating 37% of interframe waste in standard
prints, an inefficiency which has existed since the 1950s. In addition to
potential savings realized from reduced film stock footage and developing
costs, a compact print can generally be distributed on a single reel, thereby
reducing shipping and handling costs. Opportunities for the implementation of
CDP are currently being explored.
COMPETITION
The Company encounters intense competition in each of the markets
that it serves. The Company competes on the basis of quality, service,
capacity, technical capability and price. Although price is an important
competitive factor, the lowest price is seldom the sole determining factor.
The cost of the Company's services is generally low in relation to the
overall budget or anticipated revenues of the project. Quality, capacity and
service remain the critical competitive factors in providing post production
services.
The Company's sound studio operations compete in both the feature
film and television markets. In the film market, competition for sound
services is predominantly driven by the skill and creativity of sound mixers.
The Company does not believe that it has a major independent competitor for
feature films in the Los Angeles marketplace. However, two smaller
independent facilities have opened and attracted a portion of the feature
film market. On a wider basis, LucasFilm in Marin County, California, Sound
One in New York and certain London post production sound facilities compete
with the Company for motion picture studio clientele. In the television
market, the competition is intense and television pricing is constantly under
pressure. In addition to competing with the major studios, the Company also
competes with a wide array of independent post production sound facilities.
The Company believes that its major competitors are Larson Sound, Four Media
Company ("4MC"), West Productions, Echo Sound Digital Sound and Picture,
Westwind Media and EFX/Wilshire Studios.
With respect to video services, a variety of other companies offer
special effects, post production video and transmission services similar to
those provided by Todd-AO. Many of these competitors are larger and have
greater financial resources than the Company. Competition for video services
within a geographical region tends to be highly fragmented with a few larger
full service companies and numerous
5
small firms specializing in only one or two services. Most small operations
are centered around key personnel who serve one or two clients based on
long-standing relationships.
The Company believes its major direct competitors in the Los
Angeles market for distribution, telecine and professional duplication work
are 4MC, Modern Videofilm, Vidfilm, Fototronics, Pacific Ocean Post, Encore
Video and VDI Media. These companies all currently provide a significantly
larger and more complete array of video services and facilities than Todd-AO.
The Company believes its major direct competition in the London
market for Todd-AO UK and TeleCine in the area of transmissions are Pearson,
Molinare, TSI, and Arena. All provide a mixture of services for both large
and small media clients across the broadcast sector, and are conveniently
located in the prime vendor area in London's Soho district, close to many of
the customers' offices. The Company believes its major competition in the
London market for film laboratory services are Rank, Technicolor, Metrocolor,
Soho Images, Colour Film Services and Buck Laboratories. The Company believes
its major direct competition in the Atlanta market for editing and graphics
are Crawford Communications, Inc., Video Tape Associates, Inc. ("VTA"), Click
3X and Peachtree Post. Crawford Communications and VTA are both considerably
larger and currently offer a more complete array of services and facilities
than does Editworks.
EMPLOYEES
Todd-AO employs approximately 860 employees, some on a
project-by-project basis. The Company has employment agreements with 100 of
its key management, creative and technical personnel. The Company's sound
studio creative and technical personnel are subject to a collective
bargaining agreement with the International Association of Theatrical and
Stage Employees. The Company has never experienced a work stoppage and
considers relations with its employees to be excellent.
PRINCIPAL STOCKHOLDERS
Approximately 52% of the Company's outstanding shares (representing
over 80% of the voting power) are beneficially owned by Marshall Naify,
Robert A. Naify, certain members of their families and certain trusts for the
benefit of family members (the "Naify Interests").
ITEM 2. PROPERTIES.
Sound studio operations are conducted in various owned, leased or
licensed premises in the Los Angeles/Santa Monica area, New York City,
Atlanta and London. The Company's facilities are adequate to support its
anticipated business.
The Company owns approximately 147,000 sq. ft. of building space in
Los Angeles. In addition, approximately 238,000 sq. ft. of building space is
subject to lease or license agreements. In London, Todd-AO owns the
underlying freehold of 17,600 sq. ft. of building space. It leases this area
to a third party under a lease agreement which expires in December 2042 and
subleases the same area from its tenant under a lease agreement which expires
in March 2008. Todd-AO also leases an additional 3,500 sq. ft. of its owned
London property to a third party under a lease agreement which expires in
June 2009. The Company also owns two undeveloped parcels of land in Killeen,
Texas.
The Company's Los Angeles/Santa Monica sound studio facilities
include premises licensed from Radford Studio Center under agreements
expiring in 2003, each of which can be extended for an additional five years
at the Company's option. The Company also leases premises in Santa Monica
from Lantana Center. The lease expires in December 2010 and can be extended
for an additional ten years at the Company's option. The New York sound
studio facilities operate under a lease agreement which expires in December
2002 and which can be extended for an additional eight years at the Company's
option. The New York lease agreement can be terminated by the Company at any
time upon six months' written notice to the landlord.
The Company's Los Angeles post production video service facilities
operate (1) under a lease agreement for approximately 20,000 square feet which
expires in August 1999 and which can be extended
6
for two additional five-year terms or terminated on 90 days' written notice
at the Company's option and (2) under a lease agreement for approximately
35,000 sq. ft. which expires in May 2003 and can be extended for an
additional ten years at the Company's option. The Company's Santa Monica
video service facility operates under a lease agreement for approximately
25,000 sq. ft. which expires in July 2006 and which can be extended for two
additional five-year terms at the Company's option.
The Atlanta post production facility operates under a lease
agreement for approximately 12,600 square feet which expires in December 2001
and which can be extended for two additional five-year terms.
In London, the Company's TeleCine facilities operate under lease
agreements for approximately 33,500 square feet which expire between July
2004 and March 2017 and one lease for 6,200 sq. ft. which expires July 2000.
The Company also leases 7,500 square feet of office and storage space in
London with leases expiring in October 2000 and September 2002.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in litigation and similar claims incidental
to the conduct of its business. None of the pending actions is likely to
have a material adverse impact on the Company's financial position or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS.
The Company has two classes of Common Stock designated as Class A
Stock and Class B Stock, as described below. There were approximately 713
and 7 record holders of Class A and Class B Stock, respectively, as of
November 18, 1998. The number of holders of Class A Common Stock does not
include an indeterminate number of shareholders whose shares are held by
brokers in "street name."
Class A Stock
The Company's Class A Common Stock is traded on the Nasdaq National
Market System under the symbol "TODDA." The following table sets forth, for
the periods indicated, the high and low sales prices for the Class A Common
Stock as reported on the Nasdaq National Market.
STOCK PRICE RANGES
FISCAL YEAR CLOSE
- ----------- -----------------
HIGH LOW
------- ------
1997
- ----
First Quarter. . . . . . . . . . . . . . . . . . . . . 13 3/4 9 1/2
Second Quarter . . . . . . . . . . . . . . . . . . . . 10 3/4 9 1/8
Third Quarter. . . . . . . . . . . . . . . . . . . . . 9 3/4 8 1/4
Fourth Quarter . . . . . . . . . . . . . . . . . . . . 10 3/8 8 3/4
1998
- ----
First Quarter. . . . . . . . . . . . . . . . . . . . . 12 7/8 8 7/8
Second Quarter . . . . . . . . . . . . . . . . . . . . 11 1/8 7 7/8
Third Quarter. . . . . . . . . . . . . . . . . . . . . 13 9 7/8
Fourth Quarter . . . . . . . . . . . . . . . . . . . . 12 5/8 5 5/16
The holders of Class A Common Stock are entitled to cumulative cash
dividends at an annual rate of $.045 per share before any cash dividends may
be declared or paid on the Class B Common Stock. Holders of Class B Common
Stock are entitled to cash dividends equal to 90% of the cash dividends paid
on the Class A Common Stock.
The Company paid cash dividends of $.06 per Class A share for the
fiscal years 1997 and 1998.
The Transfer Agent and Registrar for the Class A Common Stock is
Continental Stock Transfer and Trust Company, 2 Broadway, New York, NY 10004.
Class B Stock
Class B shares have special voting rights (10 votes per share) and
are generally not transferable. Cash dividends are payable on the Class B
shares at a rate not to exceed 90% of the cash dividends paid on the Class A
shares. The two classes of stock participate on the same per share basis in
other property distributions. Class B Stock is convertible at the option of
the holder into Class A Stock and is automatically converted to Class A Stock
under certain circumstances. Conversion is on a share for share basis and
once so converted the Class B Stock is retired and cannot be reissued without
a stockholder vote. Except for issuances in connection with stock splits and
stock dividends, additional Class B shares cannot be issued without an
affirmative vote of the Class B stockholders.
As of August 31, 1998, 1,747,178 Class B shares were outstanding
and owned by 7 shareholders, including 1,703,639 Class B shares owned by the
Naify Interests. Dividends in the amount of $0.054 per Class B share were
paid for fiscal years 1997 and 1998. The Company acts as Transfer Agent for
the Class B common stock.
8
ITEM 6. SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT AMOUNTS PER SHARE)
Years Ended August 31
-------------------------------------------------------
1994 1995 1996 1997 1998
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,892 $50,003 $62,920 $ 78,971 $102,614
------- ------- ------- --------- --------
------- ------- ------- --------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,780 $ 3,375 $ 4,844 $ 6,005 $ 3,419
------- ------- ------- --------- --------
------- ------- ------- --------- --------
Income per Common Share - Basic (1). . . . . . . . . . . . . . . $ .24 $ .41 $ .59$ .63 $ .34
------- ------- ------- --------- --------
------- ------- ------- --------- --------
Income per Common Share - Diluted (2). . . . . . . . . . . . . . $ .24 $ .40 $ .55$ .59 $ .33
------- ------- ------- --------- --------
------- ------- ------- --------- --------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . $36,728 $57,198 $64,186 $103,451 $135,366
------- ------- ------- --------- --------
------- ------- ------- --------- --------
Total Long-Term Debt Obligations . . . . . . . . . . . . . . . . $ 1,467 $ 8,327 $ 9,354 $ 25,430 $ 44,654
------- ------- ------- --------- --------
------- ------- ------- --------- --------
Cash Dividends:
Class A Shares . . . . . . . . . . . . . . . . . . . . . . . $ .06 $ .06 $ .06 $ .06 $ .06
------- ------- ------- --------- --------
------- ------- ------- --------- --------
Class B Shares . . . . . . . . . . . . . . . . . . . . . . . $ .054 $ .054 $ .054 $ .054 $ .054
------- ------- ------- --------- --------
------- ------- ------- --------- --------
(1) Basic income per share computed using average number of shares
outstanding of 7,344,310, 8,167,905, 8,191,065, 9,539,312 and
9,987,429 in 1994, 1995, 1996, 1997 and 1998, respectively.
(2) Diluted income per share computed using the average number of
shares outstanding and common stock equivalents of 7,450,616,
8,399,462, 8,845,321, 10,207,503 and 11,218,051 in 1994, 1995,
1996, 1997 and 1998 respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(DOLLARS IN THOUSANDS, EXCEPT AMOUNTS PER SHARE)
GENERAL
The Company derives its revenue primarily from sound and video
services to the motion picture and television industries.
Over the past decade, the Company provided sound services
exclusively until the August 1994 acquisition of Todd-AO Video Services. This
acquisition represented a fundamental shift in management's vision of the
Company's future. Prior to fiscal 1995, the core sound business had grown
from $14,000 in revenues in 1986 to almost $33,000 in fiscal 1994, but
profitability was volatile and inherently subject to scheduling conflicts,
unpredictable overtime revenues and seasonality.
Beginning in fiscal 1995, the Company pursued a strategy of
diversifying its operations by acquiring or establishing complementary
service companies in the production and post production markets. This
diversification is not only functional but geographical, as represented by
the acquisitions in March 1995 and May 1998 of Todd-AO UK and TeleCine,
respectively, in London and in August 1996 of Editworks in Atlanta. The
Company also acquired Todd-AO Studios West in 1995, Filmatic in 1996 and
Hollywood Digital in 1997.
9
RESULTS OF OPERATIONS
The following discussion provides an analysis of the Company's
results of operations and should be read in conjunction with the Consolidated
Financial Statements and related notes thereto. The operating results for the
periods presented were not significantly affected by inflation.
The following sets forth, for the periods indicated, certain
information relating to the Company's operations expressed as a percentage of
the Company's revenues:
YEARS ENDED AUGUST 31,
-------------------------
1996 1997 1998
------ ------ ------
Revenues ............................................ 100.0% 100.0% 100.0%
Costs and expenses:
Operating costs and other expenses ................. 77.8 78.2 80.9
Depreciation and amortization ...................... 8.5 9.0 10.4
Restructuring charges .............................. -- -- 2.7
Interest ........................................... 1.1 1.2 1.8
Equipment lease expense, net ....................... 0.8 0.3 0.2
Other (income) expense, net ........................ (0.5) (0.1) (0.5)
------ ------ ------
Total costs and expenses ....................... 87.7 88.6 95.5
------ ------ ------
Income before provision for income taxes ............ 12.1 11.4 4.5
Provision for income tax ............................ 4.4 3.7 1.2
------ ------ ------
Net income .......................................... 7.7% 7.7% 3.3%
------ ------ ------
------ ------ ------
FISCAL YEAR ENDED AUGUST 31, 1998 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1997
Revenues increased $23,643 or 29.9% from $78,971 to $102,614
primarily due to the acquisition of Hollywood Digital ("THD") in June 1997,
the acquisition of Tele-Cine Cell Group plc. ("TeleCine") on May 8, 1998, and
the opening of the new THD Santa Monica facility in late March 1998. Video
services revenues from THD (including Santa Monica), TeleCine, and the
Company's other video divisions of $28,036 were offset by the Company's sound
services, which were down compared to a particularly strong prior year. This
was primarily due to downtime on three sound stages closed during part of the
year for renovation and conversion to advanced digital technology and to the
negative impact of a threatened Screen Actors Guild strike that caused major
delays in motion picture production industrywide.
Operating costs and other expenses increased $21,279 or 34.5% from
$61,755 to $83,034. Cost increases related to the THD and TeleCine
acquisitions and the new THD Santa Monica facility ($21,021) and the
Company's other video services divisions ($982) were offset by a reduction in
costs for the sound services divisions related to their revenue decreases
described above. These cost reductions were not sufficient to offset the
narrowing of the profit margin in the sound services divisions from the
revenue reductions.
The Company recorded a pre-tax restructuring charge of $2,767 in
its fourth quarter ended August 31, 1998 to recognize the impairment of
certain assets. The Company has recently invested in advanced digital
technologies in both the sound and video areas of post-production. Due to
the acceleration in demand by the marketplace for these advanced
technologies, certain older composite digital and analog-based technologies,
primarily in the editing and graphics areas of video post-production, have
experienced a significant reduction in demand. The Company believes that
taking the restructuring charge is a prudent action and anticipates the
impact of changing technology on our business.
The post-tax restructuring charge is $2,034 and the Basic and
Diluted Net Income Per Common Share of the Company excluding this
non-recurring expense would have been $0.55 and $0.51, respectively. The
Basic and Diluted Net Income Per Common Share of the Company including the
restructuring charge is $0.34 and $0.33, respectively.
10
Depreciation and amortization increased $3,557 or 49.9% primarily
due to the equipment and goodwill acquired with the THD and TeleCine
acquisitions and to current year capital expenditures.
Interest expense increased $887 or 96.4% primarily due to the THD and
TeleCine financing.
Other income - net increased $523. This was primarily due to a
non-recurring suit settlement in the Company's favor ($200), a net gain from
the sale of assets ($156), a reduction in expenses related to the Company's
investment in CDP ($199), and a net reduction in expenses from miscellaneous
provisions ($123). This was offset by a decrease in interest income ($184).
The effective income tax rate decreased from 32.9% to 26.5%
primarily due to state income tax credit carryovers.
As a result of the above, income before taxes decreased $4,304 from
$8,953 to $4,649 and net income decreased $2,586 from $6,005 to $3,419.
MATERIAL CHANGES IN CASH FLOWS
For the year ended August 31, 1998 the Company generated $16,964 in
cash from operating activities compared to $11,466 in 1997. Cash provided by
operating activities from net income of $3,419, adjusted for depreciation,
net amortization, and impairment of assets of $11,164, and augmented by a net
increase in receivables and a decrease in payables and accrued liabilities of
approximately $1,000 was utilized primarily to fund capital expenditures.
Net cash generated by proceeds from the sale/leaseback of certain
equipment and net borrowings from the Company's credit facility totaling
$22,689 were used to pay down long-term debt, reinvest in capital assets of
the Company and to fund the acquisition of TeleCine.
OTHER BUSINESS INFORMATION
On September 8, 1997, the Company and Disney Character Voices
International, Inc. ("DCVI") committed to jointly establishing a dubbing and
audio post production studio in Germany. The Company and DCVI's German
subsidiaries, TODD-AO GERMANY GMBH and BUENA VISTA INTERNATIONAL FILM
PRODUCTION (GERMANY) GMBH have agreed to jointly build a state-of-the-art,
all-digital post production complex in Munich. The 36,000 square foot
facility will include feature and video mixing studios, film and video
dialogue recording rooms and editorial suites. The Company will manage all
technical and operational functions and DCVI will coordinate the creative
services of the studios. Additional joint ventures are contemplated for
France, Italy, Spain and Asia. The foreign language dubbing studios will
provide each of those territories with state-of-the-art theatrical and
television recording, mixing and editing facilities.
In May 1998, the Company announced the formation of TVS DVD which will
provide DVD product services including encoding, authoring, and proofing to the
major Hollywood studios and others. TVS DVD is in its start-up stage and
currently expects to produce about 25 complete projects per month.
FISCAL YEAR ENDED AUGUST 31, 1997 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1996
Revenues increased $16,051 or 25.5% from $62,920 to $78,971 due to
significant increases from the Company's sound services divisions ($5,124) as
well as its video services divisions ($10,927) including Todd-AO/Editworks
("Editworks") acquired in August 1996 and Todd-AO Filmatic ("Filmatic")
acquired in April 1996 which contributed revenue increases of $4,262 and
$382, respectively. Hollywood Digital, acquired in June 1997, contributed
$3,864 of the increase. The revenue increase for the remaining video
divisions was $2,419.
Operating costs and other expenses increased $12,793 or 26.1% from
$48,962 to $61,755. Cost increase related to the acquisitions described
above were higher than usual due to transitional changes at Editworks and the
relocation of Filmatic. These acquisitions, as well as Hollywood Digital,
are now fully integrated into operations and should impact favorably on
future results. In addition, Todd-AO Digital
11
Images ("TDI") recorded cost increases of $476 against flat revenue. In
order to take advantage of certain operating efficiencies the operations of
TDI were transferred to the newly acquired Hollywood Digital in August 1997.
Hollywood Digital has an experienced and successful feature film effects
division and will be responsible for all digital special effects for the
Company. The remaining cost increases are related to revenue increases
described above.
Depreciation and amortization increased $1,754 or 32.6% primarily
due to the acquisitions and current year capital expenditures.
Net equipment lease expense decreased $233 or 46.8% due to
decreases in the interest rate and a declining principal balance while the
associated straight line amortization of the deferred gain remains the same.
Other (income) expense, including the 1996 loss from joint venture,
net decreased $192 primarily due to non-recurring provision adjustments in
the prior year.
As a result of the above, income before taxes increased $1,327 from
$7,626 to $8,953. The effective income tax rate decreased from 36.5% to
32.9% and net income increased $1,161 from $4,844 to $6,005.
Earnings per share increased 9% from $0.55 to $0.60 in spite of a
14% dilution in average shares outstanding primarily due to the November 1996
public offering when 1,645,000 shares were issued. If the public offering
had occurred as of September 1, 1996 and the bank credit facility debt paid
down, the EPS as of August 31, 1997 would not have changed from $0.60.
MATERIAL CHANGES IN CASH FLOWS
For the year ended August 31, 1997 the Company generated $11,466 in
cash from operating activities compared to $9,652 in 1996. In addition to
net income of $6,005, adjusted for depreciation and net amortization of
$5,656, net increases in accounts payable and other liabilities of $928 also
increased cash provided by operations. Cash was utilized primarily to fund
the increase in trade receivables and other current assets.
Net cash generated from operating activities supplemented by
proceeds from the sale of certain marketable securities and investments and
borrowings from the Company's credit facility were used to reinvest in
capital assets of the Company, to pay down long-term debt and to acquire
Hollywood Digital. Cash generated from the issuance of common stock
($15,755) included net proceeds received in connection with the Company's
public offering of $15,512 which were used to pay down long-term debt, to
reinvest in capital assets of the Company and to acquire Hollywood Digital.
OTHER BUSINESS INFORMATION
The Editworks division completed constructing two audio rooms in
order to provide its clients with additional services. The rooms began
operations in the fourth quarter of this fiscal year and have begun
contributing to the revenue and earnings of the division.
Due to shortened post production schedules for motion picture
features, it has become the norm for clients to use two stages rather than
one for the pre-mixing phase of the total post production sound mixing
process. In view of this development, the Company is converting an ADR
(Additional Dialogue Replacement) Stage at the Hollywood facilities into a
new sound mixing stage primarily for dialogue pre-mixing services, but which
can also be used for various other mixing services. The newly converted
stage is expected to begin operating in the second quarter of fiscal year
1998.
Hollywood Digital, acquired by the Company in June 1997 and which
contributed to the revenue and earnings in the fourth quarter of this fiscal
year, is also expecting to open a separate facility in Santa Monica,
California to primarily service its advertising clients. The present
Hollywood facility will expand its current feature and television services.
The new facility will begin operations during fiscal year 1998.
12
LIQUIDITY AND CAPITAL RESOURCES
In December 1994, the Company signed agreements with its bank to
implement the sale/leaseback of certain equipment and a long-term credit
facility. An aggregate of $11,218 of sound studio equipment was sold and
leased back on December 30, 1994. The sale/leaseback agreement, which
terminates on December 30, 1999, consists of five 1-year terms amortizing to
approximately 40%. The agreement, amended in December 1997, provides for
interest at the same LIBOR rates and terms as the second sale/leaseback
agreement (see below).
In October 1997, the Company signed a second agreement with its
bank to implement the sale/leaseback of certain equipment for up to $10,000
and restated the long-term credit facility signed in December 1994. An
aggregate of $8,500 of sound studio equipment was sold and leased back on
November 3, 1997. The sale/leaseback agreement consists of five 1-year terms
amortizing to approximately 42% with interest at LIBOR rates ranging from
plus .75% to plus 2% based on the leverage ratio (Funded Indebtedness/EBITDA
excluding convertible subordinated notes issued by Company in connection with
the Hollywood Digital acquisition) and terminates on December 1, 2002. Under
the new First Amended and Restated Credit Agreement, dated as of October 20,
1997, the Company may borrow up to $60,000 in revolving loans (including up
to 50% in Multi-currency) until November 30, 2001. On that date and
quarterly thereafter until August 31, 2003, the revolving loan commitment
will reduce by 6.25% to 50% of the combined loan commitment on the reduction
date. The remaining 50% will reduce to nil by the expiration of the
agreement on December 31, 2003. Annually, the Company may request an
automatic extension of the revolving period of the facility for one year that
will also extend the term period and the expiration date of the agreement.
The Company also has the availability of Standby Letters of Credit up to
$2,500 under the facility. The credit facility provides for borrowings at
the Bank's Reference, CD, and LIBOR rates ranging from plus .75% to plus
2.125% based on the leverage ratio. The leverage ratio that determines the
rate ranges from less than 1:1 to greater than 2.5:1. The leverage ratio may
not exceed 3.5:1 until February 28, 2000. Thereafter, the leverage ratio may
not exceed 3:1. The facility includes commitment fees at .2% to .5% (based
on the leverage ratio) per annum on the unused balance of the credit
facility. Other material restrictions include: the coverage ratio (cash
flow/fixed charges) may not be less than 1.25:1; Other Indebtedness or
Contingent Liabilities (excluding up to $25,000 in Capital or Off Balance
Sheet Leases, the convertible subordinated notes issued in the Hollywood
Digital acquisition and non-recourse debt up to $50,000 of less than 100%
owned Joint Ventures) may not exceed $10,000 without the Bank's approval.
Net Worth is not to be less than $54,000 plus net proceeds from issuance of
equity plus 50% of consolidated net income subsequent to May 31, 1998
(excluding the effect of stock repurchases up to $8,000 during the fiscal
year ending August 31, 1999).
Management evaluated capital raising alternatives including capital
and operating leases, sale/leaseback and other sources of long-term debt
including bank and public financing. Based upon cost, structure and term the
sale/leaseback financing provided incremental funding with a favorable impact
on earnings per share as compared with available alternative debt financings.
In January 1998 the Company entered into a three year interest rate
swap agreement for a notional amount of $10,000 to hedge the impact of
fluctuations in interest rates on its floating rate credit facility. Under
the agreement, the Company is obligated to pay 5.65% in exchange for
receiving three-month LIBOR on the notional amount. Settlements are
quarterly and the contract expires in March 2001. At August 31, 1998, based
on dealer quoted market prices, the Company would have to pay $64 to
terminate the swap agreement.
The credit facilities are available for general corporate purposes,
capital expenditures and acquisitions. Management believes that funds
generated from operations, proceeds from the new sale/leaseback and the
borrowings available under the restated credit facility will be sufficient to
meet the needs of the Company at least through the end of 1999.
On October 10, 1996, the Company filed a registration statement
with the Securities and Exchange Commission. Proceeds from the offering, net
of costs totaled $15,512. The funds received were used to pay down existing
debt in the amount of $9,102. The remaining funds were used in the
acquisition of Hollywood Digital and for other general corporate purposes.
13
In June 1997, the Company used $15,760 under the credit facility
and $3,000 from the proceeds of the offering described above to acquire the
assets of Hollywood Digital. In November 1997, the Company used $8,500 from
the sale/leaseback of equipment described above to pay down the credit
facility debt. In May 1998, the Company used $14,000 under the credit
facility to fund a substantial portion of the TeleCine acquisition. As of
August 31, 1998, the Company had $33,975 outstanding under the credit
facility.
The Company expects capital expenditures of approximately $21,000
for its Los Angeles, Santa Monica, New York City, Atlanta and London
facilities in fiscal 1999. These capital expenditures will be financed by
credit facilities and internally generated funds.
The Company does not believe that it is currently exposed to any
material foreign exchange rate risk and, at present, does not have a policy
for managing such risk beyond the utilization of local currency borrowings to
fund foreign acquisitions whenever possible.
FORWARD LOOKING STATEMENTS
When used in this document, the words "believes", expects",
anticipates", "intends", and similar expressions are intended to identify
forward looking statements. Such statements are subject to a number of known
risks and uncertainties. Actual results in the future could differ
materially from those described in the forward looking statements. Such
risks and uncertainties include, but are not limited to, industry-wide market
factors such as the timing of, and spending on, feature film and television
programming production, foreign and domestic television advertising, and
foreign and domestic spending by broadcasters, cable companies and
syndicators on first run and existing content libraries. In addition, the
failure of the company to maintain relationships with key customers and
certain key personnel, more rapid than expected technological obsolescence,
and failure to integrate acquired operations in expected time frames could
also cause actual results to differ materially from those described in
forward looking statements.
YEAR 2000 COMPLIANCE ISSUE
The Company is currently working to resolve the potential impact of
the year 2000 on the processing of date-sensitive information by the
Company's computerized information systems. The year 2000 problem is the
result of computer programs being written using two digits (rather than four)
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000, which could result in miscalculations or system
failure. The Company has conducted a review of its computer information
systems and its technological operating equipment to identify the systems
that could be affected by the year 2000 compliance issue.
The Company uses purchased software programs for a variety of
functions, including general ledger, accounts payable, and accounts
receivable accounting packages as well as comprehensive facility management
packages. These programs are generally Year 2000 compliant, and any software
and/or computer systems not currently compliant will be upgraded during
fiscal 1999 under existing maintenance and other agreements and through
normal replacement programs currently in place. A review of the Company's
equipment containing embedded microprocessors or other technology has
revealed few systems that are not Year 2000 compliant and those that are not
compliant are expected to be upgraded through normal maintenance replacements
in fiscal 1999. Operation of these systems is generally not time-sensitive
and, if necessary, equipment settings can be adjusted without posing any
significant operational problems for the Company.
Based on these reviews, costs of addressing potential problems are
not currently expected to have a material adverse impact on the Company's
financial position, results of operations or cash flows in future periods.
To date, the Company has not identified any system which presents a
material risk of not being Year 2000 ready in a timely fashion or for which a
suitable alternative cannot be implemented. As the Company progresses with
its Year 2000 conversion, however, it may identify systems which do present a
material risk of Year 2000 disruption. Such disruption may include, among
other things, the inability to process transactions or information, to record
or access data, or engage in similar normal business
14
activities. If the Company, its customers or vendors are unable to resolve
such processing issues in a timely manner, it could result in a material
financial risk. Accordingly, the company will devote the necessary resources
to resolve all significant Year 2000 issues in a timely manner.
The discussion above contains certain forward looking statements.
The costs of the Year 2000 conversion, the date which the Company has set to
complete such conversion, and possible risks associated with the Year 2000
issue are based on the Company's current estimates and are subject to various
uncertainties that could cause the actual results to differ materially from
the Company's expectations. Such uncertainties include, among others, the
success of the Company in identifying systems that are not Year 2000
compliant, the nature and amount of programming required to upgrade or
replace each of the affected systems, the availability of qualified
personnel, consultants and other resources, and the success of the Year 2000
conversion efforts of others.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 in Part IV of this 10-K Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of the Company are as follows:
NAME AGE* POSITION WITH COMPANY
- ---- ---- ---------------------
Salah M. Hassanein (1) ..................... 77 President, Chief Executive Officer and Director
M. David Cottrell .......................... 42 Vice President of Administration and Controls
Silas R. Cross ............................. 59 Vice President, Treasurer and Assistant Secretary
Clay M. Davis .............................. 52 Vice President
J.R. DeLang ................................ 42 Senior Vice President and Director
Rand Gladden ............................... 47 Vice President and President of Todd-AO Hollywood Digital
Graham Hall ................................ 40 Managing Director of Todd-AO UK Ltd.
Coburn T. Haskell .......................... 46 Vice President and Controller
Richard C. Hassanein ....................... 47 Vice President and Director
Christopher D. Jenkins ..................... 43 Senior Vice President and Director
Marshall Naify (1) ......................... 78 Co-Chairman of the Board of Directors
Robert A. Naify (1) ........................ 76 Co-Chairman of the Board of Directors
Richard O'Hare ............................. 45 Vice President and President of Todd-AO Video Services
Kathleen N. Reck ........................... 57 Vice President Human Resources
Judi M. Sanzo .............................. 41 Vice President, General Counsel, and Secretary
William R. Strickley ....................... 48 Senior Vice President and Chief Financial Officer
David Haas (3) ............................. 57 Director
Herbert L. Hutner (2)(3) ................... 89 Director
Robert I. Knudson .......................... 73 Director
David P. Malm .............................. 34 Director
Michael S. Naify ........................... 36 Director
A. Frank Pierce (2) ........................ 68 Director
Sydney Pollack ............................. 64 Director
Zelbie Trogden (3) ......................... 62 Director
- ---------------------------
* As of August 31, 1998.
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
Certain officers and directors of the Company were formerly
associated in various capacities with United Artists Communications, Inc.
("UACI"), now known as United Artists Theatre Circuit, Inc., a motion picture
theater company. UACI owned approximately 85% of the Company's common stock
until 1986.
Salah M. Hassanein was elected as a Director in 1962. In July 1996,
Mr. Hassanein was appointed the President and Chief Executive Officer of the
Company. From 1994 to 1996, he served as President and Chief Operating
Officer. Prior to 1994, Mr. Hassanein was the Company's Senior Executive Vice
President. Mr. Hassanein also served as President of Warner Bros.
International Theatres Co. from 1988 to June 30, 1994, and is presently a
consultant to Warner Bros. Mr. Hassanein previously served as Executive Vice
President of UACI and President and director of United Artists Eastern
Theatres, Inc. Mr. Hassanein is a principal of SMH Entertainment, Inc. and a
director of Software Technologies Corporation.
M. David Cottrell was appointed Vice President of Administration
and Controls for the Company in 1998. Mr. Cottrell was formerly Executive
Vice President and Chief Financial Officer for Todd-AO/Hollywood Digital from
1993 to 1998. Previously, he was Vice President of Finance for The Post
Group Inc.
16
Silas R. Cross became a Vice President of the Company in 1988. In
1995, he was appointed Treasurer and Assistant Secretary. Mr. Cross
previously served as Assistant Treasurer of UACI, and has served the Company
in various capacities since 1965.
Clay M. Davis was appointed a Vice President of the Company in
1996. Mr. Davis previously served as Vice President of Engineering of the
Todd-AO Studios since 1989.
J.R. DeLang was elected a Director in 1993. He has been the Senior
Vice President of the Company and the Executive Vice President of the
Company's Todd-AO Studios division since 1993. Mr. DeLang previously served
as Vice President of Sales and Marketing of Todd-AO Studios from 1988 to 1993
and Director of Sales and Marketing from 1987 to 1988.
Rand Gladden was appointed Vice President of the Company and
President of Todd-AO Hollywood Digital in 1997. Mr. Gladden previously
served as President and CEO of Hollywood Digital Limited Partnership from
1994 to 1997. Previously, he was a Vice President of The Post Group.
Graham Hall was appointed Managing Director of Todd-AO UK in March
1990. From 1982 to 1990, Mr. Hall was employed by Rank Video Services where
he held various engineering positions, ultimately advancing to Technical
Development Manager.
Coburn T. Haskell has served as Vice President and as Controller of
the Company since 1995. Prior thereto, he served as Controller of Todd-AO
Studios from 1994 to 1995. Mr. Haskell joined the Company in 1990 as
Assistant Controller of Todd-AO Studios, having received his CPA
certification while employed by KPMG Peat Marwick from 1988 to 1990.
Previously, Mr. Haskell was Controller of American Fiber Optics Corporation.
Richard C. Hassanein has served as Vice President of the Company
and Director since 1993. Mr. Hassanein was appointed President of the
Company's subsidiary, Todd-AO Studios West in 1997. He was Executive Vice
President of Todd-AO Studios West from 1995 to 1997. From 1991 to 1995, he
served as Executive Vice President of the Company's subsidiary, Todd-AO
Studios East. Previously, he was President of United Film Distribution Co.
Mr. Hassanein is the son of Salah M. Hassanein.
Christopher D. Jenkins has been a Senior Vice President and
Director of the Company since 1987. He was appointed President of Todd-AO
Studios in 1990 and served as Vice President from 1987 to 1990. Mr. Jenkins
is currently a lead sound mixer for the Company, and has won two Academy
Awards-Registered Trademark- for sound.
Marshall Naify was elected a Director in 1964, and currently serves
as Co-Chairman of the Board. He served as Chairman of the Board during the
period of 1990 until July 1996. From 1995 until July 1996, he also served as
Co-Chief Executive Officer. Mr. Naify previously served as Chairman of the
Board and Co-Chief Executive Officer of UACI. Mr. Naify is an investor. He is
the brother of Robert A. Naify.
Robert A. Naify was elected a Director in 1959 and currently serves
as Co-Chairman of the Board. Mr. Naify served as Co-Chairman and Co-Chief
Executive Officer from 1995 until July 1996. He previously served as
President and Chief Executive Officer during the period of 1990 until 1994.
Mr. Naify also served as President and Co-Chief Executive Officer of UACI.
Mr. Naify is an investor and is a director of Tele-Communications, Inc. He is
the brother of Marshall Naify.
Richard O'Hare was appointed Vice President of the Company in 1997.
He has served as President of Todd-AO Video Services since 1994 and
previously served as the President of Film Video Masters, its predecessor,
from 1988 until its acquisition by the Company in 1994. Previously, Mr.
O'Hare was Vice President of Twentieth Century Fox Film Corporation.
Kathleen N. Reck was appointed Vice President Human Resources of
the Company in 1997. She has served as Director of Human Resources since
1986. Previously, Ms. Reck was an employee of Glen Glenn Sound.
17
Judi M. Sanzo was appointed Vice President, General Counsel, and
Secretary of the Company in 1998. Ms. Sanzo brings to Todd-AO a considerable
background in legal affairs and, most recently, in private practice where she
specialized in litigation, business counseling and administrative
proceedings. She is a member of the California and Massachusetts bars.
William "Randy" Strickley was appointed Senior Vice President and
Chief Financial Officer of the Company in May 1997. Mr. Strickley was Bank
of America's Entertainment and Media Group managing director with 25 years
experience in corporate and international banking.
David Haas was elected a Director in October 1996. Mr. Haas has
been a financial consultant since 1995, and has assisted clients in financial
planning, financing and the negotiation and structuring of acquisitions. From
1990 to 1994, Mr. Haas served as Senior Vice President and Controller of Time
Warner Inc. He is currently a director of Information Holdings, Inc. and GRB
Entertainment, Inc.
Herbert L. Hutner was elected as a Director in 1987. He is an
investor and a financial consultant.
Robert I. Knudson was elected as a Director in 1983, and currently
serves as a consultant to the Company. He was previously an Executive Vice
President of the Company and served as President of Todd-AO Studios from 1981
until 1990. During his tenure as a lead sound mixer for the Company, Mr.
Knudson won three Academy Awards-Registered Trademark- for sound.
David P. Malm was elected a Director in 1997. He is currently a
partner of Halpern, Denny & Company, a Boston based private equity investment
firm, a director of Tealuxe, Inc., E-Z Serve/Swifty Mart Convenience Stores,
Ecce Panis, Inc., H.C. Shaw Company, and Chairman of Brown Broadcasting
Service, Inc. Prior to forming Halpern, Denny & Company in 1991, Mr. Malm
was affiliated with Bain Capital, a private equity investment firm, and Bain
& Company, a corporate strategy consulting firm. He also previously worked
in the Investment Banking Group at Morgan Stanley & Company.
Michael S. Naify was elected a Director in 1993. He was previously
Vice President of the Company, serving in that capacity from 1993 to 1994. He
is the son of Marshall Naify.
A. Frank Pierce was elected as a Director in October 1996. Mr.
Pierce currently acts as an international consultant providing services
related to motion picture distribution. From January 1993 to June 1996, Mr.
Pierce served as Senior Vice President of Europe Theatrical Distribution for
Time Warner Entertainment. From 1972 to 1993, he served as Vice President of
Europe Theatrical Distribution for Warner Bros. International. From 1955 to
1972, Mr. Pierce served in numerous international positions within the motion
picture industry including Managing Director of Italy for Paramount Pictures
International and management positions in four Latin American countries for
Columbia Pictures International.
Sydney Pollack, the renowned Academy Award-Registered
Trademark--winning director, was elected a director in 1998. Mr. Pollack's
17 films have received 46 Academy Award-Registered Trademark- nominations
including four for Best Picture. His film OUT OF AFRICA won seven Oscars
including Best Picture and Best Director. In addition to winning the New
York Film Critics' Award for his 1982 film TOOTSIE, Mr. Pollack won the
Golden Globe for Best Director twice, the National Society of Film Critics
Award, and the NATO Director of the Year Award. Mr. Pollack formed Mirage
Enterprises in 1985, which produces motion picture feature films. He is a
founding member of The Sundance Institute, The Chairman Emeritus of The
American Cinematheque, and serves on the Board of Directors of the Film
Preservation Board and The Motion Picture and Television Fund Foundation.
Zelbie Trogden was elected a Director in 1994. He has been a
financial consultant and was a director of Citadel Holding Corporation and
Fidelity Federal Bank from 1993 to 1994. Prior thereto, he held various
executive positions with Bank of America and Security Pacific National Bank
from 1960 to 1993.
18
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE. Non-Management directors (7) receive $10,000 per
year for their services as directors. All other directors receive no cash
compensation for their services as directors. The following table shows, for
the years ended August 31, 1998, 1997 and 1996 all forms of compensation for
the Chief Executive Officer and each of the most highly compensated executive
officers of the Company whose total annual salary and bonus exceeded $100,000
for the year ended August 31, 1998.
ANNUAL COMPENSATION(1) LONG-TERM
---------------------- COMPENSATION
------------
NO. OF SECURITIES
FISCAL UNDERLYING All Other
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS Compensation($)
- --------------------------- ------ ---------- --------- ------- ---------------
Salah M. Hassanein 1998 250,000 (2) 241,813 (3) -- --
President and Chief Executive Officer 1997 123,250 (2) 231,875 (3) 100,000 --
The Todd-AO Corporation 1996 100,000 (2) -- -- --
J.R. DeLang 1998 469,297 -- -- 15,000 (4)
Senior Vice-President 1997 403,490 -- 10,000 15,000 (4)
The Todd-AO Corporation 1996 335,442 -- -- 15,000 (4)
Christopher D. Jenkins 1998 962,027 (5) -- -- 6,068 (5)
President 1997 709,306 (5) -- 10,000 4,687 (5)
Todd-AO Studios 1996 575,631 (5) -- -- 3,400 (5)
Clay M. Davis 1998 253,815 -- -- 6,068 (6)
Vice President 1997 246,534 -- 15,000 4,687 (6)
The Todd-AO Corporation 1996 176,546 -- -- 3,460 (6)
Richard O'Hare 1998 204,677 -- -- 15,000 (7)
President 1997 210,922 -- 10,000 15,000 (7)
Todd-AO Video Services 1996 173,695 -- -- 17,228 (7)
Rand Gladden 1998 279,167 -- -- --
President 1997 52,949 -- 10,000 --
Todd-AO Hollywood Digital 1996 -- -- -- --
- -----------------
(1) The column for "Other Annual Compensation" has been omitted because
there is no compensation required to be reported in such column. The aggregate
amount of perquisites and other personal benefits provided to each officer
listed above is less than 10% of the total annual salary of such officer.
(2) Amounts shown as salary include professional fees of $125,000 for
1998, $87,500 for 1997 and $80,000 for 1996.
(3) Class A Common Stock bonus of 50,000 shares valued at grant date at
$241,813 for 1998 and 50,000 shares valued at grant date at $231,875 for 1997.
(4) 1998 and 1997 salary amounts include non-qualified stock option
exercise compensation of $49,198 and $82,913, respectively. Amounts shown as
"All Other Compensation" represent contributions made by the Company to its
401(k) Plan for 1998, 1997 and 1996 on Mr. DeLang's behalf.
(5) 1998 and 1997 salary amounts include non-qualified stock option
exercise compensation of $55,385 and $73,975, respectively. Amounts shown as
salary also include compensation of $806,642, $535,331, and $475,631 for 1998,
1997 and 1996, respectively, attributable to services as a sound mixer. Amounts
shown as "All Other Compensation" represent contributions made by the Company
under a collective bargaining agreement to the Motion Picture Industry Pension
Plan on Mr. Jenkins' behalf.
19
(6) 1998 and 1997 salary amounts include non-qualified stock option
exercise compensation of $27,693 and $36,988, respectively. Amounts shown as
"All Other Compensation" represent contributions made by the Company under a
collective bargaining agreement to the Motion Picture Industry Pension Plan on
Mr. Davis' behalf.
Amounts shown as "All Other Compensation" represent contributions made by the
Company to its 401(k) Plan on Mr. O'Hare's behalf.
OPTION/SAR GRANTS TABLE
The following table shows all individual grants of stock options
during the fiscal year ended August 31, 1998 to each of the executive
officers named in the Summary Compensation Table:
Option Grants in Last Fiscal Year
---------------------------------
Potential Realizable Value
at Assumed Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
- -------------------------------------------------------------------------------- --------------------------------
% of Total
Options
Granted to
Employees Exercise
Options in Fiscal or Base Expiration
Name Granted (#) Year Price ($/Sh) Date 5% ($) 10% ($)
- ------------------ ------------- ----------- ------------ ---------- ------ -------
Richard O'Hare 5,000 5.21% $9.83 8/31/2004 18,994 43,860
OPTION EXERCISES AND VALUE TABLE
The following table shows each exercise of stock options during the
fiscal year ended August 31, 1998 by each of the executive officers named in the
Summary Compensation Table, together with respective aggregate values of
unexercised options as at August 31, 1998.
Aggregated Option Exercises in Last Fiscal Year
and FY-End Option Values
-----------------------------------------------
Number of Value of Unexercised
Unexercised Options In-the-Money Options
at August 31, 199 at August 31, 1998
----------------------------- ----------------------------
Shares
Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------- --------------- ------------ ----------- ------------- ----------- -------------
Salah M. Hassanein -- -- 194,000 82,000 $197,054 $45,122
J.R. DeLang 11,000 $49,198 43,600 10,400 $15,871 $2,587
Christopher D. Jenkins 11,000 $55,385 45,800 8,200 $13,457 $1,294
Clay M. Davis 5,500 $27,693 20,300 11,200 $6,555 $1,294
Richard O'Hare -- -- 15,000 11,000 $2,761 $0
Rand Gladden -- -- 2,000 8,000 $0 $0
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Messrs. Jenkins, Davis
and Gladden. Under Mr. Jenkins' agreement (expiring December 31, 2000),
compensation for sound mixing services is paid on an hourly basis at four
times the minimum supervisor union rate. Mr. Jenkins receives an additional
$100,000 per year for management and administrative services. Mr. Davis'
agreement (expiring February 28, 1999) provides for a salary of $200,000,
$215,000 and $230,000 for the twelve months ending February 28, 1997, 1998
and 1999, respectively. Mr. Gladden's agreement (expiring January 1, 2001)
provides for a salary of $275,000, $300,000, and $325,000 for the twelve
months ending June 30, 1998, 1999, and 2000, respectively plus $175,000 for
the six months ending January 1, 2001. The Company is currently negotiating
agreements for Messrs. DeLang and O'Hare.
20
None of the foregoing agreements include any termination or
change-in-control payments. The Company's stock option plans provide that the
unvested portion of the awards will become vested and exercisable in
connection with a change-in-control.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the
beneficial ownership of the Company's outstanding Common Stock as of November
1, 1998 by (i) each person known by the Company to be the beneficial owner of
more than 5% of the outstanding shares of Common Stock, (ii) each director or
executive officer of the Company who beneficially owns any shares, and (iii)
all directors and executive officers of the Company as a group. Except as
otherwise indicated, the persons listed below have sole voting and investment
power with respect to all shares of Common Stock owned by them, except to the
extent such power may be shared with a spouse.
NUMBER OF SHARES BENEFICIALLY
OWNED PERCENT (2) OPTIONS (3)
----------------------------- ------------------------ -----------
NAME (1) CLASS A CLASS B CLASS A CLASS B CLASS A
- -------- ------------- ----------- ----------- ----------- -----------
Arnold C. Childhouse (deceased) .............. 16,666 0 .22% 0% 16,666
Silas R. Cross ............................... 19,250 0 .25% 0% 14,250
M. David Cottrell ............................ 4,500 0 .06% 0% 4,000
Clay M. Davis ................................ 36,500 0 .47% 0% 25,500
J.R. DeLang .................................. 72,000 0 .93% 0% 50,000
Rand Gladden ................................. 15,134(4) 0 .20% 0% 4,000
David Haas ................................... 30,000 0 .39% 0% 15,000
Coburn Haskell ............................... 17,000 0 .22% 0% 17,000
Richard C. Hassanein ......................... 29,100 0 .37% 0% 28,000
Salah M. Hassanein ........................... 858,043 0 8.04% 0% 0
Herbert L. Hutner ............................ 35,100 0 .45% 0% 25,000
Christopher D. Jenkins ....................... 72,000 0 .93% 0% 50,000
Robert I. Knudson ............................ 82,089 0 1.06% 0% 22,500
David P. Malm ................................ 7,527(4) 0 .10% 0% 6,000
Richard O'hare ............................... 18,000 0 .23% 0% 18,000
Frank Pierce ................................. 15,000 0 .19% 0% 15,000
Sydney Pollack ............................... 5,000 0 .06% 0% 5,000
Judi M. Sanzo ................................ 1,000 0 .01% 0% 1,000
William R. Strickley ......................... 8,500 0 .11% 0% 8,000
Zelbie Trogden ............................... 20,000 0 .26% 0% 20,000
Marshall Naify (8) ........................... 1,272,967(5) 678,839 16.03% 38.85% 210,150
Michael S. Naify (8) ......................... 184,820(7) 0 2.39% 0% 15,000
Robert A. Naify (8) .......................... 1,276,014(6) 906,290 16.07% 51.87% 210,150
Other Naify Interests (8) .................... 776,936 118,510 8.50% 6.78% 0
All directors and current executive
officers as a group (22 persons) ............. 4,097,210 1,585,129 46.83% 90.73% 1,017,216
- -----------------
(1) The address of each of the beneficial owners identified is 900 N.
Seward Street, Hollywood, California 90038.
(2) Based on 7,732,549 shares of Class A Common Stock and 1,747,178
shares of Class B Common Stock outstanding at November 18, 1998. Pursuant to
the rules of the Commission, certain shares of Common Stock which a person
has the right to acquire within 60 days of the date hereof pursuant to the
exercise of stock options are deemed to be outstanding for the purpose of
computing the percentage ownership of such person but are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person.
21
(3) Class A Common Stock options exercisable within 60 days.
(4) Includes 11,134 and 1,527 shares beneficially owned by Messrs.
Gladden and Malm respectively, which are issuable upon conversion of certain
convertible subordinated notes acquired in connection with the Company's
acquisition of Hollywood Digital.
(5) Includes 30,166 shares of Class A Common Stock held by a trust for
which Mr. Naify is both trustee and beneficiary. Excludes 109,652 shares of
Class A Common Stock held by an independent trustee for the benefit of three
of Mr. Naify's children. Mr. Naify disclaims beneficial ownership of the
shares held by the independent trustee.
(6) Includes 55,000 shares of Class A Common Stock held by a trust for
which Mr. Naify is both trustee and beneficiary.Excludes 457,913 shares of
Class A Common Stock held of record or beneficially by Mr. Naify's adult
children and grandchildren as to which he disclaims beneficial ownership.
(7) Excludes 1,081 shares of Class A Common Stock held by an
independent trustee for the benefit of his child.
(8) The Naify Interests (consisting of Marshall Naify, Robert A. Naify,
various members of their families and trusts for the benefit of such members)
may be deemed to constitute a "group" for purposes of Sections 13(d) and
13(g) of the Securities Exchange Act of 1934. The total Class A and B Stock
beneficially owned by The Naify Interests as of November 1, 1998 is 3,510,737
(42.98%) and 1,703,639 (97.51%), respectively.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a) Financial Statements and Schedules are as listed in the "Index to
Financial Statements and Schedule" on page 29 of this 10-K
Report.
(b) Exhibits are as listed in the Exhibit Index on page 25 of this
10-K Report.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
The Todd-AO Corporation
November 19, 1998 By /s/ Silas R. Cross
-----------------------------
Silas R. Cross
Vice President, Treasurer
and Principal Accounting Officer
November 19, 1998 By /s/ William R. Strickley
-----------------------------
William R. Strickley
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
November 19, 1998 By /s/ Robert A. Naify November 19, 1998 By /s/ Marshall Naify
------------------------ ---------------------------
Robert A. Naify Marshall Naify
Co-Chairman of the Co-Chairman of the
Board of Directors Board of Directors
November 19, 1998 By /s/ Salah M. Hassanein November 19, 1998 By /s/ Christopher D. Jenkins
------------------------ ---------------------------
Salah M. Hassanein Christopher D. Jenkins
Director, President and Senior Vice President and
Chief Executive Officer Director
November 19, 1998 By /s/ J.R. DeLang November 19, 1998 By /s/ Richard Hassanein
------------------------ ---------------------------
J.R. DeLang Richard Hassanein
Senior Vice President Vice President and
and Director Director
November 19, 1998 By /s/ Sydney Pollack November 19, 1998 By /s/ Michael S. Naify
------------------------ ---------------------------
Sydney Pollack Michael S. Naify
Director Director
November 19, 1998 By /s/ Robert I. Knudson November 19, 1998 By /s/ Zelbie Trogden
------------------------ ---------------------------
Robert I. Knudson Zelbie Trogden
Director Director
November 19, 1998 By /s/ Herbert L. Hutner November 19, 1998 By /s/ A. Frank Pierce
------------------------ ---------------------------
Herbert L. Hutner A. Frank Pierce
Director Director
November 19, 1998 By /s/ David Haas November 19, 1998 By /s/ David P. Malm
------------------------ ---------------------------
David Haas David P. Malm
Director Director
24
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of The Todd-AO
Corporation is incorporated by reference from Registrant's
Information Statement dated May 13, 1996.
3.2 Registrant's Bylaws are incorporated by reference from the
Registrant's Proxy Statement dated April 2, 1990.
4.1 Specimen copy of class A Common Stock Certificate is incorporated
by reference from the Registrant's Registration Statement on Form
S-2, as filed on February 2, 1988 (Registration No. 33-19279).
9.1 Voting Trust Agreements.
Not applicable.
10.1 Asset Purchase Agreement dated March 3, 1986 between the Todd-AO
Corporation and Republic Corporation is incorporated by reference
from the Registrant's Report on Form 8-K filed on March 14, 1986.
10.2 License Agreement dated April 16, 1987 between the CBS/MTM
Company and the Todd-AO Corporation in incorporated by reference
from the Registrant's Report on Form 10-K for the fiscal year
ended August 31, 1987.
10.3 License Agreement dated September 27, 1991 between the CBS/MTM
Company and The Todd-AO Corporation in incorporated by reference
from the Registrant's Form 10-K for the fiscal year ended August
31, 1991.
10.7 Amended and restated lease dated as of June 18, 1992 between West
54th Street Partners L.P., successor in interest to Rita Silver,
(Landlord) and Todd-AO Studios East, Inc. (Tenant) with respect
to premises consisting of the 7th and 8th floors at 247-59 West
54th Street, New York, NY is incorporated by reference from the
Registrant's Form 10-K for the fiscal year ended August 31, 1993.
10.8 Joint Venture Agreement dated as of July 20, 1992 between
Trans-Atlantic Enterprises, Inc. and Todd-AO Productions, Inc. is
incorporated by reference from the Registrant's Form 10-K for the
fiscal year ended August 31, 1992.
10.9 Extension and amendments to Joint Venture Agreement dated as of
October 20, 1993 between Trans-Atlantic Enterprises, Inc. and
Todd-AO Productions, Inc. is incorporated by reference from the
Registrant's Form 10-K for the fiscal year ended August 31, 1993.
10.10 Amendment No. 2 to Joint Venture Agreement dated as of September
1, 1994 is incorporated by reference from the Registrant's Form
10-K for the fiscal year ended August 31, 1994.
10.11 Employment Agreement dated as of November 8, 1996 between The
Todd-AO Corporation and Christopher D. Jenkins is incorporated by
reference from the Registrant's Form 10-Q filed on April 10, 1997.
25
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.12 Asset Purchase Agreement dated as of August 30, 1994 by and among
Todd-AO Video Services, Paskal Video and Joseph S. Paskal is
incorporated by reference from the Registrant's Form 8-K filed on
September 14, 1994.
10.13 Lease Agreement dated as of August 31, 1994 between Joseph S.
Paskal, Trustee, and Todd-AO Video Services is incorporated by
reference from the Registrant's Form 8-K filed on September 14,
1994.
10.20 First Amended and Restated Credit Agreement dated October 20,
1997 between The Todd-AO Corporation and Bank of America National
Trust and Savings Association is incorporated by reference from
the Registrant's Form 10-K filed on November 19, 1997.
10.20a First Amendment dated April 16, 1998 to the First Amended and
Restated Credit Agreement dated October 27, 1997 between The
Todd-AO Corporation and Bank of America National Trust and
Savings Association is filed herewith.
10.20b Second Amendment dated July 21, 1998 to the First Amended and
Restated Credit Agreement dated October 27, 1997 between The
Todd-AO Corporation and Bank of America National Trust and
Savings Association is filed herewith.
10.20c Third Amendment dated September 21, 1998 to the First Amended and
Restated Credit Agreement dated October 27, 1997 between The
Todd-AO Corporation and Bank of America National Trust and
Savings Association is filed herewith.
10.21 Lease intended as a Security dated December 27, 1994 between The
Todd-AO Corporation and BA Leasing and Capital Corporation is
incorporated by reference from the Registrant's Form 10-Q filed
on January 13, 1995.
10.22 Lease intended as a security dated November 3, 1997 between Todd-AO
Studios West and BA Leasing and Capital Corporation is
incorporated by reference from the Registrant's Form 10-K filed
on November 19, 1997.
10.23 Asset Purchase Agreement dated as of February 13, 1995 between
Todd-AO Studios West and Kaytea Rose, Inc. (dba Skywalker Sound
South) is incorporated by reference from the Registrant's form 8-K
filed on February 27, 1995.
10.24 Real Property Purchase Agreement (including Exhibits) dated as of
February 13, 1995 between Todd-AO Studios West and Kaytea Rose,
Inc. is incorporated by reference from the Registrant's Form 8-K
filed on February 27, 1995.
10.25 Assignment and Assumption Agreement dated as of February 3, 1995
by and among Todd-AO Studios West, The Todd-AO Corporation,
Lucasfilm Ltd., Lucas Holdings, Inc., Lucas Digital Ltd. and
Lantana Center is incorporated by reference from the Registrant's
Form 8-K filed on February 27, 1995.
10.26 Lease dated as of May 21, 1989 between Lantana Center as Landlord
and Lucasfilm Ltd. as Tenant, as amended by documents dated March
27, 1990 and November 8, 1990 is incorporated by reference from
the Registrant's Form 8-K filed on February 27, 1995.
10.27 Agreement for the acquisition of the entire issued share capital
of Chrysalis Television Facilities Ltd. dated as of March 16,
1995 between FCB 1120 Ltd. (subsequently Todd-AO Europe Holdings
Ltd.) and Chrysalis Holdings Ltd. is incorporated by reference
from the Registrant's Form 8-K filed March 31, 1995.
26
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.28 Tax Deed dated as of March 16, 1995 between FCB 1120 Ltd. and
Chrysalis Holdings Ltd. is incorporated by reference from the
Registrant's Form 8-K filed on March 31, 1995.
10.29 Performance Guarantee dated March 16, 1995 between The Todd-AO
Corporation and Chrysalis Holding Ltd. is incorporated by
reference from the Registrant's Form 8-K filed on March 31, 1995.
10.30 Agreement for the acquisition of the entire issued share capital
of Filmatic Laboratories Ltd. dated as of April 18, 1996 between
David L. Gibbs, Ian Magowan and Todd-AO Europe Holding Company
Ltd. is incorporated by reference to the Registrant's Form 10-Q
for the quarter ended May 31, 1996.
10.31 Asset Purchase Agreement dated August 13, 1996 by and among The
Todd-AO Corporation (Purchaser), Edit Acquisition LLC (Seller),
Edit Group L.P., Patrick H. Furlong, Margie F. Furlong, and James
V. Furlong (Members) and Margie F. Furlong, Patrick H. Furlong,
K. Robert Draughon and Robert Martin (Guarantors), incorporated
by reference from the Registrant's Form 8-K and 8-K/A filed on
August 28, 1996 and September 17, 1996, respectively.
10.32 Agreement and Exhibits for the Purchase and Sale of Assets dated
June 18, 1997 among The Todd-AO Corporation, Todd-AO HD, Inc. and
Hollywood Digital Limited Partnership, Hollywood Digital Inc.,
The Palladion Limited Partnership, HDZ Digital Limited
Partnership, Phemus Corporation, Rand Gladden, William Romeo,
David Cottrell and Michael Jackson is incorporated by reference
from the Registrant's Form 8-K filed on July 7, 1997.
10.33 Employment Agreement dated as of June 19, 1997 between The
Todd-AO Corporation and Rand Gladden is incorporated by reference
from the Registrant's Form 8-K filed on July 7, 1997.
10.34 Recommended Offer by Astaire and Partners Limited on behalf of
Todd-AO Europe Holding Company Limited (a wholly owned subsidiary
of The Todd-AO Corporation) for the entire issued and to be
issued ordinary share capital of Tele-Cine Cell Group plc. is
incorporated by reference from the Registrant's Form 8-K filed on
May 18, 1998.
10.35 Joint Venture Agreement dated September 8, 1998 between The
Todd-AO Corporation and United Artists Theatre Circuit, Inc. is
filed herewith.
11.1 Computation of Per Share Earnings.
See Note 1 of Notes to Financial Statements.
12.1 Computation of Earnings to Fixed Charges.
Not applicable.
13.1 Annual Report to Stockholders.
The Annual Report to Stockholders will consist of this Form 10-K Report.
18.1 Changes in Accounting Principles.
Not applicable.
27
EXHIBIT
NO. DESCRIPTION
- ------- -----------
20.1 Previously Unfiled Documents.
Not applicable.
21.1 Subsidiaries of the Registrant
Todd-AO Studios East, Inc., incorporated in New York (parent).
SUBSIDIARIES
Todd-AO East, incorporated in New York (inactive).
Todd-AO Studios, incorporated in California.
Todd-AO Studios West, incorporated in California.
Todd-AO Video Services, incorporated in California.
Todd-AO Video Services DVD, Inc., incorporated in California.
Todd-AO Hollywood Digital, incorporated in California.
Todd-AO Europe Holding Company Ltd., incorporated in the U.K. (parent)
SUBSIDIARIES
Todd-AO UK, Ltd, incorporated in the U.K.
Todd-AO Filmatic Laboratories Ltd., incorporated in the U.K.
Tele-Cine Cell Group plc., organized in the U.K. (parent)
SUBSIDIARIES
Tele-Cine Ltd., incorporated in the U.K.
XTV Cell, Ltd., incorporated in the U.K.
XTV Ltd., incorporated in the U.K. (inactive).
Silver Digital Ltd., incorporated in the U.K. (inactive).
File Exchange Ltd., incorporated in the U.K. (inactive).
Todd-AO Digital Images, incorporated in California (inactive).
Hollywood Supply Company, incorporated in California (inactive).
Todd-AO Productions, Inc., incorporated in California (inactive).
Todd-AO's Land of the Future, Inc., incorporated in California (inactive).
Todd-AO Preservation Services, incorporated in California (inactive).
22.1 Published Reports Regarding Matters Submitted to a Vote of Security Holders.
Not applicable.
23.1, 24.1, and 25.1
Not applicable.
27.1 Financial Data Schedule
Filed herewith.
28
THE TODD-AO CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
Report of Independent Public Accountants 30
Independent Auditors' Report 31
Consolidated Balance Sheets, August 31, 1997 and 1998 32
Consolidated Statements of Income for the Years Ended
August 31, 1996, 1997 and 1998 34
Consolidated Statements of Stockholders' Equity for the
Years Ended August 31, 1996, 1997 and 1998 35
Consolidated Statements of Cash Flows for the Years Ended
August 31, 1996, 1997 and 1998 36
Notes to Consolidated Financial Statements 39
Supplemental Financial Statement Schedule:
II Valuation and Qualifying Accounts For The Years Ended
August 31, 1996, 1997 and 1998 51
Schedules other than those listed above have been omitted because of the
absence of the conditions under which they are required or because the
required information, where material, is shown in the financial statements
or the notes hereto.
29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
The Todd-AO Corporation:
We have audited the accompanying consolidated balance sheet of The
Todd-AO Corporation (a Delaware corporation) and its subsidiaries as of
August 31, 1998, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Todd-AO
Corporation and its subsidiaries as of August 31, 1998, and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the
Securities and Exchange Commissions' rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
November 13, 1998
30
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
The Todd-AO Corporation:
We have audited the accompanying consolidated balance sheet of The
Todd-AO Corporation and subsidiaries (the "Company") as of August 31, 1997
and the related consolidated statements of income, stockholders' equity, and
cash flows for the years ended August 31, 1997 and 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14a for
the two years ended August 31, 1997 and 1996. These financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of August
31, 1997 and the results of its operations and its cash flows for the years
ended August 31, 1997 and 1996 in conformity with generally accepted
accounting principles. Also in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
By /s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Los Angeles, California
October 24, 1997
31
THE TODD-AO CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
AUGUST 31,
------------------------
1997 1998
---------- ----------
CURRENT ASSETS
Cash and cash equivalents.............................................. $ 5,127 $ 3,997
Marketable securities.................................................. 1,977 1,490
Trade receivables
(net of allowance for doubtful accounts of $562 and $1,768 at
August 31, 1997 and 1998, respectively).............................. 13,176 18,164
Income tax receivable.................................................. 671 1,397
Inventories (first-in first-out basis)................................. 625 783
Deferred income taxes.................................................. 368 301
Prepaid deposits and other............................................. 2,168 3,629
---------- ----------
Total current assets................................................... 24,112 29,761
---------- ----------
INVESTMENTS............................................................ 997 956
---------- ----------
PROPERTY AND EQUIPMENT - At Cost:
Land................................................................... 4,270 4,270
Buildings.............................................................. 10,994 11,293
Leasehold improvements................................................. 10,203 15,054
Lease acquisition costs................................................ 2,187 2,187
Equipment.............................................................. 54,707 76,172
Equipment under capital leases......................................... 1,540 1,151
Construction in progress............................................... 920 1,466
---------- ----------
Total 84,821 111,593
Accumulated depreciation and amortization.............................. (27,697) (38,046)
---------- ----------
Property and equipment -- net.......................................... 57,124 73,547
---------- ----------
GOODWILL
(net of accumulated amortization of $602 and $1,646 at
August 31, 1997 and 1998, respectively).............................. 19,162 29,193
---------- ----------
OTHER ASSETS........................................................... 2,056 1,909
---------- ----------
TOTAL $ 103,451 $ 135,366
========== ===========
See notes to consolidated financial statements.
32
THE TODD-AO CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
AUGUST 31,
------------------------
1997 1998
---------- ----------
CURRENT LIABILITIES:
Accounts payable....................................................... $ 5,302 $ 6,464
Accrued liabilities:
Payroll and related taxes........................................... 2,507 3,520
Interest............................................................ 422 369
Equipment lease..................................................... 279 569
Other............................................................... 1,533 3,201
Income taxes payable................................................... 105 1,090
Current maturities of long-term debt................................... 578 537
Capitalized lease obligations -- current............................... 35 422
Deferred income........................................................ 1,459 897
---------- ----------
Total current liabilities.............................................. 12,220 17,069
---------- ----------
LONG-TERM DEBT......................................................... 25,430 44,654
DEFERRED COMPENSATION AND OTHER........................................ 326 266
DEFERRED GAIN ON SALE/LEASEBACK TRANSACTIONS........................... 3,437 6,085
DEFERRED INCOME TAXES.................................................. 4,659 4,911
OTHER.................................................................. -- 2,061
---------- ----------
Total liabilities...................................................... 46,072 75,046
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock:
Class A; authorized 30,000,000 shares of $0.01 par value;
issued 8,290,494 at August 31, 1997 and 8,438,700
at August 31, 1998.................................................. 83 84
Class B; authorized 6,000,000 shares of $0.01 par value;
issued and outstanding 1,747,178 at August 31, 1997 and 1998........ 17 17
Additional capital..................................................... 39,996 40,805
Treasury stock (74,731 and 235,151 shares at cost
as of August 31, 1997 and 1998, respectively........................ (691) (2,338)
Retained earnings...................................................... 17,711 20,538
Unrealized gains on marketable securities and long-term investments.... 94 198
Cumulative foreign currency translation adjustment..................... 169 1,016
---------- ----------
Total stockholders' equity............................................. 57,379 60,320
---------- ----------
TOTAL.................................................................. $ 103,451 $ 135,366
========== ==========
See notes to consolidated financial statements.
33
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED AUGUST 31,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
REVENUES...................................................... $ 62,920 $ 78,971 $ 102,614
------------ ------------ ------------
COSTS AND EXPENSES:
Operating costs and other expenses............................ 48,962 61,755 83,034
Depreciation and amortization................................. 5,374 7,128 10,685
Interest...................................................... 702 920 1,807
Equipment lease expense -- net................................ 498 265 245
Restructuring charges:
Equipment.................................................... -- -- 2,414
Lease costs.................................................. -- -- 353
Other (income) expense -- net................................. (242) (50) (573)
------------ ------------ ------------
Total costs and expenses...................................... 55,294 70,018 97,965
------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES...................... 7,626 8,953 4,649
PROVISION FOR INCOME TAXES.................................. 2,782 2,948 1,230
------------ ------------ ------------
NET INCOME.................................................... $ 4,844 $ 6,005 $ 3,419
============ ============ ============
NET INCOME PER COMMON SHARE:
Net income available to common stockholders................... $ 4,844 $ 6,005 $ 3,419
Effect of dilutive securities:
5% convertible debentures.................................... -- 47 302
------------ ------------ ------------
Net income available to common stockholders
plus assumed conversions..................................... 4,844 6,052 3,721
------------ ------------ ------------
WEIGHTED AVERAGE SHARES
OUTSTANDING B BASIC.......................................... 8,191,065 9,539,312 9,987,429
Effect of dilutive securities:
Stock options................................................ 654,256 549,681 519,565
5% convertible debentures.................................... -- 118,510 711,057
------------ ------------ ------------
WEIGHTED AVERAGE SHARES
OUTSTANDING -- DILUTED....................................... 8,845,321 10,207,503 11,218,051
------------ ------------ ------------
NET INCOME PER COMMON SHARE -- BASIC.......................... $ 0.59 $ 0.63 $ 0.34
============ ============ ============
NET INCOME PER COMMON SHARE -- DILUTED........................ $ 0.55 $ 0.59 $ 0.33
============ ============ ============
See notes to consolidated financial statements.
34
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
COMMON STOCK UNREALIZED
-------------------------------------- GAIN
CLASS A (LOSS)
----------------- ON FOREIGN
CLASS B ADDITIONAL RETAINED TREASURY INVESTMENT CURRENCY
SHARES AMOUNT AMOUNT CAPITAL EARNINGS SHARES SECURITIES TRANSLATION
--------- ------ ------- ---------- -------- -------- ---------- -----------
BALANCE AT AUGUST 31, 1995............. 6,404,369 $ 64 $ 17 $ 23,004 $ 7,904 $ -- $ 473 $ (264)
Exercise of stock options.............. 152,600 1 -- 550 -- -- -- --
Tax benefit from exercise
of stock options...................... -- -- -- 493 -- -- -- --
Purchase of treasury shares............ -- -- -- -- -- (726) -- --
Treasury shares cancellation........... (68,192) (1) -- (725) -- 726 -- --
Shares issued in acquisition of
Editworks............................ 66,863 1 -- 969 -- -- -- --
Unrealized (loss) on investment
securities........................... -- -- -- -- -- -- (431) --
Gain on foreign currency translation... -- -- -- -- -- -- -- 5
Cash dividends:
Class A ($.06) per share............. -- -- -- -- (395) -- -- --
Class B ($.054) per share............ -- -- -- -- (86) -- -- --
Net income............................. -- -- -- -- 4,844 -- -- --
--------- ------ ------- ---------- -------- -------- ---------- -----------
BALANCE AT AUGUST 31, 1996............. 6,555,640 65 17 24,291 12,267 0 42 (259)
Exercise of stock options.............. 76,564 1 -- 226 -- -- -- --
Tax benefit from exercise
of stock options...................... -- -- -- 67 -- -- -- --
Purchase of treasury shares............ -- -- -- -- -- (1,047) -- --
Treasury shares cancellation........... (36,710) -- -- (305) -- 305 -- --
Treasury shares transfer to 401(k)..... -- -- -- -- -- 51 -- --
Shares issued in stock offering........ 1,645,000 16 -- 15,512 -- -- -- --
Shares issued for stock award.......... 50,000 1 -- 205 -- -- -- --
Unrealized gain on
investment securities................. -- -- -- -- -- -- 52 --
Gain on foreign currency translation... -- -- -- -- -- -- -- 428
Cash dividends:
Class A ($.06) per share............. -- -- -- -- (475) -- -- --
Class B ($.054) per share............ -- -- -- -- (86) -- -- --
Net income............................. -- -- -- -- 6,005 -- -- --
--------- ------ ------- ---------- -------- -------- ---------- -----------
BALANCE AT AUGUST 31, 1997............. 8,290,494 83 17 39,996 17,711 (691) 94 169
Exercise of stock options.............. 98,206 1 -- 341 -- -- -- --
Tax benefit from exercise
of stock options...................... -- -- -- 200 -- -- -- --
Purchase of treasury shares............ -- -- -- -- -- (1,857) -- --
Treasury shares transfer to 401(k)..... -- -- -- -- -- 210 -- --
Shares issued for stock award.......... 50,000 -- -- 268 -- -- -- --
Unrealized gain on
investment securities................. -- -- -- -- -- -- 104 --
Gain on foreign currency translation... -- -- -- -- -- -- -- 847
Cash dividends:
Class A ($.06) per share............. -- -- -- -- (506) -- -- --
Class B ($.054) per share............ -- -- -- -- (86) -- -- --
Net income............................. -- -- -- -- 3,419 -- -- --
--------- ------ ------- ---------- -------- -------- ---------- -----------
BALANCE AT AUGUST 31, 1998............. 8,438,700 $ 84 $ 17 $ 40,805 $ 20,538 $ (2,338) $ 198 $ 1,016
========= ====== ======= ========== ======== ======== ========== ===========
See notes to consolidated financial statements.
35
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED AUGUST 31,
-------------------------------------
1996 1997 1998
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 4,844 $ 6,005 $ 3,419
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.............................. 5,374 7,128 10,685
Restructuring charges...................................... -- -- 2,767
Deferred income taxes...................................... 577 968 327
Tax benefit from exercise of stock options................. 493 67 200
Loss from joint venture.................................... 117 -- --
Deferred compensation and other............................ (128) (72) (60)
Foreign currency exchange rate (gain) loss................. -- (21) 847
Amortization of deferred gain on
sale/leaseback transaction............................ (1,472) (1,472) (2,288)
(Gain) loss on sale of marketable securities
and investments....................................... 92 (20) (83)
Loss (gain) on disposition of fixed assets................. 276 103 (209)
Shares issued for stock award.............................. -- 206 268
Changes in assets and liabilities (net of acquisitions):
Trade receivables, net................................... (1,494) (1,249) 2,241
Inventories and other current assets................... (338) (1,133) (526)
Accounts payable and accrued liabilities................. 550 1,149 712
Accrued equipment lease.................................. (96) (21) 290
Income taxes payable, net................................ 926 (931) 254
Provision for liabilities................................ -- -- (1,277)
Deferred income.......................................... (69) 759 (603)
---------- ---------- ----------
Net cash provided by operating activities....................... 9,652 11,466 16,964
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities and investments............. (374) -- (431)
Proceeds from sale of marketable securities
and investments............................................. 881 708 1,146
Proceeds from disposition of fixed assets..................... -- 87 416
Capital expenditures.......................................... (6,219) (13,147) (24,348)
Purchase of Tele-Cine Cell Group plc.......................... -- -- (15,741)
Purchase of Editworks......................................... (3,180) (500) --
Purchase of Hollywood Digital................................. -- (17,761) --
Other assets.................................................. (286) (234) 319
---------- ---------- ----------
Net cash flows used in investing activities..................... $ (9,178) $ (30,847) $ (38,639)
---------- ---------- ----------
36
THE TODD-AO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(CONTINUED)
YEARS ENDED AUGUST 31,
-----------------------------------------
1996 1997 1998
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt............................. $ 5,356 $ 23,800 $ 28,101
Payments on long-term debt............................... (4,430) (16,309) (13,912)
Payments on capital lease obligations.................... (2,637) (603) (64)
Proceeds from sale/leaseback transaction................. -- -- 8,500
Proceeds from issuance of common stock................... 551 15,755 342
Treasury stock purchases................................. (726) (996) (1,857)
Dividends paid........................................... (481) (561) (592)
------------ ------------ ------------
Net cash flows (used in) provided by financing activities: (2,367) 21,086 20,518
Effect of exchange rate changes on cash.................. -- 37 27
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS......................................... (1,893) 1,742 (1,130)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ....................................... 5,278 3,385 5,127
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR.............................................. $ 3,385 $ 5,127 $ 3,997
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................. $ 708 $ 526 $ 1,696
============ ============ ============
Income taxes.............................................. $1,285 $1,725 $ 860
============= ============= ============
SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING AND FINANCING ACTIVITIES:
1998:
On May 8, 1998 the Company acquired substantially all of the outstanding
shares of Tele-Cine Cell Group plc. In connection with the acquisition the
Company paid cash as follows:
Assets acquired:
Property and equipment............................................. $ 8,378
Trade and other receivables -- net................................. 7,755
Investments........................................................ 119
Inventory.......................................................... 200
Goodwill........................................................... 10,699
Liabilities assumed:
Accounts payable and accrued liabilities -- net.................... (2,888)
Bank loan.......................................................... (2,638)
Equipment leases................................................... (438)
Provision for liabilities and charges.............................. (3,239)
Long-term debt issued to sellers................................... (2,207)
--------
Cash paid in acquisition............................................. $ 15,741
========
37
1997:
On June 20, 1997, the Company acquired substantially all of the assets and
certain of the liabilities of Hollywood Digital Limited Partnership. In
connection with this acquisition the Company paid cash as follows:
Assets acquired:
Property and equipment..................................... $ 12,117
Accounts receivable........................................ 2,640
Goodwill................................................... 14,100
Other assets............................................... 344
Liabilities assumed:
Accounts payable and accrued expenses...................... (2,745)
Deferred rent and notes payable............................ (296)
Convertible subordinated notes issued to seller.............. (8,399)
--------
Cash paid in acquisition $ 17,761
========
In July 1997, a non-cash adjustment in connection with the acquisition of
Chrysalis Television Facilities, Ltd. U.K capital allowances in the amount
of $1,056 was made to deferred income taxes and goodwill.
1996:
On August 14, 1996, the Company acquired substantially all of the assets
and certain of the liabilities of Edit Acquisition LLC ("Editworks"). In
connection with this acquisition, the Company paid cash as follows:
Assets acquired:
Property and equipment..................................... $ 1,992
Accounts receivable........................................ 617
Goodwill................................................... 3,930
Other assets............................................... 90
Liabilities assumed:
Accounts payable and accrued expenses...................... (307)
Capitalized lease obligations.............................. (1,672)
Common stock issued in acquisition........................... (970)
---------
Cash paid in acquisition..................................... $ 3,680
=========
See notes to consolidated financial statements.
38
THE TODD-AO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AND OPTION DATA)
1. SIGNIFICANT ACCOUNTING POLICIES
OWNERSHIP AND BUSINESS -- At August 31, 1998, Robert Naify, Marshall
Naify, and certain members of their families and various trusts for the
benefit of family members (the "Naify Interests") owned approximately 52% of
the outstanding shares of The Todd-AO Corporation (the "Company"),
representing approximately 80% of the total voting power.
BASIS OF PRESENTATION -- The consolidated financial statements include
the Company and its wholly owned subsidiaries Todd-AO Studios East, Inc. and its
wholly owned subsidiaries ("Todd-AO East"), Todd-AO Studios, Todd-AO Studios
West ("TSW"), Todd-AO Video Services ("TVS"), Todd-AO Video Services DVD, Inc.
("TVS DVD"), Todd-AO Hollywood Digital ("THD"), Todd-AO Europe Holding Company,
Ltd. and its wholly owned subsidiaries ("Todd Europe"), Todd-AO Productions,
Inc., Todd-AO Digital Images, Hollywood Supply Company, Todd-AO's Land of the
Future, and Todd-AO Preservation Services. All significant intercompany balances
and transactions have been eliminated.
CASH AND CASH EQUIVALENTS -- The Company considers investments with
original purchased maturities of three months or less to be cash equivalents.
MARKETABLE SECURITIES AND INVESTMENTS -- Marketable securities consist
primarily of corporate preferred stocks and bonds. Management has classified all
investment securities as available-for-sale. As a result, securities are
reported at fair value with net unrealized holding gains and losses excluded
from earnings and reported in stockholders' equity. Fair value is based upon
quoted market prices using the specific identification method. Investments
include stock and other investments which management intends to hold for more
than one year.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation and amortization
are computed at straight line rates based upon the estimated useful lives of
the various classes of assets. The principal rates are as follows: buildings,
3-5% per annum; equipment, 10-20% per annum; leaseholds, leasehold
improvements, and lease acquisition costs over the term of the lease.
GOODWILL -- Goodwill represents the excess purchase price paid over the
value of net assets acquired, and is being amortized on a straight-line basis
over their useful lives ranging from 15 to 40 years.
LONG-LIVED Assets -- As of each balance sheet date, the Company
evaluates the recovery of its long-lived assets and recognizes impairment if it
is probable that the recorded amounts are not recoverable based upon future
undiscounted cash flows or if there is an event or change in circumstances which
indicate that the carrying amount of an asset may not be recoverable.
As a result of the Company's recent investment in advanced digital
technologies and the acceleration in demand by the marketplace for these
advanced technologies, certain older composite digital and analogue-based
technologies have experienced a significant reduction in demand. The Company
has recorded an impairment loss based on an appraisal of this older equipment
in the amount of $2,414 in the current year. In addition, a lease impairment
cost of $353 has also been recognized in the current year due to the loss of a
beneficial option in the renegotiation of a building lease.
INCOME TAXES -- Deferred income taxes are provided for temporary
differences between the financial statement and income tax bases of the
Company's assets and liabilities, based on enacted tax rates. A valuation
allowance is provided when it is more likely than not that some portion or
all of the deferred income tax assets will not be realized.
FOREIGN CURRENCY TRANSLATION -- The Company's foreign subsidiary's
functional currency is its local currency. Assets and liabilities of foreign
operations are translated into U.S. dollars using current exchange
39
rates, and revenues and expenses are translated into U.S. dollars using
average exchange rates. The effects of the foreign currency translation
adjustments are deferred and are included as a component of stockholders'
equity.
NET INCOME PER COMMON SHARE -- The Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share"
("EPS"), during for the year ending August 31, 1998 and has restated its net
income per common share disclosures for prior periods to comply with SFAS No.
128. Under SFAS No. 128, primary EPS is replaced by "Basic" EPS, which
excludes dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for
the period. "Diluted" EPS, which is computed similarly to fully diluted EPS,
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock. When dilutive, stock options are included as share equivalents in
computing diluted earnings per share using the treasury stock method.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amounts of cash
and cash equivalents, accounts receivable and accounts payable approximate
fair value because of the short-term maturity of these instruments. Notes
payable are carried at amounts approximating fair values based on current
rates offered to the Company for debt with similar collateral and guarantees,
if any, and maturities.
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to
manage well-defined interest rate risks. The Company has entered into an
interest rate swap to alter its fixed and floating rate mix, and to
effectively swap floating rate exposure to fixed rates lower than those
available to the Company if fixed rate borrowings were made directly. Under
the interest rate swap agreement, the Company agrees with a counterparty to
exchange, at specific intervals, the difference between fixed rate and
floating rate interest amounts calculated by reference to an agreed notional
principal amount.
CONCENTRATION OF CREDIT RISK -- The Company's accounts receivable
are related primarily to the entertainment industry and are unsecured. The
Company's ten largest customers account for approximately 56% of revenues for
the year ended August 31, 1998 and 63% for the year ended August 31, 1997.
The Walt Disney Company and its affiliated companies, the only customer to
account for more than 10% of revenues, accounted for approximately 15%, 17%
and 12% of revenues for 1998, 1997 and 1996, respectively.
USE OF ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of certain
assets and liabilities and disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
STOCK-BASED COMPENSATION -- In fiscal 1998, the Company adopted the
disclosure only provision of SFAS No. 123. The Company continues to account
for its stock compensation arrangements using the intrinsic value method in
accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees."
RECLASSIFICATIONS -- Certain reclassifications have been made to the
prior years' consolidated financial statements to conform with the current
year's presentation.
RECENT ISSUED ACCOUNTING PRONOUNCEMENTS -- In June 1997, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting
Comprehensive Income." The statement establishes standards for the reporting
and display of comprehensive income and its components in a full set of
general purpose financial statements. The statement applies to all
enterprises that provide a full set of general purpose financial statements.
The statement becomes effective for all financial statements for fiscal years
beginning after December 15, 1997, with earlier application permitted.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The statement changes the
way public companies report segment information in annual financial
statements and also requires those companies to report selected segment
information in interim financial reports to shareholders. The statement
supersedes SFAS No. 14. The statement becomes
40
effective for all financial statements for fiscal years beginning after
December 15, 1997, with earlier adoption permitted.
In February 1998, the FASB issued SFAS No. 132, "Employer's
Disclosure about Pension and Other Postretirement Benefits." This statement
revises employers' disclosure about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. The
statement is effective for fiscal years beginning after December 15, 1997,
with earlier adoption permitted.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for all
quarters of fiscal years beginning after June 15, 1999. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities.
The Company is currently reviewing those Statements and will apply such
provisions as deemed appropriate.
2. ACQUISITIONS
On August 15, 1996, the Company purchased substantially all of the
assets and certain liabilities of Edit Acquisition LLC ("Editworks"). Editworks
provides video post production services to broadcasters, advertising agencies
and other businesses. The Company paid Editworks $3,680 in cash and $970 in
Class A common stock.
On June 20, 1997, the Company and its newly formed, wholly owned
subsidiary THD acquired the assets and certain liabilities of Hollywood
Digital Limited Partnership ("Hollywood Digital"). Hollywood Digital is a
digital based post-production facility providing sound and video services to
the film, television and advertising industries. In consideration of the
purchase, the Company paid $17,761 in cash to pay down existing debt of
Hollywood Digital. The Company also issued convertible subordinated notes in
the amount of $8,399. The notes are convertible into the Company's Class A
Common Stock at the adjusted conversion price of $11.812 per share at any
time before the maturity date.
On May 8, 1998, Todd Europe, a wholly owned United Kingdom
subsidiary of the Company, purchased substantially all of the outstanding
shares of Tele-Cine Cell Group plc. ("TeleCine"), a U.K. Corporation. The
purchase price of the shares was $17,948 (L11,011) of which $15,741 was paid
in cash and $2,207 is represented by unsecured loan notes guaranteed as to
principal only and bearing interest at a fixed rate of 4.5% payable annually
in arrears. Included above is cash in the amount of $495 which was paid by
Todd Europe for costs incurred in connection with the acquisition. TeleCine
is a London based facility that specializes in video post-production and
special effects providing services to the film and television industries.
The acquisitions are being accounted for under the purchase method
of accounting. The following unaudited pro forma consolidated financial
information for the years ended August 31, 1997 and 1998 are presented as if
the acquisitions had occurred on September 1, 1996.Pro forma adjustments for
Hollywood Digital are primarily for non-recurring legal and other
non-operating costs, amortization of goodwill, interest expense on borrowings
in connection with the acquisition, and income taxes. Pro forma adjustments
for TeleCine are primarily to eliminate operations discontinued as part of
the acquisition plan, to adjust depreciation to estimated useful lives of
assets acquired, amortization of goodwill, interest expense on borrowings in
connection with the acquisition, and income taxes.
1997 1998
---------- ----------
Revenues.......................................................... $ 111,964 $ 116,511
--------- ---------
--------- ---------
Net income........................................................ $ 8,791 $ 7,513
--------- ---------
--------- ---------
Net income per common share -- Basic.............................. $ 0.92 $ 0.75
--------- ---------
--------- ---------
Net income per common share -- Diluted............................ $ 0.62 $ 0.70
--------- ---------
--------- ---------
41
3. SALE/LEASEBACK
In November 1997 and December 1994 the Company signed agreements
with its bank to implement the sale/leaseback of certain equipment. The five
year agreements terminate on December 1, 2002 and December 30, 1999,
respectively, and are being treated as operating leases for financial
statement purposes. On November 3, 1997 an aggregate of $8,500 of sound
studio equipment was sold and leased back (lease #2). The total deferred gain
on the transaction to be amortized over five years is $4,937. The annual
lease cost currently is approximately $1,400. On December 30, 1994 an
aggregate of $11,218 was sold and leased back (lease #1). The total deferred
gain on the transaction to be amortized over five years is $7,345. The annual
lease cost currently is approximately $1,400.
The net equipment lease expense is as follows for the years ended:
LEASE #1 LEASE #2 TOTAL
--------- --------- ---------
AUGUST 31, 1998
Equipment lease costs.................... $ 1,428 $ 1,105 $ 2,533
Amortization of deferred gain
on sale of equipment.................... (1,472) (816) (2,288)
--------- --------- ---------
Equipment lease expense, net............. $ (44) $ 289 $ 245
========= ========= =========
AUGUST 31, 1997
Equipment lease costs.................... $ 1,737 $ 0 $ 1,737
Amortization of deferred gain
on sale of equipment.................... (1,472) 0 (1,472)
--------- --------- ---------
Equipment lease expense, net............. $ 265 $ 0 $ 265
========= ========= =========
AUGUST 31, 1996
Equipment lease costs.................... $ 1,970 $ 0 $ 1,970
Amortization of deferred gain
on sale of equipment.................... (1,472) 0 (1,472)
--------- --------- ---------
Equipment lease expense, net............. $ 498 $ 0 $ 498
========= ========= =========
4. LONG-TERM DEBT
Long-term debt outstanding as of August 31, 1997 and 1998 was as
follows:
1997 1998
----------- -----------
Revolving credit facility (including multi-currency).............. $ 16,775 $ 33,975
Note payable -- Paskal Video acquisition.......................... 313 150
Note payable -- Todd-AO UK acquisition............................ 408 --
Note payable -- Hollywood Digital -- Community
Redevelopment Agency............................................ 113 93
Bank overdraft facility -- TeleCine acquisition (UK).............. -- 367
Notes payable (unsecured) -- TeleCine acquisition (UK)............ -- 2,207
Convertible subordinated notes payable --
Hollywood Digital acquisition................................... 8,399 8,399
----------- -----------
Total............................................................. 26,008 45,191
Less: current maturities.......................................... (578) (537)
----------- -----------
Total long-term debt.............................................. $ 25,430 $ 44,654
=========== ===========
42
Aggregate loan maturities subsequent to August 31, 1998 are as follows:
FISCAL YEARS ENDING TOTALS
----------
1999................................................ $ 537
2000................................................ 8,419
2001................................................ 20
2002................................................ 10,721
2003................................................ 8,507
Thereafter.......................................... 16,987
---------
Total............................................... $ 45,191
=========
In October 1997, the Company signed a new First Amended and Restated
Credit Agreement with its bank to replace the long-term credit agreement
signed in December 1994. Under the agreement, the Company may borrow up to
$60,000 in revolving loans (including up to 50% in Multi-currency) until
November 30, 2001. On that date and quarterly thereafter until August 31,
2003, the revolving loan commitment will reduce by 6.25% to 50% of the
combined loan commitment on the reduction date. The remaining 50% will reduce
to nil by the expiration of the agreement on December 31, 2003. Annually, the
Company may request an automatic extension of the revolving period of the
facility for one year that will also extend the term period and the
expiration date of the agreement. The Company also has the availability of
Standby Letters of Credit up to $2,500 under the facility. The credit
facility provides for borrowings at the Bank's Reference, CD, and LIBOR rates
ranging from plus .75% to plus 2.125% based on the leverage ratio. The
leverage ratio that determines the rate ranges from less than 1:1 to greater
than 2.5:1. The leverage ratio may not exceed 3.5:1 until February 28, 2000.
Thereafter, the leverage ratio may not exceed 3:1. The facility includes
commitment fees at .2% to .5% (based on the leverage ratio) per annum on the
unused balance of the credit facility. Other material restrictions include:
the coverage ratio (cash flow/fixed charges) may not be less than 1.25:1;
Other Indebtedness or Contingent Liabilities (excluding up to $25,000 in
Capital or Off Balance Sheet Leases, the convertible subordinated notes
issued in the Hollywood Digital acquisition and non-recourse debt up to
$50,000 of less than 100% owned Joint Ventures) may not exceed $10,000
without the Bank's approval. Net Worth is not to be less than $54,000 plus
net proceeds from issuance of equity plus 50% of consolidated net income
subsequent to May 31, 1998 (excluding the effect of stock repurchases up to
$8,000 during the fiscal year ending August 31, 1999).
In January 1998, the Company entered into a three year interest rate
swap agreement for a notional amount of $10,000 to hedge the impact of
fluctuations in interest rates on its floating rate credit facility. Under
the agreement the Company is obligated to pay 5.65% in exchange for receiving
3 month LIBOR on the notional amount. Settlements are quarterly and the
contract expires in March 2001. At August 31, 1998 based upon dealer quoted
market prices the Company would have to pay $64 to terminate the swap
agreement.
In connection with the acquisition of Paskal Video, the Company
issued a promissory note. The note is payable in 60 monthly installments of
$13 plus interest at the prime rate.
In connection with the acquisition of Todd-AO UK, Todd Europe issued
a note payable over a three-year period in two installments of $465 and one
installment of $388. The note was completely satisfied during 1998.
In connection with the acquisition of Hollywood Digital, the Company
issued convertible subordinated notes. The notes are convertible into the
Company's Class A common stock at the adjusted conversion price of $11.812
per share at any time before the maturity date and bear interest at 5%
payable annually. The Company also acquired a non-interest bearing note
payable to the Community Redevelopment Agency. The note is forgiven at the
rate of $20 annually as long as the Company maintains the appearance of the
building located on Sunset Boulevard in Hollywood, California.
43
In connection with the acquisition of TeleCine, Todd Europe, the
Company's U.K. wholly owned subsidiary, issued unsecured loan notes in the
amount of $2,207 guaranteed as to principal only and bearing interest at 4.5%
payable annually in arrears. In addition, TeleCine has a multiple line
facility for overdrafts and working capital in the amount of L1,500 from a
bank, which is due on demand until April 2, 1999. Interest on the facility is
at 1.5% above the base rate as quoted by the bank.
5. CAPITALIZED LEASE OBLIGATIONS
In 1998, the Company acquired lease obligations for equipment which
had been capitalized in connection with the acquisition of TeleCine. The lease
has an implicit interest rate of approximately 9% and is secured by the
related equipment.
Capitalized lease obligations at August 31, 1998 mature as follows:
1999............................................................................ $ 460
Less amounts representing interest.............................................. 38
-----
$ 422
=====
6. INCOME TAXES
The Company's effective income tax rate differs from the federal
statutory income tax rate due to the following:
YEARS ENDED AUGUST 31, 1996 1997 1998
------- ------- --------
Federal statutory income tax rate............................... 35.0% 35.0% 35.0%
Adjust to actual Company rate................................... (1.0) (1.0) (1.0)
------- ------- --------
Adjusted federal statutory income tax rate...................... 34.0 34.0 34.0
State taxes, net of federal benefit............................. 1.6 (2.2) (6.8)
Other, net...................................................... (0.9) 1.1 (0.7)
------- ------- --------
Total........................................................... 34.7% 32.9% 26.5%
======= ======= ========
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future.
Such deferred income tax asset and liability computations are based on enacted
tax laws and rates applicable to periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities.
44
Deferred income tax assets and liabilities consist of the following:
FEDERAL STATE FOREIGN TOTAL
---------- ----------- ---------- -----------
1998:
- -----
Current Asset:
Accounts receivable reserves............ $ 21 $ 5 $ 234 $ 260
Vacation pay accruals................... 275 67 -- 342
State income taxes...................... (77) -- -- (77)
Other................................... -- 7 -- 7
---------- ----------- ---------- -----------
TOTAL CURRENT ASSET....................... $ 219 $ 79 $ 234 $ 532
========== =========== ========== ===========
Long-Term Asset:
Deferred compensation................... $ 44 $ 10 $ -- $ 54
U.K loss carryover...................... -- -- 84 84
U.K. capital allowances................. -- -- 255 255
State income tax credit carryover....... -- 1,656 -- 1,656
Other................................... (5) 96 -- 91
---------- ----------- ---------- -----------
Total long-term asset..................... 39 1,762 339 2,140
---------- ----------- ---------- -----------
Long-Term Liability:
Depreciation............................ (3,481) (1,192) -- (4,673)
Goodwill................................ (128) (31) -- (159)
Deferred gains on property.............. (1,869) (454) (80) (2,403)
Other................................... (53) 9 (2) (46)
---------- ----------- ---------- -----------
Total long-term liability................. (5,531) (1,668) (82) (7,281)
---------- ----------- ---------- -----------
NET LONG-TERM LIABILITY................... $(5,492) $94 $257 $(5,141)
========== =========== ========== ===========
FEDERAL STATE FOREIGN TOTAL
---------- ----------- ---------- -----------
1997:
Current Asset:
Accounts receivable reserves............ $ 186 $ 47 $ 9 $ 242
Vacation pay accruals................... 188 47 0 235
State income taxes...................... 127 0 0 127
Other................................... (192) (44) -- (236)
---------- ----------- ---------- -----------
TOTAL CURRENT ASSET....................... $ 309 $ 50 $ 9 $ 368
========== =========== ========== ===========
Long-Term Asset:
Deferred compensation................... $ 63 $ 16 $ -- $ 79
U.K loss carryover...................... -- -- 83 83
U.K. capital allowances................. -- -- 605 605
State income tax credit carryover....... -- 1,067 -- 1,067
State income tax loss carryover......... -- 531 -- 531
Other................................... -- -- -- 0
---------- ----------- ---------- -----------
Total long-term asset..................... 63 1,614 688 2,365
---------- ----------- ---------- -----------
Long-Term Liability:
Depreciation............................ (2,815) (1,710) (352) (4,877)
Deferred gains on property.............. (1,420) (359) (86) (1,865)
Other................................... (312) 30 0 (282)
---------- ----------- ---------- -----------
Total long-term liability................. (4,547) (2,039) (438) (7,024)
---------- ----------- ---------- -----------
NET LONG-TERM LIABILITY................... $(4,484) $ (425) $250 $(4,659)
========== =========== ========== ===========
45
Components of the income tax provision are as follows:
1996 1997 1998
--------- -------- ---------
Current provision -- domestic................................. $ 1,644 $ 1,156 $ (84)
Current provision -- foreign.................................. 561 (217) 988
Deferred provision -- domestic................................ 473 1,343 550
Deferred provision -- foreign................................. 104 666 (224)
--------- -------- ---------
Total......................................................... $ 2,782 $ 2,948 $ 1,230
========= ======== =========
Components of pre-tax income are as follows:
1996 1997 1998
--------- -------- ---------
Domestic...................................................... $ 5,978 $ 7,454 $ 1,675
Foreign....................................................... 1,648 1,499 2,974
--------- -------- ---------
Total......................................................... $ 7,626 $ 8,953 $ 4,649
========= ======== =========
7. STOCKHOLDERS' EQUITY
The Company has 1,000,000 shares of $.01 par value preferred stock
authorized. As of August 31, 1998 no shares of preferred stock have been
issued or were outstanding.
The Class B stock is convertible at the option of the holder into
Class A stock and is automatically converted to Class A stock under certain
circumstances; holders have ten votes per share; transferability is
restricted; and dividends are limited to 90% of any dividends paid on Class A
stock.
On July 9, 1996 the Company filed an Amended and Restated
Certificate of Incorporation with the State of Delaware which increased the
authorized shares of Class A Stock from 20,000,000 to 30,000,000 and Class B
Stock from 4,000,000 to 6,000,000. In addition, the par value of all classes
of stock was reduced from $.25 to $.01 per share. The financial statements
set forth herein, and applicable share and per share data for periods and
dates included in the accompanying financial statements and notes, have been
adjusted to retroactively restate the par value of the common stock.
The Company has a stock repurchase program under which 1,300,000
shares may be purchased from time to time in the open market or in private
transactions. As of August 31, 1998, 1,092,456 shares had been repurchased.
831,856 of these shares have been canceled and returned to authorized but
unissued status. On September 2, 1998, the Board of Directors approved an
increase of 1,000,000 additional shares which may be purchased under the
repurchase program.
8. STOCK OPTIONS
STOCK OPTION PLANS
The Company has four stock option plans: The 1986, 1994, 1995 and
the 1997 Stock Option Plans. These plans provide for the granting of either
non-qualified or incentive stock options at not less than 85% and 100% of the
market value of the stock on the date of the grant, respectively. Options
generally become exercisable in installments commencing as of the beginning
of a fiscal year near the date of grant.
46
The following summarizes stock option activity for the three years
ended August 31, 1998:
WEIGHTED
NUMBER OF AVERAGE PRICE
SHARES PER SHARE
------------ ---------------
Options outstanding, September 1, 1995...................... 1,161,325 $4.01
Awarded..................................................... 14,500 7.13
Exercised................................................... (152,600) 3.60
Forfeited................................................... (14,580) 5.02
------------ ---------------
Options outstanding, August 31, 1996........................ 1,008,645 $4.17
Awarded..................................................... 773,000 10.40
Exercised................................................... (78,564) 2.93
Forfeited................................................... (37,490) 8.32
------------ ---------------
Options outstanding, August 31, 1997........................ 1,665,591 $7.03
Awarded..................................................... 96,000 9.91
Exercised................................................... (96,206) 3.50
Forfeited................................................... (31,984) 9.85
------------ ---------------
Options outstanding, August 31, 1998........................ 1,633,401 $7.35
============ ===============
Vested as of August 31, 1998................................ 903,467
============
As of August 31, 1998, 82,015 shares and 267,640 shares were
available for grant under the 1986 and 1995 plans respectively. All
authorized options under the 1994 and 1997 Plans have been granted. Common
Shares have been reserved for issuance under the plans for all options
outstanding at August 31, 1998.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE WEIGHTED
EXERCISE AT AUGUST CONTRACTUAL EXERCISE AT AUGUST AVERAGE
PRICES 31, 1998 LIFE PRICE 31, 1998 EXERCISE PRICE
- --------------- ------------- -------------- -------------- -------------- ---------------
$ 4.50 -- 11.00 831,735 6 years $ 7.12 447,135 $ 6.19
3.26 -- 10.50 386,654 5 years 8.44 198,660 7.29
3.59 220,000 0.8 years 3.59 176,000 3.59
10.50 23,346 3.3 years 10.50 9,340 10.50
9.13 -- 10.50 171,666 8 years 10.36 72,332 10.44
- --------------- ------------- -------------- -------------- -------------- ---------------
$ 2.03 -- 11.00 1,633,401 5.23 years $ 7.35 903,467 $ 6.31
============= ==============
The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation." The estimated fair value of
options granted during 1998, 1997 and 1996 pursuant to SFAS 123 was
approximately $343, $2,738 and $42, respectively. Had the Company adopted
SFAS 123, pro forma net income for those years would have been $2,863, $5,461
and $4,836, respectively. Pro forma "basic" net income per share would have
been $0.29, $0.57 and $0.59 and "diluted" net income per share would have
been $0.28, $0.54 and $0.55 for 1998, 1997 and 1996, respectively. The fair
value of each option grant was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
dividend yield of 0.55%-0.70%, volatility of 25%, a risk free interest rate
of 5.05% for 1998 and 6.28% for 1997 and 1996 and expected option lives of 6
to 8 years.
STOCK APPRECIATION RIGHTS PLAN
The 1991 Stock Appreciation Rights Plan (the "SAR Plan") was adopted by
the Company effective February 6, 1991. The SAR Plan provided for the granting
of stock appreciation rights which entitled the grantee to receive cash equal to
the difference between the fair market value and the appreciation base of the
Class A common stock when the rights were exercised.
During 1995 the Company implemented a program to encourage the holders
under the 1991 SAR Plan to exchange their SARs for stock options.
47
Under the program, each SAR holder who exercised the vested portion
of a SAR award during the April-May window period was entitled to exchange
the entire SAR award for a replacement stock option under the 1995 Stock
Option Plan. The replacement options were issued at exercise prices equal to
the fair market value of the Class A stock on the respective dates of the SAR
exercises, with an expiration date of August 31, 2004 (instead of the August
31, 2000 expiration date applicable to SAR awards) and with vesting
restrictions no more favorable to the holder than those applicable to the
exchanged SAR.
Of the SARs outstanding under the 1991 Plan, all but 11,000 were
exercised, resulting in a cash payment of $579. An aggregate of 303,367
incentive stock options and 82,623 nonqualified stock options were issued at
exercise prices ranging from $4.50 to $5.06.
The remaining 11,000 SARs were exercised in January 1996, terminating
the SAR Plan.
9. COMMITMENTS
OPERATING LEASES - Rent expense for noncancellable operating leases
for real property and equipment was $4,526, $4,736 and $6,524 for the years
ended August 31, 1996, 1997 and 1998, respectively. Minimum rentals for
operating leases for years ending after August 31, 1998 are as follows: 1999,
$7,737; 2000, $7,505; 2001, $12,031; 2002, $5,555; 2003, $7,475 and $15,617,
thereafter. Some of the leases have options to extend terms and are subject
to escalation clauses and two leases are subject to additional rent based on
revenue.
EMPLOYMENT AGREEMENTS - At August 31, 1998, the Company is committed
to compensation under long-term employment agreements with certain of its
officers and key employees as follows: 1999, $2,885; 2000, $2,291; 2001, $824
and 2002, $569.
10. PENSION PLAN
Certain officers and employees of the Company are eligible for
participation in the "Motion Picture Industry Pension Plan" ("MPIPP"), a
multi-employer defined benefit pension plan, the Company's 401(k) Profit
Sharing Plan and Trust in the U.S. or the Group Personal Pension Plan in the
U.K. The Plans are funded by employer and employee contributions. Total
pension plan expense for the Plans for the years ended August 31, 1996, 1997,
and 1998 are as follows:
AUGUST 31,
-------------------------
1996 1997 1998
------ ------ -----
MPIPP............................................ $ 474 $ 618 $ 648
U.S. 401(k)...................................... $ 313 $ 225 $ 370
U.K. Plan........................................ $ 81 $ 85 $ 95
11. JOINT VENTURES
During 1992, Todd-AO Productions, Inc., a wholly owned subsidiary of
the Company, entered into a Joint Venture Agreement with Trans-Atlantic
Enterprises, Inc., for the development of motion picture and television
projects. The Joint Venture was dissolved during fiscal 1996. In the event
that certain projects developed by the Venture are ultimately produced or
otherwise commercialized, a portion of the proceeds are payable to Todd-AO
Productions.
The Company has organized a limited liability company ("LLC") which
is known as "CDP Limited Liability Company" with United Artists Theatre
Circuit, Inc., an operator of motion picture theatres ("UATC") for the
purpose of exploiting proprietary technology to conserve film stock and
reduce the length of wide screen film release prints. The technology, known
as "Compact Distribution Print" or "CDP", has been successfully demonstrated,
but its implementation will require a broad level of film industry acceptance
which has not yet been obtained. Pending such acceptance, further development
and marketing expenditures will be minimal. Under a Joint Venture Agreement
dated September 8, 1998, the Company, UATC and Richard Vetter, author of
certain CDP patents, will have interests of 45%, 45% and 10%, respectively,
in any profits of the LLC, after the recoupment of their defined investments
in the CDP technology.
48
On September 8, 1997, the Company and Disney Character Voices
International, Inc. ("DCVI") committed to jointly establishing a dubbing and
audio post production studio in Germany. The Company and DCVI's German
subsidiaries, Todd-AO GERMANY GmbH and BUENA VISTA INTERNATIONAL FILM
PRODUCTION (GERMANY) GmbH have agreed to jointly build a state-of-the-art,
all-digital post production complex in Munich. The 36,000 square foot facility
will include feature and video mixing studios, film and video dialogue
recording rooms and editorial suites. The Company will manage all technical
and operational functions and DCVI will coordinate the creative services of
the studios. Additional joint ventures are contemplated for France, Italy,
Spain and Asia. The foreign language dubbing studios will provide each of
those territories with state-of-the-art theatrical and television recording,
mixing and editing facilities.
12. CONTINGENCIES
The Company is involved in litigation and similar claims incidental
to the conduct of its business. In management's opinion, none of the pending
actions is likely to have a material adverse impact on the Company's
financial position or results of operations.
13. BUSINESS SEGMENT INFORMATION
The Company does business in one industry segment. Information as to
the Company's operations in different geographic areas is as follows for the
years ended August 31, 1996, 1997 and 1998.
1996 1997 1998
---------- ----------- -----------
REVENUES:
United States.......................................... $ 51,394 $ 65,436 $ 79,143
Europe................................................. 11,526 13,535 23,471
---------- ----------- -----------
Total.................................................. $ 62,920 $ 78,971 $ 102,614
========== =========== ===========
NET INCOME:
United States.......................................... $ 3,861 $ 4,955 $ 1,209
Europe................................................. 983 1,050 2,210
---------- ----------- -----------
Total.................................................. $ 4,844 $ 6,005 $ 3,419
========== =========== ===========
ASSETS:
United States.......................................... $ 50,552 $ 85,569 $ 91,001
Europe................................................. 13,634 17,882 44,365
---------- ----------- -----------
Total.................................................. $ 64,186 $ 103,451 $ 135,366
========== =========== ===========
49
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
BASIC DILUTED
EARNINGS EARNINGS
PER PER
COMMON COMMON
1997 TOTAL GROSS NET SHARE SHARE
- ---- REVENUES PROFIT INCOME OUTSTANDING OUTSTANDING
------------ ---------- ---------- --------------- --------------
First Quarter............ $ 20,340 $ 3,069 $ 1,771 $ .21 $ .20
Second Quarter........... 19,341 2,611 1,518 .15 .14
Third Quarter............ 19,657 2,688 1,900 .19 .18
Fourth Quarter........... 19,633 1,455 816 .08 .08
------------ ---------- ---------- --------------- --------------
TOTAL.................... $ 78,971 $ 9,823 $ 6,005 $ .63 (a) $ .59 (a)
============ ========== ========== =============== ==============
BASIC DILUTED
EARNINGS EARNINGS
PER PER
NET COMMON COMMON
1998 TOTAL GROSS INCOME SHARE SHARE
- ---- REVENUES PROFIT (LOSS) OUTSTANDING OUTSTANDING
------------ ---------- ---------- --------------- --------------
First Quarter............ $ 25,024 $ 3,262 $ 1,773 $ .18 $ .16
Second Quarter........... 22,582 1,991 1,316 .13 .12
Third Quarter............ 27,252 2,860 1,627 .16 .15
Fourth Quarter........... 27,756 537 (1,297) (.13) (.11)
------------ ---------- ---------- --------------- --------------
TOTAL.................... $ 102,614 $ 8,650 $ 3,419 $ .34 (a) $ .33 (a)
============ ========== ========== =============== ==============
- --------------------
(a) Aggregate per share amounts for each quarter may differ from annual totals
as each is independently calculated.
50
THE TODD-AO CORPORATION SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
YEARS ENDED AUGUST 31, 1996, 1997 AND 1998
COLUMN COLUMN COLUMN COLUMN COLUMN
A B C D E
- --------------------------------------- -------------- -------------- ------------- ------------
ADDITIONS
CHARGED
BALANCE AT (CREDITED) TO BALANCE
BEGINNING OF COSTS DEDUCTIONS AT END OF
DESCRIPTION PERIOD ANDEXPENSES AND OTHER PERIOD
- --------------------------------------- -------------- -------------- ------------- ------------
Allowance for doubtful accounts:
Year ended August 31, 1996............ $ 828 $ (158) $ 26 (a) $ 696
======= ====== ======= =======
Year ended August 31, 1997............ $ 696 $ 106 $ (240)(b) $ 562
======= ====== ======= =======
Year ended August 31, 1998............ $ 562 $ (28) $ 1,234 (c) $1,768
======= ====== ======= =======
(a) Includes balance acquired in acquisition of Editworks ($28).
(b) Includes balance acquired in acquisition of Hollywood Digital ($351).
(c) Includes balance acquired in acquisition of TeleCine ($1,220).
51