-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MDdciVLIV96ihfhPPAn2yUWPYhL9hY7/qviZ/TIx56Pj7G0k3D1kzYNranzPcFti xhG7774QOw5PiXKf1hj3+g== 0000912057-96-022521.txt : 19961011 0000912057-96-022521.hdr.sgml : 19961011 ACCESSION NUMBER: 0000912057-96-022521 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19961010 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TODD AO CORP CENTRAL INDEX KEY: 0000061442 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ALLIED TO MOTION PICTURE PRODUCTION [7819] IRS NUMBER: 131679856 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-13891 FILM NUMBER: 96642008 BUSINESS ADDRESS: STREET 1: 172 GOLDEN GATE AVENUE CITY: SAN FRANCISCO STATE: CA ZIP: 94102 BUSINESS PHONE: 4159283200 MAIL ADDRESS: STREET 1: 900 N SEWARD STREET CITY: HOLLYWOOD STATE: CA ZIP: 90038 FORMER COMPANY: FORMER CONFORMED NAME: MAGNA PICTURES CORP DATE OF NAME CHANGE: 19851128 S-1 1 S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- THE TODD-AO CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 7819 13-1679856 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code No.) ID No.) incorporation or organization)
172 GOLDEN GATE AVENUE SAN FRANCISCO, CALIFORNIA 94102 (415) 928-3200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) -------------------------- SALAH M. HASSANEIN 900 NORTH SEWARD STREET HOLLYWOOD, CALIFORNIA 90038 (213) 962-4000 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------------- Copies to: PAULA J. PETERS, ESQ. MICHAEL J. FAIRCLOUGH, ESQ. MICHAEL V. BALES, ESQ. RICHARD A. BOEHMER, ESQ. Greenberg Glusker Fields O'Melveny & Myers LLP Claman & Machtinger LLP 400 South Hope Street 1900 Avenue of the Stars, Suite 2100 Los Angeles, CA 90071 Los Angeles, CA 90067 (213) 669-6000 (310) 553-3610 (213) 669-6407 (fax) (310) 553-0687 (fax) -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. -------------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE REGISTRATION FEE Class A Common Stock....................... 2,875,000 $12.88 $37,030,000 $11,221.20
(1) Includes 375,000 shares subject to the Underwriters' over-allotment option. (2) Estimated solely for the purpose of calculating the registration fee on the basis of the high and low price on the NASDAQ National Market on October 7, 1996. -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. DATED OCTOBER 10, 1996 [LOGO] 2,500,000 SHARES THE TODD-AO CORPORATION CLASS A COMMON STOCK ------------------ ALL OF THE SHARES OF CLASS A COMMON STOCK OFFERED HEREBY (THE "SHARES") ARE BEING OFFERED BY THE TODD-AO CORPORATION (THE "COMPANY" OR "TODD-AO"). ------------------------ THE CLASS A COMMON STOCK IS INCLUDED IN THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "TODDA." ON OCTOBER 8, 1996, THE LAST REPORTED SALES PRICE FOR THE CLASS A COMMON STOCK ON THE NASDAQ NATIONAL MARKET WAS $13.00 PER SHARE. SEE "PRICE RANGE OF COMMON STOCK AND DIVIDENDS." ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS (1) COMPANY (2) PER SHARE $ $ $ TOTAL (3) $ $ $
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE SEVERAL UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SEE "UNDERWRITING." (2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $500,000. (3) THE COMPANY HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO AN ADDITIONAL 375,000 SHARES OF CLASS A COMMON STOCK TO COVER OVER-ALLOTMENTS, IF ANY. IF ALL SUCH SHARES ARE PURCHASED, THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS, AND PROCEEDS TO COMPANY WILL BE $ , $ , AND $ , RESPECTIVELY. SEE "UNDERWRITING." ------------------------ THE SHARES ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED HEREIN WHEN, AS AND IF RECEIVED AND ACCEPTED BY THEM, SUBJECT TO THEIR RIGHT TO REJECT ANY ORDER IN WHOLE OR IN PART AND SUBJECT TO CERTAIN OTHER CONDITIONS. IT IS EXPECTED THAT DELIVERY OF THE SHARES WILL BE MADE IN NEW YORK, NEW YORK, ON OR ABOUT , 1996. ------------------------ DEAN WITTER REYNOLDS INC. BREAN MURRAY & CO., INC. , 1996 [ARTWORK TO COME] IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. ------------------------ TABLE OF CONTENTS
PAGE ----- Available Information............................ 3 Prospectus Summary............................... 4 Risk Factors..................................... 8 The Company...................................... 11 Use of Proceeds.................................. 11 Price Range of Common Stock and Dividends........ 12 Capitalization................................... 13 Selected Consolidated Financial Data............. 14 Unaudited Pro Forma Condensed Consolidated Information.................................... 15 PAGE ----- Management's Discussion and Analysis of Financial Condition and Results of Operations............ 20 Business......................................... 25 Management....................................... 36 Principal Shareholders........................... 41 Description of Capital Stock..................... 43 Shares Eligible for Future Sale.................. 44 Underwriting..................................... 46 Legal Matters.................................... 47 Experts.......................................... 47 Index to Financial Statements.................... F-1
------------------------ AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (together with all amendments, exhibits and schedules thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act") with respect to the Class A Common Stock offered hereby. This Prospectus, which constitutes part of the Registration Statement, omits certain information contained in the Registration Statement and the exhibits and schedules thereto on file with the Commission pursuant to the Securities Act and the rules and regulations of the Commission thereunder. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete, and, in each instance, reference is made to the contract or document filed as an exhibit to the Registration Statement and incorporated by reference herein. The Company is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and in accordance therewith files reports, proxy statements and other information with the Commission (collectively, "Exchange Act Filings"). The Registration Statement, including exhibits and schedules thereto, as well as the Company's Exchange Act Filings may be obtained from the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: Seven World Trade Center, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained from the public reference section of the Commission at its Washington address upon payment of the fees prescribed by the Commission, or may be examined without charge at the offices of the Commission, or accessed through the Commission's Internet address at http://www.sec.gov. 3 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS PROSPECTUS TO THE COMPANY OR TODD-AO INCLUDE THE TODD-AO CORPORATION AND ITS SUBSIDIARIES. THE COMPANY Todd-AO provides 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. Todd-AO provides these sound and video services to over 500 clients, including the major motion picture studios and television production companies such as The Walt Disney Company ("Disney"), Paramount Pictures Corporation ("Paramount"), Turner Broadcasting System, Inc. ("Turner"), Sony Pictures Entertainment ("Sony"), Warner Bros. Studios Inc. ("Warner Bros.") and Spelling Entertainment Group, Inc. ("Spelling"). 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 30 Academy Awards-Registered Trademark- and have won 18. 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 pictures 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 service provider. This strategy was formulated by the Company and is being executed under the leadership of Salah M. Hassanein, who became President in 1994. Mr. Hassanein has spent his entire career in the entertainment and media industry and has garnered both international experience and mergers and acquisitions expertise with United Artists Theatres Circuit, Inc. and Time Warner International Theatres, where he was responsible for development and expansion of Warner Bros.' overseas theater operations. To implement its strategy, the Company has assembled a senior management team experienced in the industry. 4 The Company entered the video services business in 1994 through its acquisition of Film Video Masters, renamed Todd-AO Video Services. In 1995, the Company expanded its sound studio business through the acquisition of Skywalker Sound South, renamed Todd-AO Studios West, with sound studios and facilities located in the West Los Angeles area. Also in 1995, the Company expanded its operations into Europe through the acquisition of Chrysalis Television Facilities, Ltd. ("Chrysalis"), which augmented the Company's video services capabilities to include the collation of television programming for satellite broadcast. The purchase of Filmatic Laboratories ("Filmatic") in 1996 enlarged Todd-AO's video services capabilities in London and added film processing capability. In August 1996, the Company acquired Edit Acquisition LLC ("Editworks"), located in Atlanta, Georgia, which specializes in providing video services to the advertising industry. As a result of these transactions, the Company has expanded its client base, increased its range of services and broadened its global market coverage. Largely as a result of efforts implementing its strategy, the Company's annual sales have grown in the past two years at an annual compounded rate of 35% from $27.4 million in fiscal 1993 to $50.0 million in fiscal 1995. Net income has grown in the same period at an annual compounded rate of 72% from $1.14 million in fiscal 1993 to $3.38 million in fiscal 1995. THE OFFERING Common Stock Offered................................ 2,500,000 shares of Class A Common Stock Common Stock Outstanding After the Offering......... 9,055,640 shares of Class A Common Stock and 1,747,181 shares of Class B Common Stock (1) Use of Proceeds..................................... For possible future acquisitions, temporary repayment of amounts under credit facility, working capital requirements and general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol....................... "TODDA"
- ------------------------ (1) Excludes 660,000, 330,000 and 770,000 shares of Class A Common Stock reserved for issuance under the Company's 1986 Stock Option Plan, 1994 Stock Option Plan, and 1995 Stock Option Plan (the "Stock Option Plans"), respectively, of which options for an aggregate of 1,008,645 shares of Class A Common Stock were issued and outstanding as of August 31, 1996 and options for an aggregate of 514,677 shares of Class A Common Stock were exercisable as of August 31, 1996. See "Management--Stock Options." 5 SUMMARY CONSOLIDATED FINANCIAL DATA
YEARS ENDED AUGUST 31, NINE MONTHS ENDED MAY 31, -------------------------------------------- --------------------------------- 1995 1996 ---------------------- ---------------------- PRO PRO 1993 1994 ACTUAL FORMA(1) 1995 ACTUAL FORMA(1) --------- --------- --------- ----------- --------- --------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED INCOME STATEMENT DATA: Revenues............................. $ 27,402 $ 32,892 $ 50,003 $ 53,194 $ 37,125 $ 48,140 $ 51,445 --------- --------- --------- ----------- --------- --------- ----------- Costs and expenses: Operating costs and other expenses......................... 22,641 27,021 39,867 42,126 29,405 37,231 39,345 Depreciation and amortization...... 2,412 2,603 3,917 4,526 3,014 3,967 4,480 Interest expense................... 17 24 581 874 320 531 780 Equipment lease expense, net....... -- -- 593 593 371 415 415 Other (income) expense, net........ (483) (773) (290) (315) (223) (554) (600) --------- --------- --------- ----------- --------- --------- ----------- Total costs and expenses......... 24,587 28,875 44,668 47,804 32,887 41,590 44,420 --------- --------- --------- ----------- --------- --------- ----------- Income before loss from joint venture and provision for income taxes..... 2,815 4,017 5,335 5,390 4,238 6,550 7,025 Loss from joint venture.............. (1,014) (1,215) (249) (249) (167) (117) (117) --------- --------- --------- ----------- --------- --------- ----------- Income before provision for income taxes.............................. 1,801 2,802 5,086 5,141 4,071 6,433 6,908 Provision for income taxes........... 664 1,022 1,711 1,731 1,452 2,371 2,542 --------- --------- --------- ----------- --------- --------- ----------- Net income........................... $ 1,137 $ 1,780 $ 3,375 $ 3,410 $ 2,619 $ 4,062 $ 4,366 --------- --------- --------- ----------- --------- --------- ----------- --------- --------- --------- ----------- --------- --------- ----------- Net income per common share and common share equivalents(2)........ $ 0.14 $ 0.22 $ 0.40 $ 0.40 $ 0.31 $ 0.46 $ 0.49 --------- --------- --------- ----------- --------- --------- ----------- --------- --------- --------- ----------- --------- --------- ----------- Weighted average shares outstanding(2)..................... 8,279 8,196 8,399 8,466 8,352 8,805 8,872 --------- --------- --------- ----------- --------- --------- ----------- --------- --------- --------- ----------- --------- --------- ----------- OTHER FINANCIAL DATA: Capital expenditures................. $ 393 $ 1,404 $ 3,345 $ 3,848 $ 2,638 $ 3,317 $ 3,950 EBITDA(3)............................ 5,244 6,644 9,833 10,790 7,572 11,048 12,285
MAY 31, 1996 ----------------------------------- PRO FORMA PRO AS ACTUAL FORMA(4) ADJUSTED(5) --------- ----------- ----------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents...................................................... $ 3,263 $ 3,274 $ 24,562 Working capital................................................................ 11,181 11,012 32,300 Total assets................................................................... 57,684 64,469 85,757 Long-term debt, net of current portion......................................... 6,065 10,945 2,508 Stockholders' equity........................................................... 34,594 35,564 65,289
FOOTNOTES BEGIN ON NEXT PAGE 6 (1) The Company purchased substantially all of the assets and certain liabilities of Editworks for cash and the Company's Class A Common Stock as of August 15, 1996. The pro forma summary financial data gives effect to the acquisition of Editworks as if it had occurred as of September 1, 1994. Such pro forma consolidated financial information is not necessarily indicative of the financial position or results of operations as they may be in the future or as they might have been had the acquisition been effected on the assumed date. See "Unaudited Pro Forma Condensed Consolidated Information." (2) Such amounts represent net income per common share and common share equivalents, pro forma, to give effect to the 66,863 shares of the Company's Class A Common Stock issued as part of the purchase of Editworks. The net income per common share and common share equivalent is computed based upon the weighted average number of shares of common stock and common stock equivalents, including the number of shares of common stock issued in connection with the purchase of Editworks, and includes common share equivalents arising from the assumed conversion of any outstanding dilutive stock options. All share and per share data has been adjusted to give effect to the 10% stock dividends paid in August 1995. (3) EBITDA, defined as earnings before interest expense, income taxes, depreciation and amortization and loss from joint venture, is not intended to represent an alternative to net income (as determined in accordance with generally accepted accounting principles) as a measure of performance and is also not intended to represent an alternative to cash flow from operating activities as a measure of liquidity. Rather, it is included herein because management believes that it provides an important additional perspective on the Company's operating results and the Company's ability to service its long-term debt and to fund the Company's continuing operations. (4) Adjusted to give effect to the Editworks acquisition, consummated in the fourth quarter of 1996, as if the acquisition was consummated as of May 31, 1996. (5) Adjusted to give effect to (i) the sale of 2,500,000 shares of Class A Common Stock offered hereby by the Company at an assumed offering price to the public of $13.00 per share, net of underwriting discounts and commission and estimated expenses of the offering, (ii) the Editworks acquisition as if it occurred as of May 31, 1996, and (iii) the anticipated use of the estimated net proceeds of the offering. See "Unaudited Pro Forma Condensed Consolidated Information" and "Use of Proceeds." 7 RISK FACTORS PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN EVALUATING AN INVESTMENT IN THE SHARES OFFERED HEREBY. THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH BELOW, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. DEPENDENCE ON KEY PERSONNEL. The Company's success depends in large part upon the continued service of its key management, especially the Company's President and Chief Executive Officer, Salah M. Hassanein, and of its skilled technicians and artists, for whose services competition is intense. See "Management." Mr. Hassanein's international experience and his expertise in mergers and acquisitions is critical to the development and implementation of the Company's business strategy. The Company has no employment agreement with Mr. Hassanein; however, it does have employment agreements with Christopher D. Jenkins, Senior Vice President of the Company and the President of Todd-AO Studios, J.R. DeLang, Senior Vice President of the Company and Executive Vice President of Todd-AO Studios, as well as with 58 of its other key management, creative and technical personnel. See "Management--Employment Agreements." Todd-AO does not maintain "key man" life insurance for any of its employees. The loss of Mr. Hassanein or any significant number of other key managers, skilled technicians or artists or a significant labor strike or work stoppage could have a material adverse effect on the Company. FLUCTUATION IN QUARTERLY RESULTS. 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. The majority of the services performed by the Company are provided on a non-contractual basis. Clients may desire to accelerate, postpone or cancel previously scheduled services prior to the commencement of the project. As a result, the Company is susceptible to scheduling changes or cancellations by customers and may not be able to reschedule or secure additional work to replace previously scheduled projects. The post production services normally provided by the Company for a major motion picture may occur over a period of several weeks. The rescheduling or cancellation of such a project may have a material affect on the quarterly and/or annual operating results of the Company. Certain major motion picture projects may result in significant unanticipated additional revenues due to substantial overtime services provided by the Company. These additional revenues may be material to the Company's results of operations; however, their occurrence or probability cannot be predicted. As a result, the occurrence of these additional revenues in a particular fiscal period may materially affect the comparability of operating results for equivalent reporting periods. As a result of the factors described above, there can be no assurance that results of operations will not fluctuate significantly from period to period. In addition, results of operations for any fiscal period are not necessarily indicative of results of operations for any future fiscal period. CAPACITY UTILIZATION. Todd-AO's sound studio business operates at or near effective capacity. The effective utilization of the Company's sound studios depends on motion picture producers and, to a lesser extent, television producers maintaining production at or above recent levels, and on no major production interruptions due to work stoppages or other crises. The Company believes that there will not be a substantial increase, and there may be a decrease, in the current production of feature films and television programming, which could have a material adverse effect on the Company. 8 COMPETITION. The businesses in which the Company competes are highly competitive and service-oriented. The Company has few long-term or exclusive service agreements with its customers. Business generation is based primarily on customer satisfaction with reliability, timeliness, quality and price. Some of the Company's competitors have greater financial, technical and marketing resources. There is no assurance that the Company will be able to compete effectively against these competitors. The Company's primary competitors in the studio sound services area are the motion picture studios, many of which perform these services "in-house." The motion picture studios with in-house post production capabilities generally operate at or near capacity, and therefore outsource some of their requirements, usually to independent providers such as the Company, but sometimes to other studios with in-house capability. The Company's studio sound business is derived primarily from the major studios' periodic lack of capacity or the ability of the film director or other key creative personnel to select the post production provider, even when the film is produced or distributed by a studio with in-house capabilities. In addition, many of the major studios without full in-house post production capabilities evaluate from time-to-time whether to perform in-house certain of the services provided by the Company. If there were a significant decline in the number of motion pictures or the amount of original television programming produced, or if the studios or other clients of the Company either established in-house post production facilities or significantly expanded their in-house capabilities, the Company's operations could be materially and adversely affected. CUSTOMER CONCENTRATION. Although the Company serviced over 500 customers during the nine months ended May 31, 1996, the ten largest customers accounted for approximately 50% of the Company's revenues and the single largest customer, Disney, accounted for approximately 12% of revenues during the period. The loss of, or the failure to replace, any significant portion of the services provided to any significant customer could have a material adverse effect on the Company. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company intends to continue making capital expenditures to fund technological development, acquire complementary businesses and introduce additional services. Based on current plans and assumptions relating to its operations, the Company anticipates that the net proceeds of this offering, together with its existing capital, credit facility and cash from operations, will be adequate to satisfy its capital requirements through at least the end of 1997. There can be no assurance, however, that the net proceeds of this offering and such other sources of funding will be sufficient to satisfy the Company's future capital requirements or that the Company will not require additional capital sooner than currently anticipated. In addition, the Company cannot predict the precise amount of future capital that it will require, and there can be no assurance that any additional financing will be available to the Company on acceptable terms, or at all. The inability to obtain required financing would have a material adverse effect on the Company. RISKS RELATED TO GROWTH THROUGH ACQUISITIONS. The Company's strategy for growth includes expanding the range of post production services it provides to existing clients and increasing its customer base through strategic acquisitions, internal growth and strategic alliances. There can be no assurance that the Company will be able to acquire or profitably manage suitable acquisition candidates or successfully integrate them into its operations without substantial costs, delays or other problems. In addition, there can be no assurance that any businesses acquired will be profitable at the time of its acquisition or will achieve sales and profitability that justify the investment therein or that the Company will be able to realize expected operating and economic efficiencies following such acquisitions. Acquisitions may involve a number of special risks, including adverse effects on the Company's reported operating results, diversion of management's attention, increased burdens on the Company's management resources and financial controls, dependence on retention and hiring of key personnel, risks associated with unanticipated problems or legal liabilities, and amortization of acquired intangible assets, some or all of which could have a material adverse effect on the Company. Competition for acquisition opportunities from the Company's competitors, which may have greater financial resources than the Company, could increase purchase prices and related costs of potential acquisitions and result in fewer acquisitions by the Company, which could adversely affect the Company. There can be no assurance that the Company will be able to successfully 9 implement its growth strategy, and if not, the prospects of the Company may be adversely affected. See "Business--Strategy." CONTROL BY PRINCIPAL SHAREHOLDERS; POTENTIAL ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS. Upon completion of this offering, and assuming no exercise of the Underwriters' over-allotment option, Marshall Naify, Robert A. Naify, various members of their families, and trusts for the benefit of such members (collectively, the "Naify Interests") will own shares representing 75.7% of the voting power of the Company. By virtue of this stock ownership, the Naify Interests will be able to determine the outcome of substantially all matters required to be submitted to a vote of shareholders, including (i) the election of the board of directors, (ii) amendments to the Company's Amended and Restated Certificate of Incorporation, and (iii) approval of mergers and other significant corporate transactions. The foregoing may have the effect of discouraging, delaying or preventing certain types of transactions involving an actual or potential change of control of the Company, including transactions in which the holders of Class A Common Stock might otherwise receive a premium for their shares over current market prices. In addition, the Company's Board of Directors has the authority to issue up to 1,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions thereof, including voting rights, without any further vote or action by the Company's shareholders. Although the Company has no current plans to issue any shares of Preferred Stock, the rights of the holders of Common Stock would be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. Issuance of Preferred Stock could have the effect of discouraging, delaying or preventing a change in control of the Company. Furthermore, certain provisions of the Company's Amended and Restated Certificate of Incorporation and By-laws and of Delaware law also could have the effect of discouraging, delaying or preventing a change in control of the Company. See "Principal Shareholders" and "Description of Capital Stock." BROAD DISCRETION AS TO USE OF PROCEEDS. The Company intends to use the net proceeds from the sale of the Class A Common Stock offered hereby for general corporate purposes, including, temporary repayment of indebtedness, potential acquisitions of businesses complementary to the Company's operations and capital expenditures. In the ordinary course of business, the Company actively explores acquisition opportunities and has had discussions with a number of potential acquisition candidates. However, the Company does not have any agreement, understanding or commitment to acquire any particular business or repay any indebtedness, nor has it identified particular capital expenditure projects. The Company's management will therefore have broad discretion as to the use of the proceeds of this offering and there is no assurance that the Company will be able to consummate acquisitions or identify and initiate projects that meet the Company's requirements. See "Use of Proceeds" and "Business-- Strategy." FOREIGN MARKETS. The Company's growth strategy provides for increased services to foreign customers and to domestic customers distributing programming to the international market. Accordingly, the Company will be increasingly subject to the risks generally associated with marketing products or services abroad, such as currency fluctuation, political instability and the political, legislative and regulatory environment in foreign countries. The Company does not believe any of such risks have had a material impact on its business operations or financial condition, but there can be no assurance as to whether such risks will have a material impact in the future. LIMITED FLOAT AND LIQUIDITY; POSSIBLE VOLATILITY OF STOCK PRICE. There has been limited public trading of the Class A Common Stock. During the 12-month period ended August 31, 1996, the average daily trading volume of shares of the Company's Class A Common Stock on the Nasdaq National Market was 11,739 shares. Furthermore, at times the Class A Common Stock has experienced price and volume fluctuations caused by matters unrelated, as well as related, to the Company's business and results of operations. Although the number of outstanding shares of Class A Common Stock will increase by 2,500,000 (2,875,000 if the underwriters' over-allotment option is exercised) upon the closing of the offering, there 10 can be no assurance that increased trading activity will develop or be sustained or that market price volatility will diminish. RISK OF LOSS FROM EARTHQUAKES, FIRE OR OTHER CATASTROPHIC EVENTS. The Company is subject to the risk of loss from earthquakes, fires and other catastrophic events due to the dependence of its services on specially equipped, acoustically designed facilities. Due to the extensive amount of specialized equipment incorporated into the specially designed recording and scoring stages, editorial suites and mixing rooms, the Company's operations cannot be temporarily relocated to mitigate the occurrence of a catastrophic event. Consequently, the Company carries insurance for property loss and business interruption resulting from such events, other than earthquake, subject to deductibles. The Company does not carry earthquake insurance due to the unavailability of comprehensive coverage and the prohibitive cost of the coverage that is available. Although the Company believes it has adequate insurance coverage relating to damage to its property and the disruption of its business from casualties such as fire, there can be no assurance that such insurance would be sufficient to cover all costs or damages suffered by the Company or the loss of income resulting from the Company's inability to provide services for an extended period of time. THE COMPANY Todd-AO provides 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, mixing of music, sound effects and dialogue and narration. 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. Todd-AO provides these sound and video services to over 500 clients, including the major motion picture studios and television production companies such as Disney, Paramount, Turner, Sony, Warner Bros. and Spelling. 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 30 Academy Awards-Registered Trademark- and have won 18. The Company was incorporated in Delaware in 1952. The Company's principal executive offices are located at 172 Golden Gate Avenue, San Francisco, California 94102, and its telephone number is (415) 928-3200. USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the 2,500,000 shares of Class A Common Stock offered by the Company at the offering price set forth on the cover page of this Prospectus after deducting underwriting discounts and commissions and estimated expenses of the offering payable by the Company are approximately $29.725 million (approximately $34.259 million if the Underwriters' over-allotment option is exercised in full). The net proceeds to the Company from this offering will be used for possible future acquisitions, possible temporary repayment of indebtedness under the Company's long-term credit facility, of which $8.4 million at an approximate aggregate interest rate of 7.5% was outstanding at August 31, 1996, working capital requirements and other general corporate purposes. The Company may use a portion of the proceeds, as well as borrowings under the Company's long-term credit facility or other debt financing, for investment in or the acquisition of complementary businesses. In the ordinary course of business, the Company actively explores acquisition opportunities and has had discussions with a number of potential acquisition candidates. However, the Company does not have any agreement, understanding or commitment with respect to any such investment or acquisition. Pending application of the net proceeds of this offering as described above, the Company may invest the proceeds in short-term and medium-term, investment grade, interest-bearing obligations. 11 PRICE RANGE OF COMMON STOCK AND DIVIDENDS 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 (without adjustment to reflect the 10% stock dividend paid on September 29, 1995) for the Class A Common Stock as reported on the Nasdaq National Market.
HIGH LOW --------- --- FISCAL YEAR 1995 First Quarter........................... 6 1/2 5 Second Quarter.......................... 6 4 Third Quarter........................... 6 3/8 5 Fourth Quarter.......................... 11 1/2 5 5/8 FISCAL YEAR 1996 First Quarter........................... 11 7 Second Quarter.......................... 9 3/4 7 1/8 Third Quarter........................... 19 1/4 8 3/4 Fourth Quarter.......................... 17 8 1/2 FISCAL YEAR 1997 First Quarter (through October 8)....... 14 3/4 10
On October 8, 1996, the last reported sale price for the Company's Class A Common Stock on the Nasdaq National Market was $13.00 per share. As of October 8, 1996, there were approximately 1,300 and seven holders of record of Class A and Class B Common Stock, respectively. 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." 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 1995 and 1996. On August 11, 1995, a 10% stock dividend was declared for holders of Class A and Class B stock payable on September 29, 1995 to shareholders of record on September 8, 1995. The Company intends to retain all earnings in excess of mandated dividends for the operation and expansion of its business. The payment of any additional dividends in the future will be at the discretion of the Board of Directors and will depend upon, among other things, future earnings, results of operations, capital requirements, the general financial condition of the Company and general business conditions, as well as such other factors as the Board of Directors may deem relevant. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 12 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company as of May 31, 1996 (i) on an actual basis, (ii) on a pro forma basis to give effect to the acquisition of Editworks (see "Unaudited Pro Forma Condensed Consolidated Information"), and (iii) as adjusted to give effect to the sale of the Shares being offered hereby and the use of the estimated net proceeds therefrom. This table should be read in conjunction with the Consolidated Financial Statements and related notes thereto, "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma Condensed Consolidated Information" and the other financial information appearing elsewhere in this Prospectus.
MAY 31, 1996 ----------------------------------- ACTUAL PRO FORMA AS ADJUSTED --------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Long-term debt: Long-term debt, net of current portion..................................... $ 6,065 $ 10,945 $ 2,508(1) Capitalized lease obligations.............................................. 68 68 68 --------- ----------- ----------- Total long-term debt..................................................... 6,133 11,013 2,576 --------- ----------- ----------- Stockholders' equity: Preferred Stock: authorized 1,000,000 shares of $0.25 par value; none issued actual, pro forma, or pro forma as adjusted....................... -- -- -- Common Stock: Class A: authorized 30,000,000 shares of $0.25 par value; 6,488,727 shares issued and outstanding, 6,555,590 shares issued and outstanding pro forma, and 9,055,590 shares issued and outstanding, as adjusted (2)...................................................................... 1,622 1,639 2,264 Class B: authorized 6,000,000 shares of $0.25 par value; 1,747,181 shares issued and outstanding................................................... 437 437 437 Additional capital......................................................... 20,985 21,938 51,038 Retained earnings.......................................................... 11,605 11,605 11,605 Unrealized gains on marketable securities and long-term investments........ 204 204 204 Cumulative foreign currency translation adjustment......................... (259) (259) (259) --------- ----------- ----------- Total stockholders' equity............................................... 34,594 35,564 65,289 --------- ----------- ----------- Total capitalization................................................. $ 40,727 $ 46,577 $ 67,865 --------- ----------- ----------- --------- ----------- -----------
- ------------------------ (1) Reflects repayment of $8,437 of outstanding borrowings, the amount outstanding under the Company's revolving credit facility as of August 31, 1996, with a portion of the net proceeds from the offering. See "Use of Proceeds." (2) Excludes 660,000, 330,000, and 770,000 shares of Class A Common Stock reserved for issuance under the Company's 1986 Stock Option Plan, 1994 Stock Option Plan, and 1995 Stock Option Plan, respectively, of which options for an aggregate of 1,018,695 shares of Class A Common Stock were issued and outstanding as of May 31, 1996 and options for an aggregate of 524,727 shares of Class A Common Stock were exercisable as of May 31, 1996. See "Management--Stock Options." 13 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below as of and for each of the six years in the period ended August 31, 1995, and for the nine month period ended May 31, 1996 have been derived from the Consolidated Financial Statements, which statements have been audited by Deloitte & Touche LLP, independent auditors. The consolidated financial data for the nine months ended May 31, 1995 has been derived from the unaudited financial statements of the Company. The unaudited financial data includes all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the operations of the Company. The results of operations for the nine months ended May 31, 1996 are not necessarily indicative of the results for the full year. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the notes thereto included elsewhere in this Prospectus and "Unaudited Pro Forma Condensed Consolidated Information."
NINE MONTHS YEARS ENDED AUGUST 31, ENDED MAY 31, ---------------------------------------------------- ---------------- 1990 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED INCOME STATEMENT DATA: Revenues................................ $24,021 $28,526 $28,150 $27,402 $32,892 $50,003 $37,125 $48,140 ------- ------- ------- ------- ------- ------- ------- ------- Costs and expenses: Operating costs and other expenses.... 19,744 21,311 22,532 22,641 27,021 39,867 29,405 37,231 Depreciation and amortization......... 2,964 2,605 2,087 2,412 2,603 3,917 3,014 3,967 Interest expense...................... 645 247 (34) 17 24 581 320 531 Equipment lease expense, net.......... -- -- -- -- -- 593 371 415 Other (income) expense, net........... 166 11 122 (483) (773) (290) (223) (554) ------- ------- ------- ------- ------- ------- ------- ------- Total costs and expenses............ 23,519 24,174 24,707 24,587 28,875 44,668 32,887 41,590 ------- ------- ------- ------- ------- ------- ------- ------- Income before loss from joint venture and provision for income taxes........ 502 4,352 3,443 2,815 4,017 5,335 4,238 6,550 Loss from joint venture................. -- -- (87) (1,014) (1,215) (249) (167) (117) ------- ------- ------- ------- ------- ------- ------- ------- Income before provision for income taxes................................. 502 4,352 3,356 1,801 2,802 5,086 4,071 6,433 Provision for income taxes.............. 221 1,707 1,227 664 1,022 1,711 1,452 2,371 ------- ------- ------- ------- ------- ------- ------- ------- Net income.............................. $ 281 $ 2,645 $ 2,129 $ 1,137 $ 1,780 $ 3,375 $ 2,619 $ 4,062 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income per common share and common share equivalents(1).................. $ 0.03 $ 0.31 $ 0.25 $ 0.14 $ 0.22 $ 0.40 $ 0.31 $ 0.46 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Weighted average number of shares outstanding(1)........................ 8,857 8,444 8,351 8,279 8,196 8,399 8,352 8,805 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- OTHER FINANCIAL DATA: Capital expenditures.................... $ 1,407 $ 1,418 $ 4,434 $ 393 $ 1,404 $ 3,345 $ 2,638 $ 3,317 EBITDA(2)............................... 4,111 7,204 5,496 5,244 6,644 9,833 7,572 11,048 AUGUST 31, MAY 31, ---------------------------------------------------- ---------------- 1990 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............... $ 138 $ 2,969 $ 106 $ 2,289 $ 606 $ 5,278 $ 4,934 $ 3,263 Working capital......................... 1,236 1,212 2,277 4,140 5,360 11,041 11,941 11,181 Total assets............................ 31,756 32,946 31,892 31,834 36,728 57,198 59,516 57,684 Long-term debt, net of current portion............................... 3,550 800 1,750 -- 600 7,707 9,099 6,065 Stockholders' equity.................... 23,277 24,792 24,484 26,860 27,948 31,198 30,551 34,594
- ------------------------------ (1) The net income per common share and common share equivalent is computed based upon the weighted average number of shares of common stock and common stock equivalents and includes common share equivalents arising from the assumed conversion of any outstanding dilutive stock options. (2) EBITDA, defined as earnings before interest expense, income taxes, depreciation and amortization and loss from joint venture, is not intended to represent an alternative to net income (as determined in accordance with generally accepted accounting principles) as a measure of performance and is also not intended to represent an alternative to cash flow from operating activities as a measure of liquidity. Rather, it is included herein because management believes that it provides an important additional perspective on the Company's operating results and the Company's ability to service its long-term debt and to fund the Company's continuing operations. 14 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INFORMATION Todd-AO purchased substantially all of the assets and certain liabilities of Editworks for cash and Class A Common Stock as of August 15, 1996. The following Unaudited Pro Forma Condensed Consolidated Balance Sheet as of May 31, 1996 is adjusted to give effect to the acquisition of Editworks as if that transaction had occurred on May 31, 1996. The following Unaudited Pro Forma Condensed Consolidated Statements of Income for the year ended August 31, 1995 and for the nine month period ended May 31, 1996 give effect to the acquisition of Editworks as if such transaction had occurred on September 1, 1994. The Unaudited Pro Forma Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto and the financial statements of Editworks and the notes thereto included elsewhere in this Prospectus. The Unaudited Pro Forma Condensed Consolidated Statements of Income are not necessarily indicative of the operating results that would have been achieved had the acquisition of Editworks actually occurred on September 1, 1994, nor do they purport to indicate the results of future operations. The Unaudited Pro Forma Condensed Consolidated Statements of Income combine the Company's Consolidated Statements of Operations with the historical operations of Editworks prior to the date the Company made such acquisition. 15 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET MAY 31, 1996 (IN THOUSANDS, EXCEPT SHARE DATA)
PRO FORMA PRO FORMA ACQUISITION AFTER COMPANY (A) EDITWORKS (B) ADJUSTMENTS ACQUISITION ----------- ------------- ------------- ----------- ASSETS Current assets: Cash and cash equivalents....................... $ 3,263 $ 11 $ 3,274 Marketable securities........................... 2,685 -- 2,685 Trade receivables, net.......................... 11,043 632 11,675 Inventories..................................... 661 6 667 Other........................................... 1,357 117 1,474 ----------- ------ ------ ----------- Total current assets........................ 19,009 766 19,775 Investments....................................... 1,336 -- 1,336 Property and equipment, net....................... 35,226 2,437 $ (422)(c) 37,241 Goodwill, net..................................... 1,738 -- 4,000(d) 5,738 Other assets...................................... 375 4 379 ----------- ------ ------ ----------- Total assets................................ $ 57,684 $ 3,207 $3,578 $ 64,469 ----------- ------ ------ ----------- ----------- ------ ------ ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities........ $ 5,900 $ 363 $ 50(d) $ 6,313 Current maturities of long-term debt............ 615 515 1,130 Capitalized lease obligations--current.......... 867 -- 867 Other........................................... 446 7 453 ----------- ------ ------ ----------- Total current liabilities................... 7,828 885 50 8,763 Long-term debt.................................... 6,065 1,200 3,680(e) 10,945 Capitalized lease obligations..................... 68 -- 68 Deferred compensation............................. 265 -- 265 Deferred gain on sale of equipment................ 5,277 -- 5,277 Deferred income taxes............................. 3,587 -- 3,587 ----------- ------ ------ ----------- Total liabilities........................... 23,090 2,085 3,730 28,905 ----------- ------ ------ ----------- Stockholders' equity: Preferred Stock: authorized 1,000,000 shares of $0.25 par value; none issued.................. -- -- -- Common Stock: Class A: authorized 30,000,000 shares of $0.25 par value; 6,488,727 shares issued and outstanding actual, 6,555,590 shares issued and outstanding pro forma................... 1,622 -- 17(f) 1,639 Class B: authorized 6,000,000 shares of $0.25 par value; 1,747,181 shares issued and outstanding................................. 437 437 Additional capital.............................. 20,985 1,122 (169)(f)(g) 21,938 Retained earnings............................... 11,605 11,605 Unrealized gains on marketable securities and long-term investments......................... 204 -- 204 Cumulative foreign currency translation adjustment.................................... (259 ) -- (259 ) ----------- ------ ------ ----------- Total stockholders' equity.................. 34,594 1,122 (152) 35,564 ----------- ------ ------ ----------- Total liabilities and stockholders' equity.................................... $ 57,684 $ 3,207 $3,578 $ 64,469 ----------- ------ ------ ----------- ----------- ------ ------ -----------
See accompanying notes to pro forma condensed consolidated financial statements. 16 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED AUGUST 31, 1995 ------------------------------------------------------- PRO FORMA PRO FORMA ACQUISITION AFTER COMPANY(A) EDITWORKS(H) ADJUSTMENTS ACQUISITION ------------ ------------- ------------- ----------- Revenues.................................................. $ 50,003 $ 3,191 $ 53,194 ------------ ------ ----- ----------- Costs and expenses: Operating costs and other expenses...................... 39,867 2,259 42,126 Depreciation and amortization........................... 3,917 342 $ 267(i) 4,526 Interest................................................ 581 124 169(j) 874 Equipment lease expense, net............................ 593 -- 593 Other (income) expense, net............................. (290) (25) (315) ------------ ------ ----- ----------- Total costs and expenses.............................. 44,668 2,700 436 47,804 ------------ ------ ----- ----------- Income before loss from joint venture and provision for income taxes............................................. 5,335 491 (436) 5,390 Loss from joint venture................................... (249) (249) ------------ ------ ----- ----------- Income before provision for income taxes.................. 5,086 491 (436) 5,141 Provision for income taxes................................ 1,711 -- 20(k) 1,731 ------------ ------ ----- ----------- Net income................................................ $ 3,375 $ 491 $ (456) $ 3,410 ------------ ------ ----- ----------- ------------ ------ ----- ----------- Net income per common share and common share equivalents.............................................. $ 0.40 $ 0.40 ------------ ----------- ------------ ----------- Weighted average shares outstanding....................... 8,399 67(l) 8,466 ------------ ----- ----------- ------------ ----- -----------
See accompanying notes to pro forma condensed consolidated financial statements. 17 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED MAY 31, 1996 ------------------------------------------------------- PRO FORMA PRO FORMA ACQUISITION AFTER COMPANY(A) EDITWORKS(H) ADJUSTMENTS ACQUISITION ------------ ------------- ------------- ----------- Revenues.................................................. $ 48,140 $ 3,305 $ 51,445 ------------ ------ ----- ----------- Costs and expenses: Operating costs and other expenses...................... 37,231 2,114 39,345 Depreciation and amortization........................... 3,967 313 $ 200(i) 4,480 Interest................................................ 531 122 127(j) 780 Equipment lease expense, net............................ 415 -- 415 Other (income) expense, net............................. (554) (46) (600) ------------ ------ ----- ----------- Total costs and expenses.............................. 41,590 2,503 327 44,420 ------------ ------ ----- ----------- Income before loss from joint venture and provision for income taxes............................................. 6,550 802 (327) 7,025 Loss from joint venture................................... (117) -- -- (117) ------------ ------ ----- ----------- Income before provision for income taxes.................. 6,433 802 -- 6,908 Provision for income taxes................................ 2,371 -- 171(k) 2,542 ------------ ------ ----- ----------- Net income................................................ $ 4,062 $ 802 $ (498) $ 4,366 ------------ ------ ----- ----------- ------------ ------ ----- ----------- Net income per common share and common share equivalents.............................................. $ 0.46 $ 0.49 ------------ ----------- ------------ ----------- Weighted average shares outstanding....................... 8,805 67(l) 8,872 ------------ ----- ----------- ------------ ----- -----------
See accompanying notes to pro forma condensed consolidated financial statements. 18 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS A description of the adjustments included in the Pro Forma Condensed Consolidated Financial Statements are as follows (dollars in thousands, unless otherwise noted): (a) Condensed from audited financial statements of the Company for the year ended August 31, 1995 and for the nine months ended May 31, 1996 included elsewhere in this Prospectus. (b) Condensed from Editworks' unaudited June 30, 1996 balance sheet. (c) To reflect purchase accounting writedown of Editworks equipment to fair market value. (d) To recognize goodwill arising from the purchase of Editworks, including estimated legal, accounting, audit and other acquisition related costs ($50). (e) The net bank borrowings to acquire Editworks, including an additional $500 due upon completion of certain conditions. (f) To record 66,863 shares of Class A Common Stock at $14.50 per share issued as part of the total purchase price of Editworks ($17 common stock; $953 additional capital). (g) Elimination of Editworks' equity. (h) Twelve month information is condensed from Editworks audited and unaudited income statements for the year ended December 31, 1994 less the nine months ended September 30, 1994 plus the nine months ended September 30, 1995. Nine month information is condensed from Editworks audited and unaudited income statements for the year ended December 31, 1995 less the nine months ended September 30, 1995 plus the six months ended June 30, 1996. (i) To adjust amortization for excess purchase costs over 15 years. (j) To adjust interest for borrowings to pay a portion of the purchase price of Editworks ($3,680 estimated at 8 1/2% for 5 years). (k) To adjust income taxes for income resulting from the inclusion of Editworks net income in the consolidated net income of the Company, net of the pro-forma adjustments noted above. (l) To increase average shares outstanding for the 66,863 shares of Class A Common Stock issued as part of the purchase. 19 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 of Chrysalis in London and in August 1996 of Editworks in Atlanta. The Company also acquired Todd-AO Studios West in 1995 and Filmatic and Editworks in 1996. 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 and the Unaudited Pro Forma Condensed Consolidated Financial Information appearing elsewhere in this Prospectus. 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:
NINE MONTHS ENDED YEARS ENDED AUGUST 31, MAY 31, ------------------------------- -------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- Revenues........................................... 100.0% 100.0% 100.0% 100.0% 100.0% --------- --------- --------- --------- --------- Costs and expenses: Operating costs and other expenses............... 82.6 82.2 79.7 79.2 77.3 Depreciation and amortization.................... 8.8 7.9 7.8 8.1 8.2 Interest......................................... -- -- 1.2 0.9 1.1 Equipment lease expense, net..................... -- -- 1.2 1.0 0.9 Other (income) expense, net...................... (1.7) (2.3) (0.6) (0.6) (1.1) --------- --------- --------- --------- --------- Total costs and expenses....................... 89.7 87.8 89.3 88.6 86.4 --------- --------- --------- --------- --------- Income before loss from joint venture and provision for income taxes................................. 10.3 12.2 10.7 11.4 13.6 Loss from joint venture............................ (3.7) (3.7) (0.5) (0.4) (0.2) --------- --------- --------- --------- --------- Income before provision for income taxes........... 6.6 8.5 10.2 11.0 13.4 Provision for income tax........................... 2.4 3.1 3.5 3.9 5.0 --------- --------- --------- --------- --------- Net income......................................... 4.2% 5.4% 6.7% 7.1% 8.4% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
20 NINE MONTHS ENDED MAY 31, 1996 COMPARED TO NINE MONTHS ENDED MAY 31, 1995 Revenues increased $11,015 or 29.7% from $37,125 to $48,140 due primarily to the acquisitions of Todd-AO Studios West in February 1995, Chrysalis in March 1995 and Filmatic in April 1996. The 1996 revenue increases for these new subsidiaries were $4,241, $5,643 and $338, respectively. These increases represent nine months of operations for Todd-AO Studios West and Chrysalis in 1996 versus a partial period in 1995. Two months of Filmatic's operations are included in 1996. The revenue increase for the remaining divisions was $793 or 2.7%. Operating costs and other expenses increased $7,826 or 26.6% from $29,405 to $37,231 due primarily to the acquisitions described above. While operating costs and other expenses increased in absolute dollars, they decreased as a percentage of revenue from 79.2% to 77.3%. This reduction was primarily the result of improved profit margins for a full nine month period realized from Todd-AO Studios West and Chrysalis and the consolidation of certain corporate overhead costs associated with these acquisitions. Depreciation and amortization increased $953 or 31.6% primarily due to the acquisitions but did not materially change as a percentage of revenue for the comparative periods. Interest expense, equipment lease expense and other income did not materially change in dollars or as a percentage of revenues for the comparative periods. As a result of the above, income before taxes increased $2,362 from $4,071 to $6,433 and net income increased $1,443 from $2,619 (7.1% of revenue) to $4,062 (8.4% of revenue). FISCAL YEAR ENDED AUGUST 31, 1995 AS COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1994 Total revenues increased $17,111 or 52.0% from $32,892 to $50,003. This increase is the result of the organization and acquisition of new operations in fiscal 1994 and 1995. Sound studio revenues increased $7,703 due to the acquisition of Skywalker Sound South by Todd-AO Studios West in February 1995. Todd-AO Studios West provides post production sound services for the film and television industries on the westside of Los Angeles. This increase in sound studio revenues was offset by a $3,583 or 10.8% decrease at the Los Angeles and New York studios due to reduced feature film dubbing bookings. These reduced bookings were primarily the result of a threatened strike in Los Angeles which caused scheduling irregularities through December 1994, and a feature film stage which was closed for remodeling through January 1995. Video services revenues increased $12,691 due to the inclusion of Todd-AO Video Services ($6,504), Todd-AO Digital Images ("TDI")($1,253) and Chrysalis ($4,934) in fiscal 1995. Todd-AO Video Services, which acquired certain assets and liabilities of Film Video Masters, Inc. on August 30, 1994, provides post production video services to the film and television industries. TDI, which was formed in the latter half of fiscal 1994, provides visual effects services to the same industries. Todd-AO Europe Holding Co. Ltd., a wholly owned subsidiary of the Company, acquired all of the outstanding shares of Chrysalis in March 1995. Both corporations are based in London and organized under the laws of the United Kingdom. Chrysalis specializes in the collation of television programming for satellite broadcast and also provides post production video services. Operating costs and other expenses increased $12,846 or 47.5% from $27,021 to $39,867 due primarily to the acquisitions described above. Operating costs and other expenses decreased as a percentage of revenue from 82.2% to 79.7%. This improvement is primarily the result of increased profit margins realized from Todd-AO Studios West and Chrysalis and the consolidation of certain corporate overhead costs associated with the acquisitions. Depreciation and amortization increased $1,314 or 50.5% due to the acquisitions described above but did not significantly change as a percentage of revenue between fiscal 1994 and 1995. 21 Interest expense increased from $24 in fiscal 1994 to $581 in fiscal 1995 primarily due to institutional borrowings of $7,726 in connection with the acquisition of Chrysalis in March 1995. In fiscal 1995, the Company also incurred equipment lease expense (net of deferred gain on sale of equipment) of $593 in connection with a December 1994 sale/leaseback agreement with its institutional lender. Other (income) expense, net declined by $483 in fiscal 1995 primarily due to current year research and development costs and non-recurring severance costs. Losses from the Company's entertainment project development joint venture declined from $1,215 (3.7% of revenue) in fiscal 1994 to $249 (0.5% of revenue) in fiscal 1995 due to the termination of the development phase of the venture early in fiscal 1995. As a result of the above, income before taxes increased $2,284 from $2,802 to $5,086 and net income increased $1,595 from $1,780 (5.4% of revenue) to $3,375 (6.7% of revenue). FISCAL YEAR ENDED AUGUST 31, 1994 AS COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1993 Revenues increased $5,490 or 20.0% from $27,402 in 1993 to $32,892 in 1994. This increase is primarily the result of an increase in the number of feature films serviced due to an increase in feature film product released by the major studios and an increase in aggregate overtime work required for these films. Scoring revenues increased $551 or 33% as the Todd-AO scoring stage completed its second full year of operation. In addition, all other ancillary services experienced revenue increases. Operating costs and other expenses increased $4,380 or 19.4% from $22,641 to $27,021 due to the revenue increases described above and a stock appreciation rights provision related to the increase in the Company's stock price. Operating costs and other expenses as a percentage of revenue remained consistent in the two years (82.2% versus 82.6%). Depreciation and amortization, while increasing $191 due primarily to equipment additions for Todd-AO Digital Images, a new visual effects facility created during the year, decreased as a percentage of revenue from 8.8% to 7.9%. Other (income) expense, net increased $290 due to realized gains from the sale of certain investments. As a result of the above, income before taxes increased $1,001 from $1,801 to $2,802 and net income increased $643 from $1,137 (4.2% of revenue) to $1,780 (5.4% of revenue). 22 QUARTERLY RESULTS OF OPERATIONS The following table presents selected unaudited quarterly financial information for each of the eight quarters ended May 31, 1996, both in dollars and as a percentage of total revenues. In the opinion of the Company's management, this information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the selected quarterly information when read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere in this Prospectus. The Company has historically experienced, and expects to continue to experience, quarterly fluctuations in operating performance. As a result, the operating results for any quarter are not necessarily indicative of results for any future period or for the full year. In particular, the operating results for the third quarter of fiscal 1995 and the first quarter of fiscal 1996 were favorably impacted by additional revenue due to substantial overtime services provided by the Company for certain major motion picture projects. The Company does not currently anticipate that substantial overtime services will be provided by the Company in the first quarter of fiscal 1997. See "Risk Factors--Fluctuations in Quarterly Results."
1994 FISCAL QUARTER 1995 FISCAL QUARTERS 1996 FISCAL QUARTERS ------------------------------------------ ------------------------------- FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND THIRD --------- --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS) CONSOLIDATED INCOME STATEMENT DATA: Revenues............................... $ 6,892 $ 8,778 $ 10,057 $ 18,290 $ 12,878 $ 18,140 $ 13,199 $ 16,801 --------- --------- --------- --------- --------- --------- --------- --------- Costs and expenses: Operating costs and other expenses... 6,934 8,136 8,541 12,872 10,318 13,023 11,256 12,952 Depreciation and amortization........ 715 830 740 1,444 903 1,266 1,322 1,379 Interest expense..................... 17 46 54 220 261 202 184 145 Equipment lease expense, net......... -- -- 149 222 222 212 132 71 Other (income) expense, net.......... (103) (415) 319 (271) 77 198 (573) (179) --------- --------- --------- --------- --------- --------- --------- --------- Total costs and expenses........... 7,563 8,597 9,803 14,487 11,781 14,901 12,321 14,368 --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) before loss from joint venture.............................. (671) 181 254 3,803 1,097 3,239 878 2,433 Loss from joint venture................ (368) (55) (54) (58) (82) (55) (62) -- --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) before provision for income taxes......................... (1,039) 126 200 3,745 1,015 3,184 816 2,433 Provision (benefit) for income taxes... (566) (50) 86 1,416 259 1,201 309 861 --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss)...................... $ (473) $ 176 $ 114 $ 2,329 $ 756 $ 1,983 $ 507 $ 1,572 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- (EXPRESSED AS A PERCENTAGE OF REVENUES) Revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% --------- --------- --------- --------- --------- --------- --------- --------- Costs and expenses: Operating costs and other expense.... 100.6 92.7 84.9 70.4 80.1 71.8 85.2 77.1 Depreciation and amortization........ 10.4 9.5 7.4 7.9 7.0 7.0 10.0 8.2 Interest expense..................... 0.2 0.5 0.5 1.2 2.0 1.1 1.4 0.9 Equipment lease expense, net......... -- -- 1.5 1.2 1.8 1.1 1.0 0.4 Other (income) expense, net.......... (1.5) (4.7) 3.2 (1.5) 0.6 1.1 (4.3) (1.1) --------- --------- --------- --------- --------- --------- --------- --------- Total costs and expenses........... 109.7 98.0 97.5 79.2 91.5 82.1 93.3 85.5 --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) before loss from joint venture.............................. (9.7) 2.0 2.5 20.8 8.5 17.9 6.7 14.5 Loss from joint venture................ (5.4) (0.6) (0.5) (0.3) (0.6) (0.3) (0.5) -- --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) before provision for income taxes......................... (15.1) 1.4 2.0 20.5 7.9 17.6 6.2 14.5 Provision (benefit) for income taxes... 8.2 (0.6) 0.9 7.8 2.0 6.7 2.4 5.1 --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss)...................... (6.9)% 2.0% 1.1% 12.7% 5.9% 10.9% 3.8% 9.4% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
23 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 terminates on December 30, 1999. Under the credit facility, including amendments in 1995 and 1996, the Company may borrow up to $20,000 and L5,000 in revolving loans until February 28, 2000. On that date and quarterly thereafter until the expiration of the agreement on November 30, 2003, the revolving loan commitment will reduce by 5% of the original loan commitment. These credit facilities are available for general corporate purposes, capital expenditures and acquisitions. Management believes that funds generated from operations, the proceeds from this offering, the proceeds from the sale/leaseback and the borrowings available under the credit facility will be sufficient to meet the needs of the Company at least through the end of 1997. See "Risk Factors--Future Capital Needs; Uncertainty of Additional Funding." In February 1995, the Company used $6,878 of the proceeds from the sale/leaseback agreement to acquire substantially all of the property, equipment and inventory of Skywalker Sound South, renamed Todd-AO Studio West. In March 1995, the Company used $7,726 under the credit facility in connection with the acquisition of Chrysalis. In August 1996, the Company used $4,280 under the credit facility in connection with the acquisition of Editworks. As of August 31, 1996, the Company had $8,437 outstanding under the credit facility. The Company expects capital expenditures of approximately $12,000 for its Los Angeles, New York City, Atlanta and London facilities in fiscal 1997. These capital expenditures will be financed by credit facilities and internally generated funds. 24 BUSINESS Todd-AO provides 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. Todd-AO provides these sound and video services to over 500 clients, including the major motion picture studios and television production companies such as Disney, Paramount, Turner, Sony, Warner Bros. and Spelling. 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 30 Academy Awards-Registered Trademark- and have won 18. 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. This strategy was formulated by the Company and is being executed under the leadership of Salah M. Hassanein, who became President in 1994. Mr. Hassanein has spent his entire career in the entertainment and media industry and has garnered significant international experience and mergers and acquisitions expertise with United Artists Theatres Circuit, Inc. and Time Warner International Theatres, where he was responsible for development and expansion of theater operations. 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 Todd-AO Video Services. In 1995, the Company expanded its sound studio business through the acquisition of Todd-AO Studios West with sound studios and facilities located in the West Los Angeles area. Also, in 1995, the Company expanded its operations into Europe through the acquisition of Chrysalis 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 in 1996 enlarged Todd-AO's video services capabilities in London and added film processing capability. In August 1996, the Company acquired Editworks in Atlanta, which specializes in providing video services to the advertising industry. As a result of these transactions, the Company has expanded its client base, increased its range of services and broadened its global market coverage. 25 Largely as a result of efforts implementing its strategy, the Company's annual sales have grown in the past two years at an annual compounded rate of 35% from $27.4 million in fiscal 1993 to $50.0 million in fiscal 1995. Net income has grown in the same period at an annual compounded rate of 72% from $1.14 million in fiscal 1993 to $3.38 million in fiscal 1995. INDUSTRY OVERVIEW Weinstock Media Analysis, in its December 1995 report, estimated the size of the 1994 U.S. audio and video post production services market at $4.8 billion, with average annual revenue growth of approximately 10% projected from 1996 through 1999. Total 1994 U.S. audio and video post production services provided by independent facilities was estimated to be $1.2 billion. The creation of feature films and television programs is traditionally divided into distinct but interrelated phases: production, post production, distribution and exhibition. Production is the actual recording of visual images on film or videotape which generally takes place on a physical set or location. Post production has been generally defined as the various activities required to prepare a product for commercial release which occur subsequent to production. Distribution is the process whereby the finished product is delivered, either physically or electronically, to the specific medium which will exhibit the product to the consumer, such as a movie theater, television network, cable channel or prerecorded videotape retailer. With the proliferation in the past two decades of entertainment media such as cable, satellite, laser disc, VCRs and DAT machines and the globalization of product distribution, the demarcation points between the four industry phrases have begun to blur. Technological advances in production and post production equipment, especially in the realm of computer technology, have increased the quality, variety and number of video post production services provided to customers. For example, technological innovations in interactive television, digital video compression, computerized video editing equipment, computer generated special effects and graphics, as well as other contemporary post production techniques, have become an integral part of the production of motion pictures, television programs and television commercials. In addition, the after-markets for original programming are growing at such a rapid rate that the scope of post production services now extends far beyond a product's original exhibition. Traditionally, American film and television production has been accomplished by outsourcing services to an array of small, talented providers, augmenting studio in-house operations. These businesses are generally specialized and highly fragmented, and often have limited capital resources to cope with ever- changing technological developments. The increasing sophistication and complexity of creating, preparing and distributing programming have prompted some post production service providers to seek both horizontal and vertical business integration as a means of better serving their clients. The two principal sources of post production work are new production, which is produced for initial and after-market exhibition, and existing libraries, which are continually reprocessed and reformatted for new markets or media. In the case of new production, a variety of services are generally required. After the picture has been photographed, it is edited using film, videotape and computers. Dialogue is enhanced or replaced, music and special effects are added, and the sound track and picture are synchronized to produce the master video and audio elements or film negative created for a specific market and a specific territory. Throughout the process, electronic images are transferred and copied. The technique of editing and finishing product in a computer environment is becoming the standard procedure for television and feature film production. Subsequent to initial release, programs are often modified and reformatted for use in other markets, media or territories. New languages substituted for the original language and subtitles or closed captioning may have to be added. Different record and playback technologies may be integrated and new versions created to comply with local censorship restrictions. Each of these versions requires the creation of a separate master element. 26 The vast program libraries of major U.S. film and television companies provide a major source of ongoing programming. These libraries, which are constantly expanding, must be continually remastered, augmented, restored, converted, reformatted and preserved by post production companies for use or reuse in new or existing markets or media. For example, a vintage television series such as I LOVE LUCY is remastered using the latest digital equipment to enhance the picture and audio quality. It is then formatted for video, pay TV, cable, U.S. television syndication, foreign television syndication, satellite or other uses. The Company believes that, as the worldwide growth in networks and channels accelerates, these libraries will provide much of the distributed programming. Potential technological developments which may impact future worldwide product distribution and exhibition are digital television and advanced television systems. Digital television represents the digitization of picture and audio targeted for the new multimedia formats (Digital Video Discs, CD-I, CD-ROM, 3DO, etc.), the Internet, and the interactive television systems being developed by TCI, Bell Atlantic, US West, Hughes DBS and others. Advanced television systems are new high-resolution imaging systems being developed for the exhibition of motion pictures and television programs. To accommodate these new digital systems, the Company believes the industry will require various post production services, which may include compression, digital conversion and remastering. COMPANY HISTORY The Todd-AO Corporation was founded in 1952 by legendary showman, Mike Todd ("Todd"), George Skouras of the Magna Theatre Corporation and Dr. Brian O'Brien of the American Optical Company ("AO") to develop and market a new process in the photography and projection of motion pictures. The new system resulted in a 70mm film format projected on a curved, wide screen with 6-track stereo sound. Rodgers and Hammerstein's OKLAHOMA! was the first feature presentation to be released using the new Todd-AO technology, and received the 1955 Academy Award-Registered Trademark- for Best Sound. The Todd-AO system was recognized with a Scientific Achievement Award from the Academy of Motion Picture Arts and Sciences in 1957. Expanding on its successful introduction of 6-channel theatrical sound, the Company focused its efforts on recording sound services and innovative technological advances in the development of the moviegoer's audio experience. Todd-AO continued to flourish in the 1950s and 1960s, with its creative personnel winning several Academy Awards-Registered Trademark- for Best Sound for SOUTH PACIFIC, THE ALAMO, WEST SIDE STORY and THE SOUND OF MUSIC. The 1970s and 1980s brought continued success with Academy Awards-Registered Trademark- for Best Sound for CABARET, THE EXORCIST, E.T.-THE EXTRA-TERRESTRIAL and OUT OF AFRICA. In addition to the Company's reputation for excellence in the feature film business, the Company developed a presence in television, providing sound services for a number of prime time TV programs beginning with BURNS AND ALLEN, MR. ED, THE ADDAMS FAMILY, THE BEVERLY HILLBILLIES, PETTICOAT JUNCTION and GREEN ACRES, and which continues today with BEVERLY HILLS 90210, MELROSE PLACE, NEWS RADIO, DANGEROUS MINDS, THE PRETENDER and TRACEY TAKES ON. Todd-AO secured its position as the leading independent provider of post production sound services with the 1986 acquisition of Glen Glenn Sound, a pioneer in television sound. In 1951, Glen Glenn teamed with Lucille Ball and Desi Arnaz on an experimental new situation comedy entitled I LOVE LUCY. In return for a reduced rate, Glen Glenn contracted all future sound services for Desilu, Lucy and Desi's production company. I LOVE LUCY established Glen Glenn Sound as a leader in television sound production and the company went on to provide sound services to some of the most memorable shows on television, including THE DICK VAN DYKE SHOW, BONANZA, GUNSMOKE, MAYBERRY RFD, GOMER PYLE, MY THREE SONS, MISSION IMPOSSIBLE, GET SMART and WILD, WILD WEST. Glen Glenn Sound was responsible for numerous technical innovations in sound recording, including the development and application of Automated Dialogue Replacement ("ADR") in 1964. First used on the TV series I SPY, ADR is now a standard process for virtually every film and long form television project in 27 the world today. Glen Glenn Sound received Technical Achievement Awards from the Academy of Motion Picture Arts and Sciences in 1974 and 1978. A year after the purchase of Glen Glenn Sound, the Company acquired TransAudio in New York, renamed Todd-AO Studios East. This acquisition gave the Company its first geographic presence outside of the Hollywood community and, with the addition of sound stages on the CBS lot in Studio City, California in 1988 and the construction of the Todd-AO scoring stage in 1992, contributed to the Company's revenue growth from approximately $14 million in 1986 to over $32 million by fiscal 1994. With the election of Salah M. Hassanein as President in 1994, the Company embarked on a strategy to grow the Company by expanding its service offerings, extending its geographic reach and increasing its customer base through the acquisition and creation of complimentary businesses, in part intended to lessen the Company's dependence on the motion picture production cycles. In addition to the knowledge of the Company which he has acquired as a Director since 1962, Mr. Hassanein has extensive international experience in building businesses through acquisitions and internal development. During his tenure at United Artists Theatre Circuit, Inc. and Warner Bros. International Theatres, Mr. Hassanein was responsible for development and expansion of these organizations' theater circuits. With the acquisition of Todd-AO Video Services in 1994, the Company entered the video services business. In 1995 and 1996, Todd-AO entered the European market through its London acquisitions of Chrysalis and Filmatic, respectively. These acquisitions not only gave the Company a presence in Europe but also expanded its video services capabilities to include collation of television programming for satellite broadcast and film processing capability. Also in 1996, the Company acquired Editworks which expanded Todd-AO's video services to Atlanta and provided the Company with a presence in the commercial and advertising market. STRATEGY 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 toward 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 key elements of the Company's strategy are as follows: -STRATEGIC ACQUISITIONS. The Company is continually searching for and evaluating possible acquisitions in order to expand its range of services, complement its existing business, extend its geographic reach and increase its customer base. The Company believes that there are significant opportunities in this area due to the historic fragmentation of the post production services business and the current and projected capital requirements all companies must face to support technological change. With the acquisition of Todd-AO Video Services in 1994, the Company entered the video services business. The acquisition of Todd-AO Studios West in 1995 provided Todd-AO with sound studios and facilities in the West Los Angeles area, a location experiencing rapid growth in the entertainment industry. Todd-AO made its first entry into the European market by acquiring Chrysalis in 1995 while at the same time expanding its video services capabilities to include collation of television programming for satellite broadcast. The purchase of Filmatic in 1996 expanded Todd-AO's video services capabilities in London and added film processing capability. The addition of Editworks in August 1996 expanded Todd-AO's video services to Atlanta and established the Company's presence in the commercial and advertising market. See "Risk Factors - Risks Related to Growth Through Acquisitions." -INTERNAL GROWTH. The Company seeks to identify and develop additional services that will complement its existing business, to increase the capacity for existing services through capital expenditures and to 28 expand and develop the services offered by acquired businesses. For example, in 1994, Todd-AO established Todd-AO Digital Images to provide computerized visual special effects for motion pictures and television. -STRATEGIC ALLIANCES. The Company believes that there may be opportunities to partner with other companies in the industry to achieve business goals that it could not accomplish alone. In 1996, Todd-AO entered into a joint venture with Chace Production Services to provide sound preservation and other ancillary services. Todd-AO has also entered into a joint venture with United Artists Theatre Circuit, Inc. to create and promote a new film print process, known as Compact Distribution Print, or "CDP". See "Other Services" below. The Company's operational philosophy is essential to its long-term success and profitability. This philosophy involves the decentralization of day-to-day operational decision making, while maintaining centralized control of overall strategic vision and strict financial control over capital expenditures. The managers of Todd-AO's divisions and subsidiaries, most of whom have managed their businesses for many years, are given substantial day-to-day operational control of their businesses. In evaluating acquisition candidates, the Company generally gives substantial weight to the quality of existing management and its potential to contribute to the future of Todd-AO both on a divisional and corporate level. The Company is also committed to maintaining its long-standing global reputation for quality, which the Company believes is based principally on the abilities of its key management and creative personnel and their long association with Todd-AO and its customers. From its beginnings in the 1950's, the Company has trained most of its creative and artistic personnel in-house to maintain its quality standards. The Company believes that its long history of quality services and stability greatly enhance its ability to attract customers. SOUND STUDIO OPERATIONS 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 (rerecord) 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 soundtrack of a major motion picture or television show is broken down into three key elements: dialogue or narration, music and sound effects. The dialogue track is created by production field recording. This is the on-set recording of the actors, completed in conjunction with the filming. Occasionally, problems will occur during the recording of the production track, ranging from jet noise above a Western set to electrical lighting hum during a close-up. These tracks will be replaced by a sound recording process known as ADR. The actor is brought to a sound stage to redo or "loop" the lines that need replacing. ADR is usually performed after the picture has finished shooting and just prior to the rerecording or the "mix" of the show. The music track or score plays a significant role in the creative process. A composer is provided with the edited version of the film and writes music to accompany the picture. It is not uncommon for the Company to have on its scoring stage an orchestra in excess of 100 pieces playing in synchronization with the picture under the guidance of the composer. Such orchestrations, along with "canned" or "library" music, make up the music track for motion pictures today. The music accompanying the picture is used primarily for mood setting, theme and pacing of the film. At Todd-AO, the focus is on the original recording of the orchestra and its subsequent mix into the final soundtrack of the film. 29 The sound effects tracks, similar to the dialogue and music tracks, play a significant role in the overall sound of a motion picture. The elements that make up the sound effects tracks come from four primary sources: (i) sound effects recorded during the filming or taping of the production, (ii) original recordings of naturally occurring sounds created by the production mixer or specialist, (iii) sound effects from existing libraries of generic or commonplace sounds, and (iv) a stage recording process referred to as "Foley" during which original effects such as footsteps, body movements, and various customized sounds are recorded live in synchronization with the film or tape. Upon completion of all the dialogue, music and effects recording, the materials are edited in total synchronization with the picture. The sound mixing process is generally completed in a large stage atmosphere with three mixers or engineers, one specializing in dialogue, one in effects, the third in music, working in tandem under the film's director. The process is a very creative one and calls for the blending of sounds to support and enhance the visual action on the screen. Upon completion of the mix, an optical negative sound track is shot containing the entire mixed track. This negative element is sent to the film laboratory to be developed. The sound and picture negatives are then printed together to make a composite print. This print is distributed to the theaters for exhibition. 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 (rerecording) 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. 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 eight Academy Award-Registered Trademark- nominations in the last nine years and two Academy Awards-Registered Trademark- in the last four years. A list of some of Todd-AO's 1996 credits include: A TIME TO KILL, COURAGE UNDER FIRE, THE CABLE GUY, MISSION IMPOSSIBLE, FLED, and THE CHAMBER. 30 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) - --------- -------------------------------- --------- --------------------------------------------------- 1995 APOLLO 13, Braveheart 1978 Hooper 1994 Legends of the Fall 1977 Close Encounters of the Third Kind, Sorcerer 1993 Schindler's List 1976 A Star Is Born 1992 LAST OF THE MOHICANS 1973 THE EXORCIST 1990 Dick Tracy 1972 CABARET 1988 Who Framed Roger Rabbit 1965 THE SOUND OF MUSIC 1987 Empire of the Sun 1963 Cleopatra 1985 OUT OF AFRICA 1961 WEST SIDE STORY 1982 E.T. - THE EXTRA-TERRESTRIAL 1960 THE ALAMO 1979 1941 1958 SOUTH PACIFIC 1955 OKLAHOMA!
Other Academy Awards-Registered Trademark- received:
YEAR ACCOMPLISHMENT - --------- --------------------------------------------------------------------- 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 1957 Scientific/Technical Achievement Award
Todd AO's customer base for sound services has two components, feature film and television. The majority of Todd-AO's customers for feature films are independent production companies or studio in-house producers, each of whom distribute their product through one of the seven major studios-- Paramount, Warner Bros., Sony(Tri-Star Pictures, Inc./Columbia Pictures), Disney, Universal Pictures (Universal), Twentieth Century Fox Film Corp. (Fox), and Metro-Goldwyn-Mayer, Inc. (MGM). The major studios provide the majority of Todd-AO's work. Approximately 75% of the Company's feature film work results from relationships with creative personnel. Often, a director, producer, or film editor will request a specific mixer or sound supervisor to work on his or her film. The remaining 25% of feature film work results from overflow from the major studios when they are unable to service their product in-house. Paramount has been the Company's largest supplier of product over the past three years. However, any one of the major studios may be the largest customer for a particular year based upon the number of films completed for that studio. Todd-AO prices and bills each feature film on an hourly or daily basis, charging for actual services rendered and time expended. Todd-AO's pricing varies for each project depending on the required personnel and facilities. The client base for television services is much more diverse. Todd-AO's major television clients include Spelling, MTM Entertainment, Inc. (MTM), DreamWorks SKG and Home Box Office, Inc. (HBO). Television pricing is generally based on a full complement of services. Movies-of-the-week, one hour dramas and half hour comedies are all priced and billed on a per show or episode basis. 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 31 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 150 customers including the major motion picture and television studios, independent producers, advertising agencies, television networks, cable program suppliers and television program syndicators. Projects on which the Company has performed video services in the past 12 months include: A FEW GOOD MEN, SENSE AND SENSIBILITY, THE INDIAN IN THE CUPBOARD, REMAINS OF THE DAY, THE AMERICAN PRESIDENT, SISTER ACT II, MUCH ADO ABOUT NOTHING, THE JOY LUCK CLUB, PHILADELPHIA, LIKE WATER FOR CHOCOLATE, PULP FICTION, THE NET and FORREST GUMP. 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. Chrysalis 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), Chrysalis 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. 32 -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. -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. Todd-AO's ten largest video service customers account for over 75% of the division's total revenues. Except in connection with transmission services, long-term or exclusive contracts with customers are unusual in the post production industry. Customers generally do not make arrangements with the Company until shortly before its facilities and services are required. While Todd-AO does not ordinarily have long-term arrangements with customers, it may commit specific facilities, e.g., telecine suites, to certain major customers for specified periods of time. Typically, these customers do not have an obligation to pay for the facilities unless they are utilized. However, major customers typically inform the Company of their expected needs and receive pricing based on anticipated volumes. Transmission services, which are highly specialized and capital intensive, are generally provided to customers under contracts of two to three years in length. Video services provided for production of film and television programming are generally priced on an hourly basis, and services provided for distribution are generally priced on a per product basis. A majority of the Company's business is priced on an hourly basis. OTHER SERVICES -PRESERVATION. Todd-AO has entered into a joint venture with Chace Production Services for the protection, preservation, storage and retrieval of motion picture and television sound tracks. Todd-AO/ Chace is a vertically integrated company, providing a full range of sound preservation, media management services including data collection, transfer, protection and hierarchical storage. In addition to sound track preservation, Todd-AO/Chace intends to provide complete library services. These include client/server access, cataloguing, data base creation and entry, custom transfer services and audition libraries. -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 1,000 customers, including colleges, universities, corporate and training companies, film and video libraries, independent production companies and broadcast television. Currently, the British Broadcasting Corp represents 20% of Filmatic's business. -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 33 costs. Opportunities for the implementation of CDP are currently being explored. The joint venture has received no firm commitments for the application of CDP, and there are no assurances that film distributors will choose to implement CDP. SALES AND MARKETING Todd-AO has traditionally obtained new business based on its long history of reliable delivery of quality services and its relationships with the motion picture studios, many of which are its major clients. The Company receives new projects based on the desire of creative personnel to work with Todd-AO's skilled technicians and artists and from the clients' need for a reliable provider of quality services. Studio sound services are generally ordered on an individual project basis, with the production company booking studio time and often specifying the sound mixers with whom it wishes to work. With its entry into the video services business, the Company has attempted to expand its relationships with the major studios to become a corporate strategic partner, rather than simply a project vendor. The Company believes that it has the expertise and management skills to address the needs of its customers on a full service basis, not just on specific projects, and to offer new services and to expand into new markets and territories in response to its customers needs. 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, on a wider basis, LucasFilms 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 and Digital Sound and Picture. 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 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 and All Post. These companies all currently provide a significantly larger and more complete array of services and facilities than Todd-AO. The Company believes its major direct competition in the London market for transmission are Molinare, Oasis, Telecine and TVP. 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 34 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") 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. PROPERTIES Sound studio operations are conducted in various owned, leased or licensed premises in the Los Angeles 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 127,000 sq. ft. of building space are 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 sound studio facilities include premises licensed from CBS Studio Center under agreements expiring in 1999 and 2003. The agreement which expires in 2003 can be extended for an additional five 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 five 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 facility operates under a lease agreement for approximately 20,000 square feet which expires in August 1999 and which can be extended for two additional five-year terms or terminated on 90 days' written notice at the Company's option. The newly acquired 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. A portion of the London post production video and transmission facility is subject to a lease agreement which expires in March 2008. EMPLOYEES Todd-AO employs approximately 500 employees, some on a project-by-project basis. The Company has employment agreements with 60 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. 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 statements. 35 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company are as follows:
NAME AGE* POSITION WITH COMPANY - -------------------------------------- ----- ------------------------------------------------------------------- Salah M. Hassanein (1)................ 75 President, Chief Executive Officer and Director Silas R. Cross........................ 57 Vice President, Treasurer and Assistant Secretary Clay M. Davis......................... 50 Vice President J.R. DeLang........................... 40 Senior Vice President and Director Graham Hall........................... 38 Managing Director of Chrysalis/Todd-AO Europe, Ltd. Coburn T. Haskell..................... 44 Vice President and Controller Richard C. Hassanein.................. 45 Vice President and Director Christopher D. Jenkins................ 41 Senior Vice President and Director Dan Malstrom.......................... 45 Secretary Marshall Naify (1).................... 76 Co-Chairman of the Board of Directors Robert A. Naify (1)................... 74 Co-Chairman of the Board of Directors Richard O'Hare........................ 43 President of Todd-AO Video Services A.C. Childhouse (2)................... 86 Director David Haas............................ 55 Director Herbert L. Hutner (2)................. 87 Director Robert I. Knudson..................... 71 Director Michael S. Naify...................... 34 Director A. Frank Pierce....................... 66 Director Zelbie Trogden (2).................... 60 Director
- ------------------------ * As of October 1, 1996. (1) Member of the Executive Committee. (2) Member of the Audit and Compensation 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 Theatres 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 of United Artists Eastern Theatres, Inc. Mr. Hassanein is a principal of SMH Entertainment, Inc. and a director of United Artists Eastern Theatres, Inc. and Software Technologies Corporation. Silas R. Cross became Vice President and Controller 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. 36 Graham Hall was appointed Managing Director of Chrysalis 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 and served as Executive Vice President of the Company's subsidiary, Todd-AO Studios West, since 1995. Previously, he served as Executive Vice President of the Company's subsidiary, Todd-AO Studios East, from 1991 to 1995. Prior to 1991, Mr. Hassanein was an independent representative for film and television producers. Previously, he was President of United Film Distribution Co., Inc. 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. Dan Malstrom is an attorney in private practice and has served as the Company Secretary since 1987. 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 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. A.C. Childhouse was elected a Director in 1964. He previously served as a Senior Vice President and Director of UACI. Mr. Childhouse is an investor. David Haas was elected a Director in October 1996. Mr. Haas has been a financial consultant since 1995, and has assisted clients in the negotiation and structuring of acquisitions. From 1990 to 1994, Mr. Haas served as Senior Vice President and Controller of Time Warner 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. 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 Time Warner Entertainment. From 1955 to 1972, Mr. Pierce served in numerous international positions within 37 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. Zelbie Trogden was elected a Director in 1994. He has been a financial consultant and a director of Citadel Holding Corporation and Fidelity Federal Bank since 1993. Prior thereto, he held various executive positions with Bank of America and Security Pacific National Bank from 1960 to 1993. COMMITTEES OF THE BOARD The Company has an Executive Committee composed of Messrs. Salah Hassanein, Marshall Naify and Robert A. Naify. The functions of the Executive Committee include acting on matters which by reason of time limitations cannot be acted upon by the Board of Directors and studying matters which are anticipated to be considered by the Board in the future. The Company also has Compensation and Audit Committees, each consisting of Messrs Childhouse, Hutner and Trogden. The principal functions of the Compensation Committees are to review and make recommendations to the Board of Directors concerning executive compensation. The Audit Committee makes recommendations to the Board concerning the engagement of independent auditors, reviews the auditing engagement, its results and the Company's internal accounting controls, and directs investigations into matters within the scope of its functions. A Committee consisting of Messrs. Childhouse and Hutner administers the Company's Stock Option Plans. EXECUTIVE COMPENSATION All applicable share and per share data for periods included in the compensation tables set forth below have been adjusted to retroactively reflect a 10% stock dividend paid on September 29, 1995. SUMMARY COMPENSATION TABLE. Directors receive no cash compensation for their services as directors. The following table shows, for the years ended August 31, 1996, 1995 and 1994 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 $100,000 for the year ended August 31, 1996.
LONG-TERM COMPENSATION --------------- ANNUAL COMPENSATION(1) NO. OF --------------------------- SECURITIES FISCAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY ($) OPTIONS COMPENSATION($) - ------------------------------------------------------- ----------- -------------- --------------- ---------------- Salah M. Hassanein 1996 $ 100,000(2) -- $ -- President and Chief Executive Officer 1995 100,001(2) 66,000 -- The Todd-AO Corporation 1994 100,000(2) 110,000 -- J.R. DeLang 1996 335,442 -- 15,000(3) Executive Vice-President 1995 293,942 -- 19,168(3) Todd-AO Studios 1994 203,876 -- 3,073(3) Christopher D. Jenkins 1996 575,631(4) -- 3,460(4) President 1995 465,981(4) -- 3,385(4) Todd-AO Studios 1994 471,920(4) -- 4,146(4) Clay M. Davis 1996 176,546 -- 3,460(5) Vice President 1995 151,575 16,500 3,385(5) Todd-AO Studios 1994 151,231 -- 3,385(5) Richard O'Hare 1996 173,695 -- 17,228(6) President Todd-AO Video Services 1995 176,491 11,000 -- 1994 -- -- --
(FOOTNOTES ON FOLLOWING PAGE) 38 - ------------------------ (1) The columns for "Bonus" and "Other Annual Compensation" have been omitted because there is no compensation required to be reported in such columns. 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 $80,000 for 1996, 1995 and 1994. (3) Amounts shown as "All Other Compensation" represent contributions made by the Company to its 401(k) Plan for 1996 and 1995 and under a collective bargaining agreement to the Motion Picture Industry Pension Plan for 1994 on Mr. DeLang's behalf. (4) Amounts shown as salary include compensation of $475,631, $365,981 and $388,586 for 1996, 1995 and 1994, respectively, attributable to services as a sound mixer. Amounts shown as "All Other Compensation" represent contributions made by the Company under a collective bargaining agreement to the Motion Picture Industry Pension Plan on Mr. Jenkin's behalf. (5) Amounts shown as "All Other Compensation" represent contributions made by the Company under a collective bargaining agreement to the Motion Picture Industry Pension Plan on Mr. Davis' behalf. (6) Amounts shown as "All Other Compensation" represent contributions made by the Company to its 401(k) Plan on Mr. O'Hare's behalf. OPTION EXERCISES AND VALUE TABLE. No stock options were granted by the Company during the fiscal year ended August 31, 1996 to the executive officers named in the Summary Compensation Table. The following table shows each exercise of stock options during the fiscal year ended August 31, 1996 by each of the executive officers named in the Summary Compensation Table, together with respective aggregate values of unexercised options as at August 31, 1996.
NUMBER OF VALUE OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS VALUE AT AUGUST 31, 1996 AT AUGUST 31, 1996 SHARES ACQUIRED REALIZED -------------------------- -------------------------- NAME ON EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --------------------------- --------------- ----------- ----------- ------------- ----------- ------------- Salah M. Hassanein......... -- -- 110,000 66,000 $ 924,880 $ 626,208 J.R. DeLang................ -- -- 52,800 13,200 463,331 105,930 Christopher D. Jenkins..... -- -- 59,400 6,000 524,964 52,965 Clay M. Davis.............. -- -- 20,900 6,600 195,569 52,965 Rick O'Hare................ -- -- 6,600 4,400 50,741 33,827
EMPLOYMENT AGREEMENTS The Company has employment agreements with Messrs. Jenkins, DeLang and O'Hare. 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. The agreement with Mr. DeLang (expiring September 30, 1997) provides for a salary of $285,000 for the twelve months ending September 30, 1995, $300,000 for the twelve months ending September 30, 1996 and $320,000 for the twelve months ending September 30, 1997. Mr. O'Hare's agreement (expiring August 31, 1997) provides for a salary of $153,016, $168,000 and $203,000 for the twelve months ending August 31, 1995, 1996, and 1997, respectively. 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. 39 STOCK OPTIONS The Company presently has three stock option plans (the 1986 Stock Option Plan, the 1994 Stock Option Plan and the 1995 Stock Option Plan). All plans relate solely to shares of Class A Common Stock. 1986 STOCK OPTION PLAN The Company's 1986 Stock Option Plan (the "1986 Plan") was approved by the shareholders in July 1987. The 1986 Plan provides for the grant of incentive stock options (at not less than 100% of fair market value on the date of the grant), non-qualified stock options (at not less than 85% of fair market value on the date of the grant) or a combination thereof. An aggregate of 660,000 shares of Class A Common Stock was originally reserved for issuance under the 1986 Plan, which is administered by the Stock Option Committee of the Board of Directors. Options to purchase an aggregate of 290,735 shares were outstanding under the 1986 Plan at August 31, 1996 as incentive and non-qualified options at exercise prices ranging from $2.03 to $5.06 per share. On February 7, 1995, the shareholders approved an extension of the termination date of the 1986 Plan until August 31, 2004 with respect to options for an aggregate of 213,675 shares granted on September 26, 1994. Nonqualified options to purchase an aggregate of 163,560 shares are fully vested and were scheduled to expire on August 31, 1996. The termination date of the 1986 Plan with respect to these options was extended as to 50% of the shares, until August 31, 1997 and, as to the remaining 50% of the shares, August 31, 1998, by the shareholders at the annual meeting held on March 27, 1996. 1994 STOCK OPTION PLAN The Company's 1994 Stock Option Plan (the "1994 Plan") was approved by the shareholders in August 1994. The 1994 Plan provides for the grant of incentive stock options (at not less than 100% of fair market value on the date of the grant), non-qualified stock options (at not less than 85% of fair market value on the date of the grant) or a combination thereof. An aggregate of 330,000 shares has been reserved for issuance under the 1994 Plan. All of those shares have been awarded to Salah Hassanein (at an exercise price of $3.26 per share) and Marshall Naify and Robert A. Naify (at an exercise price of $3.59 per share) as incentive options to purchase 110,000 shares of Class A Common Stock each. The options vest over a five-year period commencing on September 1, 1994 and once vested terminate on August 31, 2003 (in the case of Mr. Hassanein) and June 23, 1999 (in the case of Messrs. Marshall Naify and Robert Naify). As of August 31, 1996, there were no options available for grant under the 1994 Plan and absent forfeitures, it is not expected that any additional options will be awarded. The 1994 Plan is administered by the Stock Option Committee. 1995 STOCK OPTION PLAN The Company's 1995 Stock Option Plan (the "1995 Plan") was approved by the shareholders in February 1995. The 1995 Plan provides for the grant of incentive stock options (at not less than 100% of fair market value on the date of the grant), non-qualified stock options (at not less than 85% of fair market value on the date of the grant) or a combination thereof. An aggregate of 770,000 shares is reserved for issuance under the 1995 Plan. Options to purchase an aggregate of 387,910 shares were outstanding under the 1995 Plan at August 31, 1996 as incentive and non-qualified options at exercise prices ranging from $4.50 to $7.125 per share. The options vest over a five year period commencing on or near the date of grant and once vested terminate on August 31, 2004. As of August 31, 1996, there were 337,390 shares available for future grant of options under the 1995 Plan. The 1995 Plan is administered by the Stock Option Committee. 40 PRINCIPAL SHAREHOLDERS The following table sets forth information with respect to the beneficial ownership of the Company's outstanding Common Stock as of August 31, 1996 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 PERCENT BEFORE OFFERING PERCENT AFTER OFFERING OWNED (2) (2) ----------------------------- ------------------------ ------------------------ NAME(1) CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B - -------------------------------------- ----------------- ---------- ----------- ----------- ----------- ----------- A.C. Childhouse....................... 41,087 -- .63% --% .45% --% Clay M. Davis......................... 20,900(3) -- .32 -- .23 -- J.R. DeLang........................... 52,800(3) -- .80 -- .58 -- Heine Securities Corporation(4)....... 652,442 -- 9.95 -- 7.20 -- Richard C. Hassanein.................. 15,400(3) -- .23 -- .17 -- Salah M. Hassanein.................... 517,143(3) -- 7.76 -- 5.64 -- Herbert L. Hutner..................... 19,210 -- .29 -- .21 -- Christopher D. Jenkins................ 59,400(3) -- .90 -- .65 -- Robert I. Knudson..................... 72,789(3) -- 1.10 -- .80 -- Marshall Naify(7)..................... 1,138,369 (3)(5 678,839 17.23 38.85 12.50 38.85 Michael S. Naify(7)................... 72,834 -- 1.11 -- .80 -- Robert A. Naify(7).................... 1,065,914 (3)(6 906,290 16.14 51.87 11.71 51.87 Other Naify Interests(7).............. 775,855 118,510 11.84 6.78 8.57 6.79 Zelbie Trogden........................ 4,400(3) -- .07 -- .05 -- All directors and current executive officers as a group (18 persons)..... 3,108,346(3) 1,585,129 47.01 90.72 34.11 90.72
- ------------------------ (1) The address of each of the beneficial owners identified is 172 Golden Gate Avenue, San Francisco, California 94102, except for Heine Securities Corporation whose address is 51 JFK Parkway, Short Hills, New Jersey 07078. (2) Based on 6,555,640 shares of Class A Common Stock and 1,747,181 shares of Class B Common Stock outstanding at August 31, 1996 and 9,055,640 shares of Class A Common Stock after consummation of this offering. 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. (3) Includes options exercisable within 60 days by Messrs. Davis, DeLang, R. Hassanein, S.M. Hassanein, Jenkins, Knudson, M. Naify, R.A. Naify, Trogden, and all directors and current executive officers as a group to purchase, respectively, 20,900, 52,800, 14,300, 110,000, 59,400, 40,700, 50,050, 50,050, 4,400 and 421,300 shares of Class A Common Stock. (4) Schedule 13G filed on February 10, 1996 by Heine Securities Corporation and Michael F. Price indicates that Heine Securities Corporation has sole investment discretion and voting authority with respect to the shares of Class A Common Stock, which are legally owned by one or more of its investment advisory clients. (FOOTNOTES CONTINUED ON NEXT PAGE) 41 (5) Includes 98,067 Class A shares held in the name of Marshall Naify as trustee for one of his children and 30,166 shares of Class A Common Stock held by a trust for which Mr. Naify is both trustee and beneficiary. Excludes 106,092 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) Excludes 461,473 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) 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 August 31, 1996 is 3,052,972 (46.32%) and 1,703,639 (97.51%), respectively before and percentages of 33.58% and 97.51%, respectively after. 42 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 30,000,000 shares of Class A Common Stock, $.01 par value, 6,000,000 shares of Class B Common Stock, $.01 par value, and 1,000,000 shares of Preferred Stock, $.01 par value. The par value for all classes was changed from $.25 to $.01 in July 1996. COMMON STOCK VOTING RIGHTS. Holders of Class A Common Stock and Class B Common Stock are entitled to one vote and ten votes per share, respectively, on all matters submitted to a vote of shareholders, including the election of directors. With certain exceptions, and except as otherwise required by law the holders of Class A Common Stock and Class B Common Stock vote together as a single class, subject to any voting rights which may be granted to holders of Preferred Stock. Since the Common Stock does not have cumulative voting rights, the holders of a majority of the outstanding shares voting for election of directors can elect all members of the Board of Directors. However, if and whenever and for so long as dividends accrued and unpaid on the outstanding Class A Common Stock equal or exceed an amount equal to eight (8) full quarterly dividends on all shares of Class A Common Stock then outstanding, then, until all dividends in default on the Class A Common Stock shall have been paid, or declared and set aside, the holders of the Class A Common Stock, voting together as one class are entitled to elect two directors, and the remaining members of the Board of Directors are to be elected by the holders of the Class A Common Stock and the Class B Common Stock voting together, as a single class, subject to any voting rights which may be granted to the holders of Preferred Stock. Except as provided in the next sentence, a majority vote is also sufficient for other actions that require the vote or concurrence of shareholders. The Company may not merge or consolidate with or into any other corporation in which the Company is not the surviving corporation; sell, lease exchange or otherwise dispose of all or substantially all of its assets; or dissolve; unless and until such transaction is authorized by the vote, if any, required by applicable law and the provisions of any Preferred Stock then outstanding; and unless and until such transaction is authorized by a majority of the shares voting of Class A Common Stock and of Class B Common Stock, each voting separately as a class, unless a greater vote is required by Delaware law. The Company may not effect the issuance of any additional shares of Class B Common Stock (except in connection with stock splits and stock dividends) unless and until such issuance is authorized by the holder of a majority of the outstanding shares of the Class B Common Stock. See "Principal Shareholders." DIVIDEND RIGHTS. Subject to the rights of the holders of Preferred Stock, holders of Class A Common Stock are entitled to receive out of funds legally available therefor, cumulative cash dividends at an annual rate of $.045 per share per year (subject to adjustment for stock splits and stock dividends) payable quarterly at dates fixed by the Board of Directors, before any cash dividend may be declared or paid on the Class B Common Stock. Dividends on the Class A Common Stock are cumulative. Accumulations of dividends do not bear interest. If cash dividends are paid on the Class A Common Stock in excess of the minimum dividend specified, the excess of all such dividends (computed with respect to dividends paid after the date on which dividends begin to accumulate) over such minimum rate is to be applied to future periods to reduce the amount of any dividend which must be paid in such future period on the Class A Common Stock before cash dividends can be declared or paid on the Class B Common Stock. Subject to the rights of the holders of Preferred Stock, and to holders of Class A Common Stock, Class B Common Stock is entitled to receive such dividends and other distributions in cash, stock or property of the Company as may be declared thereon by the Board of Directors from time to time out of assets or funds of the Company legally available therefor, provided that if at any time a cash dividend is paid on the Class A Common Stock (including dividends on the Class A Common Stock at the minimum rate), a cash dividend must also be paid on the Class B Common Stock equal to 90% of the amount of the dividend paid on the Class A Common Stock. In the case of dividends or other distributions payable in stock of the Company other than Preferred Stock, including distributions pursuant to stock splits or divisions of stock of the Company other than Preferred Stock, only shares of Class A Common Stock may be distributed with 43 respect to Class A Common Stock and only shares of Class B Common Stock in an amount per share equal to the amount per share paid with respect to the Class A Common Stock may be distributed with respect to Class B Common Stock, and that, in the case of any combination or reclassification of the Class A Common Stock, the shares of Class B Common Stock will also be combined or reclassified so that the number of shares of Class B Common Stock outstanding immediately following such combination or reclassification bear the same relationship to the number os shares outstanding immediately prior to such combination or reclassification as the number of shares of Class A Common Stock outstanding immediately following such combination or reclassification bears to the number of shares of Class A Common Stock outstanding immediately prior to such combination or reclassification. See "Price Range of Common Stock and Dividends." LIQUIDATION RIGHTS. After provision for the holders of any Preferred Stock, holders of Common Stock will be entitled to share ratably in the assets of the Company legally available for distribution to shareholders in the event of liquidation or dissolution. OTHER RIGHTS. Transfer of the Class B Common Stock is limited to certain permitted classes of transferees. Upon a disqualifying disposition or upon the election of the holder, Class B Common Stock may be converted into Class A Common Stock on a one-for-one basis. The holders of Class A Common Stock have no conversion rights. The holders of Class A and Class B Common Stock have no preemptive rights. The shares of Class A Common Stock offered hereby will be, when issued and paid for, fully paid and not liable for further call or assessment. PREFERRED STOCK Although the Company has no present plans to issue shares of Preferred Stock, Preferred Stock may be issued from time to time in one or more classes or series with such designations, powers, preferences, rights, qualifications, limitations and restrictions as may be fixed by the Company's Board of Directors. The Board of Directors, without obtaining shareholder approval, could issue the Preferred Stock with voting or conversion rights and thereby dilute the voting power and equity of the holders of Common Stock and adversely affect the market price of such stock. See "Risk Factors--Control by Principal Shareholders; Potential Issuance of Preferred Stock; Anti-Takeover Provisions." CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK The authorized but unissued shares of Common Stock and Preferred Stock are available for future issuance without shareholder approval. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, acquisitions and employee benefit plans. TRANSFER AGENT The transfer agent and registrar of the Class A Common Stock is Continental Stock Transfer and Trust Co., New York, New York. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have 9,055,640 shares of Class A Common Stock outstanding (9,430,640 shares if the Underwriters' over-allotment option is exercised in full) and 1,747,181 shares of Class B Common Stock outstanding, based upon the number of shares outstanding as of August 31, 1996. Of these shares, the 2,500,000 shares sold in this offering (2,875,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable without restriction or 44 further registration under the Securities Act, except for any shares purchased by "affiliates" of the Company, as that term is defined under the Securities Act ("Affiliates"). SALES OF RESTRICTED SHARES There are 66,863 shares of Class A Common Stock which are deemed "restricted securities" under Rule 144 under the Securities Act and may not be sold unless they are registered under the Securities Act or unless an exemption, such as the exemption provided by Rule 144, is available. None of these restricted shares are currently eligible for sale in the public market in accordance with Rule 144. Certain security holders have the right to have their restricted shares registered by the Company under the Securities Act as described below. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including an affiliate, who has beneficially owned restricted shares for at least two years, is entitled to sell within any three-month period, a number of such shares that does not exceed the greater of (i) one percent of the then outstanding shares of Common Stock (approximately 90,556 shares after this offering) or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks preceding the date on which notice of such sale is filed with the Commission. In addition, under Rule 144(k), a person who is not an Affiliate and has not been an Affiliate for at least three months prior to the sale and who has beneficially owned the restricted shares for at least three years may resell such shares without compliance with the foregoing requirements. In meeting the two and three year holding periods described above, a holder of restricted shares can include the holding periods of a prior owner who was not an affiliate. OPTIONS As of August 31, 1996, options to purchase a total of 1,008,645 shares of Class A Common Stock were outstanding, of which options for an aggregate of 514,677 shares of Class A Common Stock were exercisable. Of the exercisable options, 421,300 shares are subject to Lock-up Agreements. The Company has filed one or more registration statements on Form S-8 under the Securities Act to register all shares of Common Stock subject to then outstanding stock options and Class A Common Stock issuable pursuant to the Company's Stock Option Plans. The shares registered pursuant to these registration statements will, once exercisable, be eligible for sale in the public markets, subject to the Lock-up Agreements, to the extent applicable. See "Management." LOCK-UP AGREEMENTS Pursuant to the Lock-up Agreements, holders of 5,063,654 shares of Common Stock outstanding immediately prior to this offering and options to purchase an aggregate of 210,100 shares of Common Stock have agreed for a period of 180 days after the date of this Prospectus, and holders of 102,886 shares of Common Stock outstanding immediately prior to this Offering and options to purchase 211,200 shares of Common Stock have agreed for a period of 90 days after the date of this Prospectus, that they will not, without the prior written consent of Dean Witter Reynolds Inc. (i) sell, offer to sell, grant any option for the sale of, or otherwise dispose of or transfer, any shares of Common Stock beneficially owned by such person or any securities convertible into or exchangeable or exercisable for Common Stock, whether then owned or hereafter acquired by such person or with respect to which such person has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act with respect to any of the foregoing, or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction is to be settled by delivery of Common Stock or the securities, in cash or otherwise. 45 REGISTRATION RIGHTS Certain shareholders (collectively, the "Rights Holders") will be entitled, subject to the Lock-up Agreements, to require the Company to register under the Securities Act a total of approximately 66,863 shares of outstanding Class A Common Stock (the "Registrable Shares"). The Agreement provides that under certain circumstances and subject to certain limitations the Rights Holders may require the Company to file a registration statement under the Securities Act with respect to the Registrable Shares and the Company must use all commercially reasonable efforts to effect such registration. In addition, in the event the Company proposes to register any of its securities, either for its own account or for the account of a security holder, the Rights Holders may be entitled to include the Registrable Shares in such registration, subject to certain limitations on the number of shares to be included in the registration by the underwriter of such offering. UNDERWRITING The Underwriters named below, for whom Dean Witter Reynolds Inc. and Brean Murray & Co., Inc. are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement (a copy of which has been filed as an exhibit to the Registration Statement), to purchase from the Company the number of shares of Class A Common Stock set forth opposite their respective names in the table below:
NAME NUMBER OF SHARES - --------------------------------------------------------------------------- ----------------- Dean Witter Reynolds Inc................................................... Brean Murray & Co., Inc.................................................... ----------------- Total.................................................................... 2,500,000
The Underwriting Agreement provides that the obligations of the several Underwriters thereunder are subject to approval of certain legal matters by counsel and to various other conditions. The nature of the Underwriters' obligation is such that they must purchase all of the shares (other than those subject to the over-allotment option) if any are purchased. The Underwriters have advised the Company that they propose to offer the shares of Class A Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers (who may include the Underwriters) at such public offering price less a concession not to exceed $ per share. Such dealers may reallow a concession not to exceed $ per share to other dealers. After the public offering, the public offering price may be reduced and concessions and reallowances to dealers may be changed by the Underwriters. The Underwriters have informed the Company that they do not intend to confirm sales to any account over which they exercise discretionary authority. The Underwriters intend to make a market in the Common Stock after completion of this offering. The Company has granted to the Underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to an additional 375,000 shares of Class A Common Stock at the public offering price, less underwriting discounts and commissions to cover over-allotments, if any. After commencement of this offering, the Underwriters may confirm sales subject to the over-allotment option. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. The Company, Salah M. Hassanein, Marshall Naify, Robert A. Naify and the Other Naify Interests have agreed for a period of 180 days after the date of this Prospectus, and all other executive officers and directors of the Company have agreed for a period of 90 days after the date of this Prospectus that, without 46 the prior written consent of Dean Witter Reynolds Inc., they will not (i) sell, offer to sell, grant any option for the sale of, or otherwise dispose of or transfer, any shares of Common Stock beneficially owned by such person or any securities convertible into or exchangeable or exercisable for Common Stock, whether then owned or hereafter acquired by such person or with respect to which such person has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act with respect to any of the foregoing, or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction is to be settled by delivery of Common Stock or the securities, in cash or otherwise. In connection with this offering, the Underwriters and other selling group members may engage in passive market making transactions in the Class A Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act. Passive market making consists of displaying bids on the Nasdaq National Market limited by the prices of independent market makers and effecting purchases limited by such prices and in response to order flow. Net purchases by a passive market maker on each day are limited to a specified percentage of the passive market maker's average daily trading volume in the Class A Common Stock during a specified prior period and must be discontinued when such limit is reached. Passive market making may stabilize the market price of the Class A Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. LEGAL MATTERS The validity of the shares of Class A Common Stock offered hereby will be passed upon for the Company by Greenberg Glusker Fields Claman & Machtinger LLP, Los Angeles, California. Certain legal matters relating to the Offering will be passed upon for the Underwriters by O'Melveny and Myers LLP, Los Angeles, California. EXPERTS The consolidated balance sheets of the Company at August 31, 1994 and 1995 and May 31, 1996 and the consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended August 31, 1995 and for the nine-month period ended May 31, 1996, included in this Prospectus and Registration Statement, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the Registration Statement and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The balance sheet of Edit Acquisition LLC d/b/a Editworks as of December 31, 1995 and the statements of income and changes in members equity and cash flows for the year then ended, which are included in this Prospectus and Registration Statement, have been included herein in reliance on the report of Gifford, Hillegass & Ingwersen, P.C., given on the authority of that firm as experts in accounting and auditing. 47 INDEX TO FINANCIAL STATEMENTS
PAGE --------- THE TODD-AO CORPORATION Report of Deloitte & Touche LLP, Independent Auditors...................................................... F-2 Consolidated Balance Sheets as of August 31, 1994 and 1995, and May 31, 1996............................... F-3 Consolidated Statements of Income for the years ended August 31, 1993, 1994 and 1995, and the nine months ended May 31, 1995 (unaudited) and May 31, 1996.......................................................... F-5 Consolidated Statements of Stockholders' Equity for the years ended August 31, 1993, 1994 and 1995, and the nine months ended May 31, 1996........................................................................... F-6 Consolidated Statements of Cash Flows for the years ended August 31, 1993, 1994 and 1995, and the nine months ended May 31, 1995 (unaudited) and May 31, 1996................................................... F-7 Notes to Consolidated Financial Statements................................................................. F-10 EDIT ACQUISITION LLC Report of Gifford, Hillegass & Ingwersen, P.C., Independent Accountants.................................... F-20 Balance Sheets at December 31, 1995 and 1994............................................................... F-21 Statements of Income for the year ended December 31, 1995 and the ten months ended December 31, 1994....... F-22 Statements of Changes In Members' Equity for the year ended December 31, 1995 and the ten months ended December 31, 1994........................................................................................ F-23 Statements of Cash Flows for the year ended December 31, 1995 and the ten months ended December 31, 1994... F-24 Notes to Financial Statements.............................................................................. F-25 Balance Sheet at June 30, 1996 (unaudited)................................................................. F-27 Statements of Income for the six months ended June 30, 1996 and 1995 (unaudited)........................... F-28 Statements of Cash Flows for the six months ended June 30, 1996 and 1995 (unaudited)....................... F-29 Notes to Financial Statements.............................................................................. F-30
F-1 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of The Todd-AO Corporation: We have audited the accompanying consolidated balance sheets of The Todd-AO Corporation and subsidiaries (the "Company") as of August 31, 1994, August 31, 1995 and May 31, 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended August 31, 1995 and the nine months ended May 31, 1996. 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 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, 1994, August 31, 1995 and May 31, 1996 and the results of its operations and its cash flows for each of the three years in the period ended August 31, 1995 and the nine months ended May 31, 1996 in conformity with generally accepted accounting principles. By /s/ DELOITTE & TOUCHE LLP ------------------------------------ DELOITTE & TOUCHE LLP Los Angeles, California August 23, 1996 F-2 THE TODD-AO CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
AUGUST 31, ---------------------- MAY 31, 1994 1995 1996 ---------- ---------- ---------- CURRENT ASSETS Cash and cash equivalents..................................................... $ 606 $ 5,278 $ 3,263 Marketable securities......................................................... 3,880 3,484 2,685 Trade receivables (net of allowance for doubtful accounts of $408, $828 and $663 at August 31, 1994, 1995 and May 31, 1996, respectively).................................. 4,278 6,787 11,043 Inventories (first-in first-out basis)........................................ 374 484 661 Prepaid income taxes.......................................................... 148 727 -- Deferred income taxes......................................................... 563 924 805 Other......................................................................... 195 565 552 ---------- ---------- ---------- Total current assets.......................................................... 10,044 18,249 19,009 ---------- ---------- ---------- INVESTMENTS................................................................... 1,270 1,656 1,336 ---------- ---------- ---------- PROPERTY AND EQUIPMENT--At Cost: Land.......................................................................... 3,487 4,270 4,270 Buildings..................................................................... 8,201 10,762 10,773 Leasehold improvements........................................................ 5,569 6,802 6,802 Lease acquisition costs....................................................... 2,187 2,187 2,187 Equipment..................................................................... 27,031 23,392 27,373 Equipment under capital leases................................................ 886 3,163 3,163 Construction in progress...................................................... 57 -- 122 ---------- ---------- ---------- Total......................................................................... 47,418 50,576 54,690 Accumulated depreciation and amortization..................................... (22,083) (15,613) (19,464) ---------- ---------- ---------- Property and equipment--net................................................... 25,335 34,963 35,226 ---------- ---------- ---------- GOODWILL (net of accumulated amortization of $63 at August 31, 1995 and $157 at May 31, 1996)................................................................... -- 1,832 1,738 ---------- ---------- ---------- OTHER ASSETS.................................................................. 79 498 375 ---------- ---------- ---------- TOTAL......................................................................... $ 36,728 $ 57,198 $ 57,684 ---------- ---------- ---------- ---------- ---------- ----------
See notes to consolidated financial statements. F-3 THE TODD-AO CORPORATION CONSOLIDATED BALANCE SHEETS (CONTINUED) (DOLLARS IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY
AUGUST 31, -------------------- MAY 31, 1994 1995 1996 --------- --------- --------- CURRENT LIABILITIES: Accounts payable................................................................. $ 684 $ 1,784 $ 2,517 Accrued liabilities: Payroll and related taxes...................................................... 2,518 1,975 1,918 Interest....................................................................... 10 179 129 Equipment lease................................................................ -- 396 300 Other.......................................................................... 452 515 382 Income taxes payable........................................................... -- -- 654 Current maturities of long-term debt............................................. 150 759 615 Capitalized lease obligations--current........................................... 708 897 867 Deferred income.................................................................. 162 703 446 --------- --------- --------- Total current liabilities........................................................ 4,684 7,208 7,828 --------- --------- --------- LONG-TERM DEBT................................................................... 600 7,707 6,065 CAPITALIZED LEASE OBLIGATIONS.................................................... 867 620 68 DEFERRED COMPENSATION............................................................ 565 401 265 DEFERRED GAIN ON SALE/LEASEBACK.................................................. -- 6,381 5,277 DEFERRED INCOME TAXES............................................................ 2,064 3,683 3,587 --------- --------- --------- Total liabilities................................................................ 8,780 26,000 23,090 --------- --------- --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common Stock: Class A; authorized 30,000,000 shares of $0.25 par value; issued and outstanding 6,377,721 at August 31, 1994, 6,403,021 at August 31, 1995 and 6,488,727 at May 31, 1996...................................................... 1,594 1,600 1,622 Class B; authorized 6,000,000 shares of $0.25 par value; issued and outstanding 1,747,181 at August 31, 1994, 1995 and May 31, 1996............................ 437 437 437 Additional capital............................................................... 20,953 21,048 20,985 Retained earnings................................................................ 4,964 7,904 11,605 Unrealized gains on marketable securities and long-term investments.............. -- 473 204 Cumulative foreign currency translation adjustment............................... -- (264) (259) --------- --------- --------- Total stockholders' equity....................................................... 27,948 31,198 34,594 --------- --------- --------- TOTAL............................................................................ $ 36,728 $ 57,198 $ 57,684 --------- --------- --------- --------- --------- ---------
See notes to consolidated financial statements. F-4 THE TODD-AO CORPORATION CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED MAY YEARS ENDED AUGUST 31, 31, ---------------------------------- ----------------------- 1993 1994 1995 1996 ---------- ---------- ---------- 1995 ---------- ----------- (UNAUDITED) REVENUES......................................... $ 27,402 $ 32,892 $ 50,003 $ 37,125 $ 48,140 ---------- ---------- ---------- ----------- ---------- COSTS AND EXPENSES: Operating costs and other expenses............... 22,641 27,021 39,867 29,405 37,231 Depreciation and amortization.................... 2,412 2,603 3,917 3,014 3,967 Interest......................................... 17 24 581 320 531 Equipment lease expense--net..................... -- -- 593 371 415 Other (income) expense--net...................... (483) (773) (290) (223) (554) ---------- ---------- ---------- ----------- ---------- Total............................................ 24,587 28,875 44,668 32,887 41,590 ---------- ---------- ---------- ----------- ---------- INCOME BEFORE LOSS FROM JOINT VENTURE AND PROVISION FOR INCOME TAXES..................... 2,815 4,017 5,335 4,238 6,550 LOSS FROM JOINT VENTURE.......................... (1,014) (1,215) (249) (167) (117) ---------- ---------- ---------- ----------- ---------- INCOME BEFORE PROVISION FOR INCOME TAXES......... 1,801 2,802 5,086 4,071 6,433 PROVISION FOR INCOME TAXES....................... 664 1,022 1,711 1,452 2,371 ---------- ---------- ---------- ----------- ---------- NET INCOME....................................... $ 1,137 $ 1,780 $ 3,375 $ 2,619 $ 4,062 ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- ---------- NET INCOME PER COMMON SHARE AND COMMON SHARE EQUIVALENTS.................................... $ 0.14 $ 0.22 $ 0.40 $ 0.31 $ 0.46 ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- ---------- WEIGHTED AVERAGE SHARES OUTSTANDING.............. 8,278,932 8,195,678 8,399,462 8,351,588 8,805,359 ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- ----------
See notes to consolidated financial statements. F-5 THE TODD-AO CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED AUGUST 31, 1993, 1994, 1995 AND FOR THE NINE MONTHS ENDED MAY 31, 1996 (DOLLARS IN THOUSANDS)
COMMON STOCK UNREALIZED ------------------------------------- GAIN (LOSS) CLASS A CLASS ON FOREIGN ----------------- B ADDITIONAL RETAINED TREASURY INVESTMENT CURRENCY SHARES AMOUNT AMOUNT CAPITAL EARNINGS SHARES SECURITIES TRANSLATION --------- ------ ------ ---------- -------- -------- --------- ---------- BALANCE AT SEPTEMBER 1, 1992............ 5,708,328 $1,431 $ 397 $ 14,925 $ 9,029 $ (64 ) $(1,234) $ -- Stock Dividend (10%) in 1995............ 570,833 143 40 5,938 (6,123 ) -- -- -- Purchase of treasury shares............. (61,600) -- -- -- -- (223 ) -- -- Treasury shares cancellation............ -- (20 ) -- (269 ) -- 287 -- -- Unrealized loss on investment securities............................ -- -- -- -- -- -- 1,234 -- Exercise of stock options............... 213,950 54 -- 610 -- -- -- -- Cash dividends: Class A ($.06) per share.............. -- -- -- -- (346 ) -- -- -- Class B ($.054) per share............. -- -- -- -- (85 ) -- -- -- Net income............................ -- -- -- -- 1,137 -- -- -- --------- ------ ------ ---------- -------- -------- --------- ---------- BALANCE AT AUGUST 31, 1993.............. 6,431,511 1,608 437 21,204 3,612 -- -- -- Purchase of treasury shares............. (143,000) -- -- -- -- (509 ) -- -- Treasury shares cancellation............ -- (36 ) -- (476 ) -- 509 -- -- Exercise of stock options............... 89,210 22 -- 225 -- -- -- -- Cash dividends: Class A ($.06) per share.............. -- -- -- -- (342 ) -- -- -- Class B ($.054) per share............. -- -- -- -- (86 ) -- -- -- Net income............................ -- -- -- -- 1,780 -- -- -- --------- ------ ------ ---------- -------- -------- --------- ---------- BALANCE AT AUGUST 31, 1994.............. 6,377,721 1,594 437 20,953 4,964 -- -- -- Exercise of stock options............... 25,300 6 -- 95 -- -- -- -- Unrealized gain on investment securities............................ -- -- -- -- -- -- 473 -- Loss on foreign currency translation.... -- -- -- -- -- -- -- (264) Cash dividends: Class A ($.06) per share.............. -- -- -- -- (349 ) -- -- -- Class B ($.054) per share............. -- -- -- -- (86 ) -- -- -- Net income............................ -- -- -- -- 3,375 -- -- -- --------- ------ ------ ---------- -------- -------- --------- ---------- BALANCE AT AUGUST 31, 1995.............. 6,403,021 1,600 437 21,048 7,904 -- 473 (264) Exercise of stock options............... 142,550 36 -- 482 -- -- -- -- Unrealized gain on investment securities............................ -- -- -- -- -- -- (269) -- Loss on foreign currency translation.... -- -- -- -- -- -- -- 5 Cash dividends: Class A ($.045) per share............. -- -- -- -- (290 ) -- -- -- Class B ($.04) per share.............. -- -- -- -- (71 ) -- -- -- Net income.............................. -- -- -- -- 4,062 -- -- -- Treasury shares......................... (56,844) (14 ) -- (545 ) -- -- -- -- --------- ------ ------ ---------- -------- -------- --------- ---------- BALANCE AT MAY 31, 1996................. 6,488,727 $1,622 $ 437 $ 20,985 $11,605 $ -- $ 204 $(259) --------- ------ ------ ---------- -------- -------- --------- ---------- --------- ------ ------ ---------- -------- -------- --------- ----------
See notes to consolidated financial statements. F-6 THE TODD-AO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED MAY YEARS ENDED AUGUST 31, 31, -------------------------------- ---------------------- 1993 1994 1995 1996 --------- --------- ---------- 1995 --------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income........................................ $ 1,137 $ 1,780 $ 3,375 $ 2,619 $ 4,062 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..................... 2,412 2,603 3,917 3,014 3,967 Deferred income taxes............................. (186) (386) 1,258 845 23 Loss from joint venture........................... 1,014 1,215 249 167 117 Deferred compensation............................. (27) (119) (164) (107) (136) Amortization of deferred gain on sale/leaseback transaction..................................... -- -- (964) (612) (1,104) (Gain) loss on sale of marketable securities and investments..................................... (325) (342) (127) 29 42 Changes in assets and liabilities: Trade receivables............................... 679 (894) (739) (4,459) (4,022) Income taxes receivable......................... 268 -- -- -- -- Inventories and other current assets............ (24) 38 (266) (222) (16) Accounts payable and accrued liabilities........ (629) 1,249 138 1,233 103 Accrued equipment lease......................... -- -- 396 394 (96) Income taxes payable............................ 62 (210) (670) 433 1,212 Deferred income................................. 146 (93) 560 347 (257) --------- --------- ---------- ----------- --------- Net cash provided by operating activities:.......... 4,527 4,841 6,963 3,681 3,895 --------- --------- ---------- ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities and investments..................................... (750) (3,050) (996) (489) (73) Proceeds from sale of marketable securities and investments..................................... 1,653 921 1,606 1,159 881 Capital expenditures.............................. (393) (1,404) (3,345) (2,638) (3,317) Contributions to joint venture.................... (985) (900) (249) (167) (117) Purchase of Paskal Video.......................... -- (1,150) -- -- -- Purchase of Skywalker Sound South................. -- -- (6,966) (6,966) -- Purchase of Chrysalis............................. -- -- (8,333) (8,002) -- Other assets...................................... (74) (155) (1) 1 128 --------- --------- ---------- ----------- --------- Net cash flows (used in) investing activities:...... $ (549) $ (5,738) $ (18,284) $ (17,102) $ (2,498) --------- --------- ---------- ----------- ---------
F-7 THE TODD-AO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED MAY YEARS ENDED AUGUST 31, 31, -------------------------------- ---------------------- 1993 1994 1995 1996 --------- --------- ---------- --------- 1995 ----------- (UNAUDITED) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt...................... $ 1,000 $ -- $ 7,722 $ 7,714 $ 2,175 Payments on long-term debt........................ (2,800) -- (1,467) (84) (4,516) Payments on capital lease obligations............. -- (94) (1,108) (820) (669) Proceeds from sale/leaseback transaction.......... -- -- 11,218 11,218 -- Proceeds from issuance of common stock............ 659 245 101 60 518 Treasury stock transactions....................... (223) (509) -- -- (559) Dividends paid.................................... (431) (428) (435) (326) (361) --------- --------- ---------- ----------- --------- Net cash flows provided by (used in) financing activities:....................................... (1,795) (786) 16,031 17,762 (3,412) Effect of exchange rate changes on cash........... -- -- (38) (13) -- --------- --------- ---------- ----------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... 2,183 (1,683) 4,672 4,328 (2,015) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................................... 106 2,289 606 606 5,278 --------- --------- ---------- ----------- --------- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................................... $ 2,289 $ 606 $ 5,278 $ 4,934 $ 3,263 --------- --------- ---------- ----------- --------- --------- --------- ---------- ----------- --------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION-- Cash paid during the year for: Interest.......................................... $ 80 $ 19 $ 408 $ 117 $ 581 --------- --------- ---------- ----------- --------- --------- --------- ---------- ----------- --------- Income taxes...................................... $ 553 $ 1,563 $ 1,413 $ 675 $ 2,495 --------- --------- ---------- ----------- --------- --------- --------- ---------- ----------- ---------
SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING AND FINANCING ACTIVITIES: 1995 a) On February 15, 1995, the Company acquired substantially all of the property, equipment and inventory of Skywalker Sound South (See Note 2). In connection with this acquisition, the Company paid cash as follows: Assets acquired: Land.............................................................. $ 783 Buildings and improvements........................................ 844 Equipment......................................................... 5,032 Other assets...................................................... 307 --------- Cash paid in acquisition............................................ $ 6,966 --------- ---------
F-8 THE TODD-AO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLARS IN THOUSANDS) b) On March 16, 1995, the Company acquired all of the outstanding shares of Chrysalis Television Facilities, Ltd. (See Note 2). In connection with this acquisition, the Company paid cash as follows: Assets acquired: Property and equipment........................................... $ 7,599 Goodwill......................................................... 1,963 Accounts receivable.............................................. 1,815 Other assets..................................................... 339 Liabilities assumed: Accounts payable and accrued expenses............................ (798) Capitalized lease obligations.................................... (1,072) Real estate mortgage payable..................................... (149) Long-term debt issued to seller.................................... (1,364) --------- Cash paid in acquisition........................................... $ 8,333 --------- ---------
1994: a) On August 31, 1994, the Company acquired substantially of all the assets and certain of the liabilities of Paskal Video (See Note 2). In connection with this acquisition, the Company paid cash as follows: Assets acquired: Property and equipment............................................ $ 2,030 Accounts receivable............................................... 860 Other assets...................................................... 121 Liabilities assumed: Accounts payable and accrued expenses............................. (329) Capitalized lease obligations..................................... (782) Long-term debt issued to seller..................................... (750) --------- Cash paid in acquisition............................................ $ 1,150 --------- ---------
b) During the year ended August 31, 1994, TDI entered into a capital lease obligation in the amount of $886. See notes to consolidated financial statements. F-9 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 May 31, 1996, Robert Naify, Marshall Naify, and certain members of their families and various trusts for the benefit of family members (the "Naify Interests") owned over 58% of the outstanding shares of the Company, representing approximately 84% 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. ("Todd-AO East"), Todd-AO Productions, Inc., Todd-AO Digital Images, Inc. ("TDI"), Todd-AO Video Services, Inc. ("TVS"), Todd-AO Studios West ("TSW") and Todd-AO Europe Holding Ltd. ("TAO Europe")(See Note 2). 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. 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 net asset value of Chrysalis (See Note 2) and is being amortized on a straight-line basis over 15 years. The Company assesses the recoverability of its intangible assets by determining whether the amortization of the intangible asset balance over its remaining life can be recovered through projected non-discounted future cash flows over the remaining amortization period. If projected future cash flows indicate that the unamortized intangible asset balances will not be recovered, an adjustment is made to reduce the net intangible asset to an amount consistent with projected future cash flows discounted at the Company's incremental borrowing rate. 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 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--Net income per common share is computed based on the weighted average number of common and common equivalent shares outstanding for each of the periods presented including common share equivalents arising from the assumed conversion of any outstanding dilutive stock options. F-10 THE TODD-AO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AND OPTION DATA) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS--Statement of Financial and Accounting Standard ("SFAS") No. 107 requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Management believes that the book value approximates fair value of the Company's financial instrument because of the short-term nature of accounts receivable and variable interest rates associated with long-term debt. 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 50% of revenues and for the nine months ended May 31, 1996, one customer accounted for approximately 12% of revenues. 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. RECLASSIFICATIONS--Certain 1995 financial statement captions have been reclassified in order to conform to 1996 presentation. 2. ACQUISITIONS On August 31, 1994, TVS (a wholly owned subsidiary of the Company) acquired certain of the assets and liabilities of Film Video Masters ("Paskal"). TVS provides post production video services to the film and television industries. In consideration of the purchase, TVS paid Paskal $1,150 in cash and issued a note in the amount of $750. On February 15, 1995, TSW (a wholly owned subsidiary of the Company) acquired substantially all of the property, equipment and inventory of Kaytea Rose, Inc. (dba Skywalker Sound South)("SSS"). TSW provides post production sound services to the film and television industries. In consideration of the purchase, TSW paid $6,966 in cash. TSW is included in the Company's results of operations from February 1995. On March 16, 1995 TAO Europe (formerly FCB 1120, Ltd.)(a wholly owned subsidiary of the Company) acquired all of the outstanding shares of Chrysalis/Todd-AO Europe Ltd. ("Chrysalis")(formerly Chrysalis Television Facilities, Ltd.) from Chrysalis Holdings Ltd. ("CHL"). TAO Europe, Chrysalis and CHL are all corporations organized under the laws of the United Kingdom and headquartered in London. Chrysalis specializes in the collation of television programming for satellite broadcast and also provides post production video and other services to a variety of clients. In consideration of the purchase, TAO Europe paid CHL $1,966 in cash at closing and issued a note in the amount of $1,364. An additional cash settlement of $220 was paid in June 1995. Concurrently with the acquisition, TAO Europe advanced and paid on behalf of Chrysalis its intercompany debt to CHL in the amount of $4,585. Subsequent to the acquisition, TAO Europe advanced and paid on behalf of Chrysalis other debt in the amount of $1,562. TAO Europe and Chrysalis consolidated are included in the Company's results of operations from March 1995. 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, F-11 THE TODD-AO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AND OPTION DATA) 2. ACQUISITIONS (CONTINUED) advertising agencies and other businesses. At the closing, the Company paid Editworks $3,180 in cash and $970 in Todd-AO common stock. An additional $500 in cash is due upon completion of certain conditions. The acquisitions are being accounted for under the purchase method of accounting. The following unaudited pro forma consolidated financial information is presented as if the acquisitions had occurred on September 1, 1994. Pro forma adjustments for TSW are primarily to operating expenses related to nonapplicable allocations made by the parent corporation of SSS, depreciation expense relating to the acquisition of assets, interest expense on borrowings in connection with the acquisition and income taxes. Pro forma adjustments for TAO Europe are primarily to amortization expense relating to allocation of the purchase price, interest expense on borrowings in connection with the acquisition and income taxes. Pro forma adjustments for Editworks are primarily to amortization of goodwill, interest expense on borrowings in connection with the acquisition, and income taxes.
YEAR ENDED NINE MONTHS AUGUST 31, ENDED 1995 MAY 31, 1996 ----------- ------------ Revenues........................................................... $ 62,293 $ 51,445 ----------- ------------ ----------- ------------ Net income......................................................... $ 3,515 $ 4,366 ----------- ------------ ----------- ------------ Net income per common share........................................ $ 0.42 $ 0.49 ----------- ------------ ----------- ------------
3. SALE/LEASEBACK In December 1994 the Company signed an agreement with its bank to implement the sale/leaseback of certain equipment for up to $15,000. The agreement terminates on December 30, 1999 and is being treated as an operating lease for financial statement purposes. On December 30, 1994 an aggregate of $11,218 in equipment was sold and leased back to the Company. The total deferred gain on the transaction to be amortized over five years is $7,345. The net equipment lease expense for the periods ended August 31, 1995 and May 31, 1996 is as follows:
1995 1996 --------- --------- Equipment lease costs..................................................... $ 1,557 $ 1,518 Amortization of deferred gain on sale of equipment........................ (964) (1,103) --------- --------- Equipment lease expense, net.............................................. $ 593 $ 415 --------- --------- --------- ---------
F-12 THE TODD-AO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AND OPTION DATA) 4. LONG-TERM DEBT Long-term debt outstanding as of August 31, 1994, 1995 and May 31, 1996 was as follows:
1994 1995 1996 --------- --------- --------- Revolving credit facility--pound sterling credit line............. $ -- $ 6,391 $ 5,127 Revolving credit facility--other.................................. -- -- 200 Note payable--Paskal Video acquisition............................ 750 613 500 Note payable--Chrysalis acquisition............................... -- 1,318 853 Chrysalis mortgage note........................................... -- 144 -- --------- --------- --------- Total............................................................. 750 8,466 6,680 Less: current maturities.......................................... (150) (759) (615) --------- --------- --------- Total long-term debt.............................................. $ 600 $ 7,707 $ 6,065 --------- --------- --------- --------- --------- ---------
In December 1994 the Company signed a long-term credit agreement with its bank which was amended in March 1995, April 1996 and June 1996. Under the agreement the Company may borrow up to $28,000 in revolving loans until February 28, 2000. On that date and quarterly thereafter until the expiration of the agreement on November 30, 2003, the revolving loan commitment shall reduce by 5% of the original loan commitment. Approximately $8,000 of the available credit is restricted to pound sterling borrowings. The agreement provides for interest at 1/2% plus reference rate; 1 1/2% plus offshore rates ("Libor") and 1 5/8% plus certificate of deposit rates ("CD")(Libor and CD minimum borrowings $1,000 or 500). These rates increase by 1/2% if certain financial ratios are exceeded. The pound sterling borrowings are restricted to Libor and CD options. The agreement contains various restrictive provisions, including investment, capital expenditure, cash dividends and borrowing limitations. As of May 31, 1996 the Company has not exceeded the interest rate financial ratios and is in compliance with the various restrictive provisions of the agreement. In connection with the acquisition of Paskal Video (See Note 2), 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 Chrysalis (See Note 2), TAO Europe issued a note. The note is payable over a three year period in two installments of $465 and one installment of $388. Each installment bears interest at 1 1/2% above the prime rate of the National Westminster Bank in London. A mortgage note in the amount of $144 with interest at 10 3/4% was also assumed at the acquisition. In accordance with the provisions of the mortgage note, the Company elected to pay off the entire balance in November 1995. 5. CAPITALIZED LEASE OBLIGATIONS In 1994, the Company entered into lease obligations for equipment which have been capitalized. In addition, the Company acquired leases on certain other equipment with the Paskal and Chrysalis acquisitions (See Note 2). The leases have implicit interest rates ranging from 7 1/2% to 11 1/2% and are secured by the related equipment. F-13 THE TODD-AO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AND OPTION DATA) 5. CAPITALIZED LEASE OBLIGATIONS (CONTINUED) Capitalized lease obligations at August 31, 1995 mature as follows: 1996................................................................ $ 966 1997................................................................ 655 1998................................................................ 12 --------- 1,633 Less amounts representing interest.................................. 116 --------- $ 1,517 --------- ---------
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, 1993 1994 1995 - --------------------------------------------------------------------- --------- --------- --------- 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.................................. 4.6 6.6 0.8 Other, net........................................................... (1.7) (4.1) (1.2) --- --- --- Total................................................................ 36.9% 36.5% 33.6% --- --- --- --- --- ---
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. F-14 THE TODD-AO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AND OPTION DATA) 6. INCOME TAXES (CONTINUED) Deferred income tax assets and liabilities consist of the following:
1994 1995 --------- --------- Current Asset: Accounts receivable reserves........................................... $ 172 $ 329 Vacation pay accruals.................................................. 260 359 State income taxes..................................................... 131 151 Other.................................................................. -- 85 --------- --------- TOTAL CURRENT ASSET...................................................... $ 563 $ 924 --------- --------- --------- --------- Long-Term Asset: Deferred compensation.................................................. $ 238 $ 160 Stock appreciation rights.............................................. 347 12 Equity in loss of Venture.............................................. 415 85 California depreciation adjustment..................................... 277 6 --------- --------- Total long-term asset.................................................... 1,277 263 --------- --------- Long-Term Liabilities: Depreciation........................................................... (1,464) (1,986) Deferred gains on property............................................. (1,762) (1,843) Other.................................................................. (115) (117) --------- --------- Total long-term liability................................................ (3,341) (3,946) --------- --------- NET LONG-TERM LIABILITY.................................................. $ (2,064) $ (3,683) --------- --------- --------- ---------
Components of the income tax provisions are as follows:
1993 1994 1995 --------- --------- --------- Current provisions--domestic..................................... $ 850 $ 1,408 $ 274 Current provisions--foreign...................................... -- -- 180 Deferred provisions--domestic.................................... (186) (386) 1,231 Deferred provisions--foreign..................................... -- -- 26 --------- --------- --------- Total............................................................ $ 664 $ 1,022 $ 1,711 --------- --------- --------- --------- --------- --------- Components of pre-tax income are as follows: 1993 1994 1995 --------- --------- --------- Domestic......................................................... $ 1,801 $ 2,802 $ 4,347 Foreign.......................................................... -- -- 739 --------- --------- --------- Total............................................................ $ 1,801 $ 2,802 $ 5,086 --------- --------- --------- --------- --------- ---------
F-15 THE TODD-AO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AND OPTION DATA) 7. STOCKHOLDERS' EQUITY The Company has 1,000,000 shares of $.25 par value preferred stock authorized. As of May 31, 1996 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. 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 May 31, 1996, 795,146 shares had been repurchased. All of these shares have been cancelled and returned to authorized but unissued status. 8. STOCK OPTION AND STOCK APPRECIATION RIGHTS PLANS STOCK OPTION PLANS The Company has three stock option plans: The 1986, 1994 and the 1995 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. The following summarizes stock option activity for the three years and nine months ended May 31, 1996:
OPTION PRICE SHARES PER SHARE ------------ -------------- Options outstanding, September 1, 1992............ 538,120 $ 2.03 - $4.50 Exercised......................................... (213,950) 2.03 - 2.93 Forfeited......................................... (5,500) 2.93 ------------ -------------- Options outstanding, August 31, 1993.............. 318,670 2.03 - 4.50 Awarded........................................... 330,000 3.26 Exercised......................................... (89,210) 2.03 - 2.93 ------------ -------------- Options outstanding, August 31, 1994.............. 559,460 2.03 - 4.50 Awarded........................................... 638,165 4.50 - 5.29 Exercised......................................... (25,300) 2.03 - 5.06 Forfeited......................................... (11,000) 4.50 ------------ -------------- Options outstanding, August 31, 1995.............. 1,161,325 2.03 - 5.29 Awarded........................................... 14,500 7.13 Exercised......................................... (142,550) 2.03 - 7.13 Forfeited......................................... (14,580) 5.06 - 5.63 ------------ -------------- Options outstanding, May 31, 1996................. 1,018,695 $ 2.03 - $7.13 ------------ -------------- ------------ --------------
As of May 31, 1996, 70,125 shares and 337,390 shares were available for grant under the 1986 and 1995 plans respectively. All authorized options under the 1994 Plan have been granted. As of May 31, 1996, 524,727 options were exercisable. F-16 THE TODD-AO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AND OPTION DATA) 8. STOCK OPTION AND STOCK APPRECIATION RIGHTS PLANS (CONTINUED) In October 1995, SFAS No. 123 "Accounting for Stock-Based Compensation" was issued. The Company does not intend to adopt the statement's fair value provisions except for disclosure and will continue to use the intrinsic method allowed by APB25. 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. 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 $3,363, $4,045, $1,034, and $915 for the nine months ended May 31, 1996 and for the years ended August 31, 1995, 1994, and 1993, respectively. Minimum rentals for operating leases for years ending after August 31, 1995 are as follows: 1996, $4,549; 1997, $4,379; 1998, $4,104; 1999, $4,048; 2000, $8,308; and $19,327, thereafter. Some of the leases have options to extend terms and are subject to escalation clauses and one lease is subject to additional rent based on revenue. EMPLOYMENT AGREEMENTS--At May 31, 1996, the Company is committed to compensation under long-term employment agreements with certain of its officers and key employees as follows: $1,680 in 1996, $1,208 in 1997 and $95 in 1998. 10. PENSION PLAN Certain officers and employees of the Company are eligible for participation in the "Motion Picture Industry Pension Plan", a multi-employer defined benefit pension plan. The Plan is funded by employer and employee contributions. Total pension plan expense was $364, $395, and $446 for the years ended August 31, 1993, 1994, and 1995 respectively and $379 for the nine months ended May 31, 1996. F-17 THE TODD-AO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AND OPTION DATA) 11. JOINT VENTURE 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 is payable to Todd-AO Productions. 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 statements. 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 year ended August 31, 1995 and the nine months ended May 31, 1996.
1995 1996 --------- --------- REVENUES: United States......................................................... $ 45,069 $ 39,936 Europe................................................................ 4,934 8,474 --------- --------- Total................................................................. $ 50,003 $ 48,410 --------- --------- --------- --------- NET INCOME: United States......................................................... $ 2,842 $ 3,270 Europe................................................................ 533 792 --------- --------- Total................................................................. $ 3,375 $ 4,062 --------- --------- --------- --------- ASSETS: United States......................................................... $ 45,074 $ 44,764 Europe................................................................ 12,124 12,920 --------- --------- Total................................................................. $ 57,198 $ 57,684 --------- --------- --------- ---------
There were no foreign operations in 1994 and 1993 F-18 THE TODD-AO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AND OPTION DATA) 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
EARNINGS GROSS NET (LOSS) PER TOTAL PROFIT INCOME COMMON SHARE 1994 REVENUES (LOSS) (LOSS) OUTSTANDING - ------------------------------------------------- --------- --------- --------- -------------- First Quarter.................................... $ 8,975 $ (1,501) $ 924 $ .11 Second Quarter................................... 7,471 685 341 .04 Third Quarter.................................... 9,554 1,839 988 .12 Fourth Quarter................................... 6,892 (757) (473) (.06) --------- --------- --------- ----- TOTAL............................................ $ 32,892 $ 3,268 $ 1,780 $ .22(a) --------- --------- --------- ----- --------- --------- --------- ----- GROSS EARNINGS PER TOTAL PROFIT NET COMMON SHARE 1995 REVENUES (LOSS) INCOME OUTSTANDING - ------------------------------------------------- --------- --------- --------- -------------- First Quarter.................................... $ 8,778 $ (188) $ 176 $ .02 Second Quarter................................... 10,057 627 114 .01 Third Quarter.................................... 18,290 3,752 2,329 .28 Fourth Quarter................................... 12,878 1,435 756 .09 --------- --------- --------- ----- TOTAL............................................ $ 50,003 $ 5,626 $ 3,375 $ .40(a) --------- --------- --------- ----- --------- --------- --------- ----- GROSS EARNINGS PER TOTAL PROFIT NET COMMON SHARE 1996 REVENUES (LOSS) INCOME OUTSTANDING - ------------------------------------------------- --------- --------- --------- -------------- First Quarter.................................... $ 18,140 $ 3,639 $ 1,983 $ .23 Second Quarter................................... 13,199 489 507 .06 Third Quarter.................................... 16,801 2,399 1,572 .18 --------- --------- --------- ----- TOTAL............................................ $ 48,140 $ 6,527 $ 4,062 $ .46(a) --------- --------- --------- ----- --------- --------- --------- -----
- ------------------------ (a) Aggregate per share amounts for each quarter may differ from annual totals as each is independently calculated. F-19 INDEPENDENT AUDITOR'S REPORT To the Members Edit Acquisition LLC d/b/a Editworks We have audited the accompanying balance sheets of Edit Acquisition LLC (a Georgia Limited Liability Company) as of December 31, 1995 and 1994, and the related statements of income, changes in members' equity, and cash flows for the year ended December 31,1995 and the ten months ended December 31, 1994. 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 audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 of the financial statements provide 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 Edit Acquisition LLC as of December 31, 1995 and 1994, and the results of its operations, changes in members' equity and cash flows for the year ended December 31, 1995 and the ten months ended December 31, 1994, in conformity with generally accepted accounting principles. /s/ GIFFORD, HILLEGASS & INGWERSEN, P.C. -------------------------------------- Gifford, Hillegass & Ingwersen, P.C. January 26, 1996 F-20 EDIT ACQUISITION LLC D/B/A EDITWORKS BALANCE SHEETS DECEMBER 31, 1995 AND 1994
1995 1994 ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents........................................................... $ 199,214 $ 56,314 Accounts receivable (Note A)........................................................ 419,230 403,322 Work in process..................................................................... 9,431 19,404 Other receivables and prepaid expenses.............................................. 35,101 10,593 Videotape inventory................................................................. 14,630 18,405 ------------ ------------ Total current assets............................................................ 677,606 508,038 ------------ ------------ PROPERTY AND EQUIPMENT (Notes A and B) Leasehold improvements.............................................................. 66,177 37,814 Furniture and fixtures.............................................................. 57,771 41,581 Video and computer equipment........................................................ 2,465,534 2,015,300 ------------ ------------ 2,589,482 2,094,695 Less accumulated depreciation....................................................... (533,475) (198,258) ------------ ------------ Net property and equipment...................................................... 2,056,007 1,896,437 ------------ ------------ OTHER ASSETS Deposits............................................................................ 116 11,836 Loan closing costs.................................................................. 3,753 5,022 ------------ ------------ 3,869 16,858 ------------ ------------ TOTAL ASSETS.................................................................... $ 2,737,482 $ 2,421,333 ------------ ------------ ------------ ------------ LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES Accounts payable.................................................................... $ 30,282 $ 29,147 Prebilled work in process........................................................... 7,485 4,077 Accrued payroll taxes............................................................... 12,622 9,389 Accrued salaries and bonuses........................................................ 197,857 147,820 Accrued expenses.................................................................... 67,351 29,228 Other payables...................................................................... 5,373 7,784 Current portion of long-term debt (Note B).......................................... 373,030 233,172 ------------ ------------ Total current liabilities....................................................... 694,000 460,617 LONG-TERM DEBT, net of current portion (Note B)....................................... 1,001,712 949,664 ------------ ------------ Total liabilities............................................................... 1,695,712 1,410,281 MEMBERS' EQUITY....................................................................... 1,041,770 1,011,052 ------------ ------------ TOTAL LIABILITIES AND MEMBERS' EQUITY........................................... $ 2,737,482 $ 2,421,333 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. F-21 EDIT ACQUISITION LLC D/B/A EDITWORKS STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE TEN MONTHS ENDED DECEMBER 31, 1994
TWELVE TEN MONTHS 1995 MONTHS 1994 ------------ ------------ Net sales............................................................................. $ 3,449,411 $ 2,155,561 Direct production costs............................................................... 300,051 240,116 ------------ ------------ CONTRIBUTION MARGIN............................................................... 3,149,360 1,915,445 ------------ ------------ Selling and marketing expenses........................................................ 234,898 133,948 General and administrative............................................................ 1,778,930 1,207,373 ------------ ------------ Total operating expenses.......................................................... 2,013,828 1,341,321 ------------ ------------ NET INCOME FROM OPERATIONS BEFORE DEPRECATION AND AMORTIZATION.................. 1,135,532 574,124 Depreciation and amortization......................................................... 353,296 211,456 ------------ ------------ NET INCOME FROM OPERATIONS........................................................ 782,236 362,668 ------------ ------------ OTHER INCOME (EXPENSES) Interest income..................................................................... 2,191 2,678 Other income........................................................................ 20,254 15,757 Interest expense.................................................................... (143,963) (50,443) ------------ ------------ TOTAL OTHER INCOME (EXPENSE)...................................................... (121,518) (32,008) ------------ ------------ NET INCOME...................................................................... $ 660,718 $ 330,660 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. F-22 EDIT ACQUISITION LLC D/B/A EDITWORKS STATEMENTS OF CHANGES IN MEMBERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE TEN MONTHS ENDED DECEMBER 31, 1994
TWELVE TEN MONTHS 1995 MONTHS 1994 ------------ ------------ Members' equity at beginning of year.................................................. $ 1,011,052 $ -- Capital contributions............................................................... -- 980,392 Net income.......................................................................... 660,718 330,660 Distributions....................................................................... (630,000) (300,000) ------------ ------------ Members' equity at end of year........................................................ $ 1,041,770 $ 1,011,052 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. F-23 EDIT ACQUISITION LLC D/B/A EDITWORKS STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE TEN MONTHS ENDED DECEMBER 31, 1994
TWELVE TEN MONTHS MONTHS 1995 1994 ------------ ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income........................................................................... $ 660,718 $ 330,660 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization...................................................... 353,296 211,456 Decrease (increase) in: Accounts receivable.............................................................. (15,908) (275,519) Work in process.................................................................. 9,974 63,020 Other assets..................................................................... (24,789) (7,555) Increase (decrease) in: Accounts payable and accrued expenses............................................ 93,525 6,164 ------------ ----------- Net cash provided by operating activities.......................................... 1,076,816 328,226 ------------ ----------- INVESTING ACTIVITIES: Additions to property and equipment.................................................. (502,692) (839,209) Net proceeds from sale of equipment.................................................. 6,870 -- ------------ ----------- Net cash used by investing activities.............................................. (495,822) (839,209) ------------ ----------- FINANCING ACTIVITIES: Principal paid on closing............................................................ -- (73,867) Net payments on notes payable........................................................ -- (601,671) Proceeds from long-term financing.................................................... 500,000 1,309,622 Principal payments on long-term debt................................................. (308,094) (167,111) Members' distribution................................................................ (630,000) (300,000) Loan closing costs................................................................... -- (5,075) ------------ ----------- Net cash provided (used) by financing activities................................... (438,094) 161,898 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................... 142,900 (349,085) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....................................... 56,314 405,399 ------------ ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................. $ 199,214 $ 56,314 ------------ ----------- ------------ ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest........................................................................... $ 143,963 $ 50,443 ------------ ----------- ------------ -----------
The accompanying notes are an integral part of these financial statements. F-24 EDIT ACQUISITION LLC D/B/A EDITWORKS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION: Edit Acquisition LLC is a limited liability company formed on March 1, 1994. BUSINESS COMBINATION: On March 1, 1994, Edit Acquisition LLC acquired substantially all the assets, and assumed certain liabilities of Editworks, Inc. The total purchase price was $1,517,536. As part of the purchase agreement, Edit Acquisition LLC agreed to indemnify Editworks, Inc. against certain potential contingencies arising subsequent to the sale. At this time, management is not aware of any unpaid potential liabilities which may arise. FINANCIAL STATEMENT PRESENTATION: The financial statements are presented on a comparative basis. Special attention should be given when analyzing the financial statements for comparative purposes since 1995 reflects twelve months of operations and 1994 reflects only ten months of operations. CASH AND CASH EQUIVALENTS: The company considers cash and money market accounts to be cash and cash equivalents. At certain times during the year, balances in the bank accounts exceeded those limits insured by the FDIC. ACCOUNTS RECEIVABLE: Accounts receivable at December 31, 1995 and 1994, are net of an allowance for doubtful accounts of approximately $18,000 and $10,000, respectively. VIDEOTAPE INVENTORY: The videotape inventory consists of the archive library of videotapes that are expected to provide economic benefit in the future. The original cost is being amortized over a two-year period, beginning March 1, 1994. The value of the inventory is adjusted annually based on estimates. FURNITURE, FIXTURES, AND EQUIPMENT: Furniture, fixtures and equipment are carried at cost. The balances at March 1, 1994 were derived from an allocation of the purchase price based on appraised fair market values at the date of acquisition. Acquisitions since inception are carried at cost. Depreciation is calculated using the straight line method over estimated economic useful lives. NOTE B--LONG-TERM DEBT AND NOTES PAYABLE Note payable to Lyon Credit Corporation; dated December 13, 1994; bearing interest at 11.01%, monthly principal and interest payments of $31,095 maturing December, 1998, secured by equipment....................................... $ 927,282 Note payable to Lyon Credit Corporation; dated April 19, 1995; bearing interest at 9.95%, monthly principal and interest payments of $7,602 maturing April, 1999, secured by equipment....................................... 257,880 Note payable to Lyon Credit Corporation; dated September 20, 1995; bearing interest at 9.43%, monthly principal and interest payments of $5,018 maturing September, 1999, secured by equipment....................................... 189,580 -------------- 1,374,742 Less current portion.............................. (373,030) -------------- $ 1,001,712 -------------- --------------
F-25 EDIT ACQUISITION LLC D/B/A EDITWORKS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE B--LONG-TERM DEBT AND NOTES PAYABLE (CONTINUED) As of December 31, 1995, future maturities of long-term debt are as follows: 1996............................................................ $ 373,030 1997............................................................ 439,645 1998............................................................ 488,843 1999............................................................ 73,224 --------- $1,374,742 --------- ---------
Edit Acquisition LLC also has a line of credit with SouthTrust Bank in the amount of $350,000, which bears interest at prime plus 1 %. There was no balance due on this line at December 31, 1995 or 1994. The line of credit is secured by accounts receivable and work in process and has personal guarantees from K. Robert Draughon and Robert M. Martin. NOTE C--LEASE COMMITMENTS The company has an operating lease for office space which expires December 2001. Rent expense for the ten months ended December 31, 1994 was $147,431 and for the year ended December 31, 1995 was $186,472. Annual rent payments of $224,307 are required for the years 1996 through 2001. NOTE D--MEMBERS' EQUITY Edit Group, LP's initial equity interest consisted of a cash contribution of $400,000 and a debt assumption which was converted to equity of $100,000 for an initial equity amount of $500,000. Margie Furlong's initial equity interest consisted of a debt assumption which was converted to equity of $480,392. Total initial equity for the Company at inception was $980,392. Effective January 1, 1995, Margie Furlong gifted an interest amounting to 10% of the Company's total equity to Patrick Furlong. For the year ended December 31, 1995, income and distributions were allocated 51% to Edit Group, L.P., 39% to Margie Furlong and 10% to Patrick Furlong. NOTE E--RELATED PARTY TRANSACTIONS Reference should be made to Notes A and D regarding transactions with related parties. NOTE F--INCOME TAXES As a limited liability company formed under the partnership provisions of the Internal Revenue Code, the income of Edit Acquisition LLC is taxed to its members based on their proportionate ownership; therefore, no provision or liability has been included for income taxes on these financial statements. NOTE G--CONTINGENCIES As part of the purchase of the assets of Editworks, Inc., Edit Acquisition LLC agreed to indemnify certain shareholders of the seller against potential claims of certain creditors. At this time, management is not aware of any unpaid potential liabilities which may arise. NOTE H--ECONOMIC DEPENDENCY The company has four major customers which comprised total sales of over $2,310,000 and $1,061,000, or 66% and 49% of the total sales of the company for the periods ended December 31, 1995 and 1994, respectively. F-26 EDIT ACQUISITION LLC D/B/A EDITWORKS CONDENSED BALANCE SHEET JUNE 30, 1996 (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents..................................................... $ 11,133 Accounts receivable........................................................... 632,629 Prepaid expenses and other.................................................... 122,782 --------- Total current assets.................................................... 766,544 --------- PROPERTY AND EQUIPMENT Leasehold improvements........................................................ 82,314 Furniture and fixtures........................................................ 74,138 Video and computer equipment.................................................. 3,011,107 --------- 3,167,559 Less accumulated depreciation................................................. (730,364) --------- Net property and equipment.............................................. 2,437,195 --------- OTHER ASSETS.................................................................... 4,245 --------- TOTAL ASSETS............................................................ $3,207,984 --------- --------- LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities...................................... $ 326,924 Current portion of long-term debt............................................. 558,137 --------- Total current liabilities............................................... 885,061 LONG-TERM DEBT, net of current portion.......................................... 1,199,505 --------- Total liabilities....................................................... 2,084,566 --------- MEMBERS' EQUITY................................................................. 1,123,418 --------- TOTAL LIABILITIES AND MEMBERS' EQUITY................................... $3,207,984 --------- ---------
The accompanying notes are an integral part of these financial statements. F-27 EDIT ACQUISITION LLC D/B/A EDITWORKS CONDENSED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (UNAUDITED)
1996 1995 ------------ ------------ Net sales............................................................................. $ 2,352,816 $ 1,634,817 Direct production costs............................................................... 169,152 145,217 ------------ ------------ CONTRIBUTION MARGIN................................................................. 2,183,664 1,489,600 Selling, general and administrative................................................... 1,312,749 949,519 ------------ ------------ NET INCOME FROM OPERATIONS BEFORE DEPRECIATION AND AMORTIZATION..................... 870,915 540,081 Depreciation and amortization......................................................... 217,688 165,844 ------------ ------------ NET INCOME FROM OPERATIONS.......................................................... 653,227 374,237 ------------ ------------ OTHER INCOME (EXPENSE) Interest income..................................................................... 711 914 Other income........................................................................ 40,719 9,204 Interest expense.................................................................... (83,009) (68,960) ------------ ------------ TOTAL OTHER INCOME (EXPENSE)...................................................... (41,579) (58,842) ------------ ------------ NET INCOME.................................................................... $ 611,648 $ 315,395 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. F-28 EDIT ACQUISITION LLC D/B/A EDITWORKS STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (UNAUDITED)
1996 1995 ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income............................................................................ $ 611,648 $ 315,395 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization....................................................... 217,688 165,844 Increase in: Accounts receivable--trade........................................................ (203,968) (57,388) Prepaid expenses and other current assets......................................... (81,439) (27,430) Decrease in: Accounts payable and accrued expenses............................................. (20,619) (41,143) Other current liabilities......................................................... 26,575 4,293 ----------- ----------- Net cash provided by operating activities........................................... 549,885 359,571 ----------- ----------- INVESTING ACTIVITIES: Additions to property and equipment................................................... (633,068) (302,206) Net proceeds from sale of equipment................................................... 43,212 7,103 Other assets.......................................................................... (1,010) (3,157) ----------- ----------- Net cash used by investing activities............................................... (590,866) (298,260) ----------- ----------- FINANCING ACTIVITIES: Proceeds from long-term financing..................................................... 593,500 300,000 Principal payments on long-term debt.................................................. (210,600) (134,547) Members' distribution................................................................. (530,000) (270,000) ----------- ----------- Net cash used by financing activities............................................... (147,100) (104,547) DECREASE IN CASH AND CASH EQUIVALENTS................................................... (188,081) (43,236) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................................ 199,214 56,316 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.............................................. $ 11,133 $ 13,080 ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest............................................................................ $ 83,009 $ 68,961 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. F-29 EDIT ACQUISITION LLC D/B/A EDITWORKS NOTES TO FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1996 If complete notes were to accompany these statements, they would be substantially in the same form as those to the Company's Financial Statements for the Year Ended December 31, 1995. In addition, the following notes are applicable: A. In the opinion of management for the Company, all adjustments (which comprise only normal recurring accruals) necessary for a fair presentation of the results of operations have been included. B. Accounts receivable at June 30, 1996 are net of an allowance for doubtful accounts of approximately $26,000. C. On March 1, 1994, the Company acquired substantially all the assets, and assumed certain liabilities of Editworks, Inc. The total purchase price was $1,517,536. As part of the purchase agreement, the Company agreed to indemnify Editworks, Inc. against certain potential contingencies arising subsequent to the sale. At this time, management is not aware of any unpaid potential liabilities which may arise. D. The Company has four major customers which comprised total sales of over $1,688,000 and $1,074,000, or 72% and 66% of the total sales of the Company, for the six month periods ended June 30, 1996 and 1995, respectively. E. Subsequent Event: On August 13, 1996 the Company and its Members entered into an agreement with The Todd-AO Corporation, a Delaware corporation, to sell substantially all of its assets and certain liabilities for an aggregate consideration of $4,650,000. Of the total, $3,180,487 was paid in cash and $969,513 in Todd-AO Class A Common Stock at the closing on August 15, 1996. An additional $500,000 is due upon completion of certain conditions. F-30 THE TODD-AO CORPORATION [LOGO] 2,500,000 SHARES CLASS A COMMON STOCK PROSPECTUS DEAN WITTER REYNOLDS INC. BREAN MURRAY & CO., INC. , 1996 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Set forth below is an estimate of the approximate amount of fees and expenses (other than underwriting discounts and commissions) payable by the Registrant in connection with the issuance and distribution of the securities registered hereby. Securities and Exchange Commission registration fee............ $11,221.20 NASD filing fee................................................ 4,203.00 Nasdaq National Market listing fee............................. 17,500.00 Printing and engraving......................................... 80,000.00 Accountants' fees and expenses................................. 75,000.00 Blue sky fees and expenses..................................... 15,000.00 Counsel fees and expenses...................................... 275,000.00 Transfer Agent's fees.......................................... 2,000.00 Miscellaneous.................................................. 20,075.80 ---------- Total...................................................... $500,000.00 ---------- ----------
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Section 145 of the General Corporation Law of the State of Delaware provides for the indemnification of officers and directors under certain circumstances against expenses incurred in successfully defending against a claim, and authorizes Delaware corporations to indemnify their officers and directors under certain circumstances against expenses and liabilities incurred in legal proceedings involving such persons because of their being or having been an officer or director. The Bylaws of the registrant provide for indemnification of its officers and directors to the maximum extent permitted by applicable law. Section 102(b)(7) of the Delaware General Corporation Law enables a corporation in its Certificate of Incorporation to limit or eliminate the personal liability of members of its Board of Directors for monetary damages for violations of a director's fiduciary duty of care. This Section does not, however, limit the liability of a director for breaching his or her duty of loyalty, failing to act in good faith, engaging in intentional misconduct or knowingly violating a law. The Registrant's Certificate of Incorporation limits the liability of its directors to the maximum extent authorized by such Section 102(b)(7). For provisions of the Registrant's Certificate of Incorporation and Bylaws dealing with indemnification, see Exhibits 3(a) and 3(b). The Underwriting Agreement, the form of which is included as an Exhibit to this Registration Statement, provides that the Underwriters shall indemnify the Company and each person who controls the Registrant within the meaning of Section 15 of the Securities Act of 1933, as amended, for any liability arising by reason of information furnished by the Underwriters for use in the Registration Statement. The Company maintains directors' and officers' liability insurance covering such persons in their official capacities with the Company and its subsidiaries. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Effective August 15, 1996, the Registrant issued 66,863 shares of Class A Common Stock valued at $14.50 per share to Edit Acquisition LLC ("Editworks") in partial consideration for the purchase of all of the assets and certain liabilities of Editworks. II-1 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits 1.1 Form of Underwriting Agreement.(1) 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). 5.1 Opinion of Greenberg Glusker Fields Claman & Machtinger LLP, counsel to the Registrant, as to the legality of the shares being registered.(1) 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 is 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 is incorporated by reference from the Registrant's Form 10-K for the fiscal year ended August 31, 1991. 10.4 Employment and Consulting Agreement dated as of September 5, 1991 by and between Shawn Murphy individually ("SM"), Murphy Balance Engineering, a California corporation wholly owned by SM, and Todd-AO/Glen Glenn Studios is incorporated by reference from the Registrant's Form 10-K for the fiscal year ended August 31, 1993. 10.5 Equipment lease dated as of September 5, 1991 by and between Murphy Mandala (a joint venture) (lessor) and Todd-AO/Glen Glenn Studios (lessee) is incorporated by reference from the Registrant's Form 10-K for the fiscal year ended August 31, 1993. 10.6 Employment Agreement dated as of October 1, 1994 between the Todd-AO Corporation and J.R. DeLang is incorporated by reference from the Registrant's Form 10-K for the fiscal year ended August 31, 1995. 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 amendment to Joint Venture Agreement dated as of October 20, 1993 between Trans-Atlantic Enterprise, 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.
II-2 10.11 Employment Agreement dated as of January 1, 1994 between the Todd-AO Corporation and Christopher D. Jenkins is incorporated by reference from the Registrant's Form 10-Q filed on April 13, 1994. 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. 10.14 Credit Agreement dated as of December 2, 1994 between the Todd-AO Corporation and Bank of America National Trust and Savings Association is incorporated by reference from the Registrant's Form 10-Q filed on January 13, 1995. 10.15 First Amendment to Credit Agreement dated as of March 13, 1995 between the Todd-AO Corporation and Bank of America National Trust and Savings Association is incorporated by reference from the Registrant's Form 8-K filed on March 31, 1995. 10.16 Letter Amendment dated April 5, 1996 to Credit Agreement dated as of December 2, 1994 between The Todd-AO Corporation and Bank of America National Trust and Savings Association is incorporated by reference from the Registrant's Form 10-Q for the quarter ended February 29, 1996. 10.17 Third Amendment dated June 14, 1996 to Credit Agreement dated as of December 2, 1994 between The Todd-AO Corporation and Bank of America National Trust and Savings Association is incorporated by reference to the Registrant's Form 10-Q for the quarter ended May 31, 1996. 10.18 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. 10.19 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. 10.20 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. 10.21 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. 10.22 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. 10.23 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. 10.24 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. 10.25 Performance Guarantee dated March 16, 1995 between The Todd-AO Corporation and Chrysalis Holdings Ltd. is incorporated by reference from the Registrant's Form 8-K filed on March 31, 1995.
II-3 10.26 Agreement for the acquisition of the entire issued share capital of Filmation 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. 10.27 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 to Registrant's Form 8-K filed on August 28, 1996. 10.28 Amendment to Asset Purchase Agreement dated October , 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).(1) 21.1 Subsidiaries of the Registrant. 23.1 Consent of Deloitte & Touche LLP. 23.2 Consent of Gifford, Hillegass & Ingwersen, P.C. 23.3 Consent of Greenberg Glusker Fields Claman & Machtinger LLP (included as part of Exhibit 5.1). 24.1 Power of Attorney (included on Page II-5 hereto).
(b) Financial Statement Schedules Schedule II Valuation and Qualifying Accounts
- ------------------------ (1) To be filed by Amendment. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities an Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer of controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For the purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall bedeemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Los Angeles, State of California, on October 10, 1996. THE TODD-AO CORPORATION By SALAH M. HASSANEIN ----------------------------------------- Salah M. Hassanein, PRESIDENT AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY Each of the undersigned hereby constitutes and appoints Salah M. Hassanein such person's true and lawful attorney-in-fact and agent, in such person's name and on such person's behalf, in any and all capacities, to sign any and all amendments to this Registration Statement, including any post-effective amendments, and any subsequently filed registration statement, including any amendments thereto, for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1993, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission.
SIGNATURES TITLE DATE - -------------------------------------------------- ------------------------------ ---------------- SALAH M. HASSANEIN Director, President and Chief ------------------------------------ Executive Officer October 10, 1996 Salah M. Hassanein SILAS R. CROSS Vice President, Treasurer and ------------------------------------ Principal Financial and October 10, 1996 Silas R. Cross Accounting Officer ROBERT A. NAIFY Co-Chairman of the Board of ------------------------------------ Directors October 10, 1996 Robert A. Naify MARSHALL NAIFY Co-Chairman of the Board of ------------------------------------ Directors October 10, 1996 Marshall Naify CHRISTOPHER D. JENKINS Senior Vice President and ------------------------------------ Director October 10, 1996 Christopher D. Jenkins J.R. DELANG Senior Vice President and ------------------------------------ Director October 10, 1996 J.R. DeLang RICHARD HASSANEIN ------------------------------------ Vice President and Director October 10, 1996 Richard Hassanein
II-5
SIGNATURES TITLE DATE - -------------------------------------------------- ------------------------------ ---------------- A.C. CHILDHOUSE ------------------------------------ Director October 10, 1996 A.C. Childhouse ROBERT I. KNUDSON ------------------------------------ Director October 10, 1996 Robert I. Knudson ------------------------------------ Director October , 1996 David Haas HERBERT L. HUTNER ------------------------------------ Director October 10, 1996 Herbert L. Hutner ------------------------------------ Director October , 1996 Michael S. Naify ------------------------------------ Director October , 1996 A. Frank Pierce ZELBIE TROGDEN ------------------------------------ Director October 10, 1996 Zelbie Trogden
II-6 THE TODD-AO CORPORATION SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS) YEARS ENDED AUGUST 31, 1993, 1994, 1995 AND NINE MONTHS ENDED MAY 31, 1996
COLUMN C COLUMN ------------- B ADDITIONS COLUMN COLUMN --------------- CHARGED COLUMN E A BALANCE AT (CREDITED) TO D ------------- - -------------------------------------------------- BEGINNING OF COSTS AND --------------- BALANCE AT DESCRIPTION PERIOD EXPENSES DEDUCTIONS END OF PERIOD - -------------------------------------------------- --------------- ------------- --------------- ------------- Allowance for doubtful accounts: Year ended August 31, 1993........................ $ 551 $ (101) $ (42) $ 408 ----- ----- ----- ----- ----- ----- ----- ----- Year ended August 31, 1994........................ $ 408 $ 31 $ (31) $ 408 ----- ----- ----- ----- ----- ----- ----- ----- Year ended August 31, 1995........................ $ 408 $ 649 $ (229) $ 828 ----- ----- ----- ----- ----- ----- ----- ----- Nine months ended May 31, 1996.................... $ 828 $ (149) $ (11) $ 663 ----- ----- ----- ----- ----- ----- ----- -----
S-1 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE - ---------- ----------------------------------------------------------------------------------------------- ----------- 1.1 Form of Underwriting Agreement (1) 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). 5.1 Opinion of Greenberg Glusker Fields Claman & Machtinger LLP, counsel to the Registrant, as to the legality of the shares being registered (1) 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 is 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 is incorporated by reference from the Registrant's Form 10-K for the fiscal year ended August 31, 1991. 10.4 Employment and Consulting Agreement dated as of September 5, 1991 by and between Shawn Murphy individually ("SM"), Murphy Balance Engineering, a California corporation wholly owned by SM, and Todd-AO/Glen Glenn Studios is incorporated by reference from the Registrant's Form 10-K for the fiscal year ended August 31, 1993. 10.5 Equipment lease dated as of September 5, 1991 by and between Murphy Mandala (a joint venture) (lessor) and Todd-AO/Glen Glenn Studios (lessee) is incorporated by reference from the Registrant's Form 10-K for the fiscal year ended August 31, 1993. 10.6 Employment Agreement dated as of October 1, 1994 between the Todd-AO Corporation and J.R. DeLang is incorporated by reference from the Registrant's Form 10-K for the fiscal year ended August 31, 1995. 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 amendment to Joint Venture Agreement dated as of October 20, 1993 between Trans-Atlantic Enterprise, 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.
EXHIBIT NO. DESCRIPTION PAGE - ---------- ----------------------------------------------------------------------------------------------- ----------- 10.11 Employment Agreement dated as of January 1, 1994 between the Todd-AO Corporation and Christopher D. Jenkins is incorporated by reference from the Registrant's Form 10-Q filed on April 13, 1994. 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. 10.14 Credit Agreement dated as of December 2, 1994 between the Todd-AO Corporation and Bank of America National Trust and Savings Association is incorporated by reference from the Registrant's Form 10-Q filed on January 13, 1995. 10.15 First Amendment to Credit Agreement dated as of March 13, 1995 between the Todd-AO Corporation and Bank of America National Trust and Savings Association is incorporated by reference from the Registrant's Form 8-K filed on March 31, 1995. 10.16 Letter Amendment dated April 5, 1996 to Credit Agreement dated as of December 2, 1994 between The Todd-AO Corporation and Bank of America National Trust and Savings Association is incorporated by reference from the Registrant's Form 10-Q for the quarter ended February 29, 1996. 10.17 Third Amendment dated June 14, 1996 to Credit Agreement dated as of December 2, 1994 between The Todd-AO Corporation and Bank of America National Trust and Savings Association is incorporated by reference to the Registrant's Form 10-Q for the quarter ended May 31, 1996. 10.18 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. 10.19 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. 10.20 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. 10.21 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. 10.22 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. 10.23 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. 10.24 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.
EXHIBIT NO. DESCRIPTION PAGE - ---------- ----------------------------------------------------------------------------------------------- ----------- 10.25 Performance Guarantee dated March 16, 1995 between The Todd-AO Corporation and Chrysalis Holdings Ltd. is incorporated by reference from the Registrant's Form 8-K filed on March 31, 1995. 10.26 Agreement for the acquisition of the entire issued share capital of Filmation 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. 10.27 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 to Registrant's Form 8-K filed on August 28, 1996. (a) 10.28 Amendment to Asset Purchase Agreement dated October , 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).(1) 21.1 Subsidiaries of the Registrant................................................................. 23.1 Consent of Deloitte & Touche LLP............................................................... 23.2 Consent of Gifford, Hillegass & Ingwersen, P.C................................................. 23.3 Consent of Greenberg Glusker Fields Claman & Machtinger LLP (included as part of Exhibit 5.1). 24.1 Power of Attorney (included on Page II-5 hereto). (b) Financial Statement Schedules Schedule II Valuation and Qualifying Accounts..................................................
- ------------------------ (1) To be filed by Amendment EX-21.1 2 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Todd-AO Productions, Inc., incorporated in California. Todd-AO Studios East, Inc., incorporated in New York (parent) and Todd-AO East, incorporated in New York (subsidiary). Todd-AO Digital Images, incorporated in California. Todd-AO Video Services, incorporated in California. Todd-AO Studios, incorporated in California. Todd-AO Studios West, incorporated in California. Todd-AO Europe Holdings Ltd. (formerly FCB 1120 Ltd.) incorporated in the U.K. (parent), Chrysalis/ Todd-AO Europe Ltd. incorporated in the U.K. (subsidiary) and Todd-AO/Filmatic Laboratories, Ltd. incorporated in the U.K. (subsidiary). Todd-AO's Land of The Future, Inc., incorporated in California. Todd-AO Preservation Services, incorporated in California. EX-23.1 3 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of The Todd-AO Corporation on Form S-1 of our report dated August 23, 1996 appearing in the prospectus which is part of this Registration Statement and to the references to us under the headings "Selected Financial Data" and "Experts" in such Prospectus. Our audits of the financial statements referred to in our aforementioned report also included the financial statement schedule of The Todd-AO Corporation, listed in Item 16. The financial statement schedule is the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic 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 3, 1996 EX-23.2 4 EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated January 26, 1996, relating to the financial statements of Editworks Acquisition LLC, which appears in such Prospectus. We also consent to the references to us under the headings "Experts". By /s/ GIFFORD, HILLEGASS & INGWERSEN, P.C. ------------------------------------------- Gifford, Hillegass & Ingwersen, P.C. Atlanta, Georgia October 1, 1996 -----END PRIVACY-ENHANCED MESSAGE-----