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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 001-12391
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PANAVISION INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3593063
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6219 DE SOTO AVENUE 91367
Woodland Hills, California (Zip code)
(Address of principal executive offices)
Registrant's telephone number including area code:
(818) 316-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined by Rule 12b-2 of the Securities Exchange Act of 1934). Yes No X
--- ---
The aggregate market value of the voting and non-voting common stock held
by non-affiliates of the Registrant (based on the closing price for the Common
Stock on the OTC Bulletin Board on such date) on June 30, 2003 was approximately
$3.4 million. As of March 24, 2004, there were 8,769,919 shares of Panavision
Inc. Common Stock outstanding.
Portions of the registrant's 2003 definitive proxy statement, issued in
connection with the annual meeting of stockholders, are incorporated by
reference in Part III of this Form 10-K.
THIS FORM 10-K IS BEING DISTRIBUTED TO STOCKHOLDERS IN LIEU OF A SEPARATE
ANNUAL REPORT.
PANAVISION INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
PAGE
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PART I
Item 1 Business........................................................................... 1
Item 2 Properties......................................................................... 10
Item 3 Legal Proceedings.................................................................. 11
Item 4 Submission of Matters to a Vote of Security Holders................................ 11
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.............. 11
Item 6 Selected Financial Data............................................................ 12
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 14
Item 7A Quantitative and Qualitative Disclosures About Market Risk......................... 28
Item 8 Financial Statements and Supplementary Data........................................ 29
Item 9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure........................................................... 29
Item 9A Control and Procedures............................................................. 29
PART III
Item 10 Directors and Executive Officers of the Registrant................................. *
Item 11 Executive Compensation............................................................. *
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters................................................................ *
Item 13 Certain Relationships and Related Transactions..................................... *
Item 14 Principal Accounting Fees and Service.............................................. *
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K.................... 30
- -------------
* Incorporated by reference from the Panavision Inc. 2004 Proxy Statement.
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PART I
ITEM 1. BUSINESS
BUSINESS OVERVIEW
Panavision Inc. (the "Company" or "Panavision") is a leading designer,
manufacturer and supplier of high precision camera systems, comprising cameras,
lenses and accessories for the motion picture, television series and television
commercial markets in North America, Europe and the Asia Pacific region.
Panavision camera systems have been widely used in the filming of major motion
pictures over the last 30 years, including the recent box office hits MASTER AND
COMMANDER, SEABISCUIT, THE LAST SAMURAI, MYSTIC RIVER, and COLD MOUNTAIN. The
Company is also a leading supplier of camera equipment to U.S. prime time
episodic or "series" network and cable television productions, such as EVERYBODY
LOVES RAYMOND, CSI, and 24.
The Company believes that its position as an industry leader results from
its broad range of technologically superior and innovative products, its
long-standing collaborative relationships with filmmakers and studios, its
dedication to customer service, the breadth of its camera and lens equipment
inventory and its unique worldwide distribution network. Panavision is also the
only supplier of cinematography equipment that manufactures a complete camera
system incorporating its own proprietary prime and zoom lenses, the most
critical components of a camera system. The Company is also the only major
manufacturer of cameras and lenses that is located near Hollywood. In contrast,
Panavision's manufacturing competitors are located primarily in Europe and sell
their products to rental companies, which then rent the equipment to the
ultimate user.
In addition to manufacturing and renting camera systems, the Company also
has rental operations providing lighting, lighting grip, power distribution,
generation and related transportation equipment, cranes and remote camera heads.
These operations include Lee Lighting, the largest lighting rental company in
the United Kingdom, as well as other owned-and-operated facilities in New York;
Orlando, Florida; Dallas, Texas; Toronto, Canada and Australia. Recently, Lee
Lighting supplied the lighting needs of such major films as HARRY POTTER AND THE
SORCERER'S STONE, TOMB RAIDER 2, TROY and ALEXANDER THE GREAT. The Company also
manufactures and sells lighting filters and other color-correction and diffusion
filters through its Lee Filters operation.
The Company believes that it is well positioned to take advantage of the
emerging markets for the capture of images in digital format and the use of
digital technologies for post-production work. See "--Market Overview--Digital"
for a description of the digital market. The Company offers a complete
state-of-the-art high definition digital camera system comprised of a modified
version of Sony's 24P CINEALTA(TM) high definition digital camera, coupled with
Panavision's series of specially designed PRIMO DIGITAL(R) lenses and other
accessories for use in the motion picture and television industries. The Company
has access to the Sony high definition camera through DHD Ventures, LLC ("DHD"),
a joint venture established in July 2000 with Sony Electronics Inc. The
Sony/Panavision system has been used on a variety of series television programs
and commercials, including JOAN OF ARCADIA, 8 SIMPLE RULES, LIFE WITH BONNIE and
STARGATE ATLANTIS.
Panavision also believes it is well positioned in the post-production
segment of the digital market with the Company's EFILM operations. In 2002,
Panavision and Deluxe Laboratories Inc. ("Deluxe") formed EFILM, LLC, which
operates as EFILM. Panavision holds an 80% membership interest in EFILM, LLC and
Deluxe holds the remaining 20%, subject to certain agreements which could
increase Deluxe's percentage ownership in certain circumstances. EFILM, a
digital laboratory, provides the post-production services of 1) high-resolution
scanning of film, 2) digital color timing, 3) laser film recording of digital
video and high definition images to film and 4) delivering video masters to
major film studios, independent filmmakers, advertisers, animators, large format
filmmakers and restoration clients. EFILM has worked on such films as TERMINATOR
3: RISE OF THE MACHINES, BRUCE ALMIGHTY, BIG FISH, THE PASSION OF THE CHRIST,
ANGELS IN AMERICA and THE CAT IN THE HAT.
Panavision was incorporated in Delaware 1990. Predecessors of Panavision
have been engaged in the design and manufacturing of cinematography equipment
since 1954. The Company's principal executive office is located at 6219 De Soto
Avenue, Woodland Hills, California, 91367, and its telephone number is (818)
316-1000.
Approximately 85.7% of the Company's voting stock is owned by PX Holding
Corporation ("PX Holding"), a wholly owned subsidiary of Mafco Holdings Inc.
("Mafco Holdings").
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MARKET OVERVIEW
The demand for cinematographic equipment is driven by the number and
complexity of feature films, television programs and commercials being produced.
Increases in the number of action films and special effects in feature film and
television productions increase the range and volume of equipment required and
lengthen the rental period. Increases in the number of television networks and
channels and in the networks' demand for original programming also drive the
increased use of camera systems.
FEATURE FILMS
Panavision views feature films in two categories: major studio features and
independent features. Major studio features are typically large-budget
productions requiring a greater range and volume of camera and lighting
equipment, thus providing greater revenue potential for the Company. The average
major studio feature film rental is for 10 to 12 weeks. The camera and lighting
rental revenue potential from feature films is dependent on the number and types
of productions filmed in any given year. The Company has been established for
many years as a market leader in the feature film segment and provides equipment
to the majority of major studio feature film productions worldwide.
EPISODIC TELEVISION
The episodic or "series" television market in North America is comprised
primarily of dramas, situation comedies and action programs, which are aired in
both prime and non-prime time slots. These programs are broadcast on the major
television networks as well as on cable networks. The average half-hour
situation comedy series generates 22 weeks of billing in a year. The average
one-hour drama series generates 33 weeks of billing in a year. Panavision has
been established for many years as the market leader in the prime time segment,
supplying equipment to the majority of U.S. prime time network series television
productions produced on film. In addition, Panavision has become the leading
supplier of high definition digital camera equipment for use in television
situation comedies, a market that has developed in the last two years. The
Company believes that it will continue to be a strong supplier to this market as
the Company continues to offer customized equipment designed for television
production, which it believes provides both economic and qualitative benefits to
its customers.
COMMERCIALS
Although the production of a commercial generally lasts for only one to
seven days, daily rental rates for camera systems are equal to or higher than
feature film rental rates and represent a significant part of the camera
equipment rental market worldwide. Many of the creative professionals involved
in the filming of commercials seek to distinguish their products by using
innovative techniques requiring technologically advanced equipment--the ability
to achieve a unique "look," which the Company believes can, in many cases, be
achieved best by using its products. By pursuing opportunities to expand its
presence in the television commercial market, the Company believes that it can
develop brand loyalty for its products and beneficial long-term relationships
with directors and cinematographers, many of whom begin their careers filming
television commercials.
DIGITAL
The production of feature films involves three distinct phases: 1) image
capture; 2) post-production; and 3) distribution and exhibition.
IMAGE CAPTURE. Image capture refers to the recording of images in a camera.
Currently, major theatrical productions are predominantly captured on 35mm film,
although with recent advancements in digital equipment, digital capture may
become more prevalent in the future. Since the camera lens is the most important
factor in image quality, Panavision believes that the superior quality of its
PRIMO DIGITAL(R) lenses coupled with Sony's 24P CINEALTA(TM) high definition
digital camera allows the Company to compete effectively in markets that have
adopted digital capture technology. The Company does not believe that a
substantial portion of feature film or hour-long drama or commercial customers
will utilize digital cameras until additional performance and camera features
are available. The Company is continuing to develop innovative camera and lens
systems to meet evolving needs in the high definition medium.
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POST-PRODUCTION. At the conclusion of production, the captured images are
then processed in a variety of steps including color timing, the insertion of
digital effects, and titling. Much of the post-production phase has
traditionally been a chemical laboratory process, but this is changing over time
with the advent of the digital intermediate. In the digital intermediate
process, film negatives are scanned into digital files using high-resolution
scanning equipment and remain in the digital format throughout the
post-production process. This method may provide a significant improvement in
the quality of theatrical release prints as a result of less film handling, more
precise clean-up routines, real-time pixel-by-pixel color correction, and fewer
intermediate steps and therefore less potential image degradation. Since the
digital intermediate process is typically supervised by the cinematographer of a
feature film, the Company is able to connect its principal customers with a
greater range of services. EFILM's use of the digital intermediate process on
both 35mm negatives and digital media positions the Company to expand its reach
into the feature film value chain and take advantage of the growing
post-production segment of the feature film market.
DISTRIBUTION/EXHIBITION. The exhibition phase refers to the medium used to
show the completed program to the ultimate viewer. In the example of a
theatrical release, it refers primarily to film projection, although there is a
small but growing market as well for digital projection. Regardless of the speed
of implementation of digital projection or whether digital projection is
implemented on a broad scale at all, the choice of the exhibition medium will
have a limited impact on either the image capture or post-production decisions.
This is because images originally captured on film may be converted for digital
projection as readily as images originally captured digitally may be recorded
back to film for film projection.
GROWTH STRATEGY
Panavision intends to pursue the following strategies to grow and enhance
its position as the leading designer, manufacturer and supplier of high
precision film camera systems, lighting, and other equipment and services for
the motion picture, television, and commercials industries.
EXPAND PRODUCTS AND SERVICES FOR OUR CORE FILM BUSINESS. Panavision's film
camera systems business has historically been and continues to be the foundation
of the Company. Although Panavision provides digital cameras to those of
customers who desire them, the vast majority of its customers still prefer to
use film cameras to capture images because of the image quality, including depth
of field, resolution, and dynamic range. In order to meet this continuing demand
for film cameras, the Company continues to work closely with its customers to
develop innovative new products and services for film image capture. Its
location in the mainstream of Hollywood film production and its many programs
aimed at soliciting the views of its customers uniquely position the Company to
respond to changing production requirements.
DEVELOP NEW PRODUCTS AND APPLICATIONS. Panavision intends to continue
developing and manufacturing innovative cameras, lenses and accessories for
applications beyond its existing core business. Panavision's research and
development group is currently comprised of mechanical, software, electronic and
optical engineers, draftsmen and machinists. Additionally, the research and
development group has a dedicated machine shop that manufactures prototype
equipment. These internal capabilities enable Panavision to develop proprietary
technology in collaboration with filmmakers to address their unique requirements
and position the Company to develop new products.
o HD DIGITAL CAMERA SYSTEMS. Panavision offers a complete
state-of-the-art high definition digital camera system comprised
of a modified version of Sony's 24P CINEALTA(TM) high definition
digital camera coupled with Panavision's specially designed PRIMO
DIGITAL(R) lenses and other accessories. Panavision has designed
this system to simulate a film system so that traditional film
crews are comfortable using the medium. The PRIMO DIGITAL(R)
lenses represent significant technological breakthroughs
providing extremely high performance, which Panavision believes
provides the Company with the opportunity to build on the
Company's leadership position. Panavision will continue to
develop innovative camera and lens systems to meet evolving needs
in the high definition digital medium.
o HIGH PERFORMANCE LENSES FOR NEW MARKETS. Panavision has developed
significant expertise in the design, development and manufacture
of high performance lenses used in the feature film, series
television and commercial markets. Panavision believes this
expertise uniquely positions the Company to pursue new
opportunities in the optical field outside of its existing
markets. Panavision's strategy is to seek out markets and
products where high performance optics
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add value and can drive high margins. Present zoom lens
technology has maximum performance at approximately 100:1
magnification. Using a breakthrough proprietary design
technology, Panavision has designed a lens that achieves a 300:1
continuous zoom ratio. Markets that Panavision has identified for
the consumption of such technology include the sports broadcast
market and military and surveillance applications. The Company
expects these lenses to be available to customers beginning in
2004. The Company is also exploring opportunities to license the
proprietary technology behind the 300X lens for other
applications outside of Panavision's traditional markets.
IMPROVED OPERATING EFFICIENCY. Panavision believes that profitability
can be enhanced through improvements in operating efficiency. These improvements
include the implementation of a global information system to better manage
equipment rentals and customer service, the implementation of best practices
throughout the Company's rental facilities worldwide, the refinement of
compensation programs to align objectives better with employee remuneration, and
a new product development program aimed at accelerating the cycle between
concept and market delivery. In addition to improved profitability, Panavision
believes these changes will also ultimately lead to more efficient use of
equipment, thereby mitigating capital requirements in the future.
INCREASE MARKET SHARE OF EXISTING PRODUCTS. Panavision intends to identify
and develop opportunities to increase the market share of its existing products
by increasing the penetration of its products in the Company's current markets
and expanding into new geographic markets. Panavision believes that the Company
can increase its market share through the organic growth of the Company's
business and through strategic acquisitions of complementary businesses as
appropriate opportunities arise.
CONTINUE TO GROW THE EFILM BUSINESS. Panavision believes that over the next
few years the digital intermediate process will become the preferred
post-production process for finishing feature films, whether they are captured
on film or captured digitally. By utilizing EFILM's leading market position,
Panavision intends to continue to expand its digital post-production work with
the Company's existing and new customers.
INCREASE CAMERA SYSTEM PACKAGE SIZE. Panavision continues to focus the
Company's development efforts on value-added accessories that increase the
overall size and rental price of a camera package. Since the average cost of
camera rental represents less than 1% of the average major feature film budget,
Panavision believes customers tend to place a higher priority on quality of
service and the availability of a broad range of technologically superior
equipment than on price considerations. In addition, films with more complex and
extensive special effects, such as THE MATRIX series of films, require more
expensive camera packages with more cameras, more lenses and value-added
accessories. As an example of the Company's ability to meet the needs of more
complex films, Panavision has provided the camera system for every JAMES BOND
film ever made.
CAMERA RENTAL OPERATIONS
Panavision supplies cinematographic equipment, such as cameras, lenses and
accessories, to its customers on a project-by-project basis. Panavision has an
extensive rental inventory of cameras and lenses, as well as associated
accessories (including non-Panavision manufactured equipment). Panavision rents
its equipment through its network of owned-and-operated rental facilities and
independent agents located throughout North America, Europe and the Asia Pacific
region. This network provides the Company with a competitive advantage, as
Panavision is the only rental company that offers clients equipment and service
on a national and worldwide basis.
CAMERA SYSTEM PRODUCTS
Panavision is the only provider of camera systems with an integrated design
that provides customers with compatible products available on a worldwide basis.
Each camera package rented for a project is comprised of a number of camera
systems, each of which includes a camera, lenses and accessories. Each camera's
rental price includes a variety of accessories such as eyepieces, viewfinders,
cables and brackets.
FILM CAMERAS. There are two basic types of motion picture
cameras--Synchronous, or "sync-sound," and Mit Out Sound (MOS). Sync-sound
cameras are used to shoot pictures while recording dialogue. MOS cameras are
used primarily to shoot high-speed footage and special effects and may also be
used as backup cameras in situations where dialogue is not being recorded.
Panavision's camera inventory consists of both sync-
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sound and MOS cameras with various features and at a range of prices. While the
majority of the Company's sync-sound cameras are 35mm cameras, Panavision also
has 16mm cameras, which are used primarily to film episodic television shows,
and 65mm cameras, which are used primarily to film special effects and special
venue presentations.
Panavision's inventory also includes a number of non-Panavision cameras
that are used to supplement its product line. Due to the Company's ability to
purchase non-Panavision cameras if there is a business need to do so, Panavision
is able to compete with independent renters of cinematography equipment on the
same level and with the same equipment. Panavision's competitors, on the other
hand, do not have the corresponding ability to purchase Panavision equipment, as
Panavision equipment is not available to rental companies other than the
Company's agents.
FILM LENSES. Panavision develops, designs and manufactures its own
prime (fixed focal length) and zoom lenses, the most critical component
affecting picture quality and an important consideration for the filmmaker. For
many years, Panavision has specialized in anamorphic lenses, which are used for
the wide-screen movie format. While Panavision continues as the world's leading
supplier of these lenses, the Company has also created a line of advanced
spherical lenses for the non-wide screen format, producing the Company's
proprietary PRIMO PRIME(R) and PRIMO ZOOM(R) lenses. The Company believes that
the PRIMO(R) lenses have performance characteristics that exceed the other
lenses available in the marketplace.
HD DIGITAL CAMERA SYSTEMS. Panavision offers a complete high definition
digital camera system comprised of a modified version of Sony's 24P CINEALTA(TM)
high definition digital camera coupled with its new series of specially designed
PRIMO DIGITAL(R) lenses and other accessories. The PRIMO DIGITAL(R) lenses
represent significant technological breakthroughs, providing extremely high
performance, which Panavision believes will enable the Company the opportunity
to build on its leadership position in the digital segment.
ACCESSORIES. In order to provide Panavision's customers with a fully
integrated camera system, Panavision frequently introduces new camera
accessories and currently offers an extensive range of products requested by and
developed in conjunction with filmmakers. Certain accessories may reduce overall
production costs by lowering the labor intensiveness of the production process
and thereby decreasing the shooting days. Moreover, an accessory product often
achieves such widespread acceptance among its customers that Panavision
incorporates it into the base camera package, thereby increasing the rental
price of the overall package.
RESEARCH AND PRODUCT DEVELOPMENT
Panavision's research and development group is comprised of mechanical,
software, electronic and optical engineers, draftsmen and machinists.
Additionally, the research and development group has a dedicated machine shop
that manufactures prototype equipment. These internal capabilities enable the
Company to develop proprietary technology in collaboration with filmmakers to
address their unique requirements. Panavision has long been a leader in the
research and development of film camera lenses. Since the first Panavision lens
was introduced in 1957, the Company has introduced many innovative spherical and
anamorphic lenses, including the PRIMO(R) series, which won ACADEMY AWARDS(R) in
2002, 1999, 1995, 1994, 1991 and 1990. In 2000, the Company launched a new
series of specially designed PRIMO DIGITAL(R) lenses for use with the Sony 24P
CINEALTA(TM) digital camera. These lenses are among the most sophisticated and
highest performing lenses Panavision has ever produced.
The research and development group also explores camera and lens
technology for use outside of the Company's traditional markets. Research and
development expense for the years ended 2003, 2002 and 2001 was $5.1 million,
$4.4 million and, $5.0 million, respectively.
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MANUFACTURING AND ASSEMBLY
Panavision manufactures cameras, lenses, and accessories designed by the
Company's in-house research and development staff at its 150,000 square foot
corporate headquarters and manufacturing facility located near Hollywood in
Woodland Hills, California. Panavision develops and designs all the critical
components for its camera systems, including the camera movement and lens. An
entire camera system consists of hundreds of parts, each carefully produced,
assembled and tested. The manufacturing process takes up to four months and
primarily involves the fabrication and assembly of camera and lens components by
highly skilled workers, each of whom generally has an area of specialization.
Following the assembly process, each camera system is rigorously tested to
achieve the high standard of performance that customers expect from Panavision.
While Panavision manufactures most of the components internally, certain
components and subassembly work, including glass grinding, lens element
polishing and die casting, are outsourced to selected suppliers. Panavision has
developed long-standing relationships with the Company's significant suppliers
and believes that they will continue to supply high-quality products in
quantities sufficient to satisfy the Company's requirements. Since certain
components, particularly the lens element, require long lead times, precise
production schedules are critical. Inventory levels are determined based on
input from marketing, operations and the agent network. Panavision maintains a
fairly constant production schedule in order to utilize its resources
efficiently and service its customers' requirements.
MARKETING AND CUSTOMER SERVICE
The principal decision-makers in the selection of the camera packages are
cinematographers, directors and producers, who view cameras and related
equipment as critical artistic tools. In addition to cost considerations, the
selection of equipment is driven by its suitability, technological capabilities
and reliability, as well as by the degree to which the manufacturer or renter is
able to rapidly service the technical needs of the filmmaker, both before and
during film production.
Panavision's skilled sales representatives have established close working
relationships with numerous filmmakers. To cultivate these relationships,
Panavision assigns to each production a sales representative who possesses
skills and experience appropriate to the needs of that production. Based on
discussions with the filmmaker, the sales representative recommends a camera
package tailored to achieve the filmmaker's desired visual effect and meet the
production's budget. In addition, sales representatives provide further advice
and support by visiting film production sites during the production. As a result
of providing high-quality customer service, many of Panavision's representatives
have been working with the same filmmakers throughout their careers and in many
instances the collaborative effort with the filmmaker has prompted the design of
innovative camera systems and accessories.
After preliminary decisions have been made with respect to the proper
camera package, the camera equipment is delivered to a preparation area in one
of the Company's facilities reserved for that filmmaker. The filmmaker, together
with his or her own and Panavision's representatives, then inspects, tests and
experiments with the equipment at the facility's prep floor, sound stage, film
processing room and screening room.
DISTRIBUTION
Camera packages are rented to the motion picture and television industries
through rental offices owned and operated by the Company as well as through its
independent agents. These rental offices serve as a single point of contact for
the cinematographers and often provide services that include maintenance and
technical advice. The Company believes it is the only manufacturer to have the
majority of its revenue generated through owned-and-operated rental houses,
primarily because of the Company's choice not to sell its equipment. Panavision
does not currently intend to begin selling its cinema camera systems. Panavision
owns and operates camera rental and camera and lighting rental facilities
worldwide in North America, Europe and the Asia Pacific region. In addition to
the Company's owned-and-operated facilities, Panavision serves its customers
through a network of international third-party agents who are responsible for
the rental of the Company's equipment in locations that are not serviced by its
owned-and-operated facilities. Agents generally pay approximately 60% of their
rental revenue to Panavision and retain the balance, which is charged as a
commission expense in the Company's statement of operations. All of Panavision's
agents are well trained in the use of Panavision equipment and are supported by
the Company's technical staff.
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For information as to the Company's operations in different geographical
areas, see Note 11 of the Notes to the Consolidated Financial Statements of the
Company included elsewhere in this Form 10K.
COMPETITIVE STRENGTHS
Panavision's leading market position is demonstrated by its premier brand
name recognition and strong market share of the major studio feature films
worldwide and North American episodic television programs. Panavision believes
its leading position results from the following competitive strengths:
REPUTATION FOR QUALITY AND TECHNOLOGICALLY ADVANCED PRODUCTS. Panavision is
recognized in the motion picture and television industries as the preeminent
brand name for cinematography equipment and the industry leader in the
development of high quality, technologically advanced camera systems, lenses and
accessories. Since its inception in 1954, Panavision has continually introduced
camera systems, lenses and accessories that have become industry standards. The
Company has been awarded three OSCARS(R) and 23 other ACADEMY AWARDS(R) granted
for Scientific and Technical Achievement, including a 2003 award for advancement
in camera systems designed for the film industry, a 2002 award for the PRIMO
MACRO ZOOM(R) lens, a 2001 award for the MILLENNIUM(R) XL camera system, a 2000
award for the MILLENNIUM(R) camera viewfinder and a 1999 award for the
development of the PRIMO(R) lens series. The Company received two EMMY(R)
awards, including one in July of 2000 for the development of the MILLENNIUM(R)
XL camera system and another in 2001 for the development of the PRIMO(R) lens
series. Since 1990, 11 of the 14 OSCARS(R) for Best Cinematography have been
awarded to cinematographers who used the Company's camera systems, including
the cinematographers of MASTER AND COMMANDER, ROAD TO PERDITION, AMERICAN
BEAUTY, and SAVING PRIVATE RYAN.
RANGE AND BREADTH OF CAMERA SYSTEMS. Panavision believes that it has the
world's largest inventory of camera systems, including cameras, lenses, and
accessories. Panavision also offers a broad range of choices, including
equipment that is exclusively available through the Company and its agents as
well as equipment manufactured by others. The Company is able to upgrade its
existing inventory to meet continually changing market demands, thereby reducing
obsolescence, achieving better control of inventory and product availability and
providing customers with access to the latest technological advances. Panavision
believes that the range and breadth of its camera systems inventory enables the
Company to provide camera systems to a greater number of film productions
throughout the world than any of its competitors and to serve multiple
large-scale feature film productions simultaneously.
LONGSTANDING RELATIONSHIPS WITH FILMMAKERS. As a result of Panavision's
significant relationships with cinematographers, directors, producers and studio
executives and its leading market position, Panavision has favorable access to
key decision-makers regarding camera system selection. These relationships
foster a cooperative effort to design and produce unique systems and accessories
that meet filmmakers' creative needs. Additionally, Panavision offers
instruction and training in the handling of its equipment to young directors and
cinematographers while they are still in film school and thereafter, thereby
developing loyalty to Panavision and providing a foundation for the Company to
sustain its strong market position. For several years, Panavision, in
association with the International Cinematographers Guild, has been providing
training in the use of digital cameras. In addition, Panavision is the only
major manufacturer of cameras and lenses in the Hollywood area, enabling the
Company to maintain its close relationships with Hollywood filmmakers and to
respond rapidly to its customers' needs.
UNIQUE MANUFACTURING AND DISTRIBUTION MODEL. Panavision is the only
vertically integrated worldwide provider of camera systems, lenses and
accessories to the film, series television and television commercial industries.
By renting camera systems from Panavision, customers are ensured continual
access to compatible state-of-the-art equipment as well as the availability of
proper equipment combinations for each specific project. The Company's control
over the design, development, manufacturing and distribution processes enables
it to 1) rapidly incorporate technological developments and filmmakers'
suggestions into new products, 2) maintain product exclusivity and 3) offer
products with greater quality and higher performance at a premium price.
DEDICATION TO CUSTOMER SERVICE. The Company's customer service, repair and
maintenance personnel are "on call" and available to assist customers 24 hours a
day. In order to provide filmmakers with a high level of support, the Company
regularly sends marketing representatives and technicians to film production
sets to provide advice or immediate assistance with any equipment needs or
questions. In the Hollywood area, the Company operates a "Panavan," a commercial
van fully equipped with service equipment that visits Panavision's customers on
a daily basis. The Company assigns a marketing representative to each production
in an effort to
7
foster a strong and lasting working relationship with the customer. In addition,
as part of the Company's customer service activities, the Company often
develops, customizes or procures equipment for specific customers or projects.
Central to its customer service philosophy is Panavision's maintenance and
repair team, which services all equipment between projects to ensure the quality
and reliability of its equipment. The Company is currently in the process of
reviewing its service standards and upgrading its entire rental process.
WORLDWIDE DISTRIBUTION NETWORK. Panavision is the only camera and lighting
operation with an extensive worldwide distribution network, including 29 owned
and operated rental facilities throughout North America, Europe and the Asia
Pacific region. With the increasing globalization of feature film production,
this worldwide Panavision network offers its customers an integrated support
system totally unique in the industry. These facilities offer a large inventory
of rental equipment, on-site technical expertise, knowledgeable market
specialization in feature films, episodic television and commercials, and strong
customer support. Panavision also serves its customers through a network of 24
international third-party agent offices, who are responsible for the rental of
the Company's equipment in locations that are not served by its owned and
operated facilities. Panavision's extensive network for the distribution of its
products instills confidence in the Company's customers that they can receive
the level of quality and customer service they expect from Panavision for their
cinematography equipment needs worldwide.
EXPERIENCED MANAGEMENT. Panavision's management team provides depth and
continuity of experience. Panavision's senior management has developed
relationships over many years with influential individuals in the motion picture
and television industries, a central aspect of the Company's ability to maintain
its strong market share. Panavision's management team has also been instrumental
in developing new technologies in the industry.
COMPETITION
The market for high-precision cinematography equipment is highly
competitive, primarily driven by technology, customer service and price. As a
manufacturer of cinematography equipment, Panavision has one primary competitor,
Arri Inc., based in Munich, Germany. Arri Inc. manufactures only cameras and
certain accessories, primarily for sale to rental houses and individuals that
are not the end users. Arri Inc. has rental facilities in selected markets but
does not have a global rental distribution network. Because Panavision
manufactures lenses, cameras, and a full range of accessories that are
cross-compatible, has close relationships with filmmakers, has global
distribution and has in-house opto-mechanical design and manufacturing
capabilities, Panavision believes that it is better able to develop the
innovative camera systems demanded by its customers.
As a renter of cinematography equipment, Panavision competes with numerous
rental facilities, which generally purchase their equipment from other
manufacturers and then rent that equipment to their customers. While the overall
rental business is price competitive and subject to discounting, Panavision has
chosen to compete primarily on the basis of the Company's large inventory base,
technologically advanced proprietary products, broad product line, extensive
sales and marketing force and commitment to customer service. Panavision
believes that the Company, as both the manufacturer and rental house, is able to
respond to many user requests on shorter notice and more effectively than the
Company's rental competitors. In addition to the Company's existing competitors,
Panavision may encounter competition from new competitors, as well as from new
types of equipment, such as digital cameras. Although Panavision believes that
the Company is well positioned to capitalize on potential growth in the digital
capture market, including through the Company's interest with Sony in DHD, the
digital capture market is relatively new and the Company cannot predict whether
or how quickly the rental market for digital cameras will grow or what effect
that market will have on the Company's film camera business.
LIGHTING RENTAL OPERATIONS
In addition to manufacturing and renting camera systems, Panavision rents
lighting, lighting grip, transportation and distribution equipment and mobile
generators used in the production of feature films, television programs and
commercials, outside broadcasts and other events from Panavision's
owned-and-operated facilities located in New York; Orlando, Florida; Dallas,
Texas; the United Kingdom; Toronto, Canada and Australia. Panavision's extensive
inventory of lighting equipment enables various lighting operations to service
projects with large-scale equipment and personnel requirements, such as feature
films, while still maintaining sufficient capacity to service other projects
simultaneously. Panavision's worldwide lighting rental operations employ senior
management who have developed relationships over many years with influential
individuals in the motion
8
picture and television industries. These operations include Lee Lighting, the
largest lighting rental operation in the United Kingdom. It maintains the
largest rental asset base of lighting equipment, transport, mobile generators
and power distribution equipment in the United Kingdom. Lee Lighting currently
has the largest inventory of lampheads, the core element of lighting equipment
used by filmmakers in all areas of the industry, in the United Kingdom. Lee
Lighting operates lighting rental operations in London, Bristol and Manchester,
England and Glasgow, Scotland, each of which has its own rental inventories.
From these four locations, Lee Lighting is able to service any production in
England, Wales, Ireland, or Scotland. In addition, Lee Lighting maintains a
rental base at Shepperton Studios, the second largest studio complex in the
United Kingdom for the production of feature films. Lee Lighting is the only
lighting company in the United Kingdom that supplies its own electricians in
connection with the rental of its equipment, a sizable field force of gaffers
and electricians who work exclusively with the Company. This service force is on
call 24 hours a day, seven days a week and is supplemented by freelance labor
when required.
Panavision's lighting facilities in the United States are operated by TFN
Lighting Corp., a wholly owned subsidiary of PANY Rental, Inc. ("PANY Rental")
(dba Panavision New York). Pursuant to a lease agreement entered into in
December 2001, when PANY Rental was an agent of the Company in which Panavision
owned a one third interest, Panavision leased to TFN Lighting Corp. lighting and
related lighting accessory equipment located in the United States. Effective May
30, 2003, PANY Rental became a 66.7% owned subsidiary of Panavision
International. In addition, on May 30, 2003, PX Holding Corporation, the holder
of approximately 85.7% of the Company's voting stock, purchased the remaining
33.3% of PANY Rental shares from Silo Capital Corp for $0.7 million. On January
16, 2004, the Company exchanged the 33.3% interest in PANY Rental held by PX
Holding Corporation for shares of Series C Preferred Stock; as a result, PANY
Rental became a wholly-owned subsidiary of Panavision International, L.P.
COMPETITION
Panavision's lighting rental operations service the motion picture,
television and commercials industries, including studio programs, outside
broadcasts, and commercials. These markets require a similar range of lighting
productions and related support equipment; however, feature films and episodic
television programs generally require larger equipment packages than
commercials. The composition of equipment packages is frequently determined by
the producer, director or cinematographer, who may desire a specific type of
image or lighting effect. Although the Company's worldwide inventory of lighting
equipment is extensive, the lighting rental market is price competitive. Because
film and television productions tend to rent lighting equipment from rental
agencies in the territories where the productions are filmed, the rental revenue
generated from Panavision's lighting rental operations depends on the number of
feature films, television programs and commercials being filmed in the areas
near the Company's' operations.
SALES AND OTHER OPERATIONS
Panavision manufactures and sells lighting filters through the Company's
Lee Filters operations in the United Kingdom and the United States. Panavision
also owns an 80% interest in and operates EFILM in the United States. In
addition, the Company sell various consumable products such as film stock, light
bulbs and gaffer tape, which are used in all types of productions, from several
of Panavision's facilities.
Lee Filters is a manufacturer of light control media for the motion
picture, television, theater and other industries. The majority of Lee Filters'
business is the sale of filters or gels used by lighting directors to control or
correct lighting conditions during productions. On a worldwide basis, lighting
filter distribution is handled primarily through a network of third-party
dealers who have been selected because of their specific knowledge of the
filters market in their respective countries. However, in the United Kingdom and
United States, Lee Filters sells directly to end users and rental houses as well
as to distributors and dealers.
EFILM provides the following post-production services: 1) high-resolution
scanning of film, 2) digital color timing, 3) laser film recording of digital
video and high definition images to film and 4) delivery of video masters to
major film studios, independent filmmakers, advertisers, animators, large format
filmmakers and restoration clients. In 2002, Panavision and Deluxe formed EFILM,
LLC, which operates as EFILM. Panavision holds an 80% membership interest in
EFILM, LLC and Deluxe holds the remaining 20%, subject to certain agreements
which could increase Deluxe's percentage ownership in certain circumstances.
9
INTELLECTUAL PROPERTY
Panavision relies on a combination of patents, licensing arrangements,
trade names, trademarks, service marks, trade secrets, know-how and proprietary
technology to protect the Company's intellectual property rights. Panavision
owns or has been assigned or licensed domestic and foreign patents and patent
applications relating to its cameras, lenses and accessories. In 2003,
Panavision filed an application for patent on the compound zoom technology used
in the 300X lens, which is currently pending. Panavision also owns or have been
assigned several domestic and foreign trademark or service mark registrations
including PANAVISION(R), PANAFLEX(R), PANAHEAD(R), PANALITE(R), PANASTAR(R),
PRIMO(R), PRIMO ZOOM(R), PRIMO MACRO ZOOM(R), PRIMO-L(R), PRIMO DIGITAL(R),
MILLENNIUM(R) and ULTRAVIEW(R) among others which, collectively, are material to
its business.
ENVIRONMENTAL MATTERS
Panavision is subject to foreign, federal, state and local environmental
laws and regulations relating to the use, storage, handling, generation,
transportation, emission, discharge, disposal and remediation of hazardous and
non-hazardous substances, materials and wastes. Panavision is also subject to
laws and regulations relating to worker health and safety. Panavision believes
that its operations are in substantial compliance with all applicable
environmental and health and safety laws. Although no material capital or
operating expenditures relating to environmental controls or other environmental
matters are currently anticipated, there can be no assurance that Panavision
will not incur costs in the future relating to environmental matters that would
have a material adverse effect on its business or financial condition.
EMPLOYEES
As of December 31, 2003, Panavision had approximately 1,274 full-time
employees, consisting of 608 employees based in North America, 544 employees
based in Europe, and 122 employees based in the Asia Pacific region. The
Company's subsidiary, PANY Rental, is a party to collective bargaining
agreements with two local affiliates of the International Brotherhood of
Teamsters, which together cover approximately 23 employees. Panavision believes
that its relationships with its employees is good.
AVAILABILITY OF CERTAIN DOCUMENTS CONCERNING THE COMPANY
Current versions of the following documents are available on the Company's
website, www.panavision.com, as well as without charge upon request to the
Secretary, Panavision Inc., 6219 De Soto Avenue, Woodland Hills, California
91367:
o The Company's Code of Business Conduct, which includes its Code
of Financial Ethics for Senior Financial Officers.
o The charters for all standing committees of the Company's Board
of Directors, namely its Audit, Compensation and
Nominating/Governance Committees.
o The Company's Corporate Governance Guidelines.
o The policy that the Nominating/Governance Committee of the
Company's Board of Directors adopted concerning criteria for the
nomination of candidates to the Board of Directors.
Paper copies of this annual report on Form 10-K, the Company's quarterly reports
on Form 10-Q, any current report on Form 8-K and any amendment to any of these
documents are similarly available.
ITEM 2. PROPERTIES
Panavision's headquarters and principal manufacturing facility are located
at its 150,000 square-foot facility in Woodland Hills, California. Panavision
operates domestic rental facilities in Woodland Hills, Hollywood, New York City,
Dallas, Orlando and Wilmington. To service its international markets, Panavision
operates rental facilities in Toronto and Vancouver, Canada; Dublin, Ireland;
London (two) and Manchester, England; Paris (three) and Marseilles, France;
Prague, Czech Republic; Warsaw, Poland; Sydney (two), Queensland and Melbourne,
Australia; and Auckland and Wellington, New Zealand. Lee Lighting operates
rental facilities in
10
ITEM 2. PROPERTIES (CONTINUED)
London, Bristol and Manchester, England and Glasgow and Edinburgh, Scotland. Lee
Filters has a sales operation in Burbank, California, as well as a manufacturing
facility located in Andover, England. EFILM is located in Hollywood. All of its
facilities are leased.
ITEM 3. LEGAL PROCEEDINGS
Panavision is not engaged in any legal proceeding other than ordinary
routine litigation incidental to its business. The Company does not believe that
any such proceedings currently pending will have a material adverse effect on
its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Until August 5, 2002, Panavision Common Stock was listed on the New York
Stock Exchange ("NYSE") under the symbol "PVI". After falling below certain
continued listing criteria of the NYSE, the Company's stock ceased trading on
the exchange and now trades over the counter under the symbol "PVIS.OB".
As of March 24, 2004, there were approximately 662 holders of Panavision
Common Stock comprised of approximately 82 record holders and 580 beneficial
holders.
STOCK SALES PRICES
-----------------------------------------------
High Low Closing
----------- ------------ ------------
2003
First Quarter*............................. $ 4.50 $ 3.25 $ 3.60
Second Quarter*............................ 7.75 3.60 5.50
Third Quarter*............................. 6.50 4.10 5.45
Fourth Quarter*............................ 6.05 5.15 5.50
2002
First Quarter.............................. $ 4.75 $ 3.70 $ 3.70
Second Quarter............................. 3.80 2.80 2.85
Third Quarter*............................. 3.25 1.25 3.25
Fourth Quarter*............................ 4.70 2.50 4.00
*On August 5, 2002, the NYSE ceased listing the Company's Common
Stock. Since that date, it has traded over the counter under the
ticker symbol "PVIS.OB". As such, stock information in this table
beyond that date represents such over-the-counter market quotations
which reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not necessarily represent actual transactions.
The trading market for the Company's Common Stock may at times be
relatively illiquid due to low trading volume.
The Company has never paid a cash dividend on Panavision Common Stock and
does not anticipate paying any cash dividend on Panavision Common Stock in the
foreseeable future. The current policy of the Company's Board of Directors is to
retain earnings to finance the operations and expansion of the Company's
business. In addition, the Company's Existing Credit Agreement restricted the
Company's ability to pay dividends to its stockholders (see Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 7 of Notes to the Consolidated Financial Statements of the Company).
11
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the Company's
Consolidated Financial Statements. The information set forth below is not
necessarily indicative of results of future operations, and should be read in
conjunction with Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and related Notes thereto included elsewhere in this Form 10-K (in thousands,
except per share amounts).
Year ended December 31, 2001
----------------------------------
Pre-M&F Post-M&F
Purchase Purchase
--------------- -----------------
Year ended Year ended Period from Period from Year ended Year ended
December 31, December 31, January 1 to April 20 to December 31, December 31,
2003 2002 (1) April 19, 2001 Dec. 31, 2001 2000 1999
------------- ------------- -------------- --------------- ------------ --------------
STATEMENT OF OPERATIONS DATA:
Camera rental $ 118,686 $ 122,223 $ 45,660 $ 78,978 $ 130,047 $ 130,808
Lighting rental 38,757 32,844 9,629 22,118 40,289 36,219
Sales and other 50,514 38,115 10,520 23,905 34,292 35,724
------------- ------------- ------------ ------------- --------- ----------
Total revenue 207,957 193,182 65,809 125,001 204,628 202,751
Cost of camera rental 62,620 62,482 18,089 40,506 61,119 63,459
Cost of lighting rental 34,667 27,524 8,234 18,279 29,962 26,642
Cost of sales and other 28,865 24,034 5,681 13,610 19,214 20,507
------------- ------------- ------------ ------------- --------- ----------
Total cost of revenue 126,152 114,040 32,004 72,395 110,295 110,608
------------- ------------- ------------ ------------- --------- ----------
Gross margin 81,805 79,142 33,805 52,606 94,333 92,143
Selling, general and
administrative expenses 71,022 53,715 16,470 41,708 55,638 57,795
Research and development
expenses 5,072 4,436 1,841 3,136 6,163 6,103
------------- ------------- ------------ ------------- --------- ----------
Operating income 5,711 20,991 15,494 7,762 32,532 28,245
Net interest expense (30,067) (34,586) (15,019) (28,436) (49,993) (43,918)
Refinancing expense (1,505) (4,523) - - - -
Net other income (expense) 1,691 2,894 48 638 (1,303) 1,435
------------- ------------- ------------ ------------- --------- ----------
Income (loss) before income
taxes (24,170) (15,224) 523 (20,036) (18,764) (14,238)
Income tax benefit (provision) 6,414 4,145 (1,011) 6,511 (4,881) (1,800)
------------- ------------- ------------ ------------- --------- ----------
Net loss $ (17,756) $ (11,079) $ (488) $ (13,525) $ (23,645) $ (16,038)
============= ============= ============ ============= ========== ==========
Net loss per share - basic and
diluted $ (3.60) $ (1.59) $ (0.06) $ (1.54) $ (2.83) $ (1.99)
============= ============= ============ ============= ========== ==========
Shares used in computation -
basic and diluted 8,770 8,770 8,770 8,770 8,366 8,056
============= ============= ============ ============= ========== ==========
12
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
PRO FORMA (2) POST-M&F PURCHASE PRE-M&F PURCHASE
-------------- -------------------------- ------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2003 2002 2001 2000 1999
-------------- ------------- ------------ ----------- ----------- ----------
BALANCE SHEET DATA:
Total assets $ 624,284 $ 621,922 $ 633,167 $ 601,216 $284,712 $291,558
Total current liabilities 41,877 44,168 58,474 50,198 50,133 41,245
Long-term debt and Redeemable
Series B Preferred Stock 299,840 333,789 467,397 448,623 477,425 473,429
Stockholders' equity/(deficiency) 243,273 204,670 72,129 75,325 (250,302) (231,765)
- --------------
(1) The above Statement of Operations data includes the results of EFILM, LLC
from July 2, 2002. See Note 14 of Notes to the Consolidated Financial
Statements of the Company included elsewhere in this Form 10-K.
(2) This column reflects a pro forma presentation of selected balance sheet
data as if transactions in connection with the January 2004 Refinancing had
occurred as of December 31, 2003. See Note 7 Long-Term Debt on the
Consolidated Financial Statements of the Company included elsewhere in this
Form 10-K.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the Consolidated Financial
Statements of Panavision and the Notes thereto included elsewhere in this Form
10-K. Except for historical information contained therein, the matters addressed
in this Item 7 constitute "forward-looking statements."
OVERVIEW
The Company's revenue is derived from three sources: (i) camera rental
operations, (ii) lighting rental operations, and (iii) sales and other revenue.
Revenue from camera rental operations consists of the rental of camera systems,
lenses and accessories to the motion picture and television industries through a
network of rental offices located throughout North America, Europe and the Asia
Pacific region.
The Company's lighting rental operations generate revenue through the
rental of lighting, lighting grip, transportation and distribution equipment, as
well as mobile generators, which are all used in the production of feature
films, television programs, commercials and other events. The Company owns and
operates lighting rental facilities in the United States, United Kingdom, Canada
and Australia. Revenue generated by Lee Lighting, the Company's lighting rental
facility located in the United Kingdom, generates the majority of the Company's
lighting rental operations revenue.
Sales and other revenue is comprised of: (i) the manufacture and sale of
lighting filters through Lee Filters in the United Kingdom and the United
States; (ii) EFILM's operations, which provide high-resolution scanning of film,
digital color timing, laser film recording of digital video and high definition
images to film, and digital mastering services to the motion picture and
television industries, and (iii) sales of various consumable products, such as
film stock, light bulbs and gaffer tape, which are used in all types of
productions.
The Company considers revenue from international business to be that
revenue which is generated from the rental of its equipment by productions that
are located at production sites outside of the United States.
RESULTS OF OPERATIONS
The following discussion and analysis includes the Company's consolidated
historical results of operations for 2003 and 2002. With respect to 2001, the
following discussion and analysis includes the combined amounts of the Pre-M&F
Purchase period and the Post-M&F Purchase period as set forth in the selected
financial data table. Such combined amounts do not represent a pro forma
presentation of the results of the Company for 2001.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
CAMERA RENTAL OPERATIONS
Camera rental revenue for the year ended December 31, 2003 was $118.7
million. Revenue decreased $3.5 million, or 2.9%, compared to the year ended
December 31, 2002. The decrease principally reflects decreased feature film
revenue, partially offset by increased camera rental revenue from the Company's
international operations due to the positive translation effect of foreign
exchange rate changes. Feature film revenues decreased due to several factors,
principally a lower number of starts in 2003 as compared to 2002 in the film
industry and, to a lesser extent, a lower percentage of industry starts captured
by the Company. Compared to 2002, the estimated increase in 2003 in camera
rental revenue from higher translation of revenues from international operations
was approximately $7 million.
Cost of camera rental for the year was $62.6 million, as compared to $62.5
million in 2002. 2002 expense included $1.3 million of non-cash charges related
to lens components. Adjusting for that amount, expense increased $1.4 million in
2003. While there was reduction in certain types of camera rental expense due to
lower revenue, this net increase in expense occurred due to higher international
expenses attributable to foreign exchange rate changes, as well as higher
personnel and other costs to enhance customer service consistent with the
Company's strategy. Since camera rental revenues declined, as a percentage of
camera rental revenues the expense increased from 51.1% to 52.8%.
14
LIGHTING RENTAL OPERATIONS
Lighting rental revenue for the year ended December 31, 2003 was $38.8
million, an increase of $5.9 million, or 18.0%, compared to the year ended
December 31, 2002. The primary driver was increased activity at Lee Lighting in
the U.K. of $6.2 million, inclusive of the positive translation effect of
foreign exchange rates. PANY Rental, Inc. ("PANY Rental") also contributed $3.4
million in 2003 as a result of the Company's consolidation of PANY Rental's
results of operations from the date it increased ownership of PANY Rental to
67% in May 2003. These increases were offset by decreased lighting rental
revenue in Australia, principally due to decreased features activity.
Cost of lighting rental for the year was $34.7 million, an increase of $7.1
million, or 26.0%. The increase was primarily due to increased expense of
approximately $4.7 million related to increased activity at Lee Lighting in the
U.K. This expense increase represents 76% of the revenue increase for Lee
Lighting due to part of the revenue increase pertaining to services in
connection with equipment rental for which the profitability margin was low. The
balance was driven by the consolidation of PANY Rental's lighting business,
partially offset by lower expenses in Australia due to lower volume. Because the
Company believes the decline in Australia's revenues in 2003 was atypical, the
reduction in Australian expenses in 2003 related mostly to variable costs
associated with lower revenues. As a result, the decrease in Australian lighting
revenues had a significant impact on lighting gross margin in 2003 as compared
to 2002. Combined with the lower level of profitability of Lee Lighting's
revenue increase, as discussed above, the result was a reduction of $1.2 million
in gross margin for lighting in 2003 as compared to 2002.
SALES AND OTHER
Sales and other for the year ended December 31, 2003 was $50.5 million, an
increase of $12.4 million, or 32.5%, from the year ended December 31, 2002. The
increase was primarily due to continued growth in EFILM revenue $9.9 million.
The balance of the change was primarily due to international operations,
principally attributable to foreign exchange rate changes.
Cost of sales and other for the year was $28.9 million, an increase of $4.8
million, or 20.1%. The change was primarily due to increased activity at EFILM
of $2.9 million, as well as higher translated expenses associated with the
higher international revenues.
OPERATING COSTS
Selling, general and administrative expenses for the year ended December
31, 2003 were $71.0 million, an increase of $17.3 million, or 32.2%, compared to
the year ended December 31, 2002. The increase was primarily due to severance
expense of $4.6 million in connection with the departure of the Company's former
Chief Executive Officer, Chief Financial Officer, and President of US
Operations, $4.1 million related to the expansion of EFILM since the prior year,
and approximately $3.2 million related to increased infrastructure expense,
principally personnel related, to support future growth initiatives. The balance
of the increase related primarily to translation of international expenses into
higher U.S. dollars due to foreign exchange rate changes, consistent with the
increase in revenues from international operations as discussed earlier.
Research and development expenses for the year ended December 31, 2003 were
$5.1 million, an increase of $0.6 million, or 14.3%, from the year ended
December 31, 2002. The change related to the Company's strategy to increase new
product development efforts.
OPERATING INCOME
Operating income for 2003 was $5.7 million, a decrease of $15.3 million as
compared to 2002. Consistent with the above discussion, year to year comparisons
of revenue and profitability were significantly impacted by several factors,
principally the translation of international results into higher U.S. dollars.
However, there were two primary factors impacting profitability: the reduction
in camera rental revenues and severance.
o Camera rental revenues, excluding the translation effect on
international results, declined approximately $10.5 million from 2003
to 2002. Because the Company believes 2003 to be atypical in terms of
feature revenues, the Company did not make reductions in fixed camera
rental costs; rather, the
15
Company made additional investments to strengthen the business for the
future. As a result, this decline of approximately $10.5 million in
revenue significantly impacted profitability in 2003.
o Severance expense caused $4.6 million of the decline year to year.
While other factors explained above, impacted results, these two factors
accounted for approximately $15 million of the reduction from 2002 to 2003.
INTEREST, TAXES AND OTHER
Net interest expense for the year ended December 31, 2003 was $30.1
million, a decrease of $4.5 million, or 13.1%, as compared to the year ended
December 31, 2002. The decrease in expense primarily reflects lower debt
compared to the prior year due to the contribution in 2003 of $90.9 million
principal amount of the 9 5/8% Senior Subordinated Discount Notes due 2006
("Existing Notes") owned by Mafco Holdings Inc. ("Mafco Holdings") in exchange
for equity, as well as payments of scheduled amortization.
Foreign exchange loss for the year ended December 31, 2003 was $0.2 million
as compared to a $1.0 million foreign exchange gain for the year ended December
31, 2002. The decrease was primarily due to a weaker U.S. dollar as compared to
the prior year and primarily reflects the effects of the fluctuating foreign
currencies on the foreign currency denominated intercompany balances held in the
U.S.
Refinancing expense of $1.5 million for the year ended December 31, 2003
reflects costs incurred in connection with the Company's discontinued offering
of secured notes in the Summer of 2003 and bank refinancing consummated in early
2004. These costs represent primarily professional fees incurred by the Company.
The tax benefit for the year ended December 31, 2003 was $6.4 million, as
compared to a tax benefit of $4.1 million for the year ended December 31, 2002.
The Company recorded an income tax benefit of $7.8 million resulting from the
benefit associated with domestic tax losses, offset by a $1.4 million provision
relating to profitable foreign operations and foreign taxes withheld at source.
See Note 6 to Consolidated Financial Statements included in the Form 10-K for a
discussion of the Company's Tax Sharing Agreements.
Under applicable Internal Revenue Service regulations, as a result of the
M&F Settlement (defined below in "Related Party Transactions"), the Company may
not join in filing a consolidated federal income tax return with either Mafco
Holdings or the Company's subsidiaries until May 2006 without consent from the
Internal Revenue Service. Accordingly, from the effective date of the M&F
Settlement of December 3, 2002, the Company will file separate federal income
tax returns for the Company and incorporated subsidiaries. The Company does not
believe that deconsolidation of its federal income tax returns will have a
material adverse effect on the Company's business or financial condition.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
CAMERA RENTAL OPERATIONS
Camera rental revenue for the year ended December 31, 2002 was $122.2
million. Revenue decreased $2.4 million, or 1.9%, compared to the year ended
December 31, 2001. The decline largely reflects lower revenue associated with
television commercials, reflecting a continuation of a weak television
commercial market. Most territories worldwide were adversely impacted by the
television commercial slowdown. The decline also reflects slightly lower series
television revenue generated outside the U.S. Camera rental revenue associated
with worldwide feature film production increased modestly as compared to 2001.
Cost of camera rental for the year was $62.5 million, an increase of $3.9
million, or 6.7%, as compared to 2001. Cost of camera rental as a percentage of
revenue remained stable compared to the prior year. The 2002 costs include
approximately $3.4 million of additional depreciation resulting from the fair
value adjustments arising from the M&F Purchase and $1.3 million in non-cash
charges related to lens components which will no longer be used in the Company's
rental operation, offset by the impact of cost reductions achieved in 2002.
16
LIGHTING RENTAL OPERATIONS
Lighting rental revenue for the year ended December 31, 2002 was $32.8
million, an increase of $1.1 million, or 3.5%, compared to the year ended
December 31, 2001. The increase reflects stronger feature revenue in the U.K.
and Australia, offset by lower lighting revenue in the U.S. resulting from the
restructuring of the Company's U.S. lighting business in the first quarter of
2002.
Cost of lighting rental for the year was $27.5 million, an increase of $1.0
million, or 3.8%, as compared to 2001 and as a percentage of revenue, the ratio
remained stable compared to prior year. The increase in lighting costs was
associated with the increase in lighting revenue during the year.
SALES AND OTHER
Sales and other for the year ended December 31, 2002 was $38.1 million, an
increase of $3.7 million, or 10.8%, from the year ended December 31, 2001. The
increase primarily reflects the additional revenue generated by EFILM, which the
Company began operating in the third quarter of 2001.
Cost of sales and other for the year was $24.0 million, an increase of $4.7
million, or 24.4%, as compared to 2001. The increase was primarily due to
additional costs associated with EFILM's operation.
OPERATING COSTS
Selling, general and administrative expenses for the year ended December
31, 2002 were $53.7 million, a decrease of $4.5 million, or 7.7%, compared to
the year ended December 31, 2001. The decrease primarily reflects the
elimination of approximately $9.2 million of goodwill and trade name
amortization resulting from the Company's adoption of SFAS 142 on January 1,
2002. The reductions were offset by $3.5 million of additional costs associated
with EFILM's operation, a $0.5 million reserve for vacant property leased in one
of the Company's territories and $0.6 million of compensation charges recorded
in one of the Company's divisions.
Research and development expenses for the year ended December 31, 2002 were
$4.4 million, a decrease of $0.6 million, or 12.0%, from the year ended December
31, 2001. The decrease was principally due to lower overall staffing expenses.
OPERATING INCOME
Operating income declined $2.3 million from 2001 to 2002, reflecting a
decrease in gross margin of $7.3 million, offset by decreased selling, general
and administrative and research and development expenses of $5.0 million.
Adjusting for the additional depreciation resulting from the fair value
adjustment in connection with the M&F Purchase described in Note 1 of the Notes
to Consolidated Financial Statements included elsewhere in this Form 10-K, of
$3.4 million, the non-cash charges of $1.3 million and elimination of goodwill
and trademark amortization of $9.2 million, as discussed above, operating income
declined $6.8 million as compared to the increase in revenues of $2.4 million.
This change was principally caused by the changes in EFILM, including increased
infrastructure expenses for projected growth in 2003 and beyond. Excluding
EFILM's 2001 and 2002 results, the decline in adjusted operating income from
2001 to 2002 would have approximated the decline in revenues.
INTEREST, TAXES AND OTHER
Net interest expense for the year ended December 31, 2002 was $34.6
million, a decrease of $8.9 million, or 20.4%, as compared to the year ended
December 31, 2001. The decrease primarily reflects lower interest rates and debt
levels as compared to the year ended December 31, 2001.
Foreign exchange gain for the year ended December 31, 2002 was $1.0 million
as compared to a $0.5 million foreign exchange loss for the year ended December
31, 2001. This change is primarily due to the effects of the fluctuating British
Pound rate on the U.S. Dollar-denominated intercompany payable balances held in
the U.K.
17
Refinancing expense of $4.5 million for the year ended December 31, 2002
reflects costs incurred in connection with the Company's discontinued offering
of secured notes and the bank refinancing. These costs included approximately
$2.2 million of professional fees incurred in connection with the Company's
potential refinancing and lenders' fees of $2.9 million paid in accordance with
the March 15, 2002 amendment to the Existing Credit Agreement. Such charges were
offset by a gain of approximately $0.6 million associated with the $37.7 million
principal amount at maturity of Existing Notes that were cancelled on June 28,
2002.
The tax benefit for the year ended December 31, 2002 was $4.1 million, as
compared to a tax benefit of $5.5 million for the year ended December 31, 2001.
The change over the prior year is primarily due to the impact of non-deductible
items partially offset by state and local income taxes.
CAPITAL EXPENDITURES
The Company intends to use cash provided by operating activities and its
revolving lines of credit to make additional capital expenditures primarily to
manufacture camera systems and accessories and purchase other rental equipment.
Based on projected revenues in 2004 and beyond, the Company anticipates
incurring a higher level of capital expenditures in 2004 as compared to 2003.
Consistent with the Company's view of the market and its related strategy, a
higher percentage of such spending will pertain to the Company's core film
business as compared to recent years. In addition, a higher level of spending
for new products for the core film business is projected relative to recent
years.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain information from the Company's
Consolidated Statements of Cash Flows for the years indicated (in thousands):
Year Ended December 31,
------------------------------------------------------
Unaudited
Combined
2003 2002 2001
---------------- ---------------- -------------------
Net cash provided by (used in):
Operating activities $ 18,205 $ 23,351 $ 43,277
Investing activities (22,776) (22,292) (25,007)
Financing activities 277 9,382 (21,023)
Cash provided by operating activities for the year ended December 31, 2003
totaled $18.2 million comprised of the net loss of $17.8 million adjusted for
depreciation and amortization of $43.4 million offset by the net change in
working capital (excluding cash) and other miscellaneous items totaling $7.4
million. Total investing activities of $22.8 million included $25.2 million of
capital expenditures, offset by $2.4 million in proceeds received from the
disposition of fixed assets. The Company also purchased an additional 1/3
ownership interest in PANY Rental in May 2003 (such that, as of May 2003, the
Company owned a 2/3 interest in PANY Rental) that resulted in the consolidation
of PANY Rental's financial position and results of operations in the Company's
accompanying consolidated financial statements. The purchase price together with
additional payments relating to this transaction approximated $0.6 million and
were offset by a similar amount of cash received upon consolidation. Capital
expenditures were primarily used to manufacture camera rental systems and
accessories. Total net cash provided by financing activities was less than $0.3
million, which was comprised of borrowings of $14.5 million under the MacAndrews
Line and Second MacAndrews Line (as defined below), repayments of $1.5 million
under the MacAndrews Line, notes payable to Deluxe Laboratories, Inc. ("Deluxe")
of $0.6 million, proceeds from the issuance of Series B Preferred Stock of $4.4
million, and proceeds from the issuance of Series C Preferred Stock of $9.7
million, net of transaction costs, offset by repayment of long-term debt of
$23.3 million, and payment of deferred financing costs of $4.1 million.
18
Cash provided by operating activities for the year ended December 31, 2002
totaled $23.4 million comprised of the net loss of $11.1 million adjusted for
depreciation and amortization of $43.5 million and the amortization of the
discount on the Existing Notes of $1.5 million, offset by the net change in
working capital (excluding cash) and other miscellaneous items totaling $10.5
million. Total investing activities of $22.3 million included $25.2 million of
capital expenditures, offset by $2.9 million in proceeds received from the
disposition of fixed assets. Capital expenditures were primarily used to
manufacture camera rental systems and accessories, expand EFILM's operation and
purchase lighting equipment. Cash provided by financing activities was $9.4
million, reflecting borrowings of $32.2 million and repayments of $35.8 million
under the Existing Credit Agreement, deferred financing costs of $2.2 million,
the issuance of Series B Preferred Stock for $10.0 million in cash and the $5.2
million invested by Deluxe in EFILM, LLC.
Cash provided by operating activities for the year ended December 31, 2001
totaled $43.3 million comprised of the net loss of $14.0 million, adjusted for
depreciation and amortization of $47.9 million and the amortization of the
discount on the Existing Notes of $19.3 million, offset by the recording of the
deferred income tax benefit of $10.1 million and the net change in working
capital (excluding cash) and other miscellaneous items totaling $0.2 million.
Investing activities of $25.0 million included $26.6 million of capital
expenditures, offset by $1.6 million in proceeds received from the disposition
of fixed assets. The majority of the capital expenditures were used to
manufacture camera rental systems and accessories. Cash used in financing
activities was $21.0 million, primarily reflecting a decrease in net borrowings
under the Existing Credit Agreement.
The Company has certain cash obligations and other commercial commitments
which will affect its short and long term liquidity. Giving pro forma effect as
if the January 2004 Refinancing, as described below, had occurred on December
31, 2003, such obligations and commitments were as follows (in thousands):
PAYMENTS DUE BY PERIOD
CONTRACTUAL ----------------------
OBLIGATIONS TOTAL LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
- ----------- ----- ---------------- --------- --------- -------------
Long-term debt $ 305,880 $ 5,885 $ 81,395 $ 115,600 $ 103,000
Operating leases 38,875 11,153 15,866 7,265 4,591
----------- ------------- ----------- ----------- ------------
Total contractual
cash obligations $ 344,755 $ 17,038 $ 97,261 $ 122,865 $ 107,591
============ ============= =========== =========== ============
For information on the Company's long-term debt obligations, see the
discussion herein and in Note 7 of the Notes to the Consolidated Financial
Statements included elsewhere in this Form 10-K. The above table does not
include interest on long-term debt.
As of December 31, 2003, the Company had lines of credit totaling
approximately $20.0 million, under which $13.0 was drawn. In connection with the
January 2004 Refinancing described below, one $10.0 million line of credit,
which was fully drawn, was converted into Series D Preferred Stock, and the
other $10.0 million line of credit, of which $3.0 million was drawn, was
increased to $20.0 million. The Company does not have any off-balance sheet
financing arrangements, other than operating leases.
The Existing Notes were issued at a discount representing a yield to
maturity of 9-5/8%. There were no periodic or interest payments through February
1, 2002. Thereafter, they bear interest at a rate of 9-5/8% per annum, payable
semi-annually on February 1 and August 1 of each year, commencing August 1,
2002.
On June 4, 1998, the Company entered into a Credit Agreement with a
syndicate of lenders (as subsequently amended on September 30, 1998, June 30,
1999, March 15, 2002, June 14, 2002, September 30, 2002, March 25, 2003 and
November 12, 2003, the "Existing Credit Agreement"). As described below, the
Existing Credit Agreement was later replaced with the Amended and Restated
Credit Agreement pursuant to the January 2004 Refinancing. The Existing Credit
Agreement was comprised of two facilities, the Term Facility and the Revolving
Facility. As of December 31, 2003, amounts outstanding under the Existing Credit
Agreement were $151.8 million and $99.2 million for the Term Facility and
Revolving Facility, respectively. The Term Facility had two tranches: the
Tranche A Term Facility was a 6-year facility in an aggregate principal amount
of $90.0 million and the Tranche B Term Facility was a 7-year facility in an
aggregate principal amount of $150.0 million. The Revolving Facility was a
6-year facility in an aggregate principal amount of $100.0 million.
19
The Company's obligations under the Existing Credit Agreement were secured
by substantially all of the Company's assets. The Existing Credit Agreement
required that the Company meet certain financial tests and contained other
restrictive covenants including limitations on indebtedness, leverage ratio
levels, interest coverage ratio levels and restrictions on the ability of the
Company to declare or pay dividends to its stockholders.
On March 15, 2002, the Company amended its Existing Credit Agreement to,
among other things, revise certain of the financial tests and required ratios
that the Company was required to maintain through December 31, 2002 (the "March
2002 Amendment"). As required by the March 2002 Amendment, on June 28, 2002, the
Company acquired from Mafco Holdings $37.7 million principal amount of Existing
Notes, which had approximately $1.5 million of accrued interest, and $10.0
million cash. In exchange, the Company issued to Mafco Holdings 49,199 shares of
Series B Preferred Stock, which it contributed to the capital of PX Holding.
On April 1, 2002, the Company entered into an agreement with certain
holders of its Existing Notes that gave the Company the option to acquire from
these holders Existing Notes with a face value of $78.4 million at a price of
$650 per $1,000 of principal amount. On June 28, 2002, Mafco Holdings assumed
this option from the Company and subsequently exercised the option on July 3,
2002.
On June 14, 2002, the Company amended its Existing Credit Agreement to,
among other things, allow the Company to (1) acquire 100% of the outstanding
shares of Las Palmas from M&F Worldwide in exchange for the Las Palmas Note, (2)
contribute the assets of Las Palmas and certain other assets owned by the
Company to the newly-formed EFILM, LLC in exchange for 80% of its membership
interests, and (3) allow Deluxe to purchase 20% of the EFILM, LLC membership
interests for $5.2 million. In addition, certain covenants were amended.
Effective September 30, 2002, the Company amended the Existing Credit
Agreement to, among other things, reduce the minimum EBITDA the Company was
required to achieve for the four fiscal quarters ending September 30, 2002 (the
"September 2002 Amendment"). This provision of the September Amendment expired
on March 28, 2003. As required by the September 2002 Amendment, on January 31,
2003, an affiliate of Mafco Holdings made a cash equity contribution to the
Company in the amount of the interest due February 1, 2003 on the Existing Notes
held by affiliates of the Company on that date in exchange for 4,372 shares of
the Company's Series B Preferred Stock.
On February 3, 2003, MacAndrews & Forbes Holdings Inc. ("MacAndrews &
Forbes") agreed to provide the Company a revolving line of credit in the amount
of $4.0 million, at the same rate as provided for in the revolving facility
pursuant to the Existing Credit Agreement (as amended, the "MacAndrews Line").
As described below, amounts outstanding under the MacAndrews Line were retired
in exchange for shares of Series D Preferred Stock as part of the January 2004
Refinancing.
On March 27, 2003, the Company amended its Existing Credit Agreement to,
among other things, decrease minimum EBITDA for the four fiscal quarters ended
December 31, 2002, specify the minimum EBITDA, decrease the minimum interest
coverage ratio and increase the maximum leverage ratio required for the four
fiscal quarters ending on each of March 31, 2003, June 30, 2003, September 30,
2003 and December 31, 2003 (the "March 2003 Amendment"). Absent this amendment,
the Company would not have been in compliance with certain financial covenants
under the Existing Credit Agreement for the four fiscal quarters ended December
31, 2002. Under the March 2003 Amendment, certain lenders also agreed to defer
$20.0 million of amortization payments otherwise due in 2003 to March 31, 2004.
In connection with the March 2003 Amendment, Mafco Holdings contributed
$90.9 million principal amount of Existing Notes (on which there was
approximately $1.4 million of accrued and unpaid interest) and $10.0 million in
cash to the Company in exchange for 102,220 shares of Series C Cumulative
Pay-in-Kind Preferred Stock, par value $0.01 per share, of the Company (the
"Series C Preferred Stock"), which Mafco Holdings contributed to the capital of
PX Holding, and PX Holding contributed to the Company 53,571 shares of Series B
Preferred Stock in exchange for 57,424 shares of Series C Preferred Stock.
MacAndrews & Forbes also agreed to extend the MacAndrews Line until March 31,
2004.
20
On August 13, 2003, MacAndrews & Forbes agreed to amend the terms of the
MacAndrews Line to increase the amount available for borrowings thereunder from
$4.0 million to $10.0 million and to extend the maturity date of the MacAndrews
Line to August 31, 2006. As of December 31, 2003, the Company had drawn $10.0
million under the MacAndrews Line.
In August 2003, the Company postponed an offering of secured notes it had
previously announced due to unfavorable pricing terms resulting from
deteriorating market conditions. Concurrently, the Company also deferred its
plans to replace its Existing Credit Agreement with a new credit agreement.
Effective November 12, 2003, the Company amended the Existing Credit
Agreement to, among other things, decrease minimum EBITDA required for the four
fiscal quarters ending September 30, 2003 and the four fiscal quarters ending
December 31, 2003 (the "November 2003 Amendment"). In the absence of this
amendment, the Company would not have been in compliance with certain financial
covenants under the Existing Credit Agreement for the four fiscal quarters
ending September 30, 2003 and likely would not have been in compliance with
financial covenants for the four fiscal quarters ending December 31, 2003, due
to, among other factors, costs associated with the abandoned offering of secured
notes and lower than expected feature film and commercial television production.
In connection with the November 2003 Amendment, on November 12, 2003,
MacAndrews & Forbes agreed to provide an additional revolving line of credit
(the "Second MacAndrews Line") in the amount of $10.0 million at a rate equal to
50 basis points above the rate provided for in the revolving facility pursuant
to the Existing Credit Agreement and a maturity of April 15, 2004.
On January 16, 2004, the Company consummated a series of transactions to
refinance its indebtedness under the Existing Credit Agreement (the "January
2004 Refinancing"). As part of the January 2004 Refinancing, the Company sold,
in a private placement, $104.2 million of senior secured notes (the "Senior
Notes") bearing an interest rate of 12.50%, payable quarterly, with a maturity
date of January 16, 2009. These Senior Notes were sold at an original issue
discount of approximately 4% for an aggregate purchase price of $100.0 million.
The Senior Notes are secured by a second-priority lien on substantially all of
the Company's assets. The indenture pursuant to which the Senior Notes were
issued (the "2004 Indenture") requires that, among other provisions, the Company
achieve certain EBITDA levels and abide by certain other restrictive covenants,
including limitations on indebtedness, liens, disposition of assets, and certain
restricted payments including dividends to stockholders. Upon certain events of
default under the 2004 Indenture, the Senior Notes will bear interest at 2.5%
above the rate otherwise applicable.
Also as part of the January 2004 Refinancing, the Company issued to PX
Holding 215,274 shares of new Series D Cumulative Pay-In-Kind Preferred Stock in
exchange for (a) 159,644 shares of Series C Preferred Stock held by PX Holding
(together with approximately $13.2 million of dividends in arrears thereon); (b)
$23.0 million in cash; (c) the retirement of all principal and interest owed as
of January 16, 2004 under the MacAndrews Line; (d) 33.3 shares of common stock
of PANY Rental, having a fair market value of $0.7 million (such that, as of
January 16, 2004, the Company owned 100% of the outstanding shares of PANY
Rental); (e) the retirement of all amounts (consisting of $630,780 in principal
and $82,913 in accrued and unpaid interest) owed by PANY Rental to PX Holding
pursuant to a certain promissory note held by PX Holding; and (f) the retirement
of all amounts (consisting of $7.8 million in principal and unpaid interest)
owed to Mafco Holdings under the Las Palmas Note. The Series D Preferred Stock
is non-voting, has a liquidation preference of $1,000 per share plus accrued and
unpaid dividends, and entitles the holder to cumulative dividends at a rate of
10% per annum regardless of whether declared or earned. Additionally, the Series
D Preferred Stock is subject to redemption in certain circumstances upon a
change of control. The Company also issued to PX Holding 1,381,690 shares of new
Series E Non-Cumulative Perpetual Participating Preferred Stock (the "Series E
Preferred Stock") in exchange for 1,381,690 shares of Series A Preferred Stock.
The Series E Preferred Stock is entitled to one vote per share, voting together
with the Common Stock as a single class, has a liquidation preference of $1.00
per share plus accrued and unpaid dividends, and provides for non-cumulative
cash dividends at an annual rate of $0.05 per share if declared by the Company.
As a result of the January 2004 Refinancing transactions, all of the outstanding
shares of Series A and Series C Preferred Stock were transferred to the Company.
In addition, MacAndrews & Forbes increased the amount of the Second MacAndrews
Line to $20.0 million and extended the maturity to April 16, 2009.
As another part of the January 2004 Refinancing, the Company used proceeds
from the sale of the Senior Notes and the issuance of Series D Preferred Stock
to reduce the indebtedness under the Existing Credit Agreement by $115.4
million, and replaced the Existing Credit Agreement with an Amended and Restated
Credit
21
Agreement (the "Amended Credit Agreement") with the lenders under the Existing
Credit Agreement. The Amended Credit Agreement provides for a single term loan
facility in the principal amount of $135.6 million repayable in quarterly
installments with a final maturity of January 12, 2007, except that the term
facility shall be due on September 5, 2005 if any of the Existing Notes remain
outstanding on that date. The term facility bears interest at either the ABR or
Eurodollar Rate (as defined in the Amended Credit Agreement) plus a margin of
5.25% in the case of ABR loans or 6.25% in the case of Eurodollar Loans. The
term facility under the Amended Credit Agreement is secured on substantially the
same basis as indebtedness under the Existing Credit Agreement. In connection
with the Amended Credit Agreement, the Company paid fees to lenders and
professional advisors of approximately $3.5 million, including an original issue
discount fee of approximately $2.0 million. Approximately $3.1 million of the
fees paid will be expensed in 2004.
Under the Amended Credit Agreement, the Company is required to repay $5.0
million in principal in 2004, whereas under the Existing Credit Agreement the
Company would have been required to make principal payments of approximately
$221.1 million in 2004. In addition, the Amended Credit Agreement revised
certain financial tests and other restrictive covenants set forth in the
Existing Credit Agreement, including required EBITDA (as defined), limitations
on indebtedness, and other provisions. As defined in the Amended Credit
Agreement and 2004 Indenture, EBITDA includes adjustments for severance expense,
refinancing expense, foreign exchange (gain) loss, and other non-cash charges.
As compliance with EBITDA levels is a material aspect of the Amended Credit
Agreement and the 2004 Indenture, the calculation of EBITDA pursuant to these
agreements for the year ended 2003 is set forth below, with the calculation for
the year ended 2002 provided for comparative purposes (in millions):
Year ended Year ended
December 31, December 31,
------------- ------------
2003 2002
------------- -----------
Net loss ($17.8) ($11.1)
Net interest expense 30.1 34.6
Income tax benefit (6.4) (4.1)
Depreciation and amortization 43.4 42.0
Severance expense 4.6 -
Refinancing expense 1.5 4.5
Foreign exchange (gain) loss 0.6 (0.9)
Non-cash charges - 1.8
------------- -----------
EBITDA $56.0 $66.8
============= ===========
$50 million was the required level of EBITDA, as defined, for the year ended
December 31, 2003 pursuant to the Amended Credit Agreement and 2004 Indenture.
As a result of the January 2004 Refinancing, in accordance with Statement of
Financial Accounting Standards No. 6, "Classification of Short-Term Obligations
Expected to be Refinanced" ("SFAS 6"), the Company has reclassified $246.0
million of the refinanced debt to long-term debt as of December 31, 2003.
Although there can be no assurance, the Company expects that cash flows from
operations, borrowings under the revolving line of credit, and cash equity
contributions and advances from affiliates will be sufficient to enable the
Company to meet its anticipated operating, capital spending and debt service
requirements through at least the next twelve months.
CRITICAL ACCOUNTING POLICIES
The Company reviews the accounting policies it uses in reporting its
financial results on a regular basis. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. On an ongoing basis, the
Company evaluates its estimates, including those related to accounts receivable,
investments, rental assets, intangible assets, income taxes, contingencies and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. These estimates form the basis for the Company's judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Results may differ from these estimates if actual outcomes are
different from the estimates on which the
22
Company based its assumptions. These estimates and judgments are reviewed by
management on an ongoing basis. The Company believes the following critical
accounting policies affect its more significant judgments and estimates used in
the preparation of the Consolidated Financial Statements of Panavision.
REVENUE RECOGNITION - The Company recognizes revenue over the related
equipment rental period using prices that are negotiated at the time of rental.
Revenue from product sales is recognized upon shipment. The Company does not
have a history of significant product returns or revenue adjustments. Revenue
from digital laboratory services is recognized at the time such services have
been rendered.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. If the financial condition of the Company's
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
INCOME TAXES - The Company estimates its actual current tax liabilities
together with temporary differences resulting from differing treatment of items,
such as net operating losses and depreciation, for tax and accounting purposes.
These temporary differences result in deferred tax assets and liabilities. The
Company must then assess the likelihood that its deferred tax assets will be
recovered from future taxable income and to the extent the Company believes that
recovery is not likely, it must establish a valuation allowance. At December 31,
2003, the Company had a $7.3 million valuation allowance established against its
deferred tax assets. To the extent the Company establishes a valuation allowance
or changes this allowance in a period, it must reflect the change to the
allowance within the tax provision in the consolidated statement of operations.
Significant management judgment is required in determining the provision for
income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against its net deferred tax assets.
LONG-LIVED ASSETS - The Company assesses the impairment of property, plant
and equipment (comprised principally of its rental assets), goodwill, and other
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Some factors the Company
considers important which could trigger an impairment review include the
following:
o Significant underperformance relative to expected historical or
projected future operating results;
o Significant changes in the manner of the Company's use of the acquired
assets or the strategy for its overall business; and
o Significant negative industry or economic trends.
The Company determines whether the carrying value of its long-lived assets
may not be recoverable based upon the existence of one or more of the above
indicators of impairment. The Company measures any impairment based on a
projected discounted cash flow method using a discount rate determined by
management to be commensurate with the risk inherent in its current business
model. In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," ("SFAS 142"), on January 1, 2002 the
Company ceased to amortize goodwill and its trade name since both are believed
to have an indefinite life. In lieu of amortization, the Company performs an
annual review of its goodwill and trade name (more frequently if impairment
indicators exist). If the Company determines at any point in the impairment
review process that goodwill or its trade name has been impaired, the Company
would record an impairment charge in its consolidated statement of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity" (including Certain Costs Incurred in a Restructuring). SFAS
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. SFAS 146 was effective
for exit or disposal activities that are initiated after December 31, 2002 and
did not have a material impact on the Company's financial statements.
23
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees it has issued. It also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements were effective for financial
statements of interim or annual periods ending after December 15, 2002. The
recognition and measurement provisions of FIN 45 were applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The
application of FIN 45 did not materially impact the financial condition, results
of operations, and cash flows of the Company.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"), which amends
FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
SFAS 148 provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
more prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The Company has complied with the
disclosure requirements of SFAS 148 and elected not to adopt the fair value
based method of accounting for stock-based employee compensation.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS No. 150"). SFAS 150 established standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. SFAS 150 requires that certain financial instruments be
classified as liabilities that were previously considered equity. The adoption
of this standard on July 1, 2003, as required, had no impact on the Company's
consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires an investor with
a majority of the variable interests (primary beneficiary) in a variable
interest entity ("VIE") to consolidate the entity and also requires majority and
significant variable interest investors to provide certain disclosures. A VIE is
an entity in which the voting equity investors do not have a controlling
financial interest, or the equity investment at risk is insufficient to finance
the entity's activities without receiving additional subordinated financial
support from other parties. For arrangements entered into with VIEs created
prior to January 31, 2003, the provisions of FIN 46 were originally effective as
of the beginning of the three months ended September 30, 2003, however, the FASB
subsequently delayed the effective date of this provision until the first
interim or annual period ending after December 15, 2003 for entities that have
interests in structures that are commonly referred to as special-purpose
entities and for periods ending after March 15, 2004 for all other types of
variable interest entities. The provisions of FIN 46 were effective immediately
for all arrangements entered into with new VIEs created after January 31, 2003.
The Company is currently performing a review of its relationships with its
network of agents, its investment in DHD Ventures, LLC ("DHD") and Panavision
Imaging, LLC, a subsidiary of PX Holding Corporation, to determine whether the
agents, DHD, or Panavision Imaging, LLC qualify as VIEs and then whether the
Company is the primary beneficiary of any of the entities. The Company is also
reviewing its accounting for EFILM LLC in light of FIN 46. The review has not
identified any VIE that would require consolidation for the year ended December
31, 2003. The Company expects to complete the review prior to the issuance of
its unaudited interim financial statements as of March 31, 2004. Provided that
the Company is not the primary beneficiary, the Company is not exposed to losses
related to any of the agent entities. Should the Company be determined to be the
primary beneficiary of DHD, the maximum exposure to losses is generally limited
to the carrying amount of the investment in the entity.
COMMITMENTS AND CONTINGENCIES - The Company periodically records the
estimated impacts of various conditions, situations or circumstances involving
uncertain outcomes. These events are called "contingencies," and the Company's
accounting for such events is prescribed by SFAS No. 5, "Accounting for
Contingencies."
The accrual of a contingency involves considerable judgment on the part of
management. The Company uses its internal expertise, and outside experts (such
as lawyers and tax specialists), as necessary, to help estimate the probability
that a loss has been incurred and the amount (or range) of the loss. The Company
currently does not have any material contingencies that it believes require
accrual or disclosure in its Consolidated Financial Statements.
24
RELATED PARTY TRANSACTIONS
On April 19, 2001, M&F Worldwide purchased from PX Holding all 7,320,225
shares (the "Purchased Shares") of the Company's Common Stock held by PX Holding
(the "M&F Purchase"). The Purchased Shares constituted approximately 83.5% of
the Company's then outstanding Common Stock. The aggregate consideration for the
Purchased Shares consisted of (a) 1,500,000 shares of M&F Worldwide common
stock; (b) 6,182,153 shares of M&F Worldwide preferred stock; and (c) $80.0
million in cash. As a result of the purchase, Mafco Holdings increased its
indirect interest in M&F Worldwide to a majority position.
M&F Worldwide accounted for the M&F Purchase as a purchase, and purchase
accounting adjustments were pushed down to the Panavision financial statements
for the period subsequent to April 19, 2001 (designated "Post-M&F Purchase").
The Panavision financial statements for the periods ended prior to April 19,
2001 were prepared using Panavision's historical basis of accounting and are
designated as "Pre-M&F Purchase." Accordingly, the results of the Company for
the Pre-M&F Purchase period and the Post-M&F Purchase period are not comparable.
The push down of the M&F Purchase price allocation had the following
effects on the Panavision financial statements as of the date of acquisition to
the extent of the 83.5% change in ownership: (i) accumulated depreciation and
amortization of approximately $211.0 million was reset to zero by netting it
against