10-Q/A 1 vdi10qa33100.txt FIRST QUARTER RESTATED SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- FORM 10-Q/A (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act - of 1934. For the quarterly period ended March 31, 2000 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 0-21917 ------------- VDI MultiMedia --------------------------------------------------- (Exact Name of Registrant as Specified) California ----------------------------------------------------- (State or Other Jurisdiction of Incorporation or Organization) 95-4272619 ------------------------------------- (IRS Employer Identification Number) California (State or Other Jurisdiction of Incorporation or Organization) 95-4272619 (IRS Employer Identification Number) 7083 Hollywood Boulevard, Suite 200, Hollywood, CA 90028 (Address of principal executive offices) (Zip Code) (323) 957-7990 ------------------------------------- (Registrant's Telephone Number, Including Area Code) ------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) 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 ____ -------- As of April 20, 2001, there were 9,046,004 shares of the registrant's common stock outstanding. VDI MultiMedia is filing this Amendment to its Quarterly Report on Form 10-Q for the period ending March 31, 2000 in order to reflect and describe the restatement of its financial statements and the adoption of SAB 101 as of and for the three-month periods ended March 31, 2000 and March 31, 1999 and as of the fiscal year ended December 31, 1999. See Notes 2 and 3. VDI MULTIMEDIA CONSOLIDATED BALANCE SHEET
ASSETS DECEMBER 31, MARCH 31, 1999 2000 ---- ---- (as restated) (as restated) Current assets: Cash and cash equivalents $ 3,030,000 $ 403,000 Accounts receivable, net of allowances for doubtful accounts of $971,000 and $1,101,000, respectively 19,836,000 19,911,000 Inventories 1,122,000 1,027,000 Prepaid expenses and other current assets 948,000 1,624,000 Deferred income taxes 1,259,000 908,000 ------------- ------------- Total current assets 26,195,000 23,873,000 Property and equipment, net 19,564,000 20,855,000 Other assets, net 662,000 648,000 Goodwill and other intangibles, net 26,510,000 26,385,000 ------------- ------------- Total assets $ 72,931,000 $ 71,761,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,998,000 $ 6,165,000 Accrued expenses 2,989,000 3,521,000 Income taxes payable 599,000 79,000 Borrowings under revolving credit agreement 5,888,000 5,888,000 Current portion of notes payable 8,309,000 8,300,000 Current portion of capital lease obligations 217,000 180,000 ------------- ------------- Total current liabilities 25,000,000 24,133,000 ------------- ------------- Deferred income taxes 489,000 531,000 Notes payable, less current portion 16,433,000 14,983,000 Capital lease obligations, less current portion 68,000 44,000 Shareholders' equity Preferred stock - no par value; 5,000,000 authorized; none outstanding Common stock - no par value; 50,000,000 authorized; 9,210,697 and 9,238,361 shares, respectively, issued and outstanding 17,935,000 18,100,000 Retained earnings 13,006,000 13,970,000 ------------ ------------- Total shareholders' equity 30,941,000 32,070,000 ------------ ------------- Total liabilities and shareholders' equity $ 72,931,000 $ 71,761,000 ============ =============
See accompanying notes to consolidated financial statements. 2 VDI MULTIMEDIA CONSOLIDATED STATEMENT OF INCOME (Unaudited)
THREE MONTHS ENDED MARCH 31, 1999 2000 ---- ---- (as restated) (as restated) Revenues $ 19,784,000 $ 19,090,000 Cost of goods sold 12,006,000 10,885,000 ------------ ------------ Gross profit 7,778,000 8,205,000 Selling, general and administrative expense 4,981,000 5,335,000 ------------ ------------ Operating income 2,797,000 2,870,000 Interest expense, net 501,000 685,000 ------------ ------------ Income before income taxes 2,296,000 2,185,000 Provision for income taxes 1,002,000 898,000 ------------ ------------ Income before adoption of SAB 101 (Note 3) 1,294,000 1,287,000 Cumulative effect of adopting SAB 101 (Note 3) - (322,000) ------------ ------------ Net income $ 1,294,000 $ 965,000 ============ ============ Earnings per share: Basic: Income per share before adoption of SAB 101 $ 0.13 $ 0.14 Cumulative effect of adopting SAB 101 - (0.04) ------------ ------------ Net income $ 0.13 $ 0.10 ============ ============ Weighted average number of shares 9,664,531 9,214,808 Diluted: Income per share before adoption of SAB 101 $ 0.13 $ 0.13 Cumulative effect of adopting SAB 101 - (0.03) ------------ ------------ Net income $ 0.13 $ 0.10 ============ ============ Weighted average number of shares including the dilutive effect of stock options 9,729,973 9,848,996
See accompanying notes to consolidated financial statements. 3 VDI MULTIMEDIA CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED MARCH 31, 1999 2000 ---- ---- (as restated) (as restated) Cash flows from operating activities: Net income $ 1,294,000 $ 965,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,165,000 1,311,000 Provision for doubtful accounts 324,000 144,000 Deferred income taxes 241,000 392,000 Cumulative effect of adopting SAB 101 322,000 - Changes in assets and liabilities: Increase in accounts receivable (1,227,000) (219,000) (Increase) decrease in inventories (92,000) 95,000 Decrease (increase) in prepaid expenses and other current assets 2,000 (676,000) (Increase) decrease in other assets (2,000) 14,000 Decrease in accounts payable. (723,000) (833,000) Increase in accrued expenses 517,000 532,000 Decrease in income taxes payable (448,000) (842,000) -------------- ------------- Net cash provided by operating activities 1,051,000 1,205,000 -------------- ------------- Cash used in investing activities: Capital expenditures (1,958,000) (2,178,000) Net cash paid for acquisitions (479,000) (299,000) ------------- ------------- Net cash used in investing activities (2,437,000) (2,477,000) ------------- -------------- Cash flows from financing activities: Change in revolving credit agreement 5,505,000 - Repurchase of common stock (2,293,000) - Proceeds from exercise of stock options - 165,000 Deferred financing costs (258,000) - Repayment of notes payable (1,469,000) (1,459,000) Repayment of capital lease obligations (163,000) (61,000) ------------- Net cash provided by (used in) financing activities 1,322,000 (1,355,000) ------------- ------------- Net decrease in cash (64,000) (2,627,000) Cash at beginning of period 2,048,000 3,030,000 ------------- ------------- Cash at end of period $ 1,984,000 $ 403,000 ============= ============= Supplemental disclosure of cash flow information - Cash paid for: Interest $ 504,000 $ 685,000 ============= ============= Income tax $ 1,210,000 $ 820,000 ============= =============
See accompanying notes to consolidated financial statements 4 VDI MULTIMEDIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 NOTE 1 - THE COMPANY VDI MultiMedia ("VDI" or the "Company") is a leading provider of video and film asset management services to owners, producers and distributors of entertainment and advertising content. The Company provides the services necessary to edit, master, reformat, digitize, archive and ultimately distribute its clients' video content. The Company provides physical and electronic delivery of commercials, movie trailers, electronic press kits, infomercials and syndicated programming to thousands of broadcast outlets worldwide. The Company operates in one reportable segment. The Company provides worldwide electronic distribution, using fiber optics and satellites. Additionally, the Company provides a broad range of video services, including the duplication of video in all formats, element storage, standards conversions, closed captioning and transcription services and video encoding for air play verification purposes. The Company also provides its customers value-added post production, editing and digital media services. The Company seeks to capitalize on growth in demand for the services related to the distribution of entertainment content, without assuming the production or ownership risk of any specific television program, feature film or other form of content. The primary users of the Company's services are entertainment studios and advertising agencies that generally choose to outsource such services due to the sporadic demand of any single customer for such services and the fixed costs of maintaining a high-volume physical plant. Since January 1, 1997, the Company has successfully completed eight acquisitions of companies providing similar services. The Company will continue to evaluate acquisition opportunities to enhance its operations and profitability. As a result of these acquisitions, VDI believes it is one of the largest and most diversified providers of technical and distribution services to the entertainment and advertising industries, and is therefore able to offer its customers a single source for such services at prices that reflect the Company's scale economies. The accompanying restated unaudited financial statements have been prepared in accordance with generally accepted accounting principles and the Securities and Exchange Commission's rules and regulations for reporting interim financial footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. These financial statements should be read in conjunction with the financial statements and related notes contained in the Company's Form 10-K for the year ended December 31, 2000. NOTE 2 - ADJUSTMENTS TO PRIOR PERIOD FINANCIAL STATEMENTS During 2000, the Company restated financial results of 1999 and 2000 to reflect (i) expensing repairs and maintenance costs on equipment when incurred rather than capitalizing such costs and depreciating them over future periods; (ii) depreciating leasehold improvements over the shorter of the estimated useful asset life or the remaining lease term rather than ten years; (iii) the retroactive write off of undepreciated leasehold improvements to correspond to certain lease termination dates; (iv) accrual of legal costs incurred for a failed merger in the period in which the expenses were incurred; (v) reflecting unrecorded invoices; and (vi) increase of tax provision for nondeductible items and taxes related to the above items. In addition, the schedule reflects the adoption of SAB 101 (see Note 3). These adjustments for the periods ended March 31, 1999 and 2000 are summarized as follows: 5
(INCREASE) DECREASE INCOME 1999 2000 ---- ---- ADJUSTMENTS TO PREVIOUSLY ISSUED FINANCIAL STATEMENTS: To expense repairs and maintenance costs that were previously capitalized (1) $ 395,000 $ (5,000) To depreciate leasehold improvements over the proper period and to write off any undepreciated amounts at the lease termination date (2) 11,000 19,000 To recognize merger expenses in the period incurred (3) - (408,000) To reflect unrecorded invoices (1) - 49,000 To revise tax provision for nondeductible items and taxes related to above adjustments (105,000) 145,000 ------------- ------------ Subtotal 301,000 (200,000) ------------- ------------ Cumulative impact of adopting SAB 101 (4) - 647,000 Tax effect of adopting SAB 101 - (272,000) ------------- ------------ Subtotal - 375,000 ------------- ------------ Total $ 301,000 $ 175,000 ============= ============ REDUCTION IN PREVIOUSLY REPORTED NET INCOME AFTER TAX BENEFIT, AND EARNINGS PER SHARE: Reduction in net income: Adjustments $ 301,000 $ (200,000) SAB 101 - 375,000 ------------- ------------ Total $ 301,000 $ 175,000 ============= ============ Basic earnings per share: Adjustments $ 0.03 $ (0.02) SAB 101 - 0.04 ------------- ------------ Total $ 0.03 $ 0.02 ============= ============ Diluted earnings per share: Adjustments $ 0.03 $ (0.02) SAB 101 - 0.04 ------------- ------------ Total $ 0.03 $ 0.02 ============= ============
(1) Charged to cost of goods sold (2) Charged to cost of goods sold and selling, general and administrative expense (3) Credited to selling, general and administrative expense (4) Charged to revenues NOTE 3 - ACCOUNTING PRONOUNCEMENTS Effective January 1, 2000, the Company adopted Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. The effect of applying this Staff Accounting Bulletin has been accounted for as a change in accounting principle, with a cumulative charge of $322,000, or $0.03 per share, being recorded on that date. Previously, the Company had recognized revenues from certain post production services as work was performed. Under SAB 101, the Company now recognizes these revenues when all services have been completed. As a result of adopting SAB 101, revenue recognized in the three months ended March 31, 2000, which was included in the cumulative effect adjustment, was $555,000. 6 The table below sets forth pro forma net income and earnings per share data for the three month period ended March 31, 1999 as if the change in accounting policy had been adopted at the beginning of such period. Previously reported (A) $ 1,294,000 Adjustment (46,000) ----------- Pro forma $ 1,248,000 =========== Adjustment to earnings per share: Basic - Previously reported (A) $ 0.13 Adjustment - ----------- Pro forma $ 0.13 =========== Diluted - Previously reported (A) $ 0.13 Adjustment - ----------- Pro forma $ 0.13 ----------- (A) After retroactive adjustments described above. NOTE 4 - STOCK REPURCHASE In February 1999, the Company commenced a stock repurchase program. The board of directors authorized the Company to allocate up to $4,000,000 to purchase its common stock at suitable market prices. As of November 10, 2000, the Company had repurchased 638,500 shares of the Company's common stock in connection with this program. NOTE 5 - LONG TERM DEBT AND NOTES PAYABLE In November 1998, the Company borrowed $29,000,000 on a term loan with a bank, payable in 60 monthly installments of $483,000 plus interest. The term loan was repaid in 2000 with the proceeds of a new borrowing arrangement with a group of banks. NOTE 6 - SUBSEQUENT EVENTS STOCK REPURCHASE In September 2000, the board of directors authorized the Company to allocate an additional $5,000,000 to purchase its common stock. LONG TERM DEBT AND NOTES PAYABLE In September 2000, the Company entered into a credit agreement ("Agreement") with a group of banks providing a revolving credit facility of up to $45,000,000. The purpose of the facility was to repay previously outstanding amounts under a prior agreement with a bank, fund working capital and capital expenditures and for general corporate purposes including up to $5,000,000 of stock repurchases under the Company's repurchase program. The Agreement provides for interest at the banks' reference rate, the federal funds effective rate plus 0.5%, or a LIBOR adjusted rate. Loans made under the Agreement are collateralized by substantially all of the Company's assets. The borrowing base under the Agreement is limited to 90% of eligible accounts receivable, 50% of inventory and 100% of operating machinery and equipment, which percentages decline after 2001 for receivables and equipment. The Agreement provides that the aggregate commitment will decline by $5,000,000 on each December 31 beginning in 2002 until expiration of the entire commitment on December 31, 2005. The Agreement also contains covenants requiring certain levels of annual earnings before interest, taxes, depreciation and amortization (EBITDA) and net worth, and limits the amount of capital expenditures. By December 31, 2000, the Company had borrowed $31,024,000 under the Agreement and was not in compliance with certain financial covenants due to adjustments recorded to prior years' and 2000 results (see Note 2). The bank has waived compliance with the covenants and the Company has renegotiated the breached financial covenants. 7 VDI MULTIMEDIA MANAGEMENT'S DISCUSSION AND ANALYSIS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is based on restated financial statements appearing in this Form 10-Q. Reference is made to Note 2 of notes to consolidated financial statements for an itemization of adjustments. THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999. REVENUES. Revenues decreased by $0.7 million or 3.5% to $19.1 million for the three-month period ended March 31, 2000, compared to $19.8 million for the three-month period ended March 31, 1999. This decrease was due to a decrease in the use of the Company's services in 2000 by certain customers resulting from service failures that occurred during the integration of its two largest facilities in 1999. Revenues were also negatively impacted by the discontinuation of certain business lines which were either unprofitable or shut down to accommodate the rollout of the Company's high definition television services. GROSS PROFIT. Gross profit increased $0.4 million or 5.5% to $8.2 million for the three-month period ended March 31, 2000, compared to $7.8 million for the three-month period ended March 31, 1999. As a percent of revenues, gross profit increased from 39.3% to 43.0%. The increase in gross profit as a percentage of revenues was due primarily to the lower cost of direct materials resulting from volume purchasing discounts. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense increased $0.4 million, or 7.1% to $5.3 million for the three-month period ended March 31, 2000, compared to $4.9 million for the three-month period ended March 31, 1999. As a percentage of revenues, selling, general and administrative expense increased to 27.9% for the three-month period ended March 31, 2000, compared to 25.2% for the three-month period ended March 31, 1999. This increase was due to legal costs associated with a terminated merger. OPERATING INCOME. Operating income increased $0.1 million or 2.6% to $2.9 million for the three-month period ended March 31, 2000, compared to $2.8 million for the three-month period ended March 31, 1999. INTEREST EXPENSE. Interest expense increased $0.2 million, or 36.7%, to $0.7 million for the three-month period ended March 31, 2000, compared to $0.5 million for the three-month period ended March 31, 1999. This increase was due to increased borrowing under credit facilities. INCOME TAXES. The Company's effective tax rate was 41.1% for the first quarter of 2000 and 43.6% for the first quarter of 1999. CUMULATIVE EFFECT OF ADOPTING SAB 101. During Fiscal 2000, the company adopted SAB 101. The effect of applying this change in accounting principle is a cumulative charge, after tax, of $322,000, or $0.03 per share. Previously, the Company had recognized revenues from certain post-production processes as work was performed. Under SAB 101, the Company now recognizes these revenues when the entire project is completed. NET INCOME. Net income for the three-month period ended March 31, 2000 decreased $0.3 million or 25.4% to $1.0 million, compared to $1.3 million for the three-month period ended March 31, 1999. LIQUIDITY AND CAPITAL RESOURCES This discussion should be read in conjunction with the notes to the financial statements and the corresponding information more fully described in the Company's Form 10-K for the year ended December 31, 2000. On March 31, 2000, the Company's cash and cash equivalents aggregated $0.4 million. The Company's operating activities provided cash of $1.2 million for the three months ended March 31, 2000. The Company's investing activities used cash of $2.5 million for the three months ended March 31, 2000. The Company spent approximately $2.2 million for the addition and replacement of capital equipment and for investments in digital television services equipment and management information systems. The Company's business is equipment intensive, requiring periodic expenditures of cash or the incurrence of additional debt to acquire additional fixed assets in order to increase capacity or replace existing equipment. The Company expects to spend approximately $7.5 million on capital expenditures during the last nine months of 2000 to upgrade and replace equipment, upgrade the Company's management information systems and invest in high definition and other digital equipment. 8 The Company's financing activities used cash of $1.4 million in the three months ended March 31, 2000. Cash flows from financing activities included the repayment of $1.5 million related to notes payable. In September 2000, the Company signed a $45 million revolving credit facility agented by Union Bank of California. The new facility provides the Company with funding for capital expenditures, working capital needs and support for its acquisition strategies. The amount available under the facility reduces to $40 million on December 31, 2002, to $35 million on December 31, 2003 and to $30 million on December 31, 2004. The facility expires on December 31, 2005. As of December 31, 2000, there was $31 million outstanding under the facility. Management believes that cash generated from its ongoing operations and its credit facility will fund necessary capital expenditures and provide adequate working capital for at least the next twelve months. The Company, from time to time, considers the acquisition of businesses complementary to its current operations. Consummation of any such acquisition or other expansion of the business conducted by the Company may be subject to the Company securing additional financing. CAUTIONARY STATEMENTS AND RISK FACTORS In our capacity as Company management, we may from time to time make written or oral forward-looking statements with respect to our long-term objectives or expectations which may be included in our filings with the Securities and Exchange Commission, reports to stockholders and information provided in our web site. The words or phrases "will likely," "are expected to," "is anticipated," "is predicted," "forecast," "estimate," "project," "plans to continue," "believes," or similar expressions identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We wish to caution you not to place undue reliance on any such forward-looking statements, which speak only as of the date made. In connection with the "Safe Harbor" provisions on the Private Securities Litigation Reform Act of 1995, we are calling to your attention important factors that could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The following list of important factors may not be all-inclusive, and we specifically decline to undertake an obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Among the factors that could have an impact on our ability to achieve expected operating results and growth plan goals and/or affect the market price of our stock are: o Our highly competitive marketplace. o The risks associated with dependence upon significant customers. o Our ability to execute our expansion strategy. o The uncertain ability to manage growth. o Our dependence upon and our ability to adapt to technological developments. o Dependence on key personnel. o Our ability to maintain and improve service quality. o Fluctuation in quarterly operating results and seasonality in certain of our markets. o Possible significant influence over corporate affairs by significant shareholders. o The potential impact of a possible labor action affecting our studio and television customers. These risk factors are discussed further below. COMPETITION. Our broadcast video post production, duplication and distribution industry is a highly competitive, service-oriented business. In general, we do not have long-term or exclusive service agreements with our customers. Business is acquired on a purchase order basis and is based primarily on customer satisfaction with reliability, timeliness, quality and price. We compete with a variety of post production, duplication and distribution firms, some of which have a national presence, and to a lesser extent, the in-house post production and distribution operations of major motion picture studios and advertising agencies. Some of these firms, and all of the studios, have greater financial, distribution and marketing resources and have achieved a higher level of brand recognition than the Company. In the future, we may not be able to compete effectively against these competitors merely on the basis of reliability, timeliness quality and price or otherwise. 9 We may also face competition from companies in related markets which could offer similar or superior services to those offered by the Company. For example, telecommunications providers could enter the market as competitors with materially lower electronic delivery transportation costs. We believe that an increasingly competitive environment could lead to a loss of market share or price reductions, which could have a material adverse effect on our financial condition, results of operations and prospects. CUSTOMER AND INDUSTRY CONCENTRATION. Although we have an active client list of over 2,500 customers, seven motion picture studios accounted for approximately 39% of the Company's revenues during the three months ended March 31 2000. If one or more of these companies were to stop using our services, our business could be adversely affected. Because we derive substantially all of our revenue from clients in the entertainment and advertising industries, the financial condition, results of operations and prospects of the Company could also be adversely affected by an adverse change in conditions which impact those industries. EXPANSION STRATEGY. Our growth strategy involves both internal development and expansion through acquisitions. We currently have no agreements or commitments to acquire any company or business. Even though we have completed eight acquisitions in the last three fiscal years, we cannot be sure additional acceptable acquisitions will be available or that we will be able to reach mutually agreeable terms to purchase acquisition targets, or that we will be able to profitably manage additional businesses or successfully integrate such additional businesses into the Company without substantial costs, delays or other problems. Certain of the businesses previously acquired by the Company reported net losses for their most recent fiscal years prior to being acquired, and our future financial performance will be in part depend on our ability to implement operational improvements in, or exploit potential synergies with, these acquired businesses. Acquisitions may involve a number of special risks including: adverse effects on our reported operating results (including the amortization of acquired goodwill), diversion of management's attention and unanticipated problems or legal liabilities. In addition, we may require additional funding to finance future acquisitions. We cannot be sure that we will be able to secure acquisition financing on acceptable terms or at all. We may also use working capital or equity, or raise financing through equity offerings or the incurrence of debt, in connection with the funding of any acquisition. Some or all of these risks could negatively affect our financial condition, results of operations and prospects or could result in dilution to the Company's shareholders. In addition, to the extent that consolidation becomes more prevalent in the industry, the prices for attractive acquisition candidates could increase substantially. We may not be able to effect any such transactions. Additionally, if we are able to complete such transactions they may prove to be unprofitable. The geographic expansion of the Company's customers may result in increased demand for services in certain regions where it currently does not have post production, duplication and distribution facilities. To meet this demand, we may subcontract. However, we have not entered into any formal negotiations or definitive agreements for this purpose. Furthermore, we cannot assure you that we will be able to effect such transactions or that any such transactions will prove to be profitable. MANAGEMENT OF GROWTH. During the last four years (except for 2000), we have experienced rapid growth that has resulted in new and increased responsibilities for management personnel and has placed and continues to place increased demands on our management, operational and financial systems and resources. To accommodate this growth, compete effectively and manage future growth, we will be required to continue to implement and improve our operational, financial and management information systems, and to expand, train, motivate and manage our work force. We cannot be sure that the Company's personnel, systems, procedures and controls will be adequate to support our future operations. Any failure to do so could have a material adverse effect on our financial condition, results of operations and prospects. DEPENDENCE ON TECHNOLOGICAL DEVELOPMENTS. Although we intend to utilize the most efficient and cost-effective technologies available for telecine, high definition formatting, editing, coloration and delivery of video content, including digital satellite transmission, as they develop, we cannot be sure that we will be able to adapt to such standards in a timely fashion or at all. We believe our future growth will depend in part, on our ability to add to these services and to add customers in a timely and cost-effective manner. We cannot be sure we will be successful in offering such services to existing customers or in obtaining new customers for these services, including the Company's recent significant investment in high definition technology. We intend to rely on third part vendors for the development of these technologies and there is no assurance that such vendors will be able to develop such technologies in a manner that meets the needs of the Company and its customers. Any material interruption in the supply of such services could materially and adversely affect the Company's financial condition, results of operations and prospects. 10 DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts and abilities of certain of its senior management, particularly those of R. Luke Stefanko, Chairman of the Board of Directors and Chief Executive Officer. The loss or interruption of the services of key members of management could have a material adverse effect on our financial condition, results of operations and prospects if a suitable replacement is not promptly obtained. Although we have employment agreements with Mr. Stefanko and certain of our other key executives and technical personnel, we cannot be sure that such executives will remain with the Company during or after the term of their employment agreements. In addition, our success depends to a significant degree upon the continuing contributions of, and on our ability to attract and retain, qualified management, sales, operations, marketing and technical personnel. The competition for qualified personnel is intense and the loss of any such persons, as well as the failure to recruit additional key personnel in a timely manner, could have a material adverse effect on our financial condition, results of operations and prospects. There is no assurance that we will be able to continue to attract and retain qualified management and other personnel for the development of our business. ABILITY TO MAINTAIN AND IMPROVE SERVICE QUALITY. Our business is dependent on our ability to meet the current and future demands of our customers, which demands include reliability, timeliness, quality and price. Any failure to do so, whether or not caused by factors within our control could result in losses to such clients. Although we disclaim any liability for such losses, there is no assurance that claims would not be asserted or that dissatisfied customers would refuse to make further deliveries through the Company in the event of a significant occurrence of lost deliveries, either of which could have material adverse effect on our financial condition, results of operations and prospects. Although we maintain insurance against business interruption, such insurance may not be adequate to protect the Company from significant loss in these circumstances or that a major catastrophe (such as an earthquake or other natural disaster) would not result in a prolonged interruption of our business. In addition, our ability to make deliveries within the time periods requested by customers depends on a number of factors, some of which are outside of our control, including equipment failure, work stoppages by package delivery vendors or interruption in services by telephone or satellite service providers. FLUCTUATING RESULTS, SEASONALITY. Our operating results have varied in the past, and may vary in the future, depending on factors such as the volume of advertising in response to seasonal buying patterns, the timing of new product and service introductions, the timing of revenue recognition upon the completion of longer term projects, increased competition, timing of acquisitions, general economic factors and other factors. As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance. For example, our operating results have historically been significantly influenced by the volume of business from the motion picture industry, which is an industry that is subject to seasonal and cyclical downturns, and, occasionally, work stoppages by actors, writers and others. In addition, as our business from advertising agencies tends to be seasonal, our operating results may be subject to increased seasonality as the percentage of business from advertising agencies increases. In any period our revenues are subject to variation based on changes in the volume and mix of services performed during the period. It is possible that in some future quarter the Company's operating results will be below the expectations of equity research analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. Fluctuations in sales due to seasonality may become more pronounced if the growth rate of the Company's sales slows. CONTROL BY PRINCIPAL SHAREHOLDER; POTENTIAL ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS. The Company's Chairman, President and Chief Executive Officer, R. Luke Stefanko, beneficially owned approximately 28% of the outstanding common stock as of December 31, 2000. Mr. Stefanko's ex-spouse owned approximately 25% of the common stock on that date. Together, they owned approximately 59%. In August 2000, Mr. Stefanko was granted a one-time proxy to vote his ex-spouse's shares in connection with the election of directors at the Company's annual meeting. By virtue of his stock ownership, Mr. Stefanko may be able to significantly influence the outcome of matters required to be submitted to a vote of shareholders, including (i) the election of the board of directors, (ii) amendments to the Company's Restated Articles of Incorporation and (iii) approval of mergers and other significant corporate transactions. The foregoing may have the effect of discouraging, delaying or preventing certain types of transactions involving an actual or potential change of control of the Company, including transactions in which the holders of common stock might otherwise receive a premium for their shares over current market prices. Our Board of Directors also has the authority to issue up to 5,000,000 shares of preferred stock without par value (the "Preferred Stock") and to determine the price, rights, preferences, privileges and restrictions thereof, including voting rights, without any further vote or action by the Company's shareholders. Although we have no current plans to issue any shares of Preferred Stock, the rights of the holders of common stock would be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. Issuance of Preferred Stock could have the effect of discouraging, delaying, or preventing a change in control of the Company. Furthermore, certain provisions of the Company's Restated Articles of Incorporation and By-Laws and of California law also could have the effect of discouraging, delaying or preventing a change in control of the Company. 11 POSSIBLE STRIKE AFFECTING OUR CUSTOMERS. In May 2001 and July 2001, screenwriters and actors, respectively, may conduct a work stoppage directly affecting our studio and television customers. We cannot predict the length of a strike by either of these groups or the ultimate impact on our customers' production and ability to provide work to the Company. Either work stoppage, should it occur, could have a material adverse effect on the Company's results of operations. YEAR 2000 COMPLIANCE ISSUE. The risks posed by Year 2000 issues, which arise because computer systems and software products may be unable to distinguish 21(st) century dates from 20(th) century dates, could harm the Company's business. Prior to the end of the 1999 the Company completed a review of the Year 2000 compliance of its IT infrastructure, business and operational systems and third-party suppliers. The Company's review included testing to determined how their systems would function at and beyond the Year 2000. To date, the Company has not experienced any material Year 2000 related problems with its IT infrastructure, business systems or operational systems. Additionally, the Company is not aware of any failure by its third-party suppliers to be Year 2000 compliant that could impact its business or operations. However, there is an ongoing risk that such problems or failures could arise or become apparent in the future. Any such problems or failures experienced by the Company or its customers could have negative consequences for the Company, including decreasing the demand for its products and interrupting its operations. As a result, the Company's supply chain and revenue could be harmed. 12 VDI MULTIMEDIA PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports On Form 8-K The Company filed a Current Report on Form 8-K on or about January 11, 2000 relating to its proposed merger with an affiliate of Bain Capital SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VDI MULTIMEDIA DATE: May 9, 2001 BY:/s/ Alan Steel --------------------------------------- Alan Steel Executive Vice President, Finance and Administration (duly authorized officer and principal financial officer)