10-Q/A 1 vdi10qa93000.txt THIRD 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 September 30, 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 September 30, 2000 in order to reflect and describe the restatement of its financial statements and adoption of SAB 101 as of and for the three-month and nine-month periods ended September 30, 2000 and September 30, 1999 and as of the fiscal year ended December 31, 1999. See Notes 2 and 3. VDI MULTIMEDIA CONSOLIDATED BALANCE SHEET ASSETS DECEMBER 31, SEPTEMBER 30, 1999 2000 ------------- ------------- (as restated) (as restated) Current assets: Cash and cash equivalents $ 3,030,000 $ 1,453,000 Accounts receivable, net of allowances for doubtful accounts of $971,000 and $1,095,000, respectively 19,836,000 17,293,000 Inventories 1,122,000 1,041,000 Prepaid expenses and other current assets 948,000 2,251,000 Income tax receivable - 529,000 Deferred income taxes 1,259,000 1,086,000 ------------- ------------- Total current assets 26,195,000 23,653,000 Property and equipment, net 19,564,000 23,681,000 Other assets, net 662,000 906,000 Goodwill and other intangibles, net 26,510,000 26,310,000 ------------- ------------- Total assets $ 72,931,000 $ 74,550,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,998,000 $ 7,579,000 Accrued expenses 2,989,000 2,933,000 Income taxes payable 599,000 - Borrowings under revolving credit agreement 5,888,000 - Current portion of notes payable 8,309,000 - Current portion of capital lease obligations 217,000 102,000 ------------- ------------- Total current liabilities 25,000,000 10,614,000 ------------- ------------ Deferred income taxes 489,000 746,000 Notes payable, less current portion 16,433,000 30,024,000 Capital lease obligations, less current portion 68,000 26,000 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 9,201,995 shares, respectively, issued and outstanding 17,935,000 17,859,000 Retained earnings 13,006,000 15,281,000 ------------ ------------ Total shareholders' equity 30,941,000 33,140,000 ------------ ------------ Total liabilities and shareholders' equity $ 72,931,000 $ 74,550,000 ============ ============
See accompanying notes to consolidated financial statements. 2
VDI MULTIMEDIA CONSOLIDATED STATEMENT OF INCOME (Unaudited) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 1999 2000 1999 2000 ---- ---- ---- ---- (as restated) (as restated) (as restated) (as restated) Revenues $ 20,366,000 $ 18,121,000 $ 58,808,000 $ 55,691,000 Cost of goods sold 12,912,000 11,413,000 35,906,000 33,618,000 ------------ ------------- ------------ ------------- Gross profit 7,454,000 6,708,000 22,902,000 22,073,000 Selling, general and administrative expense 4,242,000 4,694,000 13,474,000 15,034,000 ------------ ------------- ------------- ------------- Operating income 3,212,000 2,014,000 9,428,000 7,039,000 Interest expense, net 560,000 717,000 1,623,000 2,106,000 ------------ ------------- ------------- ------------- Income before income taxes 2,652,000 1,297,000 7,805,000 4,933,000 Provision for income taxes 1,157,000 485,000 3,407,000 2,049,000 ------------ ------------- ------------- ------------- Income before extraordinary item and adoption of SAB 101 (Note 3) 1,495,000 812,000 4,398,000 2,884,000 Extraordinary item (net of tax benefit of $168,000) (Note 6) - (232,000) - (232,000) Cumulative effect of adopting SAB 101 (Note 3) - - - (322,000) ------------ ------------- ------------- ------------- Net income $ 1,495,000 $ 580,000 $ 4,398,000 $ 2,330,000 ============ ============== ============= ============= Earnings per share: Basic: Income per share before extraordinary item and adoption of SAB 101 $ 0.16 $ 0.09 $ 0.47 $ 0.31 Extraordinary item - (0.03) - (0.03) Cumulative effect of adopting SAB 101 - - - (0.03) ------------ ------------- ------------- ------------- Net income $ 0.16 $ 0.06 $ 0.47 $ 0.25 ============ ============== ============= ============= Weighted average number of shares 9,205,785 9,211,157 9,360,384 9,221,565 Diluted: Income per share before extraordinary item and adoption of SAB 101 $ 0.16 $ 0.09 $ 0.46 $ 0.30 Extraordinary item - - - (0.03) Cumulative effect of adopting SAB 101 - (0.03) - (0.03) ------------ ------------- ------------- ------------- Net income $ 0.16 $ 0.06 $ 0.46 $ 0.24 ============ ============== ============= ============= Weighted average number of shares including the dilutive effect of stock options 9,540,863 9,327,983 9,543,127 9,549,921
See accompanying notes to consolidated financial statements. 3
VDI MULTIMEDIA CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, 1999 2000 --------------- ------------- (as restated) (as restated) Cash flows from operating activities: Net income $ 4,398,000 $ 2,330,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,513,000 4,198,000 Provision for doubtful accounts 600,000 124,000 Abandonment of leasehold improvements 190,000 7,000 Deferred income taxes 571,000 429,000 Cumulative effect of adopting SAB 101 - 322,000 Extraordinary item - 232,000 Changes in assets and liabilities: (Increase) decrease in accounts receivable (1,613,000) 2,419,000 (Increase) decrease in inventories (177,000) 81,000 Increase in prepaid expenses and other current assets (353,000) (1,303,000) Increase in other assets (24,000) (6,000) Increase in accounts payable. 620,000 581,000 Increase (decrease) in accrued expenses 870,000 (55,000) Decrease in income taxes payable (1,238,000) (1,681,000) --------------- ------------- Net cash provided by operating activities 7,357,000 7,678,000 --------------- ------------- Cash used in investing activities: Capital expenditures (4,661,000) (7,087,000) Net cash paid for acquisitions (1,801,000) (1,035,000) --------------- ------------- Net cash used in investing activities (6,462,000) (8,122,000) --------------- ------------- Cash flows from financing activities: S Corporation distributions to shareholders - (55,000) Change in revolving credit agreement 5,655,000 - Repurchase of common stock (3,064,000) (332,000 Proceeds from exercise of stock options 35,000 256,000 Deferred financing costs (261,000) (239,000) Proceeds from notes payable - 31,174,000 Repayment of notes payable (4,369,000) (25,892,000) Repayment of capital lease obligations (431,000) (157,000) Repayment of revolving credit agreement - (5,888,000) --------------- ------------- Net cash used in financing activities (2,435,000) (1,133,000) --------------- ------------- Net decrease in cash (1,540,000) (1,577,000) Cash at beginning of period 2,048,000 3,030,000 --------------- ------------- Cash at end of period $ 508,000 $ 1,453,000 ============== ================ Supplemental disclosure of cash flow information - Cash paid for: Interest $ 1,626,000 $ 2,505,000 ============== ================ Income tax $ 4,074,000 $ 2,415,000 ============== ================ See accompanying notes to consolidated financial statements
4 VDI MULTIMEDIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 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 latest of these acquisitions occurred in November 2000, as described in Note 7. 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 nine months ended September 30, 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 restatements. In addition, the schedule reflects the adoption of SAB 101 (see Note 3). These adjustments for the periods ended September 30, 1999 and 2000 are summarized as follows: 5
(INCREASE) DECREASE INCOME 1999 2000 ---- ---- THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS --------------- ------------- ------------- ------------- ADJUSTMENTS TO PREVIOUSLY ISSUED FINANCIAL STATEMENTS: To expense repairs and maintenance costs that were previously capitalized (1) $ 357,000 $ 927,000 $ 371,000 $ 797,000 To depreciate leasehold improvements over the proper period and to write off any undepreciated amounts at the lease termination date (2) 129,000 215,000 40,000 112,000 To recognize merger expenses in the period incurred (3) - - - (408,000) To reflect unrecorded invoices (1) - - 35,000 129,000 To revise tax provision for nondeductible items and taxes related to above adjustments (129,000) (261,000) (187,000) (264,000) --------------- ------------- ------------- ------------- Subtotal 357,000 881,000 259,000 366,000 ------------- ------------- ------------- ------------- Cumulative impact of adopting SAB 101 (4) - - (117,000) 480,000 Tax effect of adopting SAB 101 - - 49,000 (202,000) -------------------------------------------- ------------- Subtotal - - (68,000) 278,000 ---------------------------------------------- ------------ Total $ 357,000 $ 881,000 $ 191,000 $ 644,000 ============= ============= ============= ============= REDUCTION IN PREVIOUSLY REPORTED NET INCOME AFTER TAX BENEFIT, AND EARNINGS PER SHARE: Reduction in net income: Adjustments $ 357,000 $ 881,000 $ 259,000 $ 366,000 SAB 101 (68,000) 278,000 ------------- ------------- ------------- ------------- Total $ 357,000 $ 881,000 $ 191,000 $ 644,000 ============= ============= ============ ============= Basic earnings per share Adjustments $ 0.04 $ 0.09 $ 0.03 $ 0.04 SAB 101 - - (0.01) 0.03 -------------- ------------ ------------- ------------ Total $ 0.04 $ 0.09 $ 0.02 0.07 ============== ============ ============= ============ Diluted earnings per share Adjustments $ 0.04 $ 0.09 $ 0.03 $ 0.04 SAB 101 - - (0.01) 0.03 -------------- ------------ ------------- ------------ Total $ 0.04 $ 0.09 $ 0.02 $ 0.07 ============== ============ ============= ============
(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 nine months ended September 30, 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 and nine month periods ended September 30, 1999 as if the change in accounting policy had been adopted at the beginning of each period.
Three Months Nine Months ------------- ------------ Previously reported (A) $ 1,495,000 $ 4,398,000 Adjustment (44,000) 41,000 ------------- ------------ Pro forma $ 1,451,000 $ 4,439,000 ============= ============ Adjustment to earnings per share: Basic - Previously reported (A) $0.16 $0.47 Adjustment - - ------------- ------------ Pro forma $0.16 $0.47 ============= ============ Diluted - Previously reported (A) $0.16 $0.46 Adjustment (0.01) - ------------- ------------ Pro forma $0.15 $0.46 ============= ============
(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. In September 2000, the board of directors authorized the Company to allocate an additional $5,000,000 to purchase its common stock. NOTE 5 - EMPLOYEE LOAN On September 30, 2000, the Company had a $600,000 loan outstanding to its Chief Executive Officer. The loan is collateralized by a trust deed and bears interest at a rate of 6.19%. The loan is due on or before August 20, 2001. NOTE 6 - 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. Deferred financing costs related to the term loan of approximately $232,000, net of tax benefits of $168,000, were concurrently written off and treated as an extraordinary item during the quarter ended September 30, 2000. 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 September 30, 2000, the Company had borrowed $30,024,000 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 NOTE 7 - SUBSEQUENT EVENT On November 3, 2000. VDI acquired all of the assets and certain liabilities of Creative Digital, Inc. Creative Digital provides creative and editorial services for national commercials, promos, film trailers, television shows, music videos and feature films. As consideration, the Company paid Creative Digital $500,000 in cash and assumed certain liabilities in November 2000. Additionally, the Company issued Creative Digital $350,000 in stock. Creative Digital may also earn up to $3,000,000 in earn-out payments, subject to certain earn-out provisions which are predicated upon Creative Digital attaining certain earnings goals, as set forth in the purchase agreement, in each year through December 31, 2005. 8 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 SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999. REVENUES. Revenues decreased by $2.2 million or 11% to $18.1 million for the three-month period ended September 30, 2000, compared to $20.4 million for the three-month period ended September 30, 1999. Revenue for the third quarter of 1999 included approximately $1.5 million for the completion of a special project not related to the Company's core operations in the entertainment and advertising industries. Additionally, revenues decreased 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, and the loss of certain key sales personnel. Advertising revenues were also negatively impacted by an on-going actor's strike in the advertising industry. GROSS PROFIT. Gross profit decreased $0.8 million or 10% to $6.7 million for the three-month period ended September 30, 2000, compared to $7.5 million for the three-month period ended September 30, 1999. As a percent of revenues, gross profit increased from 36.6% to 37%. The increase in gross profits as a percentage of revenues was due to lower outsourcing costs, which were partially offset by higher wages and depreciation related to the build out of the digital television services department. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense increased $0.5 million, or 10.7% to $4.7 million for the three-month period ended September 30, 2000, compared to $4.2 million for the three-month period ended September 30, 1999. As a percentage of revenues, selling, general and administrative expense increased to 25.9% for the three-month period ended September 30, 2000, compared to 20.8% for the three-month period ended September 30, 1999. This increase was due to higher administrative wages in the digital, television and information systems departments; increased legal, consulting and public relations fees; and increased depreciation. OPERATING INCOME. Operating income decreased $1.2 million or 37.3% to $2 million for the three-month period ended September 30, 2000, compared to $3.2 million for the three-month period ended September 30, 1999 due to the lower gross profit and increased selling, general and administrative expenses. INTEREST EXPENSE. Interest expense increased $0.2 million, or 28%, to $0.7 million for the three-month period ended September 30, 2000, compared to $0.6 million for the three-month period ended September 30, 1999. This increase was due to increased borrowing under credit facilities. INCOME TAXES. The Company's effective tax rate was 37.4% for the third quarter of 2000 and 43.6% for the third quarter of 1999. EXTRAORDINARY ITEM. During the quarter ended September 30, 2000, the Company wrote off $0.4 million of deferred financing costs related to prior credit facilities that were terminated. This item was treated as an extraordinary item and is reported net of income taxes. NET INCOME. Net income for the three-month period ended September 30, 2000 decreased $0.9 million or 61.2% to $0.6 million, compared to $1.5 million for the three-month period ended September 30, 1999. NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999. REVENUES. Revenues decreased by $3.1 million or 5.3% to $55.7 million for the nine-month period ended September 30, 2000, compared to $58.8 million for the nine-month period ended September 30, 1999. Revenue decreased 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, and the loss of certain key sales personnel in 2000. Additionally, revenue for the third quarter of 1999 included approximately $1.5 million for the completion of a special project not related to the Company's core operations in the entertainment and advertising industries. Advertising revenues were also negatively impacted by an on-going actor's strike in the advertising industry. 9 GROSS PROFIT. Gross profit decreased by $0.8 million or 3.6% to $22.1 million for the nine-month period ended September 30, 2000, compared to $22.9 million for the nine-month period ended September 30, 1999. As a percent of revenues, gross profit increased from 38.9% to 39.6%. The increase in gross profit as a percentage of revenues was due primarily to lower outsourcing costs and the lower cost of direct materials resulting from volume purchasing discounts. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense increased $1.6 million, or 11.6%, to $15.1 million for the nine-month period ended September 30, 2000, compared to $13.5 million for the nine-month period ended September 30, 1999. As a percentage of revenues, selling, general and administrative expense increased to 27% for the nine-month period ended September 30, 2000, compared to 22.9% for the nine-month period ended September 30, 1999. This increase was due to an increase in administrative salaries related to the digital television services and information systems departments; accrued severance costs of $0.4 million in the second quarter of 2000; increased legal, consulting and public relations fees; and increased depreciation and $0.8 million in expenses related to the termination of the proposed merger with an affiliate of Bain Capital. OPERATING INCOME. Operating income decreased $2.4 million or 25.3% to $7 million for the nine-month period ended September 30, 2000, compared to $9.4 million for the nine-month period ended September 30, 1999 due to the lower gross profit and increased selling, general and administrative expenses, including expenses related to the terminated merger. INTEREST EXPENSE. Interest expense increased $0.5 million, or 30%, to $2.1 million for the nine-month period ended September 30, 2000, compared to $1.6 million for the nine-month period ended September 30, 1999. This increase was due to increased borrowings under the Company's debt agreements. INCOME TAXES. The Company's effective tax rate was 41.5% for the first nine months of 2000 and 43.7% for the first nine months of 1999. EXTRAORDINARY ITEM. During the quarter ended September 30, 2000, the Company wrote off $0.4 million of deferred financing costs related to prior credit facilities that were terminated. This item was treated as an extraordinary item and is reported net of income taxes. 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 nine-month period ended September 30, 2000 decreased $2.1 million or 47% to $2.3 million, compared to $4.4 million for the nine-month period ended September 30, 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 September 30, 2000, the Company's cash and cash equivalents aggregated $1.5 million. The Company's operating activities provided cash of $7.7 million for the nine months ended September 30, 2000. The Company's investing activities used cash of $8.1 million for the nine months ended September 30, 2000. The Company spent approximately $7.1 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 $3 million on capital expenditures during the last three months of 2000 to upgrade and replace equipment, upgrade the Company's management information systems and invest in high definition and other digital equipment. The Company's financing activities used cash of $1.1 million in the nine months ended September 30, 2000. Cash flows from financing activities included the repayment of $31.8 million related to the Company's prior credit facilities and the draw down of $31.2 million under a new credit facility, as described below. In September, 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 September 30, 2000, there was $30 million outstanding under the facility. 10 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. 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. 11 CUSTOMER AND INDUSTRY CONCENTRATION. Although we have an active client list of over 2,500 customers, seven motion picture studios accounted for approximately 38% of the Company's revenues during the nine months ended September 30, 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. 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 12 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. 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. 13 VDI MULTIMEDIA PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Shareholders was held on August 15, 2000. At the meeting, shareholders voted on: (i) the election of directors to hold office until the next annual meeting of shareholders of the Company or until their successors are duly elected and qualified, and (ii) approval of the appointment of PricewaterhouseCoopers LLP as the Company's independent public accountants for the fiscal year ending December 31, 2000. 1. Election of Directors The following individuals were elected as directors at the Annual Meeting of Shareholders: Name Votes For Votes Withheld ---- --------- -------------- R. Luke Stefanko 5,999,371 11,400 Haig S. Bagerdijan 5,999,371 11,400 Robert A. Baker 5,999,371 11,400 Greggory J. Hutchins 5,999,371 11,400 Robert M. Loeffler 5,999,371 11,400 2. The appointment by the Board of Directors of the Company of PricewaterhouseCoopers LLP as the Company's independent auditors for the fiscal year ending December 31, 2000 was ratified with 6,009,571 for the proposal, 1,200 against the proposal, 0 votes abstaining and 0 broker nonvotes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBIT NO. DESCRIPTION ----------- ----------- 10.1 Second Amended and Restated Credit Agreement (Filed with the SEC on November 14, 2000 as an exhibit to the Company's Form 10-Q and incorporated herein by reference) (B) REPORTS ON FORM 8-K ------------------- The Company filed a Current Report on Form 8-K covering Item 4 above on or about July 26, 2000 relating to changes in the Company's management and board of directors. 14 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)