-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PYaQ9S6/6S3iqtV3RAl1rnnLTo8KJo7Xw+EYG8cspeMlfVZ0melFDmXJQ+zYRlDQ 02bo//WPy4G8MY/AYG7d6A== 0001047469-98-041231.txt : 19981118 0001047469-98-041231.hdr.sgml : 19981118 ACCESSION NUMBER: 0001047469-98-041231 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VDI MEDIA CENTRAL INDEX KEY: 0001014733 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 954272619 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21917 FILM NUMBER: 98752320 BUSINESS ADDRESS: STREET 1: 6920 SUNSET BOULEVARD CITY: HOLLYWOOD STATE: CA ZIP: 90028 BUSINESS PHONE: 2139575500 MAIL ADDRESS: STREET 1: 6920 SUNSET BLVD CITY: HOLLYWOOD STATE: CA ZIP: 90028 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 Commission File Number 0-21917 -------------------- VDI MEDIA (Exact name of registrant as specified in its charter) California 95-4272619 (State of or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6920 Sunset Boulevard, 90028 Hollywood, California (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (213) 957-5500 Securities registered pursuant to Section 12(b) of the Act None. Securities registered pursuant to Section 12(g) of the Act Common Stock, no par value. -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X] No [ ] As of November 13, 1998, there were 9,770,837 shares of Common Stock outstanding. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VDI MEDIA CONSOLIDATED BALANCE SHEET ASSETS
December 31, September 30, 1997 1998 ---------------- ------------------ (Unaudited) Current assets: Cash and cash equivalents $ 2,921,000 $ 2,261,000 Accounts receivable, net of allowances for doubtful accounts of $607,000 and $613,000, respectively 11,532,000 14,871,000 Inventories 285,000 558,000 Prepaid expenses and other current assets 382,000 429,000 Deferred income taes 330,000 508,000 ---------------- ------------------ Total current assets 15,450,000 18,627,000 Property and equipment, net 7,808,000 14,211,000 Deferred income taxes 119,000 - Other assets, net 124,000 339,000 Goodwill and other intangibles, net 9,406,000 18,480,000 ---------------- ------------------ Total Assets $ 32,907,000 $ 51,657,000 ---------------- ------------------ ---------------- ------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,964,000 $ 3,629,000 Accrued expenses 3,147,000 1,461,000 Income taxes payable 791,000 - Borrowings under revolving credit agreement 1,086,000 17,964,000 Current portion of notes payable 350,000 25,000 Current portion of capital lease obligations 758,000 678,000 ---------------- ------------------ Total current liabilities 10,096,000 23,757,000 ---------------- ------------------ Deferred income taxes - 103,000 Notes payable, less current portion 552,000 - Capital lease obligations, less current portion 727,000 279,000 Shareholders' equity: Preferred stock; no par value; 5,000,000 authorized; none outstanding - - Common stock; no par value; 50,000,000 authorized; 9,580,000 and 9,770,837 shares, respectively, issued and outstanding 18,880,000 20,608,000 Retained earnings 2,652,000 6,910,000 ---------------- ------------------ Total shareholders' equity 21,532,000 27,518,000 ---------------- ------------------ $ 32,907,000 $ 51,657,000 ---------------- ------------------ ---------------- ------------------
See accompanying notes to consolidated financial statements VDI MEDIA CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------ ------------------------------------ 1997 1998 1997 1998 ----------------- ----------------- ------------------ ----------------- Revenues $ 11,248,000 $ 16,419,000 $ 28,546,000 $ 42,312,000 Cost of goods sold 7,096,000 9,886,000 17,513,000 25,578,000 ----------------- ----------------- ------------------ ----------------- Gross profit 4,152,000 6,533,000 11,033,000 16,734,000 Selling, general and administrative expense 2,518,000 3,457,000 6,752,000 8,953,000 ----------------- ----------------- ------------------ ----------------- Operating income 1,634,000 3,076,000 4,281,000 7,781,000 Interest expense 74,000 342,000 239,000 583,000 Interest income 57,000 3,000 205,000 19,000 ----------------- ----------------- ------------------ ----------------- Income before income taxes 1,617,000 2,737,000 4,247,000 7,217,000 Provision for income taxes 665,000 1,122,000 1,421,000 2,959,000 Establishment of deferred tax liability (Note 1) - - 185,000 - ----------------- ----------------- ------------------ ----------------- Net income $ 952,000 $ 1,615,000 $ 2,641,000 $ 4,258,000 ----------------- ----------------- ------------------ ----------------- ----------------- ----------------- ------------------ ----------------- Earnings per share: Basic: Net income per share $ 0.10 $ 0.17 $ 0.29 $ 0.44 Weighted average number of shares 9,580,000 9,769,904 8,968,425 9,725,144 Diluted: Net income per share $ 0.10 $ 0.16 $ 0.29 $ 0.43 Weighted average number of shares including the dilutive effect of stock options 9,735,608 9,817,243 9,041,098 9,827,240
VDI MEDIA CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ------------------------------------- 1997 1998 ----------------- ---------------- Cash flows from operating activities: Net income $ 1,689,000 $ 4,258,000 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,599,000 3,553,000 Change in deferred taxes 185,000 (746,000) Provision for doubtful accounts 65,000 6,000 Changes in assets and liabilities: Decrease (increase) in accounts receivable 65,000 (491,000) Increase in inventories (11,000) (4,000) (Increase) decrease in prepaid expenses and other current assets (390,000) 95,000 Increase in other assets - (215,000) Decrease in deferred offering costs 876,000 - Decrease in accounts payable (607,000) (1,587,000) Decrease in accrued expenses (106,000) (1,718,000) ----------------- ---------------- Net cash provided by operating activities 3,365,000 3,151,000 ----------------- ---------------- Cash used in investing activities: Capital expenditures (329,000) (4,576,000) Net cash paid for acquisitions (4,278,000) (16,436,000) ----------------- ---------------- Net cash used in investing activities (4,607,000) (21,012,000) Cash flows from financing activities: S Corporation distributions to shareholders (5,555,000) - Change in revolving credit agreement - 16,878,000 Proceeds from sale of common stock 18,041,000 1,728,000 Repayment of notes payable (1,816,000) (877,000) Repayment of amounts receivable from officer 1,225,000 - Repayment of capital lease obligations (470,000) (528,000) ----------------- ---------------- Net cash provided by financing activities 11,425,000 17,201,000 Net increase (decrease) in cash 10,183,000 (660,000) Cash at beginning of period 564,000 2,921,000 ----------------- ---------------- Cash at end of period $ 10,747,000 $ 2,261,000 ----------------- ---------------- ----------------- ---------------- Supplemental disclosure of cash flow information: Cash paid for: Interest $ 165,000 $ 582,000 ----------------- ---------------- ----------------- ---------------- Income tax $ 1,316,000 $ 3,724,000 ----------------- ---------------- ----------------- ----------------
See accompanying notes to consolidated financial statements 4 VDI MEDIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1998 NOTE 1 -- THE COMPANY VDI MEDIA (the "Company") provides broadcast quality video duplication, distribution and related value-added services including distribution of national television spot advertising, trailers and electronic press kits. The Company's services consist of (i) the physical and electronic delivery of broadcast quality advertising, including spots, trailers, electronic press kits and infomercials, and syndicated television programming to television stations, cable television and other end-users nationwide and (ii) 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 and editing services. The Company is headquartered in Hollywood, California and has additional facilities in Los Angeles, Santa Monica, Burbank and San Francisco, California; Chicago, Illinois; New York, New York; and Dallas, Texas. In the first quarter of 1997, the Company completed the sale of 3,120,000 common shares, no par value ("Common Stock"), in an initial public offering (the "Offering"). Prior to the Offering, the Company had elected S Corporation status for federal and state income tax purposes. As a result of the Offering, the S Corporation status terminated. Thereafter, the Company has paid federal and state income taxes as a C Corporation. The termination of the Company's S Corporation status resulted in the establishment of a net deferred tax liability calculated at normal federal and state income rates, causing a one-time non-cash charge of $185,000 against earnings for additional income tax expense in the quarter ended March 31, 1997. The accompanying 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 information. Accordingly, they do not include all of the information and 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, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 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, 1997. NOTE 2 -- ACQUISITIONS On June 9, 1998, the Company acquired all of the assets of The Dub House, Inc. ("The Dub House"). The Dub House distributes broadcast media for advertising agencies, independent producers and other broadcast media providers. As consideration, the Company will pay the owners of The Dub House a maximum of $1.7 million, of which $1.5 million was paid in the second quarter of 1998. The remaining balance is subject to earn-out provisions which are predicated upon The Dub House attaining certain sales goals, as set forth in the purchase agreement, through June 1999. On June 12, 1998, the Company acquired substantially all of the assets of All Post, Inc. ("All Post"). All Post provides full service duplication, distribution, video content storage and ancillary services to major motion picture studios and independent production companies for both domestic and international use. As consideration, the Company will pay All Post a maximum of $14.5 million, of which $13.0 million was paid in the second quarter of 1998. The remaining balance is subject to earn-out provisions which are predicated upon All Post attaining certain gross profit goals, as set forth in the purchase agreement, through June 1999. The Company has accounted for both of these acquisitions as purchases. Goodwill arising from these transactions is being amortized over twenty years. The contingent purchase price for each of these transactions, to the extent earned, will be recorded as an increase to goodwill. The consolidated statement of income includes both The Dub House and All Post's results of operations from the effective date of their acquisitions. NOTE 3 - SUBSEQUENT EVENT The Company has signed a definitive agreement to acquire substantially all of the assets of Dubs, Inc. for an initial purchase price of $11.0 million plus a contingent earn-out payment of up to $3.3 million of common stock. The agreement is subject to certain closing conditions and is expected to close on November 17, 1998. The acquisition will be accounted for as a purchase. Goodwill arising from this transaction will be amortized over 20 years. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In connection with the "safe-harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company, in its Annual Report on Form 10-K for the year ended December 31, 1997, outlined cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements made by, or on behalf of, the Company. Such forward-looking statements, as made within this Quarterly Report on Form 10-Q, should be considered in conjunction with the information included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and the risk factors set forth in the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 19, 1997 and Registration Statement on Form S-3 filed with the Securities and Exchange Commission on June 29, 1998. Factors that could cause future results to differ from the Company's expectations include, but are not limited to, the following: competition, customer and industry concentration, dependence on technological developments, risks related to expansion and acquisition of new businesses, dependence on key personnel, fluctuating results and seasonality and control by management. THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 REVENUES. Revenues increased by $5.2 million or 46.0% to $16.4 million for the three month period ended September 30, 1998 compared to $11.2 million for the three month period ended September 30, 1997 primarily due to the acquisitions of Multimedia Services, Fast Forward and All Post and also due to the increased use of the Company's services by existing customers and the addition of new customers. The increased use of the Company's services and addition of new customers was primarily due to (i) the availability of new services and capacity resulting from the acquisition of Multimedia Services, Fast Forward and All Post and (ii) substantially increased marketing of the Company's services. GROSS PROFIT. Gross profit increased $2.3 million or 57.4% to $6.5 million for the three month period ended September 30, 1998 compared to $4.2 million for the three month period ended September 30, 1997. As a percentage of revenues, gross profit increased to 39.8% from 36.9%. The increase in gross profit as a percentage of revenues was primarily attributable to (i) lower direct materials costs from scale buying and lower direct services costs due to changes in the mix of services provided, and (ii) lower depreciation expenses which are allocated to cost of goods sold. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense increased $1.0 million or 37.3% to $3.5 million for the three month period ended September 30, 1998 compared to $2.5 million for the three month period ended September 30, 1997. As a percentage of revenues, selling, general and administrative expense decreased to 21.1% for the three month period ended September 30, 1998 compared to 22.4% for the three month period ended September 30, 1997. This decrease was due to a reduction in the cost of administrative personnel, as a percent of sales, resulting from the ongoing integration of the Company's subsidiaries and the subsequent elimination of staff. The decrease in administrative wages was offset in part by increased amortization expense related to goodwill from acquired companies. OPERATING INCOME. Operating income increased $1.5 million or 88.3% to $3.1 million for the three month period ended September 30, 1998 compared to $1.6 million for the three month period ended September 30, 1997. INCOME TAXES. The Company provided for taxes in the third quarter of 1998 at its expected effective tax rate of 41%. NET INCOME. Net income for the three month period ended September 30, 1998 increased $0.6 million or 70.0% to $1.6 million compared to $1.0 million in 1997. Such increase is primarily attributable to the previously described factors. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 REVENUES. Revenues increased by $13.8 million, or 48.2%, to $42.3 million for the nine month period ended September 30, 1998 compared to $28.5 million for the nine month period ended September 30, 1997. This increase in revenue was primarily due to increased demand for services resulting from (i) the integration of new clients and availability of new services resulting from the acquisitions of Multi-Media Services, Fast Forward and All Post, and (ii) the increased use of the company's services by existing clients. GROSS PROFIT. Gross profit increased $5.7 million, or 51.2%, to $16.7 million for the nine month period ended September 30, 1998 compared to $11.0 million for the nine month period ended September 30, 1997. As a percentage of revenues, gross profit increased from 38.7% to 39.5%. The increase in gross profit as a percentage of revenues was primarily attributable to lower direct materials costs from scale buying and lower depreciation expenses (as a percent of revenues) which are allocated to cost of goods sold. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense increased $2.2 million, or 32.6%, to $9.0 million for the nine month period ended September 30, 1998 compared to $6.8 million for the nine month period ended September 30, 1997. As a percentage of revenues, selling, general and administrative expense decreased to 21.2% for the nine month period ended September 30, 1998 compared to 23.7% for the nine month period ended September 30, 1997. This decrease in selling, general and administrative expense as a percentage of revenues was primarily due to (i) the elimination of several selling, general and administrative personnel as acquired companies were integrated into the Company, and (ii) the spreading of fixed overhead expenses over a higher revenue base in the nine month period ended September 30, 1998 compared to the same period in 1997. OPERATING INCOME. Operating income increased $3.5 million, or 81.8%, to $7.8 million for the nine month period ended September 30, 1998 compared to $4.3 million for the nine month period ended September 30, 1997. INCOME TAXES. Prior to the Offering, the Company operated as an S Corporation. As such, the Company was not responsible for federal income taxes and provided for state income taxes at reduced rates. As a result of the Offering, the Company's S Corporation status terminated. Accordingly, the Company has since provided, and will continue to provide, for all income taxes at higher statutory rates. These factors resulted in an effective tax rate for 1997 of approximately 40%. The Company provided for taxes at a rate of 41% in the first nine months of 1998. NET INCOME. Net income for the nine month period ended September 30, 1998 increased $1.7 million, or 61.2%, to $4.3 million compared to $2.6 million for the nine month period ended September 30, 1997. 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, 1997. At September 30, 1998, the Company's cash and cash equivalents aggregated $2.3 million. The Company's operating activities provided cash of $3.1 million for the nine months ended September 30, 1998. The Company's investing activities used cash of $21 million for the nine months ended September 30, 1998, including $13.6 million for the acquisition of All Post, and $1.5 million for the acquisition of The Dub House. The Company also spent approximately $4.6 million for the addition and replacement of capital equipment necessary to accommodate increased customer demands for the Company's services, and for investments in 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 $1.0 million on capital expenditures during the last quarter of 1998 to upgrade and replace equipment and management information systems. The Company's financing activities provided cash of $17.2 million in the nine months ended September 30, 1998. Cash flows from financing activities include a $16.9 million increase in the Company's revolving credit agreement with Union Bank of California, N.A. (Union Bank), used primarily to fund the purchases of All Post and The Dub House. The Company has a $20.0 million revolving credit agreement with Union Bank which expired on September 30, 1998. There was $18.0 million outstanding under the Union Bank credit agreement at September 30, 1998. Management is currently in the process of negotiating a $35.0 million credit facility to replace its existing credit agreement which it expects to complete by November 17, 1998. In June 1998 the Company acquired substantially all of the assets and assumed certain liabilities of All Post (the "All Post Acquisition"). The purchase price consisted of an initial payment of $13.0 million plus an as yet undetermined contingent purchase price. The contingent purchase price is to be earned and paid based on the gross profit (as defined) resulting from the financial results of All Post as a separate division of the Company. The contingent purchase price, in total, is limited to $1.5 million. The excess of the initial consideration over the fair value of the assets acquired and liabilities assumed of approximately $6.5 million has been allocated to goodwill. The Company also acquired substantially all of the assets and assumed certain liabilities of The Dub House (the "Dub House Acquisition"), located in Dallas, Texas, in June 1998. The purchase price consisted of an initial payment of $1.5 million plus an undetermined contingent purchase price. The contingent purchase price is to be earned and paid based on the sales growth attained by The Dub House as a separate division of the Company. The contingent purchase price, in total, is limited to $0.2 million. The excess of the initial consideration over the fair value of the assets acquired and liabilities assumed of approximately $1.0 million has been allocated to goodwill. Goodwill arising from the All Post Acquisition and the Dub House Acquisition (the "Acquisitions") will be amortized over 20 years. The contingent purchase price, to the extent earned, will be treated as an increase in goodwill. The Acquisitions were accounted for by the Company under the purchase method of accounting. Management believes that cash available on its revolving credit agreement (as proposed to be amended) and generated from its ongoing operations and existing working capital 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. YEAR 2000 ISSUE The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit format, as opposed to four digits, to indicate the year. Such computer systems will be unable to interpret dates beyond the year 1999, which could cause a system failure or other computer errors, leading to disruptions in operations. The Company recently developed a three-phase program for Y2K information systems compliance. Phase I is to identify those systems with which the Company has exposure to Y2K issues. Phase II is the development and implementation of action plans to be Y2K compliant in all areas by late 1998. Phase III, to be completed by mid-1999, is the final testing of each major area of exposure to ensure compliance. The Company has identified three major areas determined to be critical for successful Y2K compliance: (1) financial and informational system applications, (2) manufacturing applications and (3) third-party relationships. The Company, in accordance with Phase I of the program, is in the process of conducting an internal review of all systems and contacting all software suppliers to determine major areas of exposure to Y2K issues. In the financial and information system area, a number of applications have been identified as being Y2K compliant due to their recent implementation. The Company's core financial and reporting systems are not Y2K compliant but were already scheduled for replacement by mid-1999. In the manufacturing area, the Company is in the process of identifying areas of exposure. The Company plans to substantially complete its survey of third party systems by the end of 1998. The Company believes it will cost approximately $2.0 million to replace the core financial and reporting systems. The Company will utilize outside consultants to undertake a portion of the work and expects approximately one-fourth of the cost to be incurred in 1998 and the remainder in 1999. The Company has yet to determine what costs will be incurred in connection with the manufacturing area and the third party area. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit No. Description ----------- ----------- 27 Financial Data Schedule (b) Reports on Form 8-K ----------------- The Company filed an amendment to a Current Report on Form 8-K in August 1998 with respect to the All Post acquisition. 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 MEDIA DATE: November 16, 1998 BY: /s/ Donald R. Stine ---------------------- ------------------- Donald R. Stine Chief Financial Officer and Treasurer (duly authorized officer and principal financial officer) EX-27 2 EXHIBIT 27
5 3-MOS DEC-31-1998 JUL-01-1998 SEP-30-1998 2,261,000 0 15,484,000 (613,000) 558,000 18,548,000 32,662,000 (18,451,000) 51,578,000 23,757,000 0 0 0 20,608,000 0 51,578,000 42,312,000 42,312,000 25,578,000 25,578,000 8,953,000 0 583,000 7,217,000 2,959,000 4,258,000 0 0 0 4,258,000 0.44 0.43
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